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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10 - Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended June 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to _______________ to _______________
Commission File Number: 0-20750
STERLING BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-2175590
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2550 NORTH LOOP WEST, SUITE 600
HOUSTON, TEXAS 77092
(Address of principal executive office) (Zip Code)
713-466-8300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
("Act") during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act). Yes [X] No [ ]
As of August 7, 2003, there were outstanding 44,184,552 shares of common stock,
par value $1.00 per share, of the registrant.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STERLING BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
JUNE 30, DECEMBER 31,
2003 2002
------------ ------------
(UNAUDITED)
ASSETS
Cash and cash equivalents $ 156,674 $ 139,209
Interest-bearing deposits in financial institutions 1,239 1,302
Trading assets 137,784 142,803
Available-for-sale securities, at fair value 225,785 251,165
Held-to-maturity securities, at amortized cost 53,473 61,889
Loans held for sale 604,337 701,301
Loans held for investment 2,042,149 1,910,565
Allowance for credit losses (31,574) (27,248)
----------- -----------
Loans held for investment, net 2,010,575 1,883,317
Accrued interest receivable 12,125 15,637
Real estate acquired by foreclosure 4,736 3,358
Premises and equipment, net 46,688 49,860
Goodwill, net 50,354 55,666
Other assets 99,987 178,407
Assets related to discontinued operations 41,409 98,831
----------- -----------
TOTAL ASSETS $ 3,445,166 $ 3,582,745
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits:
Noninterest-bearing $ 1,030,942 $ 991,271
Interest-bearing 869,760 867,942
Certificates of deposit and other time deposits 693,114 673,689
----------- -----------
Total deposits 2,593,816 2,532,902
Other borrowed funds 402,800 509,590
Notes payable 18,694 21,430
Subordinated debt 49,254 -
Accrued interest payable and other liabilities 5,561 16,750
Liabilities related to discountinued operations 33,527 172,746
----------- -----------
Total liabilities 3,103,652 3,253,418
COMPANY-OBLIGATED MANDITORILY REDEEMABLE
TRUST PREFERRED SECURITIES OF SUBSIDIARY TRUSTS 80,000 80,000
Shareholders' equity:
Convertible preferred stock, $1 par value, 1 million shares authorized 20 59
Common stock, $1 par value, 100 million shares authorized 44,159 43,983
Capital surplus 45,611 44,633
Retained earnings 168,576 156,664
Accumulated other comprehensive income--net unrealized gain on
available-for-sale securities, net of tax 3,148 3,988
----------- -----------
Total shareholders' equity 261,514 249,327
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,445,166 $ 3,582,745
=========== ===========
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS WHICH ARE AN INTEGRAL
PART OF THESE INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
2
STERLING BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2003 2002 2003 2002
-------------------- -------------------
(UNAUDITED) (UNAUDITED)
Interest income:
Loans, including fees $ 41,053 $ 36,515 $ 80,533 $ 70,712
Securities:
Taxable 2,201 3,767 4,925 7,650
Tax-exempt 595 739 1,244 1,520
Federal funds sold 39 124 86 339
Trading assets 871 917 1,733 1,967
Deposits in financial institutions 17 30 36 59
-------- -------- -------- --------
Total interest income 44,776 42,092 88,557 82,247
Interest expense:
Demand and savings deposits 1,264 2,176 2,621 4,384
Certificates and other time deposits 3,807 3,677 7,739 7,797
Other borrowed funds 1,578 995 2,926 1,721
Note payable 155 197 320 400
Subordinated debt 716 - 716 -
-------- -------- -------- --------
Total interest expense 7,520 7,045 14,322 14,302
-------- -------- -------- --------
NET INTEREST INCOME 37,256 35,047 74,235 67,945
Provision for credit losses 6,098 3,088 10,548 5,711
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 31,158 31,959 63,687 62,234
Noninterest income:
Customer service fees 3,908 3,749 7,871 7,418
Other 3,179 3,187 6,618 5,833
-------- -------- -------- --------
Total noninterest income 7,087 6,936 14,489 13,251
Noninterest expense:
Salaries and employee benefits 15,998 15,116 32,810 29,668
Occupancy expense 3,931 3,739 7,602 7,323
Technology 1,229 1,265 2,421 2,409
Postage and delivery charges 515 528 1,081 1,059
Supplies 328 277 660 618
Professional fees 1,286 1,237 1,980 1,838
Minority interest expense:
Company-obligated mandatorily redeemable trust preferred
securities of subsidiary trusts 1,549 1,325 3,101 2,655
Other 4,136 3,724 8,106 7,351
-------- -------- -------- --------
Total noninterest expense 28,972 27,211 57,761 52,921
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 9,273 11,684 20,415 22,564
Provision for income taxes 3,047 3,727 6,675 7,111
-------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS 6,226 7,957 13,740 15,453
INCOME (LOSS) FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES (2,588) 2,404 3,357 3,778
Provision (benefit) for income taxes (1,003) 978 1,219 1,550
-------- -------- -------- --------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (1,585) 1,426 2,138 2,228
-------- -------- -------- --------
NET INCOME $ 4,641 $ 9,383 $ 15,878 $ 17,681
======== ======== ======== ========
EARNINGS PER SHARE:
Basic $ 0.11 $ 0.21 $ 0.36 $ 0.40
======== ======== ======== ========
Diluted $ 0.10 $ 0.21 $ 0.36 $ 0.40
======== ======== ======== ========
EARNINGS PER SHARE FROM CONTINUING OPERATIONS:
Basic $ 0.14 $ 0.18 $ 0.31 $ 0.35
======== ======== ======== ========
Diluted $ 0.14 $ 0.18 $ 0.31 $ 0.35
======== ======== ======== ========
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS WHICH ARE AN INTEGRAL
PART OF THESE INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
3
STERLING BANCSHARES, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(In thousands)
SIX MONTHS ENDED JUNE 30,
2003 2002
----------- -----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 13,740 $ 15,453
Adjustments to reconcile income from continuing operations to net cash
provided by (used in) operating activities:
Amortization and accretion of premiums and discounts on securities, net 3,182 56
Net gain on the sale of assets (382) (100)
Net gain on the sale of trading assets (974) (309)
Provision for credit losses 10,548 5,711
Write-downs, less gains on sale, of real estate acquired by
foreclosure and repossessed assets (239) 34
Depreciation and amortization 4,440 4,460
Net decrease (increase) in loans held for sale 96,964 (173,129)
Net decrease in accrued interest receivable and other assets 87,469 15,368
Net decrease in accrued interest payable and other liabilities (11,876) (305)
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES FROM CONTINUING OPERATIONS 202,872 (132,761)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in securities purchased under agreements to resell - 9,514
Proceeds from maturity and paydowns of held-to-maturity securities 8,333 10,196
Proceeds from the sale of available-for-sale securities 16,870 6,810
Proceeds from maturity and paydowns of available-for-sale securities 100,490 57,294
Purchases of available-for-sale securities (95,990) (53,482)
Proceeds from the sale of trading assets 259,867 253,491
Purchases of trading assets (255,965) (237,805)
Proceeds from principal paydowns of trading securities 2,091 5,767
Net increase in loans held for investment (142,226) (97,763)
Proceeds from sale of real estate acquired by foreclosure 3,281 890
Net decrease in interest-bearing deposits in financial institutions 63 159
Proceeds from sale of premises and equipment 731 1,307
Purchase of premises and equipment (1,770) (4,154)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES FROM CONTINUING OPERATIONS (104,225) (47,776)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts 60,914 53,194
Repayment of notes payable (2,736) -
Issuance of subordinated debt 49,940 -
Net decrease (increase) in repurchase agreements/funds purchased (106,790) 106,671
Proceeds from issuance of common stock and preferred stock 1,116 1,515
Dividends paid (3,967) (3,510)
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES FROM CONTINUING OPERATIONS (1,523) 157,870
NET CASH USED IN DISCONTINUED OPERATIONS (79,659) (2,008)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 17,465 (24,675)
CASH AND CASH EQUIVALENTS:
Beginning of period 139,209 141,399
--------- ---------
End of period $ 156,674 $ 116,724
========= =========
SUPPLEMENTAL INFORMATION:
Income taxes paid $ 14,489 $ 5,800
========= =========
Interest paid $ 14,418 $ 16,546
========= =========
Noncash investing and financing activities:
Acquisitions of real estate through foreclosure of collateral $ 4,420 $ 1,455
========= =========
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS WHICH ARE AN INTEGRAL
PART OF THESE INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
4
STERLING BANCSHARES, INC., AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(Unaudited)
1. BASIS OF PRESENTATION:
The accompanying unaudited interim consolidated financial statements
have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial
information and in accordance with the instructions to Form 10-Q as
prescribed by the Securities and Exchange Commission. Accordingly, they
do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting
of normal recurring items) considered necessary for a fair presentation
have been included. Operating results for the six-month period ended
June 30, 2003, are not necessarily indicative of the results that may
be expected for the entire year or any interim period. For further
information, refer to the consolidated financial statements and notes
thereto included in the Annual Report on Form 10-K of Sterling
Bancshares, Inc. (the "Company") for the year ended December 31, 2002.
Certain reclassifications have been made to prior year amounts to
conform to current year presentation. All reclassifications have been
applied consistently for the periods presented and had no effect on net
income or stockholders' equity.
2. EARNINGS PER COMMON SHARE
Earnings per common share ("EPS") were computed based on the following
(in thousands, except per share amounts):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2003 2002 2003 2002
--------------------------- -------------------------
AMOUNT AMOUNT AMOUNT AMOUNT
---------- ---------- -------- ---------
Income from continuing operations $ 6,226 $ 7,957 $ 13,740 $ 15,453
Income (loss) from discontinued operations (1,585) 1,426 2,138 2,228
-------- -------- -------- --------
Net income $ 4,641 $ 9,383 $ 15,878 $ 17,681
======== ======== ======== ========
Basic:
Weighted average shares outstanding 44,101 43,849 44,044 43,814
Diluted:
Add incremental shares for:
Assumed exercise of outstanding options 622 850 636 828
Assumed conversion of preferred stock 21 98 40 89
-------- -------- -------- --------
Total 44,744 44,797 44,720 44,731
======== ======== ======== ========
Earnings per share from continuing operations:
Basic $ 0.14 $ 0.18 $ 0.31 $ 0.35
======== ======== ======== ========
Diluted $ 0.14 $ 0.18 $ 0.31 $ 0.35
======== ======== ======== ========
Earnings per share:
Basic $ 0.11 $ 0.21 $ 0.36 $ 0.40
======== ======== ======== ========
Diluted $ 0.10 $ 0.21 $ 0.36 $ 0.40
======== ======== ======== ========
5
3. SHAREHOLDERS' EQUITY
The following table displays the changes in shareholders' equity for
the three-month and six-month periods ended June 30, 2003 and 2002 (in
thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2003 2002 2003 2002
-------------------- -------------------- ---------------------- ---------------------
Equity, beginning of period $ 258,394 $ 224,002 $ 249,327 $ 217,369
Comprehensive income:
Net income $ 4,641 $ 9,383 $ 15,878 $ 17,681
Net change in net unrealized gains
on available-for-sale securities (558) 1,166 (840) 717
--------- --------- --------- ---------
Total comprehensive income 4,083 10,549 15,038 18,398
Issuance of common stock 1,022 978 1,116 1,273
Issuance of preferred stock - - - 242
Cash dividends paid (1,985) (1,757) (3,967) (3,510)
--------- --------- --------- ---------
Equity, end of period $ 261,514 $ 233,772 $ 261,514 $ 233,772
========= ========= ========= =========
4. SEGMENTS
The Company has two reportable operating segments: commercial banking
and mortgage banking. Sterling Bank (the "Bank") has an 80 percent
ownership interest in Sterling Capital Mortgage Company ("SCMC") and
reports its financial position and results of operations on a
consolidated basis. The commercial banking and mortgage banking
segments are managed separately because each business requires
different marketing strategies and each offers different products and
services. On July 16, 2003, the Company and the Bank entered into a
definitive agreement with RBC Mortgage Company to sell the Bank's 80%
indirect interest in SCMC. The business related to SCMC is accounted
for as discontinued operations and therefore, the results of operations
and cash flows have been removed from the Company's results of
continuing operations for all periods presented in this document. In
addition, the assets and liabilities of SCMC are stated separately as
discontinued operations. Details of SCMC's results of operations are
disclosed in footnote 5.
5. DISCONTINUED OPERATIONS
On July 16, 2003, the Company and the Bank entered into a definitive
agreement with RBC Mortgage Company to sell the Bank's 80% indirect
interest in SCMC. The remaining 20% interest is owned by management and
employees of SCMC. The gross proceeds to the Company are estimated to
be approximately $83 million at closing. Net of tax and transaction
costs, the Company expects to realize net cash proceeds of
approximately $49 million. The sale consists of all of the stock of
SCMC. In addition, effective July 16, 2003, the Bank purchased from
SCMC its mortgage servicing portfolio of $15.5 million at June 30,
2003. The purchase price paid by the Bank for the mortgage servicing
portfolio was approximately $15.5 million. It is anticipated that the
Bank, in a separate transaction, will sell the mortgage servicing
portfolio to a third party prior to the consummation of the sale of
SCMC.
On May 8, 2003, the Bank sold three banking offices in south Texas to
an investor group headed by the current executive officers of the three
locations. Assets of $16.6 million, loans of $15.2 million and deposits
of $42.1 million were sold in the transaction.
On March 20, 2003, the Bank sold its banking office located in Eagle
Pass, Texas to South Texas National Bank of Laredo. Assets of $18.7
million, loans of $16.8 million and deposits of $95.7 million were sold
in the transaction.
6
The business related to SCMC and the four banking offices is accounted for as
discontinued operations and therefore, the results of operations and cash flows
have been removed from the Company's results of continuing operations for all
periods presented in this document. The results of SCMC and the four banking
offices are presented as discontinued operations in a separate category on the
income statement following results from continuing operations. The income from
discontinued operations for the six months ended June 30, 2003 and 2002,
respectively, is as follows (in thousands):
SIX MONTHS ENDED JUNE 30, 2003 SIX MONTHS ENDED JUNE 30, 2002
---------------------------------- ----------------------------------
COMMERCIAL MORTGAGE COMMERCIAL MORTGAGE
BANKING BANKING COMBINED BANKING BANKING COMBINED
---------------------------------- ----------------------------------
(UNAUDITED) (UNAUDITED)
Interest income $ 663 $ - $ 663 $ 1,239 $ - $ 1,239
Interest expense 442 - 442 1,075 - 1,075
-------- -------- -------- -------- -------- --------
Net interest income 221 - 221 164 - 164
Provision for credit losses - 3,708 3,708 - - -
-------- -------- -------- -------- -------- --------
Net interest income (loss) after
provision for credit losses 221 (3,708) (3,487) 164 - 164
Noninterest income:
Customer service fees 429 - 429 834 - 834
Gain on sale of mortgage loans - 25,384 25,384 - 11,670 11,670
Mortgage origination income - 17,595 17,595 - 9,006 9,006
Other 3,349 5,175 8,524 226 4,384 4,610
-------- -------- -------- -------- -------- --------
Total noninterest income 3,778 48,154 51,932 1,060 25,060 26,120
Noninterest expense:
Salaries and employee benefits 523 16,141 16,664 870 11,775 12,645
Occupancy expense 110 6,064 6,174 189 3,460 3,649
Mortgage servicing rights amortization and impairment - 15,460 15,460 - 1,842 1,842
Technology 8 579 587 23 121 144
Postage and delivery charges 38 833 871 60 407 467
Supplies 26 925 951 30 579 609
Professional fees 3 432 435 26 182 208
Minority interest expense:
Sterling Capital Mortgage Company - 37 37 - 581 581
Other 227 3,682 3,909 169 2,192 2,361
-------- -------- -------- -------- -------- --------
Total noninterest expense 935 44,153 45,088 1,367 21,139 22,506
Income (loss) from discontinued operations
before income taxes 3,064 293 3,357 (143) 3,921 3,778
Provision (benefit) for income taxes 1,072 147 1,219 (47) 1,597 1,550
-------- -------- -------- -------- -------- --------
Income (loss) from discontinued operations $ 1,992 $ 146 $ 2,138 $ (96) $ 2,324 $ 2,228
======== ======== ======== ======== ======== ========
Included in income from discontinued operations for the six months
ended June 30, 2003 is a before-tax net gain of $3.2 million related to
the sale of the Eagle Pass office. Additionally, a before-tax expense
of $8.2 million was recorded by SCMC in June 2003 to reflect an
impairment to the mortgage servicing rights.
7
The assets and liabilities of SCMC are stated separately as
discontinued operations as of June 30, 2003 and December 31, 2002 on
the Consolidated Balance Sheet. While the assets and liabilities
relating to the Carrizo Springs, Crystal City, Pearsall and Eagle Pass
banking offices were separately stated as discontinued operations on
the Consolidated Balance Sheet as of December 31, 2002, these assets
and liabilities were not included in the June 30, 2003 Consolidated
Balance Sheet due to the consummation of the sales on May 8, 2003 and
March 20, 2003. The major asset and liability categories of
discontinued operations are as follows (in thousands):
JUNE 30, DECEMBER 31,
2003 2002
-------- ------------
(UNAUDITED)
Cash and cash equivalents $ - $ 7,791
Loans held for investment - 32,996
Premises and equipment, net 7,042 5,059
Mortgage servicing rights 15,480 26,467
Goodwill, net 6,202 5,618
Other assets 12,685 20,900
-------- --------
Assets related to discontinued operations $ 41,409 $ 98,831
======== ========
Demand deposits:
Noninterest-bearing $ - $ 25,547
Interest-bearing - 51,535
Certificates of deposit and other time deposits - 63,088
-------- --------
Total deposits - 140,170
Other liabilities 28,417 27,502
Minority interest in Sterling Capital Mortgage Company 5,110 5,074
-------- --------
Liabilities related to discontinued operations $ 33,527 $172,746
======== ========
6. STOCK OPTIONS
The Company accounts for its employee stock options using the intrinsic
value-based method. If the compensation cost for the Company's
stock-based compensation plan had been determined based on the fair
value at the grant dates for awards, there would have been no material
impact on the Company's reported net income or earnings per share. Pro
forma information regarding net income and earnings per share is
required under Statement of Financial Accounting Standard No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation" and has been
determined as if the Company accounted for its employee stock option
plans under the fair value method of SFAS 123. The fair value of
options was estimated using a Black-Scholes option pricing model.
Option valuation models require use of highly subjective assumptions.
Also, employee stock options have characteristics that are
significantly different from those of traded options, including vesting
provisions and trading limitations that impact their liquidity.
8
The following table shows information related to stock-based
compensation in both the reported and pro forma earnings per share
amounts (dollars in thousands except for per share amounts):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2003 2002 2003 2002
----------- ----------- --------- ---------
Net income, as reported $ 4,641 $ 9,383 $15,878 $17,681
Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects 224 261 483 521
------- ------- ------- -------
Pro Forma net income $ 4,417 $ 9,122 $15,395 $17,160
======= ======= ======= =======
Earnings per share:
Basic - as reported $ 0.11 $ 0.21 $ 0.36 $ 0.40
======= ======= ======= =======
Basic - pro forma $ 0.10 $ 0.21 $ 0.35 $ 0.39
======= ======= ======= =======
Diluted - as reported $ 0.10 $ 0.21 $ 0.36 $ 0.40
======= ======= ======= =======
Diluted - pro forma $ 0.10 $ 0.20 $ 0.34 $ 0.38
======= ======= ======= =======
7. INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the year ended
December 31, 2002 and the six months ended June 30, 2003 are as follows
(in thousands):
SOUTH
(Unaudited) HOUSTON SAN ANTONIO DALLAS TEXAS TOTAL
--------- ----------- -------- --------- ---------
Balance, January 1, 2002 $ 29,641 $ 15,079 $ - $ 5,312 $ 50,032
Purchase price adjustment (28) - - - (28)
Eagle National acquisition - - 5,662 - 5,662
----------------------------------------------------------
Balance, December 31, 2002 29,613 15,079 5,662 5,312 55,666
Sale of Eagle Pass office - - - (3,570) (3,570)
Sale of South Texas offices - - - (1,742) (1,742)
-------- -------- -------- -------- --------
Balance, June 30, 2003 $ 29,613 $ 15,079 $ 5,662 $ - $ 50,354
======== ======== ======== ======== ========
The changes in the carrying amounts of intangible assets other than
goodwill for the year ended December 31, 2002 and six months ended June
30, 2003 are as follows (in thousands):
CORE
DEPOSIT
(Unaudited) INTANGIBLE
--------------
Balance, January 1, 2002 $ 2,036
Amortization (426)
Eagle National acquisition 486
-------------
Balance, December 31, 2002 2,096
Amortization (228)
-------------
Balance, June 30, 2003 $ 1,868
=============
8. RECENT ACCOUNTING PRONOUNCEMENTS
On January 17, 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 46 ("FIN 46") "Consolidation of Variable
Interest Entities", which addresses consolidation by business
enterprises of variable interest entities. FIN No. 46 clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements", to certain entities in which equity investors do
not have the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the
9
entity to finance its activities without additional subordinated
financial support from other parties. FIN No. 46 applies immediately to
variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest
after that date. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest entities in which
an enterprise holds a variable interest that it acquired before
February 1, 2003. In its current form, Fin 46 may require the
Corporation to de-consolidate its investment in Sterling Bancshares
Capital Trust II ("Capital Trust II"), Sterling Bancshares Capital
Trust III ("Capital Trust III") and Sterling Bancshares Statutory Trust
One ("Statutory Trust One"). The potential de-consolidation of
subsidiary trusts of bank holding companies formed in connection with
the issuance of trust preferred securities, such as Capital Trust I,
Capital Trust II and Statutory Trust One, appears to be an unintended
consequence of FIN 46. It is currently unknown if, or when, the FASB
will address this issue. In July 2003, the Board of Governors of the
Federal Reserve System issued a supervisory letter instructing bank
holding companies to continue to include the trust preferred securities
in their Tier 1 capital for regulatory capital purposes until notice is
given to the contrary. The Federal Reserve intends to review the
regulatory implications of any accounting treatment changes and, if
necessary or warranted, provide further appropriate guidance. There can
be no assurance that the Federal Reserve will continue to allow
institutions to include trust preferred securities in Tier 1 capital
for regulatory capital purposes. If the trust preferred securities were
no longer allowed to be included in Tier 1 capital, the Company would,
subject to the conditions applicable thereto, also be permitted to
redeem the trust preferred securities.
In April 2003, FASB issued Statement No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" ("SFAS 149").
SFAS 149 amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. The amendments (i) reflect decisions of the Derivatives
Implementation Group process that effectively required amendments to
SFAS 133, (ii) reflect decisions made by the Financial Accounting
Standards Board in connection with other board projects dealing with
financial instruments, and (iii) address implementation issues related
to the application of the definition of a derivative. SFAS 149 is
effective for contracts entered into or modified after June 30, 2003,
and for hedging relationships designated after June 30, 2003, with all
provisions applied prospectively. The Company does not believe the
adoptions of SFAS 149 will have a significant impact on its financial
statements.
In May 2003, FASB issued FASB Statement No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities
and Equity" ("SFAS 150"). SFAS 150 establishes standards for how an
issuer classifies, measures and discloses in its financial statements
certain financial instruments with characteristics of both liabilities
and equity. SFAS 150 requires that an issuer classify financial
instruments that are within its scope as liabilities, in some
circumstances. Such financial instruments include (i) financial
instruments that are issued in the form of shares that are mandatorily
redeemable; (ii) financial instruments that embody an obligation to
repurchase the issuer's equity shares, or are indexed to such an
obligation, and that require the issuer to settle the obligation by
transferring assets; (iii) financial instruments that embody an
obligation to repurchase the issuer's equity shares if, at inception,
the monetary value of the obligation is predominantly based on a fixed
amount, variations in something other than the fair value of the
issuer's equity shares or variations inversely related to changes in
the fair value of the issuer's equity shares; and (iv) certain free
standing financial instruments. SFAS 150 is effective for contracts
entered into or modified after May 31 2003, and is otherwise effective
at the beginning of the first interim period beginning after June 15,
2003. The adoption of SFAS 150 did not have a significant impact on the
Company's financial statements.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including Management's Discussion
and Analysis of Financial Condition and Results of Operations, contains
"forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements
discuss future expectations, activities or events and by their nature,
they are subject to risks and uncertainties. Forward-looking statements
can be identified by the fact that they do not relate strictly to
historical or current facts. They often include words such as
"believe," "expect," "anticipate," "intend," "plan," "estimate," or
words of similar meaning, or future or conditional verbs such as
"will," "would," "should," "could," or "may." Forward-looking
statements speak only as of the date they are made. The Company will
not update these forward-looking statements to reflect circumstances or
events that occur after the date the forward-looking statements are
made.
Many possible factors could affect the Company's future financial
performance and actual results may differ materially from what is
expressed in any forward-looking statement. Important factors that
could cause actual results to differ materially from estimates or
projections contained in forward-looking statements include, but are
not limited to, the following: general business and economic conditions
in the markets the Company serves may be less favorable than
anticipated which could decrease the demand for loan, deposit and other
financial services and increase loan delinquencies and defaults;
changes in market rates and prices may adversely impact the value of
securities, loans, deposits and other financial instruments; the
Company's liquidity requirements could be adversely affected by changes
in its assets and liabilities; legislative or regulatory developments
including changes in laws concerning taxes, banking, securities,
insurance and other aspects of the financial securities industry;
competitive factors, including product and pricing pressures among
financial services organizations, may increase; and changes in fiscal
and governmental policies of the United States federal government could
have an adverse effect on the Company's business. For additional
discussion of such risks, uncertainties and assumptions, see the
Company's Annual Report on Form 10-K for the year ended December 31,
2002, filed with the Securities and Exchange Commission under the
Securities Exchange Act of 1934.
CRITICAL ACCOUNTING POLICIES
The Company's accounting policies are integral to understanding the
results reported. Accounting policies are described in detail in Note A
to the consolidated financial statements in the 2002 Annual Report. The
Company believes that of its significant accounting policies, the
allowance for credit losses may involve a higher degree of judgment and
complexity
Allowance for credit losses - The allowance for credit losses is a
valuation allowance for probable losses incurred on loans. Loans are
charged to the allowance when the loss actually occurs or when a
determination is made that a probable loss has occurred. Recoveries are
credited to the allowance at the time of recovery. Throughout the year,
management estimates the probable level of losses to determine whether
the allowance for credit losses is adequate to absorb losses in the
existing portfolio. Based on these estimates, an amount is charged to
the provision for credit losses and credited to the allowance for
credit losses in order to adjust the allowance to a level determined to
be adequate to absorb losses. Management's judgment as to the level of
probable losses on existing loans involves the consideration of current
economic conditions and their estimated effects on specific borrowers;
an evaluation of the existing relationships among loans, potential
credit losses and the present level of the allowance; results of
examinations of the loan portfolio by regulatory agencies; and
management's internal review of the loan portfolio. In determining the
collectibility of certain loans, management also considers the fair
value of any underlying collateral. The amount ultimately realized may
differ from the carrying value of these assets because of economic,
operating or other conditions beyond the Company's control. Please
refer to the
11
subsequent discussion of "Allowance for Credit Losses" below as well as
Note A to the consolidated financial statements in the annual report
for additional insight into management's approach and methodology in
estimating the allowance for credit losses.
SIGNIFICANT DEVELOPMENTS
On July 16, 2003, the Company and the Bank entered into a definitive
agreement with RBC Mortgage Company to sell the Bank's 80% indirect
interest in SCMC. The remaining 20% interest is owned by management and
employees of SCMC. The gross proceeds to the Bank are estimated to be
approximately $83 million at closing. Net of tax and transaction costs,
the Bank expects to realize net cash proceeds of approximately $49
million. The sale consists of all of the stock of SCMC. In addition,
effective July 16, 2003, the Bank purchased from SCMC its mortgage
servicing portfolio of $15.5 million at June 30, 2003. The purchase
price paid by the Bank for the mortgage servicing portfolio was
approximately $15.5 million. It is anticipated that the Bank, in a
separate transaction, will sell the mortgage servicing portfolio to a
third party prior to the consummation of the sale of SCMC.
On May 8, 2003, the Bank sold three banking offices in south Texas to
an investor group headed by the current executive officers of the three
locations. Assets of $16.6 million, loans of $15.2 million and deposits
of $42.1 million were sold in the transaction.
On March 20, 2003, the Bank sold its banking office located in Eagle
Pass, Texas to South Texas National Bank of Laredo. Assets of $18.7
million, loans of $16.8 million and deposits of $95.7 million were sold
in the transaction.
During April, 2003, the Bank raised approximately $50 million through a
private offering of subordinated unsecured notes. The subordinated
notes issued by the Bank bear interest at a fixed rate of 7.375% and
mature over a ten year period ending April 15, 2013, with semi-annual
interest payment. These subordinated notes are not convertible or
redeemable. In June 2003, the Bank entered into an interest rate swap
agreement in which the Bank swapped $50 million fixed rate subordinated
debt to floating rate debt. Under the terms of the agreement, the Bank
will receive the fixed coupon rate of 7.375% associated with the
subordinated debt and will pay its swap counterparty a variable
interest rate equal to the three-month London Inter-Bank Rate
("LIBOR"), that is reset on a quarterly basis, plus 3.62%. This swap is
designated as a fair-value hedge and qualifies for "short-cut" hedge
accounting treatment under SFAS 133 such that changes in the fair value
of the swap will not be reflected in the income statement.
NON-GAAP PRESENTATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains financial information
determined by methods other than in accordance with Generally Accepted
Accounting Principles ("GAAP"). Management uses these non-GAAP measures
in their analysis of the business and its performance. In particular,
net interest income and net interest margin as reflected in the
Consolidated Yield Analysis table are calculated on both a GAAP based
measurement and on a fully tax-equivalent basis ("FTE"). Management
believes that these measures calculated on a FTE basis provide a useful
picture of net interest income and net interest margin for comparative
purposes. The GAAP based measures do not take into consideration the
tax-exempt status of certain income. Net interest income and net
interest margin calculated on a FTE basis are determined by adjusting
net interest income to reflect tax-exempt interest income on an
equivalent before-tax basis. Non-GAAP information presented by other
companies may not be comparable to that presented herein, since each
company may define non-GAAP measured differently.
RESULTS OF OPERATIONS
A discussion of the Company's results of operations is presented below.
Certain reclassifications have been made to make prior periods
comparable.
In 2002, the Company entered into two separate agreements for the sale
of four banking offices in South Texas. The Company completed the sale
of its banking office located in Eagle Pass, Texas in March 2003.
12
In May 2003, the Company completed the sale of its banking offices in
Carrizo Springs, Crystal City and Pearsall.
In July 2003, the Company and the Bank entered into a definitive
agreement to sell the Bank's 80% indirect interest in SCMC.
Revenues, operating costs and expenses, and other non-operating results
from the discontinued operations of the four banking offices and SCMC
are excluded from the Company's results from continuing operations at
and for the periods ending June 30, 2003 and December 31, 2002.
The assets and liabilities of the four banking offices and SCMC are
presented in the Company's Consolidated Balance Sheets in the line
items "Assets related to discontinued operations" and "Liabilities
related to discontinued operations" at December 31, 2002. However,
these line items at June 30, 2003 only include the assets and
liabilities of SCMC since the sales of the four banking offices were
completed before June 30, 2003. The financial results of these four
banking offices and SCMC are presented in the Company's Consolidated
Statements of Income under the line items "Income (loss) from
discontinued operations before income taxes" and "Income (loss) from
discontinued operations" and in the Company's Consolidated Statements
of Cash Flows as "Net cash used in discontinued operations" for each of
the periods ending June 30, 2003 and December 31, 2002.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SAME PERIOD IN 2002
NET INCOME - Net income for the six-month period ended June 30, 2003
was $15.9 million as compared to $17.7 million for the same period in
2002, a decrease of approximately $1.8 million or 10.2%. Included in
net income is a before-tax net gain of $3.2 million related to the sale
of the Eagle Pass office. Also a before-tax expense of $8.2 million was
recorded by SCMC in June 2003 to reflect an impairment to the mortgage
servicing rights. The impairment charge is included in loss from
discontinued operations. Income from continuing operations for the
six-month period ended June 30, 2003 was $13.7 million as compared to
$15.5 million for the same period in 2002, a decrease of approximately
$1.7 million or 11.1%. The decrease was due, in part, to a higher loan
loss provision during the quarter ended June 30, 2003.
NET INTEREST INCOME - Net interest income for the six-month period
ended June 30, 2003, was $74.2 million, as compared to $67.9 million
for the same period in 2002, an increase of $6.3 million or 9.3%. The
increase is primarily due to the average loan growth of 30.9%. The
growth in average loans that was related to the acquisition of Eagle
National was 2.6%.
While average earning assets for the period ended June 30, 2003
increased over a year ago, the average yield decreased 93 basis points
from 6.93% for the six-month period ended June 30, 2002, to 6.00% for
the same period in 2003. As of June 30, 2003, average interest bearing
liabilities were $2.0 billion, an increase of $464.1 million or 29.8%
from June 30, 2002. Average interest bearing deposits at June 30, 2003
were $1.5 billion, an increase of 14.3% from June 30, 2002. The
increase in average interest bearing deposits related to the
acquisition of Eagle National was 2.9%. The cost of interest bearing
liabilities decreased 42 basis points from 1.85% for the six months
ended June 30, 2002 to 1.43% during the same period in 2003.
The Company's 5.03% net interest margin for the six months ended June
30, 2003 decreased from the 5.73% net interest margin recorded during
the same period in 2002. Additionally, the Company's 5.08% tax
equivalent net interest margin for the six months ended June 30, 2003
decreased from the 5.80% tax equivalent net interest margin recorded
during the same period in 2002. In November 2002 and June 2003, the
Federal Reserve Bank decreased the discount rate 50 basis points and 25
basis points, respectively. Since the Company's balance sheet is asset
sensitive, the interest earning assets generally reprice more quickly
than the interest bearing liabilities. Thus, the Company's net interest
margin tends to increase in periods of rising interest rates in the
market and decrease in periods of declining interest rates.
13
The following schedule gives a comparative analysis of the Company's
daily average interest-earning assets and interest-bearing liabilities
for the six-month periods ended June 30, 2003 and 2002, respectively:
CONSOLIDATED YIELD ANALYSIS
SIX MONTHS ENDED JUNE 30,
(DOLLARS IN THOUSANDS)
2003 2002
--------------------------------- -----------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD BALANCE INTEREST YIELD
---------- -------- ------- ----------- -------- -------
INTEREST EARNING ASSETS:
Interest bearing deposits in financial
institutions $ 1,220 $ 36 5.95% $ 2,266 $ 59 5.25%
Federal funds sold and securities
purchased under agreements to resell 15,119 86 1.15% 35,617 339 1.92%
Trading assets 114,244 1,733 3.06% 101,821 1,967 3.90%
Investment securities (taxable) 250,865 4,925 3.96% 242,626 7,650 6.36%
Investment securities (tax-exempt) 56,601 1,244 4.43% 70,215 1,520 4.37%
Loans held for sale (taxable) 567,100 15,604 5.55% 269,961 9,798 7.32%
Loans held for investment (taxable) 1,967,773 64,782 6.64% 1,665,609 60,780 7.36%
Loans (tax-exempt) 4,636 147 6.39% 4,320 134 6.26%
---------- -------- ---- ---------- -------- ----
Total Interest Earning Assets 2,977,558 88,557 6.00% 2,392,435 82,247 6.93%
NONINTEREST EARNING ASSETS:
Cash and due from banks 97,780 90,681
Premises and equipment, net 48,513 50,012
Other assets 230,113 179,142
Allowance for credit losses (28,756) (24,014)
Assests related to discontinued operations 73,431 78,564
---------- ----------
Total Noninterest Earning Assets 421,081 374,385
---------- ----------
TOTAL ASSETS $3,398,639 $2,766,820
========== ==========
INTEREST BEARING LIABILITIES:
Demand and savings deposits 875,894 $ 2,621 0.60% $ 826,200 $ 4,384 1.07%
Certificates and other time deposits 667,601 7,739 2.34% 524,474 7,797 3.00%
Other borrowed funds 435,603 2,926 1.35% 186,275 1,721 1.86%
Notes payable 20,252 320 3.19% 20,879 400 3.86%
Subordinated debt 22,621 716 6.38% - - 0.00%
---------- -------- ---- ---------- -------- ----
Total Interest Bearing Liabilities 2,021,971 14,322 1.43% 1,557,828 14,302 1.85%
NONINTEREST BEARING LIABILITIES:
Demand deposits 918,685 759,037
Other liabilities 13,375 14,385
Liabilities related to discontinued
operations 104,840 150,864
---------- ----------
Total Noninterest Bearing Liabilities 1,036,900 924,286
Trust preferred securities 80,000 57,500
Shareholders' equity 259,768 227,206
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,398,639 $2,766,820
========== ==========
NET INTEREST INCOME & MARGIN $ 74,235 5.03% $ 67,945 5.73%
======== ==== ======== ====
NET INTEREST INCOME & MARGIN (TAX EQUIVALENT)
(1) $ 74,936 5.08% $ 68,763 5.80%
======== ==== ======== ====
(1) In order to present pretax income and resultant yields on
tax-exempt investments and loans on a comparable basis to those on
taxable investments and loans, a tax-equivalent adjustment has been
made equally to interest income and income tax expense with no effect
on after tax income. The tax equivalent adjustment has been computed
using a federal income tax rate of 35%.
14
PROVISION FOR CREDIT LOSSES - The provision for credit losses for the
six months ended June 30, 2003 was $10.5 million, as compared to $5.7
million for the same period in 2002, an increase of $4.8 million. A
provision for credit losses of $1.0 million was recorded in the first
quarter of 2003 for loans purchased with Eagle National. The increase
in the provision for credit losses was due to a moderate deterioration
of the loan portfolio quality and the addition of certain loans to the
Bank's monitored loan list. The Company's allowance for credit losses
increased by $4.3 million from $27.2 million at December 31, 2002, to
$31.6 million on June 30, 2003. The increase in the allowance for
credit losses is primarily due to the $10.5 million provision for
credit losses offset by $5.9 million in net charge-offs. Please refer
to the subsequent discussion of ALLOWANCE FOR CREDIT LOSSES and RISK
ELEMENTS for additional insight to management's approach and
methodology in estimating the allowance for credit losses.
NONINTEREST INCOME - Total noninterest income for the six months ended
June 30, 2003 was $14.5 million, as compared to $13.3 million for the
same period in 2002, an increase of $1.2 million or 9.3%. Noninterest
income for the six months ended June 30, 2003 and 2002, respectively,
is summarized as follows (in thousands):
FOR THE SIX MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2002
------------- -------------
Customer service fees $ 7,871 $ 7,418
Bank owned life insurance 1,012 1,029
Debit card income 741 512
Gain on the sale of trading assets 627 309
Gain on the sale of securities 374 -
Sale of Community charter - 150
Other 3,864 3,833
------- -------
$14,489 $13,251
======= =======
Customer service fees for the six-month period ended June 30, 2003
increased $453 thousand or 6.1% as a result in the growth in deposit
transaction accounts and the acquisition of Eagle National in September
2002. During the six months ended quarter of 2003, the Bank had a gain
on the sale of securities of $374 thousand. Also the Bank had an
increase of $318 thousand in gains on the sale of trading assets. In
June 2002, the Company sold the charter for Community Bank to Sabine
State Bank & Trust Company for $150 thousand.
NONINTEREST EXPENSE - Noninterest expense increased $4.8 million or
9.1%, to $57.8 million for the six-month period ending June 30, 2003 as
compared to $52.9 million for the same period in 2002. Noninterest
expense for the six months ended June 30, 2003 and 2002, respectively,
is summarized as follows (in thousands):
FOR THE SIX MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2002
------------- -------------
Salaries and employee benefits $ 32,810 $ 29,668
Occupancy expense 7,602 7,323
Net (gain) loss and carrying costs of
real estate acquired by foreclosure (211) 71
FDIC assessment 213 189
Technology 2,421 2,409
Postage and delivery charges 1,081 1,059
Supplies 660 618
Professional fees 1,980 1,838
Minority interest expense:
Company obligated mandatorily redeemable trust
preferred securities of subsidiary trusts 3,101 2,655
Marketing 1,157 524
Other 6,947 6,567
-------- --------
$ 57,761 $ 52,921
======== ========
15
Salaries and employee benefits for the six-month period ended June 30,
2003 were $32.8 million, as compared to $29.7 million for the same
period in 2002, an increase of $3.1 million or 10.6%. The increase is
primarily related to merit increases, increased payroll taxes and
increased hospital and medical insurance expenses. Additionally,
salaries and employee benefits expenses related to the acquisition of
Eagle National were $561 thousand.
Minority interest expense increased $446 thousand or 16.8% from the six
months ended June 30, 2002 as compared to the same period in 2003. The
increase is related to the interest due on the additional trust
preferred securities issued in August 2002 and September 2002 offset by
the redemption of trust preferred securities in November 2002.
The Company has increased its marketing and branding efforts through
increased television and radio programming. As a result of these
efforts, marketing expenses for the six-month period ended June 30,
2003 were $1.2 million, an increase of $633 thousand or 120.8% from
$524 thousand for the same period in 2002.
PROVISION FOR INCOME TAXES - The provision for income taxes as a
percent of net income before taxes increased from 33.2% for the six
months of 2002 to 32.9% for the same period in 2003. The provision of
income taxes as a percent of income from continuing operations before
taxes was 31.5% for the six months ended June 30, 2002 as compared to
32.7% for the same period in 2003.
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO SAME PERIOD IN 2002
NET INCOME - Net income for the three-month period ended June 30, 2003
was $4.6 million as compared to $9.4 million for the same period in
2002, a decrease of approximately $4.7 million or 50.5%. Income from
continuing operations for the three-month period ended June 30, 2003
was $6.2 million as compared to $8.0 million for the same period in
2002, a decrease of approximately $1.7 million or 21.8%. The decrease
was due, in a large part, to a higher loan loss provision during the
quarter ended June 30, 2003.
NET INTEREST INCOME - Net interest income for the three-month period
ended June 30, 2003, was $37.3 million, as compared to $35.0 million
for the same period in 2002, an increase of $2.2 million or 6.3%. The
increase is primarily due to the average loan growth of 30.5%. The
growth in average loans related to the acquisition of Eagle National
was 2.3%.
While average earning assets for the period ended June 30, 2003
increased over a year ago, the average yield decreased 100 basis points
from 6.91% for the three-month period ended June 30, 2002, to 5.91% for
the same period in 2003. As of June 30, 2003, average interest bearing
liabilities were $2.1 billion, an increase of $502.6 million or 31.7%
from June 30, 2002. Average interest bearing deposits at June 30, 2003
were $1.6 billion, an increase of 14.7% from June 30, 2002. The
increase in average interest bearing deposits that was related to the
acquisition of Eagle National was 2.7%. The cost of interest bearing
liabilities decreased 34 basis points from 1.78% for the three months
end June 30, 2002 to 1.44% during the same period in 2003.
The Company's 4.92% net interest margin for the three months ended June
30, 2003 decreased from the 5.75% net interest margin recorded during
the same period in 2002. Additionally, the Company's 4.96% tax
equivalent net interest margin for the three months ended June 30, 2003
decreased from the 5.82% tax equivalent net interest margin recorded
during the same period in 2002. In November 2002 and June 2003, the
Federal Reserve Bank decreased the discount rate 50 basis points and 25
basis points, respectively. Since the Company's balance sheet is asset
sensitive, the interest earning assets generally reprice more quickly
than the interest bearing liabilities. Thus, the Company's net interest
margin tends to increase in periods of rising interest rates in the
market and decrease in periods of declining interest rates.
16
The following schedule gives a comparative analysis of the Company's
daily average interest-earning assets and interest-bearing liabilities
for the three-month periods ended June 30, 2003 and 2002, respectively:
CONSOLIDATED YIELD ANALYSIS
THREE MONTHS ENDED JUNE 30,
(Dollars in thousands)
2003 2002
----------------------------------- ------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD BALANCE INTEREST YIELD
---------- -------- ------- ----------- --------- -------
INTEREST EARNING ASSETS:
Interest bearing deposits in financial
institutions $ 1,291 $ 17 5.28% $ 2,276 $ 30 5.29%
Federal funds sold and securities
purchased under agreements to resell 13,958 39 1.12% 27,221 124 1.83%
Trading assets 107,383 871 3.25% 100,396 917 3.66%
Investment securities (taxable) 240,922 2,201 3.66% 238,422 3,767 6.34%
Investment securities (tax-exempt) 54,889 595 4.35% 67,824 739 4.37%
Loans held for sale (taxable) 617,822 8,462 5.49% 311,533 5,722 7.37%
Loans held for investment (taxable) 1,996,281 32,518 6.53% 1,691,365 30,730 7.29%
Loans (tax-exempt) 4,774 73 6.13% 4,286 63 5.90%
---------- -------- ---- ---------- -------- ----
Total Interest Earning Assets 3,037,320 44,776 5.91% 2,443,323 42,092 6.91%
NONINTEREST EARNING ASSETS:
Cash and due from banks 95,030 88,053
Premises and equipment, net 47,674 49,818
Other assets 229,038 183,690
Allowance for credit losses (29,240) (24,267)
Assests related to discontinued operations 60,793 80,503
---------- ----------
Total Noninterest Earning Assets 403,295 377,797
---------- ----------
TOTAL ASSETS $3,440,615 $2,821,120
========== ==========
INTEREST BEARING LIABILITIES:
Demand and savings deposits 876,513 $ 1,264 0.58% $ 833,140 $ 2,176 1.05%
Certificates and other time deposits 675,745 3,807 2.26% 520,164 3,677 2.84%
Other borrowed funds 470,633 1,578 1.34% 210,922 995 1.89%
Notes payable 19,792 155 3.14% 20,879 197 3.78%
Subordinated debt 44,994 716 6.38% - - 0.00%
---------- -------- ---- ---------- -------- ----
Total Interest Bearing Liabilities 2,087,677 7,520 1.44% 1,585,105 7,045 1.78%
NONINTEREST BEARING LIABILITIES:
Demand deposits 944,883 781,539
Other liabilities 12,672 13,092
Liabilities related to discontinued
operations 51,635 152,886
---------- ----------
Total Noninterest Bearing Liabilities 1,009,190 947,517
Trust preferred securities 80,000 57,500
Shareholders' equity 263,748 230,998
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,440,615 $2,821,120
========== ==========
NET INTEREST INCOME & MARGIN $ 37,256 4.92% $ 35,047 5.75%
======== ==== ======== ====
NET INTEREST INCOME & MARGIN (TAX EQUIVALENT)
(1) $ 37,592 4.96% $ 35,445 5.82%
======== ==== ======== ====
(1) In order to present pretax income and resultant yields on
tax-exempt investments and loans on a comparable basis to those on
taxable investments and loans, a tax-equivalent adjustment has been
made equally to interest income and income tax expense with no effect
on after tax income. The tax equivalent adjustment has been computed
using a federal income tax rate of 35%.
17
PROVISION FOR CREDIT LOSSES - The provision for credit losses for the
second quarter of 2003 was $6.1 million, as compared to $3.1 million
for the same period in 2002, an increase of $3.0 million. The increase
in the provision for credit losses was due to a moderate deterioration
of the loan portfolio quality and the addition of certain loans to the
Bank's monitored loan list. The Company's allowance for credit losses
increased by $3.2 million from $28.4 million at March 31, 2003, to
$31.6 million on June 30, 2003. The increase in the allowance for
credit losses is primarily due to the $6.1 million provision for credit
losses offset by $3.0 million in net charge-offs. Please refer to the
subsequent discussion of ALLOWANCE FOR CREDIT LOSSES and RISK ELEMENTS
for additional insight to management's approach and methodology in
estimating the allowance for credit losses.
NONINTEREST INCOME - Total noninterest income for the quarter ended
June 30, 2003 was $7.1 million, as compared to $6.9 million for the
same period in 2002, an increase of $151 thousand or 2.2%. Noninterest
income for the three months ended June 30, 2003 and 2002, respectively,
is summarized as follows (in thousands):
FOR THE THREE MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2002
------------- -------------
Customer service fees $3,908 $3,749
Bank owned life insurance 507 520
Debit card income 405 277
Gain on the sale of trading assets 280 188
Sale of Community charter - 150
Other 1,987 2,052
------ ------
$7,087 $6,936
====== ======
Customer service fees increased $159 thousand as a result in the growth
in deposit transaction accounts and the acquisition of Eagle National
in September 2002. In June 2002, the Company sold the charter for
Community Bank to Sabine State Bank & Trust Company for $150 thousand.
NONINTEREST EXPENSE - Noninterest expense increased $1.8 million or
6.5%, to $29.0 million for the three-month period ending June 30, 2003
as compared to $27.2 million for the same period in 2002. Noninterest
expense for the three months ended June 30, 2003 and 2002,
respectively, is summarized as follows (in thousands):
FOR THE THREE MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2002
------------- -------------
Salaries and employee benefits $ 15,998 $ 15,116
Occupancy expense 3,931 3,739
Net (gain) loss and carrying costs of
real estate acquired by foreclosure (205) 5
FDIC assessment 105 137
Technology 1,229 1,265
Postage and delivery charges 515 528
Supplies 328 277
Professional fees 1,286 1,237
Minority interest expense:
Company obligated mandatorily redeemable trust
preferred securities of subsidiary trusts 1,549 1,325
Marketing 518 287
Other 3,718 3,295
-------- --------
$ 28,972 $ 27,211
======== ========
Salaries and employee benefits for the three-month period ended June
30, 2003 were $16.0 million, as compared to $15.1 million for the same
period in 2002, an increase of $882 thousand or 5.8%. The increase is
primarily related to merit increases, increased payroll taxes and
increased hospital and medical
18
insurance expenses. Additionally, increased salaries and employee
benefits expenses related to the acquisition of Eagle National were
$226 thousand.
Minority interest expense increased $224 thousand or 16.9% from the
three months ended June 30, 2002 as compared to the same period in
2003. The increase is related to the interest due on the additional
trust preferred securities issued in August 2002 and September 2002
offset by the redemption of trust preferred securities in November
2002.
PROVISION FOR INCOME TAXES - The provision for income taxes as a
percent of net income before taxes decreased from 33.4% for the second
quarter of 2002 to 30.6% for the same period in 2003. The provision for
income taxes as a percent of income from continuing operations before
taxes increased from 31.9% to 32.9% for the same period in 2003.
FINANCIAL CONDITION
TOTAL ASSETS - The total consolidated assets of the Company decreased
$137.6 million from $3.6 billion at December 31, 2002 to $3.4 billion
at June 30, 2003. The assets of the Eagle Pass, Carrizo Springs,
Crystal City and Pearsall banking offices are stated separately as
discontinued operations as of December 31, 2002 on the Consolidated
Balance Sheet. These assets are not included in the June 30, 2003
Consolidated Balance Sheet because these sales were consummated before
June 30, 2003. Assets sold with the Eagle Pass office in March 2003
totaled $18.7 million. Assets sold with the banking offices located in
Carrizo Springs, Crystal City and Pearsall in May 2003 totaled $16.6
million.
CASH AND CASH EQUIVALENTS - The Company had cash and cash equivalents
of $156.7 million at June 30, 2003. Comparatively, the Company had
$139.2 million in cash and cash equivalents on December 31, 2002, an
increase of $17.4 million.
TRADING ASSETS - The Company trades SBA 7(a) government guaranteed
loans and pools. Trading assets as of June 30, 2003 were $137.8
million, a decrease of $5.0 million from December 31, 2002. These
assets are generally held up to 120 days. The trading assets are
carried at fair market value. The realized and unrealized gains and
losses on these assets are included in income.
SECURITIES - The Company's securities portfolio as of June 30, 2003,
totaled $279.3 million, as compared to $313.1 million on December 31,
2002, a decrease of $33.8 million or 10.8%. During the first quarter of
2003, the Bank sold $16.5 million of securities. The remaining decrease
is due to principal paydowns and maturities. At June 30, 2003, the
unrealized gain on the available for sale securities was $4.8 million.
LOANS HELD FOR SALE - Total loans held for sale decreased from $701.3
million at December 31, 2002 to $604.3 million at June 30, 2003, a
decrease of $97.0 million, or 13.8%. The majority of these loans
represent loans funded by the Bank through a mortgage warehouse line to
SCMC. Upon closing of the sale of SCMC, this warehouse facility is
expected to run off and not be replaced.
LOANS HELD FOR INVESTMENT - As of June 30, 2003, loans held for
investment were $2.04 billion which was a $131.6 million increase from
the balance of $1.91 billion at December 31, 2002. At June 30, 2003,
loans held for investment as a percentage of total assets and total
deposits were 59.3% and 78.7%, respectively.
19
The following table summarizes the Company's loan portfolio by type of
loan as of June 30, 2003 (in thousands):
PERCENT OF
AMOUNT TOTAL
---------- ----------------
Commercial, financial and industrial $ 628,638 23.75%
Real estate - commercial 690,867 26.11%
Real estate - residential mortgage 200,145 7.56%
Real estate - construction 385,295 14.56%
Foreign commercial and industrial 6,602 0.25%
Consumer and other 130,602 4.93%
Unearned discounts - 0.00%
---------- ------
Total loans held for investment 2,042,149 77.16%
Loans held for sale 604,337 22.84%
---------- ------
Total loans $2,646,486 100.00%
========== ======
ALLOWANCE FOR CREDIT LOSSES - The following is a summary of the changes in the
allowance for credit losses for the six months ended June 30, 2003 and June 30,
2002, respectively, (in thousands):
SIX MONTHS ENDED
JUNE 30,
----------------------------
2003 2002
---------- ----------
Allowance for credit losses, January 1, $ 27,248 $ 22,927
Charge-offs (6,793) (5,372)
Recoveries 924 951
Provision for credit losses 10,548 5,711
Allowance related to Eagle Pass divestiture (353) -
-------- --------
Allowance for credit losses, June 30, $ 31,574 $ 24,217
======== ========
Net charge-offs as a percentage of average
loans (annualized) 0.47% 0.46%
======== ========
Provision for credit losses as a percentage of
average loans (annualized) 0.84% 0.59%
======== ========
The following is a summary of the relationship of the allowance for
credit losses to total loans at June 30, 2003, and December 31, 2002
(in thousands):
JUNE 30, DECEMBER 31,
2003 2002
---------- ----------
Loans at period-end $2,646,486 $2,611,866
Allowance for credit losses $ 31,574 $ 27,248
Allowance as a percent of period-end loans 1.19% 1.04%
In order to determine the adequacy of the allowance for credit losses,
management considers the risk classification and delinquency status of
loans and other factors. Management also establishes specific
allowances for credits which management believes require allowances
greater than those allocated according to their risk classification. An
unallocated allowance is also established based on the Company's
historical charge-off experience. The Company will continue to monitor
the adequacy of the allowance for credit losses to determine the
appropriate accrual for the Company's provision for credit losses.
20
RISK ELEMENTS - Nonperforming, past-due, and restructured loans are
fully or substantially secured by assets, with any excess of loan
balances over collateral values specifically allocated in the allowance
for credit losses. Thirty-four properties make up the $4.7 million of
other real estate owned ("ORE") at June 30, 2003. All properties are
carried at the lower of cost or fair market value.
The Company defines potential problem loans as those loans for which
information known by management indicates serious doubt that the
borrower will be able to comply with the present payment terms.
Management identifies these loans through its continuous loan review
process and defines potential problem loans as those loans classified
as "substandard", "doubtful", or "loss". As of June 30, 2003, the
Company has no material foreign loans outstanding or loan
concentrations.
The following table summarizes total nonperforming assets and potential
problem loans at June 30, 2003 and at December 31, 2002:
JUNE 30, DECEMBER 31,
2003 2002
-------- ------------
(IN THOUSANDS)
Nonaccrual loans $20,089 $19,654
Other real estate ("ORE") and other foreclosed assets 4,825 3,425
------- -------
Total nonperforming assets $24,914 $23,079
======= =======
Total nonperforming assets as a % of loans,
ORE and other foreclosed assets 0.94% 0.88%
Allowance for credit losses as a percentage of
nonperforming assets 126.73% 118.06%
Accruing loans past due 90 days or more $ 110 $ 984
Potential problem loans, other than those shown
above as nonperforming $80,687 $62,189
PREMISES AND EQUIPMENT - The Company's premises and equipment, net of
depreciation and discontinued operations, as of June 30, 2003, was
$46.7 million, as compared to $49.9 million as of December 31, 2002, a
decrease of $3.2 million.
DEPOSITS - Total deposits as of June 30, 2003, were $2.59 billion, as
compared to $2.53 billion on December 31, 2002, an increase of $60.9
million. The percentage of noninterest bearing deposits to total
deposits as of June 30, 2003 was 39.7%.
CAPITAL RESOURCES AND LIQUIDITY
SHAREHOLDERS' EQUITY - At June 30, 2003, shareholders' equity totaled
$261.5 million, as compared to $249.3 million at December 31, 2002. The
Company's risk-based capital ratios remain above the levels designated
by regulatory agencies for the Company to be considered as "well
capitalized" on June 30, 2003, with Tier 1 capital, total risk-based
capital, and leverage capital ratios of 10.34%, 13.33%, and 8.38%,
respectively.
LIQUIDITY - Effective management of balance sheet liquidity is
necessary to fund growth in earning assets and to pay liability
maturities, depository withdrawals and shareholders' dividends. The
Company has instituted asset/liability management policies, including
but not limited to a computer simulation model, to improve liquidity
controls and to enhance its management of interest rate risk and
financial condition. The
21
Company has numerous sources of liquidity including a significant
portfolio of short-term assets, marketable investment securities
(excluding those presently classified as "held-to-maturity"), loans
available-for-sale, core deposits and access to borrowing arrangements.
Available borrowing arrangements maintained by the Company include
federal funds lines with other commercial banks and Federal Home Loan
Bank ("FHLB") advances. Also in 2002, the Bank began accepting brokered
certificates of deposits to assist in funding the growth of the held
for sale loan portfolio.
During April, 2003, the Bank raised approximately $50 million through a
private offering of subordinated unsecured notes. The subordinated
notes issued by the Bank bear interest at a fixed rate of 7.375% and
mature over a ten year period ending April 15, 2013, with semi-annual
interest payment. These subordinated notes are not convertible or
redeemable. In June 2003, the Bank entered into an interest rate swap
agreement in which the Bank swapped $50 million fixed rate subordinated
debt to floating rate debt. Under the terms of the agreement, the Bank
will receive the fixed coupon rate of 7.375% associated with the
subordinated debt and will pay its swap counterparty a variable
interest rate equal to the three-month LIBOR that is reset on a
quarterly basis, plus 3.62%. This swap is designated as a fair-value
hedge and qualifies for "short-cut" hedge accounting treatment under
SFAS 133, such that changes in the fair value of the swap will not be
reflected in the income statement.
As of June 30, 2003, the Company had $18.3 million outstanding under a
term loan with Wells Fargo Bank, National Association ("Wells Fargo").
The term note bears interest at a rate per annum of 1.95% above the
federal funds rate from time to time. The federal funds rate is a
fluctuating interest rate per annum set daily by Wells Fargo as the
rate at which funds are offered to Wells Fargo by federal funds
brokers. The indebtedness evidenced by the term note is payable in
quarterly installments with a final maturity date of February 1, 2006.
The Credit Agreement requires the Company and the Bank to maintain
certain financial ratios and includes other restrictive covenants. At
June 30, 2003, the Company and Bank were in compliance with all related
financial covenants for this credit facility.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's profitability, as with most financial institutions, is
greatly dependent upon net interest income. The Company actively
manages its overall exposure to changes in interest rates. While the
Company has entered into the interest rate swap agreement described
below, the Company believes that there have been no material changes in
market risk faced by the Company since December 31, 2002. For more
information regarding quantitative and qualitative disclosures about
market risk, please refer to the Company's Annual Report on Form 10-K
as of and for the year ended December 31, 2002.
In June 2003, the Bank entered into an interest rate swap agreement in
which the Bank swapped $50 million fixed rate subordinated debt to
floating rate debt. Under the terms of the agreement, the Bank will
receive the fixed coupon rate of 7.375% associated with the
subordinated debt and will pay its swap counterparty a variable
interest rate equal to the three-month LIBOR that is reset on a
quarterly basis, plus 3.62%. This swap is designated as a fair-value
hedge and qualifies for "short-cut" hedge accounting treatment under
SFAS 133, such that changes in the fair value of the swap will not be
reflected in the income statement.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of disclosure controls and procedures - Based on their
evaluation of the Company's disclosure controls and procedures as of
the end of the period covered by this report, the Chief Executive
Officer and Chief Financial Officer of the Company have concluded that
the disclosure controls and procedures are effective in insuring that
the information required to be disclosed by the Company in the reports
that it files or submits under the Securities Exchange Act is recorded,
processed, summarized and report within the time periods specified in
the Securities and Exchange Commission's rules and forms.
Changes in internal control over financial reporting - There were no
changes in the Company's internal control over financial reporting that
occurred during the Company's most recent fiscal quarter that have
22
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's Annual Meeting of Stockholders was held on April 28,
2003, to consider and vote on the following proposals:
Proposal 1: The Election of Directors
The following individuals were nominated and elected as Class II
directors to hold office until the 2006 annual meeting of the
stockholders of the Company or until their successors have been duly
elected and qualified.
For Withheld
J. Downey Bridgwater 31,957,414 913,069
David L. Hatcher 32,566,308 304,175
James J. Kearney 32,575,138 295,345
G. Edward Powell 32,468,080 402,403
Raimundo Riojas E. 32,575,138 295,345
Harold L. Campbell was nominated and elected as a Class I director to
hold office until the 2005 annual meeting of the stockholders of the
Company or until his successor has been duly elected and qualified.
For Withheld
Harold L. Campbell 32,468,567 401,916
The following directors continued in office after the annual meeting:
George Martinez, Chairman Glenn H. Johnson
George Beatty, Jr. Paul Michael Mann, M.D.
Anat Bird Thomas A. Reiser
John H. Buck Steven F. Retzloff
James D. Calaway Howard T. Tellepsen
Bruce J. Harper
23
Proposal 2: Approval of the 2003 Stock Incentive and Compensation Plan:
For 28,838,733 Against 3,997,111 Abstain 34,636
Proposal 3: Ratification of the appointment of Deloitte & Touche LLP as
the Company's independent public accountants for its fiscal year ending
December 31, 2003.
For 32,022,170 Against 836,896 Abstain 11,417
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
4.1 -- Fiscal and Paying Agency Agreement dated April 10,
2003 between Sterling Bank and Deutsche Bank Trust
Company Americas. [Incorporated by reference to
Exhibit 4.1 of the Company's Report on Form 8-K filed
on April 15, 2003 (File No. 000-20750.]
4.2 -- Form of Global Certificate representing Sterling
Bank's 7.375% Subordinated Notes due 2013.
[Incorporated by reference to Exhibit 4.2 of the
Company's Report on Form 8-K filed on April 15, 2003
(File No. 000-20750).]
10.1 -- Sterling Bancshares, Inc. 2003 Stock Incentive and
Compensation Plan. [Incorporated by reference to
Exhibit 4.4 of the Company's Registration Statement
on Form S-8 (File No. 333-105307).]
10.2 -- Purchase Agreement dated April 3, 2003 among Sterling
Bank, Lehman Brothers Inc. and Keefe, Bruyette &
Woods, Inc. [Incorporated by reference to Exhibit
10.1 of the Company's Report on Form 8-K filed on
April 15, 2003 (File No. 000-20750.)
11 -- Statement Regarding Computation of Earnings Per
Share (included as Note (2) to Interim Consolidated
Financial Statements on page 5 of this Quarterly
Report on Form 10-Q).
*31.1-- Certification of J. Downey Bridgwater, President and
Chief Executive Officer, as required pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2-- Certification of Stephen C. Raffaele, Executive Vice
President and Chief Financial Officer, as required
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
*32.1-- Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
*32.2-- Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
-------
*As filed herewith.
(b) Reports on Form 8-K:
(1) Current Report on Form 8-K filed April 15,
2003 announcing the private placement of $50
million of subordinated unsecured notes.
(2) Current Report on Form 8-K filed April 17,
2003 announcing the release of Sterling
Bancshares' preliminary earnings report for
the three months ended March 31, 2003.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
STERLING BANCSHARES, INC.
-------------------------
(Registrant)
DATE: August 12, 2003 BY: /s/ J. Downey Bridgwater
---------------------------------
J. DOWNEY BRIDGWATER
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
DATE: August 12, 2003 BY: /s/ Stephen C. Raffaele
---------------------------------
STEPHEN C. RAFFAELE
EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
25
EXHIBIT INDEX
EXHIBIT DESCRIPTION
4.1-- Fiscal and Paying Agency Agreement dated April 10, 2003 between
Sterling Bank and Deutsche Bank Trust Company Americas. [Incorporated
by reference to Exhibit 4.1 of the Company's Report on Form 8-K filed
on April 15, 2003 (File No. 000-20750).]
4.2-- Form of Global Certificate representing Sterling Bank's 7.375%
Subordinated Notes due 2013. [Incorporated by reference to Exhibit 4.2
of the Company's Report on Form 8-K filed on April 15, 2003 (File No.
000-20750).]
10.1-- Sterling Bancshare, Inc. 2003 Stock Incentive and Compensation Plan.
[Incorporated by reference to Exhibit 4.4 of the Company's Registration
Statement on Form S-8 (File No. 333-105307).]
10.2-- Purchase Agreement dated April 3, 2003 among Sterling Bank, Lehman
Brothers Inc. and Keefe, Bruyette & Woods, Inc. [Incorporated by
reference to Exhibit 10.1 of the Company's Report on Form 8-K filed on
April 15, 2003 (File No. 000-20750).]
11-- Statement Regarding Computation of Earnings Per Share (included as Note
(2) to Interim Consolidated Financial Statements on page 5 of this
Quarterly Report on Form 10-Q).
*31.1-- Certification of J. Downey Bridgwater, President and Chief Executive
Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
*31.2-- Certification of Stephen C. Raffaele, Executive Vice President and
Chief Financial Officer, as required pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
*32.1-- Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
*32.2-- Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
- -------
*As filed herewith.
26