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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10 - Q
--------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
COMMISSION FILE NUMBER: 0-20750
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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 May 3, 2005, there were outstanding 45,243,415 shares of common stock, par
value $1.00 per share, of the registrant.
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STERLING BANCSHARES, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2005
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Consolidated Statements of Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 26
Item 4. Controls and Procedures 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits 26
SIGNATURES 28
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STERLING BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share amounts)
MARCH 31, DECEMBER 31,
2005 2004
----------- ------------
ASSETS
Cash and cash equivalents $ 103,774 $ 88,439
Interest-bearing deposits in financial institutions 1,067 595
Trading assets 13,639 36,720
Available-for-sale securities, at fair value 554,054 540,704
Held-to-maturity securities, at amortized cost 119,704 117,414
Loans held for sale 10,611 6,881
Loans held for investment 2,436,426 2,338,096
----------- -----------
Total loans 2,447,037 2,344,977
Allowance for credit losses (31,594) (30,232)
----------- -----------
Loans, net 2,415,443 2,314,745
Premises and equipment, net 39,126 40,171
Real estate acquired by foreclosure 957 1,536
Goodwill 62,480 62,480
Core deposit intangibles, net 1,727 1,839
Accrued interest receivable 12,759 11,964
Other assets 119,825 119,463
----------- -----------
TOTAL ASSETS $ 3,444,555 $ 3,336,070
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand $ 888,384 $ 884,017
Interest-bearing demand 995,462 970,281
Certificates and other time deposits 610,017 589,669
----------- -----------
Total deposits 2,493,863 2,443,967
Short-term borrowings 476,315 420,575
Subordinated debt 46,027 47,162
Junior subordinated debt 82,475 82,475
Accrued interest payable and other liabilities 30,967 28,719
----------- -----------
Total liabilities 3,129,647 3,022,898
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value, 1,000,000 shares authorized, no shares issued
and outstanding at March 31, 2005 and December 31, 2004, respectively - -
Common stock, $1 par value, 100,000,000 shares authorized, 45,217,078 and 45,068,048
issued and outstanding at March 31, 2005 and December 31, 2004, respectively 45,217 45,068
Capital surplus 55,976 54,522
Retained earnings 218,865 213,814
Accumulated other comprehensive loss, net of tax (5,150) (232)
----------- -----------
Total shareholders' equity 314,908 313,172
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,444,555 $ 3,336,070
=========== ===========
See Notes to Consolidated Financial Statements.
2
STERLING BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except per share amounts)
THREE MONTHS
ENDED MARCH 31,
2005 2004
------- -------
Interest income:
Loans, including fees $39,881 $33,234
Securities:
Taxable 6,155 5,020
Non-taxable 628 455
Trading assets 312 1,462
Federal funds sold 37 20
Deposits in financial institutions 9 15
------- -------
Total interest income 47,022 40,206
------- -------
Interest expense:
Demand and savings deposits 1,774 953
Certificates and other time deposits 3,372 3,365
Short-term borrowings 2,690 681
Subordinated debt 787 595
Junior subordinated debt 1,660 1,591
------- -------
Total interest expense 10,283 7,185
------- -------
NET INTEREST INCOME 36,739 33,021
Provision for credit losses 3,340 3,500
------- -------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 33,399 29,521
------- -------
Noninterest income:
Customer service fees 2,896 3,921
Net gain on the sale of securities 85 143
Net gain on trading assets 82 348
Other 3,584 2,805
------- -------
Total noninterest income 6,647 7,217
------- -------
Noninterest expense:
Salaries and employee benefits 17,181 17,687
Occupancy expense 3,642 3,597
Technology 1,214 1,388
Professional fees 1,296 1,062
Postage, delivery and supplies 750 875
Marketing 645 386
Core deposit intangibles amortization 112 124
Other 3,892 3,943
------- -------
Total noninterest expense 28,732 29,062
------- -------
Income before income taxes 11,314 7,676
Provision for income taxes 3,556 2,442
------- -------
NET INCOME $ 7,758 $ 5,234
======= =======
EARNINGS PER SHARE:
BASIC $ 0.17 $ 0.12
======= =======
DILUTED $ 0.17 $ 0.12
======= =======
See Notes to Consolidated Financial Statements.
3
STERLING BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(In thousands)
CONVERTIBLE ACCUMULATED
PREFERRED STOCK COMMON STOCK OTHER
--------------- -------------- CAPITAL RETAINED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT SURPLUS EARNINGS INCOME (LOSS) TOTAL
------- ------- ------ ------- ------- -------- -------------- --------
BALANCE AT JANUARY 1, 2004 20 $ 20 44,642 $44,642 $48,953 $197,819 $ 1,162 $292,596
Comprehensive income:
Net income 5,234 5,234
Net change in unrealized gains and losses on
available-for-sale securities, net of taxes
of $1,702 3,161 3,161
Less: Reclassification adjustment for gains
included in net income, net of taxes of ($50) (93) (93)
--------
Total comprehensive income 8,302
--------
Issuance of common stock 114 114 1,083 1,197
Cash dividends paid (2,235) (2,235)
------ ----- ------ ------- ------- -------- -------- --------
BALANCE AT MARCH 31, 2004 20 $ 20 44,756 $44,756 $50,036 $200,818 $ 4,230 $299,860
====== ===== ====== ======= ======= ======== ======== ========
BALANCE AT JANUARY 1, 2005 - $ - 45,068 $45,068 $54,522 $213,814 $ (232) $313,172
Comprehensive income:
Net income 7,758 7,758
Net change in unrealized gains and losses on
available-for-sale securities, net of taxes
of ($2,618) (4,863) (4,863)
Less: Reclassification adjustment for gains
included in net income, net of taxes of ($30) (55) (55)
--------
Total comprehensive income 2,840
--------
Issuance of common stock 149 149 1,454 1,603
Cash dividends paid (2,707) (2,707)
------ ----- ------ ------- ------- -------- -------- --------
BALANCE AT MARCH 31, 2005 - $ - 45,217 $45,217 $55,976 $218,865 $ (5,150) $314,908
====== ===== ====== ======= ======= ======== ======== ========
See Notes to Consolidated Financial Statements.
4
STERLING BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
THREE MONTHS ENDED MARCH 31,
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,758 $ 5,234
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and accretion of premiums and discounts on securities, net 745 2,467
Net gain on the sale of securities (85) (143)
Net gain on the sale of premises and equipment (13) -
Net gain on trading assets (82) (348)
Provision for credit losses 3,340 3,500
Writedowns, less gains on sale, of real estate acquired by foreclosure (16) (2)
Depreciation and amortization 1,926 2,286
Proceeds from sales of trading assets 62,437 145,838
Purchases of trading assets (42,218) (111,116)
Proceeds from principal paydowns of trading securities 386 828
Net increase in loans held for sale (3,730) (2,409)
Net decrease (increase) in accrued interest receivable and other assets 1,489 (950)
Net increase (decrease) in accrued interest payable and other liabilities 1,112 (16,633)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 33,049 28,552
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the maturities or calls of securities and paydowns of
held-to-maturity securities 6,591 3,073
Proceeds from the sale of available-for-sale securities 35,443 11,647
Proceeds from maturities and paydowns of available-for-sale securities 32,174 39,480
Purchases of available-for-sale securities (86,580) (68,342)
Purchases of held-to-maturity securities (8,934) -
Net (increase) decrease in loans held for investment (100,454) 3,685
Proceeds from sale of real estate acquired by foreclosure 741 804
Net (increase) decrease in interest-bearing deposits in financial institutions (472) 34
Proceeds from sale of premises and equipment 15 3,551
Purchase of premises and equipment (770) (5,743)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (122,246) (11,811)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 49,896 87,983
Net increase (decrease) in short-term borrowings 55,740 (122,210)
Proceeds from issuance of common stock and preferred stock 1,603 1,197
Dividends paid (2,707) (2,235)
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 104,532 (35,265)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 15,335 (18,524)
CASH AND CASH EQUIVALENTS:
Beginning of period 88,439 136,764
--------- ---------
End of period $ 103,774 $ 118,240
========= =========
SUPPLEMENTAL INFORMATION:
Income taxes paid $ - $ 19,842
Interest paid 9,910 6,911
Noncash investing and financing activities-
Acquisitions of real estate through foreclosure of collateral 146 175
See Notes to Consolidated Financial Statements
5
STERLING BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying Consolidated Financial Statements are unaudited and include the
accounts of Sterling Bancshares, Inc. and its subsidiaries (the "Company")
except for those subsidiaries where it has been determined that the Company is
not the primary beneficiary. The Company's accounting and financial reporting
policies are 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. The information furnished in these interim
statements reflects all adjustments that are, in the opinion of management,
necessary for a fair statement of the results for such periods. Such adjustments
are of a normal recurring nature unless otherwise disclosed in this Form 10-Q.
The results of operations in the interim statements are not necessarily
indicative of the results that may be expected for the full year. The interim
financial information should be read in conjunction with the Company's 2004
Annual Report on Form 10-K. Certain prior period amounts have been reclassified
to conform to current period classifications. These reclassifications had no
affect on net income or shareholders' equity.
RECENT ACCOUNTING STANDARDS
In March 2004, the Emerging Issues Task Force reached a consensus on Issue No.
03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments. This Issue provides guidance for determining when an
investment is other-than-temporarily impaired. It specifically addresses whether
an investor has the ability and intent to hold an investment until recovery. In
addition, Issue 03-1 contains disclosure requirements that provide useful
information about impairments that have not been recognized as
other-than-temporary for investments within the scope of this Issue. On
September 30, 2004, the Financial Accounting Standards Board deferred the
effective date of this Issue's guidance on how to evaluate and recognize an
impairment loss that is other-than-temporary. This Issue's guidance is pending
the issuance of a final FASB Staff Position ("FSP") relating to the draft FSP
EITF Issue 03-1-a, Implementation Guidance for the Application of Paragraph 16
of EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments." This deferral did not change the disclosure
guidance which remains effective for fiscal years ending after December 15,
2003.
SFAS No. 123R, Share-Based Payment (Revised 2004) establishes standards for
accounting for transactions in which an enterprise receives employee services in
exchange for (a) equity instruments of the enterprise or (b) liabilities that
are based on the fair value of the enterprise's equity instruments or that may
be settled by the issuance of such equity instruments. The effective date for
adoption of SFAS 123R was deferred by the Securities and Exchange Commission
("SEC") in April 2005. SFAS 123R is now effective for the beginning of the next
fiscal year that begins after June 15, 2005. SFAS 123R eliminates the ability to
account for stock-based compensation using the intrinsic value-based method of
accounting, and requires that such transactions be recognized as compensation
cost in the income statement based on their fair values on the date of the
grant. SFAS 123R applies to new awards and to awards modified, repurchased, or
cancelled after January 1, 2006. The Company plans to transition to fair value
based accounting for stock-based compensation using a modified version of
prospective application ("modified prospective application"). Additionally,
compensation cost for the portion of awards for which the requisite service has
not been rendered (generally referring to non-vested awards) that are
outstanding as of January 1, 2006 must be recognized as the remaining requisite
service is rendered during the period of and/or the periods after the adoption
of SFAS 123R. The attribution of compensation cost for those earlier awards will
be based on the same method and on the same grant-date fair values previously
determined for the pro forma disclosures required for companies that did not
adopt the fair value accounting method for stock-based employee compensation.
Based on the stock-based compensation awards outstanding as of March 31, 2005
for which the requisite service is not expected to be fully rendered prior to
January 1, 2006, the Company expects to recognize additional pre-tax
compensation cost of approximately $550 thousand in 2006 as a result of the
adoption of SFAS 123R.
In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB 107"). SAB
107 expresses the views of the SEC staff regarding the interaction between SFAS
123R and the SEC rules and regulations. Additionally, SAB 107 provides the
staff's views on certain issues including assumptions such as expected
volatility and expected term used in the valuation of share-based arrangements
by public companies, share-based payment transactions with nonemployees, the
accounting for income tax effects of share-based payment arrangements upon
adoption of SFAS 123R and disclosures in Management's Discussion and Analysis
subsequent to adoption of SFAS 123R.
6
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation plans using the
intrinsic value-based method of accounting, as permitted, and discloses pro
forma information as if accounted for using the fair value-based method as
prescribed by accounting principles. Because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized on options granted.
Compensation expense for restricted stock awards is based on the market price of
the stock on the date of grant and is recognized ratably over the vesting period
of the award.
On a pro-forma basis, if compensation cost for the Company's stock-based
compensation plans had been determined based on the fair value method 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 has been determined as if the Company accounted for its employee stock
option plans under the fair value-based method. 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 MARCH 31,
2005 2004
------------- ------------
Net income, as reported $ 7,758 $ 5,234
Add: Stock-based employee compensation expense
included in reported net income, net of related taxes - 160
Less: Total stock-based employee compensation
expense determined under fair value-based method,
net of related taxes (131) (368)
---------- ---------
Pro-forma net income $ 7,627 $ 5,026
========== =========
Earnings per share:
Basic- as reported $ 0.17 $ 0.12
========== =========
Basic- pro-forma $ 0.17 $ 0.11
========== =========
Diluted - as reported $ 0.17 $ 0.12
========== =========
Diluted - pro-forma $ 0.17 $ 0.11
========== =========
The Company expects to adopt the provisions of SFAS No. 123R, "Share-Based
Payment (Revised 2004)," on January 1, 2006. See Recent Accounting Standards
above.
7
2. SECURITIES
The amortized cost and fair value of securities are as follows (in thousands):
MARCH 31, 2005
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
AVAILABLE-FOR-SALE
Obligations of the U.S Treasury and other
U.S. government agencies $ 7,721 $ - $ (48) $ 7,673
Obligations of states of the U.S. and
political subdivisions 3,097 60 (1) 3,156
Mortgage-backed securities and collateralized
mortgage obligations 536,962 688 (8,700) 528,950
Other securities 14,197 370 (292) 14,275
-------- -------- -------- --------
Total $561,977 $ 1,118 $ (9,041) $554,054
======== ======== ======== ========
HELD-TO-MATURITY
Obligations of states of the U.S. and $ 60,449 $ 1,234 $ (291) $ 61,392
political subdivisions
Mortgage-backed securities and collateralized
mortgage obligations 59,255 10 (672) 58,593
-------- -------- -------- --------
Total $119,704 $ 1,244 $ (963) $119,985
======== ======== ======== ========
DECEMBER 31, 2004
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
AVAILABLE-FOR-SALE
Obligations of the U.S Treasury and other
U.S. government agencies $ 8,254 $ - $ (60) $ 8,194
Obligations of states of the U.S. and
political subdivisions 4,035 99 (1) 4,133
Mortgage-backed securities and collateralized
mortgage obligations 516,865 2,112 (2,652) 516,325
Other securities 11,908 354 (210) 12,052
-------- -------- -------- --------
Total $541,062 $ 2,565 $ (2,923) $540,704
======== ======== ======== ========
HELD-TO-MATURITY
Obligations of states of the U.S. and
political subdivisions $ 61,956 $ 1,928 $ (71) $ 63,813
Mortgage-backed securities and collateralized
mortgage obligations 55,458 57 (306) 55,209
-------- -------- -------- --------
Total $117,414 $ 1,985 $ (377) $119,022
======== ======== ======== ========
8
The contractual maturities of securities available-for-sale and securities
held-to-maturity at March 31, 2005, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties. Dollar
amounts are shown in thousands.
AVAILABLE-FOR-SALE HELD-TO-MATURITY
---------------------- ----------------------
AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE
--------- ---------- --------- ----------
Due in one year or less $ 819 $ 823 $ 4,159 $ 4,203
Due after one year through five years 8,856 8,836 26,054 27,090
Due after five years through ten years 1,143 1,170 29,665 29,528
Due after ten years - - 571 571
Mortgage-backed securities and
collateralized mortgage obligations 536,962 528,950 59,255 58,593
Other securities 14,197 14,275 - -
-------- -------- -------- --------
Total $561,977 $554,054 $119,704 $119,985
======== ======== ======== ========
The following table summarizes the proceeds received and gross realized gains
and losses on the sales of the available-for-sale securities (dollars in
thousands):
THREE MONTHS ENDED MARCH 31,
2005 2004
-------- --------
Proceeds from sales and calls $ 35,443 $ 11,647
Gross realized gains 138 143
Gross realized losses (53) -
Securities with unrealized losses segregated by length of impairment, were as
follows (dollars in thousands):
MARCH 31,2005
----------------------------------------------------------------------------
LESS THAN 12 MONTHS MORE THAN 12 MONTHS
------------------------------------- ------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED AMORTIZED UNREALIZED FAIR
COST LOSSES FAIR VALUE COST LOSSES VALUE
--------- ---------- ---------- --------- ---------- --------
AVAILABLE-FOR-SALE
Obligations of the U.S Treasury and other
U.S. government agencies $ 7,720 $ (48) $ 7,672 $ - $ - $ -
Obligations of states of the U.S. and
political subdivisions 126 (1) 125 - - -
Mortgage-backed securities and
collateralized mortgage obligations 489,252 (8,606) 480,646 4,808 (94) 4,714
Other securities - - - 6,039 (292) 5,747
-------- -------- -------- -------- -------- --------
Total $497,098 $ (8,655) $488,443 $ 10,847 $ (386) $ 10,461
======== ======== ======== ======== ======== ========
HELD-TO-MATURITY
Obligations of states of the U.S. and
political subdivisions $ 21,666 $ (291) $ 21,375 $ - $ - $ -
Mortgage-backed securities and
collateralized mortgage obligations 57,547 (672) 56,875 - - -
-------- -------- -------- -------- -------- --------
Total $ 79,213 $ (963) $ 78,250 $ - $ - $ -
======== ======== ======== ======== ======== ========
Declines in the fair value of individual securities below their cost that are
other-than-temporary would result in writedowns, as a realized loss, of the
individual securities to their fair value. Management believes that the
unrealized losses on the Company's securities portfolio were caused primarily by
interest rate increases. The Company does not consider these investments to be
other-than-temporarily impaired at March 31, 2005.
The Company does not own any securities of any one issuer (other than U.S.
government and its agencies) of which aggregate adjusted cost exceeds 10% of the
consolidated shareholders' equity at March 31, 2005.
Securities with carrying values totaling $365.5 million and fair values totaling
$361.9 million at March 31, 2005 were pledged to secure public deposits.
9
3. LOANS
The loan portfolio is classified by major type as follows (dollars in
thousands):
MARCH 31, DECEMBER 31,
2005 2004
---------------------- ----------------------
AMOUNT % AMOUNT %
------------- ------ ------------ ------
Loans held for sale $ 10,611 0.4% $ 6,881 0.3%
Loans held for investment
Domestic
Commercial and industrial 699,125 28.6% 682,209 29.1%
Real estate:
Commercial 1,061,240 43.4% 1,015,114 43.3%
Construction 400,852 16.4% 363,044 15.5%
Residential mortgage 174,250 7.1% 179,623 7.7%
Consumer/other 68,737 2.8% 72,997 3.1%
Foreign
Commercial and industrial 28,688 1.2% 21,785 0.9%
Other loans 3,534 0.1% 3,324 0.1%
------------- ----- ------------ -----
Total loans held for investment 2,436,426 99.6% 2,338,096 99.7%
------------- ----- ------------ -----
Total loans $ 2,447,037 100.0% $ 2,344,977 100.0%
============= ===== ============ =====
Loan maturities and rate sensitivities of the loans held for investment
excluding real estate - residential mortgage and consumer loans, at March 31,
2005 are as follows (in thousands):
DUE AFTER
ONE YEAR
DUE IN ONE THROUGH FIVE DUE AFTER
YEAR OR LESS YEARS FIVE YEARS TOTAL
------------ ------------ ---------- ---------
Commercial and industrial $ 531,159 $159,709 $ 8,257 $ 699,125
Real estate - commercial 710,108 277,307 73,825 1,061,240
Real estate - construction 324,103 58,561 18,188 400,852
Foreign loans 12,404 19,811 7 32,222
---------- -------- -------- ----------
Total $1,577,774 $515,388 $100,277 $2,193,439
========== ======== ======== ==========
Loans with a fixed interest rate $ 219,592 $475,016 $ 94,477 $ 789,085
Loans with a floating interest rate 1,358,182 40,372 5,800 1,404,354
---------- -------- -------- ----------
Total $1,577,774 $515,388 $100,277 $2,193,439
========== ======== ======== ==========
The loan portfolio consists of loans made principally to borrowers located in
the Houston, San Antonio, and Dallas metropolitan areas. As of March 31, 2005,
there was no concentration of loans to any one type of industry exceeding 10% of
total loans nor were there any loans classified as highly leveraged
transactions.
As of March 31, 2005 and December 31, 2004, loans from Sterling Bank outstanding
to directors, officers and their affiliates were $14.9 million and $15.3
million, respectively. In the opinion of management, all transactions entered
into between Sterling Bank and such related parties have been and are, in the
ordinary course of business, made on the same terms and conditions as similar
transactions with unaffiliated persons. For the three months ended March 31,
2005, total principal payments were $382 thousand related to these loans. There
were no new related party loans originated during the first quarter of 2005.
The recorded investment in impaired loans is $18.8 million and $21.8 million, at
March 31, 2005 and December 31, 2004, respectively. Such impaired loans required
an allowance for credit losses of approximately $6.8 million and $6.7 million,
respectively. The average recorded investment in impaired loans for the three
months ended March 31, 2005 and 2004 was $17.4 million and $28.7 million,
respectively. Interest income on impaired loans of $25 thousand and $5 thousand
was recognized for cash payments received for the three months ended March 31,
2005 and 2004, respectively.
10
Included in impaired loans are nonperforming loans of $17.9 million and $20.6
million at March 31, 2005 and December 31, 2004, respectively, which have been
categorized by management as nonaccrual. For the three months ended March 31,
2005, interest foregone on nonaccrual loans was approximately $537 thousand. The
Company did not have any restructured loans as of March 31, 2005 or December 31,
2004.
When management doubts a borrower's ability to meet payment obligations,
typically when principal or interest payment are more than 90 days past due, the
loans are placed on nonaccrual status. Loans 90 days or more past due, not on
nonaccrual were $1.9 million and $2.4 million at March 31, 2005 and December 31,
2004, respectively.
4. ALLOWANCE FOR CREDIT LOSSES
An analysis of activity in the allowance for credit losses is as follows (in
thousands):
THREE MONTHS ENDED
MARCH 31,
2005 2004
-------- --------
Balance at beginning of the period $ 30,232 $ 30,722
Loans charged-off 2,365 8,368
Loan recoveries (387) (755)
-------- --------
Net loans charged-off 1,978 7,613
Provision for credit losses 3,340 3,500
-------- --------
Balance at end of the period $ 31,594 $ 26,609
======== ========
5. GOODWILL AND OTHER INTANGIBLES
The changes in the carrying amount of goodwill by reporting unit for the year
ended December 31, 2004, and the period ended March 31, 2005, are as follows (in
thousands):
HOUSTON SAN ANTONIO DALLAS TOTAL
------- ----------- ------ --------
Balance, January 1, 2004 $29,613 $ 27,658 $5,662 $ 62,933
Plaza Bank goodwill adjustments - (453) - (453)
------- -------- ------ --------
Balance, December 31, 2004 29,613 27,205 5,662 62,480
Goodwill adjustments - - - -
------- -------- ------ --------
Balance, March 31, 2005 $29,613 $ 27,205 $5,662 $ 62,480
======= ======== ====== ========
Management performs an annual evaluation of whether any impairment of the
goodwill and other intangibles has occurred, if any such impairment is
determined, a writedown is recorded. As of March 31, 2005, there were no
impairments recorded on goodwill.
The changes in the carrying amounts of core deposit intangibles for the year
ended December 31, 2004, and three months ended March 31, 2005, are as follows
(in thousands):
CORE
DEPOSIT
INTANGIBLES
-----------
Balance, January 1, 2004 $ 2,326
Amortization expense (487)
-------
Balance, December 31, 2004 1,839
Amortization expense (112)
-------
Balance, March 31, 2005 $ 1,727
=======
11
6. EARNINGS PER COMMON SHARE
Earnings per common share ("EPS") were computed based on the following (in
thousands, except per share amounts):
THREE MONTHS ENDED MARCH 31,
2005 2004
------- -------
Net income $ 7,758 $ 5,234
Basic:
Weighted average shares outstanding 45,131 44,700
Diluted:
Add incremental shares for:
Assumed exercise of outstanding options 466 471
Assumed conversion of preferred stock - 20
------- -------
Total 45,597 45,191
======= =======
Earnings per share:
Basic $ 0.17 $ 0.12
======= =======
Diluted $ 0.17 $ 0.12
======= =======
The incremental shares for the assumed exercise of the outstanding options were
determined by application of the treasury stock method. The incremental shares
for the conversion of the preferred stock were determined assuming applicable
performance goals had been met. The calculation of the diluted EPS excludes
98,421 and 262,860 options outstanding during the three months ended March 31,
2005 and 2004, respectively which were antidilutive.
7. COMMITMENTS AND CONTINGENCIES
LEASES - The Company leases certain office facilities and equipment under
operating leases. Rent expense under all noncancelable operating lease
obligations, net of income from noncancelable subleases aggregated, was
approximately $871 thousand and $690 thousand for the three months ended March
31, 2005 and 2004. There have been no significant changes in future minimum
lease payments by the Company since December 31, 2004. Refer to the 2004 Form
10-K for information regarding these commitments.
LITIGATION - The Company has been named as a defendant in various legal actions
arising in the normal course of business. In the opinion of management, after
reviewing such claims with outside counsel, resolution of these matters is not
expected to have a material adverse impact on the Consolidated Financial
Statements.
SEVERANCE AND NON-COMPETITION AGREEMENTS - The Company has entered into
severance and non-competition agreements with certain executive officers. Under
these agreements, upon a termination of employment under the circumstances
described in the agreements, each executive officer would receive: (i) two
years' base pay; (ii) an annual bonus for two years in an amount equal to the
highest annual bonus paid to the respective executive officer during the three
years preceding termination or change in control (as defined in the agreement);
(iii) continued eligibility for Company perquisites, welfare and life insurance
benefit plans, to the extent permitted, and in the event participation is not
permitted, payment of the cost of such welfare benefits for a period of two
years following termination of employment; (iv) payment of up to $20,000 in job
placement fees; and (v) to the extent permitted by law or the applicable plan,
accelerated vesting and termination of all forfeiture provisions under all
benefit plans, options, restricted stock grants or other similar awards.
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to various financial instruments with off-balance sheet
risk in the normal course of business to meet the financial needs of its
customers. These financial instruments include commitments to extend credit and
standby letters of credit. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized in
the consolidated balance sheets. The Company's exposure to credit loss in the
event of nonperformance by the other party to the financial instrument for
commitments to extend credit is represented by the contractual or notional
amount of these instruments. The Company uses the same credit policies in making
these commitments and conditional obligations as it does for on-balance sheet
instruments.
12
The following is a summary of the various financial instruments entered into by
the Company (in thousands):
MARCH 31, DECEMBER 31,
2005 2004
-------- -----------
Commitments to extend credit $668,090 $657,740
Standby letters of credit 43,028 28,435
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being fully drawn upon, the total commitment amounts disclosed above do
not necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if considered necessary by the Company, upon extension of credit, is
based on management's credit evaluation of the customer.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. The credit risk to the
Company in issuing letters of credit is essentially the same as that involved in
extending loan facilities to its customers
Off-balance sheet arrangements also include the Trust Preferred Securities,
which have been deconsolidated in this report as required. Refer to the 2004
Form 10-K for information regarding these Trust Preferred Securities.
9. REGULATORY MATTERS
CAPITAL REQUIREMENTS - The Company is subject to various regulatory capital
requirements administered by the state and federal banking agencies. Any
institution that fails to meet its minimum capital requirements is subject to
actions by regulators that could have a direct material effect on its financial
statements. Under the capital adequacy guidelines and the regulatory framework
for prompt corrective action, Sterling Bank must meet specific capital
guidelines based on its assets, liabilities, and certain off-balance sheet items
as calculated under regulatory accounting practices. The Company's capital
amount and classification under the regulatory framework for prompt corrective
action are also subject to qualitative judgments by the regulators.
To meet the capital adequacy requirements, Sterling Bancshares and Sterling Bank
must maintain minimum capital amounts and ratios as defined in the regulations.
Management believes, as of March 31, 2005 and December 31, 2004, that Sterling
Bancshares and Sterling Bank met all capital adequacy requirements to which they
are subject.
The most recent notification from the regulatory banking agencies categorized
Sterling Bank as "well capitalized" under the regulatory capital framework for
prompt corrective action and there have been no events since that notification
that management believes have changed Sterling Bank's category.
13
TO BE CATEGORIZED AS
WELL CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------------- ----------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- --------- --------
(IN THOUSANDS, EXCEPT PERCENTAGE AMOUNTS)
CONSOLIDATED:
As of March 31, 2005:
Total capital (to risk weighted assets) $413,282 14.0% $236,152 8.0% N/A N/A
Tier 1 capital (to risk weighted assets) 335,660 11.4% 118,076 4.0% N/A N/A
Tier 1 capital (to average assets) 335,660 10.1% 133,128 4.0% N/A N/A
As of December 31, 2004:
Total capital (to risk weighted assets) $406,343 14.6% $223,457 8.0% N/A N/A
Tier 1 capital (to risk weighted assets) 328,948 11.8% 111,729 4.0% N/A N/A
Tier 1 capital (to average assets) 328,948 10.1% 129,625 4.0% N/A N/A
STERLING BANK:
As of March 31, 2005:
Total capital (to risk weighted assets) $407,431 13.8% $235,680 8.0% $294,600 10.0%
Tier 1 capital (to risk weighted assets) 329,809 11.2% 117,840 4.0% 176,760 6.0%
Tier 1 capital (to average assets) 329,809 9.9% 133,390 4.0% 166,737 5.0%
As of December 31, 2004:
Total capital (to risk weighted assets) $399,808 14.3% $222,987 8.0% $278,734 10.0%
Tier 1 capital (to risk weighted assets) 322,413 11.6% 111,494 4.0% 167,241 6.0%
Tier 1 capital (to average assets) 322,413 9.9% 129,387 4.0% 161,733 5.0%
On January 1, 2004 the Company deconsolidated the outstanding trust preferred
securities from its Consolidated Financial Statements. However, trust preferred
securities are still considered in calculating the Company's Tier 1 capital
ratios. On March 1, 2005, the Federal Reserve released final rules for the
capital treatment of trust preferred securities. The rules, as applicable to the
Company, limit the aggregate amount of trust preferred securities and certain
other capital elements to 25% of Tier 1 capital, net of goodwill. At March 31,
2005 approximately $63.9 million of the $82.5 million of trust preferred
securities outstanding would count as Tier 1 capital. The excess amount of trust
preferred securities not qualifying for Tier 1 capital may be included in Tier 2
capital. This amount is limited to 50% of Tier 1 capital. There is a five-year
transition period for banks to become compliant with the new rules.
Additionally, the rules provide that trust preferred securities no longer
qualify for Tier 1 capital within five years of their maturity. Under the final
rules, the Company's consolidated capital ratios at March 31, 2005 would have
been:
Pro forma ratio:
Total capital (to risk weighted assets) 14.0%
Tier 1 capital (to risk weighted assets) 10.8%
Tier 1 capital (to average assets) 9.6%
DIVIDEND RESTRICTIONS - Dividends paid by Sterling Bank and Sterling Bancshares
are subject to certain restrictions imposed by regulatory agencies. Under these
restrictions there was an aggregate of approximately $21.5 million and $63.0
million available for payment of dividends at March 31, 2005, by Sterling Bank
and Sterling Bancshares, respectively.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report may contain certain statements relating to the future results of the
Company based upon information currently available. These "forward-looking
statements" (as defined in Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Exchange Act) are typically identified by words
such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," or words of similar meaning, or future or conditional verbs such as
"will," "would," "should," "could," or "may."
Forward-looking statements reflect our expectation or predictions of future
conditions, events or results based on information currently available and
involve risks and uncertainties that may cause actual results to differ
materially from those in such statements. These risks and uncertainties include,
but are not limited to, the following:
- general business and economic conditions in the markets we serve 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 and the
interest rate sensitivity of our balance sheet;
- our liquidity requirements could be adversely affected by changes in
our assets and liabilities;
- the effect of legislative or regulatory developments including
changes in laws concerning taxes, banking, securities, insurance and
other aspects of the financial securities industry;
- competitive factors among financial services organizations,
including product and pricing pressures and our ability to attract,
develop and retain qualified banking professionals;
- the effect of changes in accounting policies and practices, as may
be adopted by the Financial Accounting Standards Board, the
Securities and Exchange Commission, the Public Company Accounting
Oversight Board and other regulatory agencies; and
- the effect of fiscal and governmental policies of the United States
federal government.
Forward-looking statements speak only as of the date they are made. We do not
undertake to update forward-looking statements to reflect circumstances or
events that occur after the date the forward-looking statements are made or to
reflect the occurrence of unanticipated events, such as market deterioration
that adversely affects credit quality and asset values.
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, 2004, filed
with the Securities and Exchange Commission.
OVERVIEW
We are a bank holding company headquartered in Houston, Texas that provides a
range of commercial and consumer banking services through our subsidiary,
Sterling Bank. We operate 36 banking offices in the greater metropolitan areas
of Houston, San Antonio and Dallas. At March 31, 2005, the Company had
consolidated total assets of $3.4 billion, total loans of $2.4 billion, deposits
of $2.5 billion and shareholders' equity of $314.9 million.
We reported net income of $7.8 million for the first quarter ended March 31,
2005, a 48% increase compared to $5.2 million reported for the first quarter of
2004. Earnings were $0.17 per diluted share in 2005's first quarter, up 47% from
$0.12 per diluted share for the first quarter of 2004.
Our first quarter earnings showed significant improvement resulting from
strengthened business conditions and our success in attracting new lenders and
customers. These results also reflect our continued focus on asset quality and
expense control.
We have implemented various expense reduction initiatives over the past year.
These initiatives, along with higher revenues, improved our efficiency ratio to
66.22% for the first quarter of 2005 compared with 72.23% for the first quarter
of 2004.
15
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make a
number of judgments, estimates and assumptions that affect the reported amount
of assets, liabilities, income and expenses in our Consolidated Financial
Statements and accompanying notes. We believe that the judgments, estimates and
assumptions used in the preparation of our Consolidated Financial Statements are
appropriate given the factual circumstances as of March 31, 2005.
Various elements of our accounting policies, by their nature, are inherently
subject to estimation techniques, valuation assumptions and other subjective
assessments. We have identified two accounting policies that, due to the
judgments, estimates and assumptions inherent in those policies, and the
sensitivity of our Consolidated Financial Statements to those judgments,
estimates and assumptions, are critical to an understanding of our Consolidated
Financial Statements. These policies relate to the methodology that determines
our allowance for credit losses and the assumptions used in determining
stock-based compensation.
These policies and the judgments, estimates and assumptions are described in
greater detail in the Company's 2004 Annual Report on Form 10-K in the "Critical
Accounting Policies" section of Management's Discussion and Analysis and in Note
1 to the Consolidated Financial Statements - "Organization and Summary of
Significant Accounting and Reporting Policies." There have been no material
changes in these policies since December 31, 2004.
RECENT ACCOUNTING STANDARDS
In March 2004, the Emerging Issues Task Force reached a consensus on Issue No.
03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments. This Issue provides guidance for determining when an
investment is other-than-temporarily impaired. It specifically addresses whether
an investor has the ability and intent to hold an investment until recovery. In
addition, Issue 03-1 contains disclosure requirements that provide useful
information about impairments that have not been recognized as
other-than-temporary for investments within the scope of this Issue. On
September 30, 2004, the Financial Accounting Standards Board deferred the
effective date of this Issue's guidance on how to evaluate and recognize an
impairment loss that is other-than-temporary. This Issue's guidance is pending
the issuance of a final FASB Staff Position ("FSP") relating to the draft FSP
EITF Issue 03-1-a, Implementation Guidance for the Application of Paragraph 16
of EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments." This deferral did not change the disclosure
guidance which remains effective for fiscal years ending after December 15,
2003.
SFAS No. 123R, Share-Based Payment (Revised 2004) establishes standards for
accounting for transactions in which an enterprise receives employee services in
exchange for (a) equity instruments of the enterprise or (b) liabilities that
are based on the fair value of the enterprise's equity instruments or that may
be settled by the issuance of such equity instruments. The effective date for
adoption of SFAS 123R was deferred by the Securities and Exchange Commission
("SEC") in April 2005. SFAS 123R is now effective for the beginning of the next
fiscal year that begins after June 15, 2005. SFAS 123R eliminates the ability to
account for stock-based compensation using the intrinsic value-based method of
accounting, and requires that such transactions be recognized as compensation
cost in the income statement based on their fair values on the date of the
grant. SFAS 123R applies to new awards and to awards modified, repurchased, or
cancelled after January 1, 2006. The Company plans to transition to fair value
based accounting for stock-based compensation using a modified version of
prospective application ("modified prospective application"). Additionally,
compensation cost for the portion of awards for which the requisite service has
not been rendered (generally referring to non-vested awards) that are
outstanding as of January 1, 2006 must be recognized as the remaining requisite
service is rendered during the period of and/or the periods after the adoption
of SFAS 123R. The attribution of compensation cost for those earlier awards will
be based on the same method and on the same grant-date fair values previously
determined for the pro forma disclosures required for companies that did not
adopt the fair value accounting method for stock-based employee compensation.
Based on the stock-based compensation awards outstanding as of March 31, 2005
for which the requisite service is not expected to be fully rendered prior to
January 1, 2006, the Company expects to recognize additional pre-tax
compensation cost of approximately $550 thousand in 2006 as a result of the
adoption of SFAS 123R.
In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB 107"). SAB
107 expresses the views of the SEC staff regarding the interaction between SFAS
123R and the SEC rules and regulations. Additionally, SAB 107 provides the
staff's views on certain issues including assumptions such as expected
volatility and expected term used in the valuation of share-based arrangements
by public companies, share-based payment transactions with nonemployees, the
accounting for income tax effects of share-based payment arrangements upon
adoption of SFAS 123R and disclosures in Management's Discussion and Analysis
subsequent to adoption of SFAS 123R.
16
SELECTED FINANCIAL DATA
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
2005 2004 2004
---------- ---------- ------------
(Dollars and shares in thousands, except for per share amounts)
INCOME STATEMENT DATA:
Net interest income $ 36,739 $ 33,021 $ 135,384
Provision for credit losses 3,340 3,500 12,250
Noninterest income 6,647 7,217 30,922
Noninterest expense 28,732 29,062 119,609
Income before income taxes 11,314 7,676 34,447
Net income 7,758 5,234 24,963
BALANCE SHEET DATA (at period-end):
Total assets $3,444,555 $3,163,285 $3,336,070
Total loans 2,447,037 2,147,975 2,344,977
Allowance for credit losses 31,594 26,609 30,232
Total securities 673,758 581,689 658,118
Trading assets 13,639 137,623 36,720
Total deposits 2,493,863 2,506,352 2,443,967
Short-term borrowings 476,315 201,950 420,575
Subordinated debt 46,027 48,319 47,162
Junior subordinated debt 82,475 82,475 82,475
Shareholders' equity 314,908 299,860 313,172
COMMON SHARE DATA:
Earnings per share (1)
Basic $ 0.17 $ 0.12 $ 0.56
Diluted 0.17 0.12 0.55
Shares used in computings earnings per common share
Basic 45,131 44,700 44,839
Diluted 45,597 45,191 45,278
End of period common shares outstanding 45,217 44,756 45,068
Book value per common share at period-end
Total $ 6.96 $ 6.69 $ 6.95
Tangible 5.54 5.25 5.52
Cash dividends paid per common share 0.060 0.050 0.200
Common stock dividend payout ratio 34.89% 42.68% 35.91%
SELECTED PERFORMANCE RATIOS AND OTHER DATA:
Return on average common equity (2) 9.88% 7.09% 8.23%
Return on average assets(2) 0.93% 0.66% 0.78%
Net interest margin 4.84% 4.58% 4.65%
Efficiency ratio 66.22% 72.23% 71.92%
Full-time equivalent employees 962 1044 961
Number of banking offices 36 37 36
17
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
2005 2004 2004
----- ------ ------------
LIQUIDITY AND CAPITAL RATIOS:
Average loans to average deposits 96.25% 87.35% 89.32%
Period-end shareholders' equity to total assets 9.14% 9.48% 9.39%
Average shareholders' equity to average assets 9.41% 9.34% 9.52%
Period-end tangible capital to total tangible assets 7.42% 7.59% 7.61%
Tier 1 capital to risk-weighted assets 11.37% 12.57% 11.78%
Total capital to risk-weighted assets 14.00% 15.59% 14.55%
Tier 1 leverage ratio (Tier 1 capital to total average assets) 10.09% 9.96% 10.15%
ASSET QUALITY RATIOS:
Period-end allowance for credit losses to period-end loans 1.29% 1.24% 1.29%
Net charge-offs to average loans (2) 0.34% 1.42% 0.58%
Period-end allowance for credit losses to nonperforming loans 176.90% 162.56% 146.72%
Nonperforming assets to period-end loans and foreclosed assets 0.78% 0.89% 0.95%
Nonperforming loans to period-end loans 0.73% 0.76% 0.88%
Nonperforming assets to period-end assets 0.55% 0.60% 0.67%
(1) The calculation of diluted EPS excludes 98,421 and 262,860 options for the
three months ended March 31, 2005 and 2004 and 218,895 options for the year
ended December 31, 2004, which were antidilutive.
(2) Interim periods annualized
RESULTS OF OPERATIONS
NET INCOME - Net income for the quarter ended March 31, 2005 was $7.8 million, a
48% increase compared to $5.2 million earned for the first quarter of 2004.
Earnings were $0.17 per diluted share in 2005's first quarter, up 47% from $0.12
per diluted share for the first quarter of 2004.
Details of the changes in the various components of net income are discussed
below.
NET INTEREST INCOME - Net interest income represents the amount by which
interest income on interest-earning assets, including loans and securities,
exceeds interest paid on interest-bearing liabilities, including deposits and
borrowings. Net interest income is our principal source of earnings. Interest
rate fluctuations, as well as changes in the amount and type of earning assets
and liabilities, combine to affect net interest income.
The Federal Reserve Board significantly influences market interest rates,
including rates offered for loans and deposits by many financial institutions.
Generally, when the Federal Reserve Board changes the target overnight interest
rate charged by banks, the market responds with a similar change in the prime
lending rate. Our loan portfolio is impacted significantly by changes in
short-term interest rates. Between 2001 and 2003, the Federal Reserve Board
decreased overnight interest rates to 1.00%. During this period, market interest
rates were near 40-year lows. This extended period of declining and then low
interest rates negatively impacted our net interest margin and net interest
income during these periods.
Since June 2004 the Federal Reserve Board has increased overnight interest rates
by 175 basis points to 2.75% at March 31, 2005. Since our balance sheet is asset
sensitive, our interest-earning assets generally reprice more quickly than the
interest-bearing liabilities. Our net interest margin began to improve during
the second half of 2004 continuing into 2005 following these increases in
interest rates.
Net interest income was $36.7 million for the three month period ended March 31,
2005, up 11.3% compared to the same period of 2004, driven primarily by loan
growth and an increasing net interest margin. Interest income increased $6.8
million for this time frame due to an increase in average interest-earning
assets and a 63 basis point increase in the average yield earned on
interest-earning assets. This increase was partially offset by an increase in
interest expense of $3.1 million during the first three months of 2005 compared
to the same period in 2004, resulting from higher average interest-bearing
liabilities and a 50 basis point increase in the average yield paid on
interest-bearing liabilities.
Our net interest margin was 4.84% for the first quarter of 2005 compared to
4.58% for the first quarter of 2004. The increase of 26 basis points was
primarily attributable to growth in the loan portfolio and increasing interest
rates previously noted.
Average interest-earning assets increased $174.5 million or 6.0% for the first
quarter of 2005 compared to the same period in 2004. The average yield earned on
interest-earning assets increased 63 basis points for the same time frame. These
increases resulted primarily from
18
an increase in average loans held for investment of $223.1 million or 10.4% for
the first quarter of 2005 over the comparable period in 2004. During the first
quarter of 2005, average loans held for investment were 77% of interest-earning
assets compared to 74% for the first quarter of 2004. This growing loan
portfolio coupled with increases in interest rates contributed an additional 60
basis points to the average yield earned. Trading assets decreased on average
$136.0 million or 83.0% for the first quarter of 2005 compared to the same
period of 2004. We have lowered our holdings in these assets in response to
current market conditions and redeployed these assets, in part, into the
securities portfolios. On average, the securities portfolio was higher by $93.4
million or 16.4% for the first quarter of 2005 compared to the same period in
2004. We have continued to increase the size of our securities portfolio as a
percentage or interest-earning assets for balance sheet liquidity purposes.
Average interest-bearing liabilities for the first quarter of 2005 were $2.2
billion, an increase of $130.3 million or 6.4% compared to the same period in
2004. Average rate paid on interest-bearing liabilities increased 50 basis
points for this same time frame. This increase was due in part to an increase in
average short-term borrowings of $189.8 million with an increase in the rate
paid on these borrowings of 138 basis points. The impact of the increase in the
rate paid on short-term borrowings was partially mitigated by growth in
lower-cost interest-bearing deposits. Deposits in lower-cost interest-bearing
products increased on average $68.3 million or 7.3% for the first quarter of
2005 compared to the first quarter of 2004 while the rate paid on these deposit
increased a modest 30 basis points.
19
Certain average balances, together with the total dollar amounts of interest
income and expense and the average interest yields/rates are included below. No
tax equivalent adjustments were made (dollars in thousands).
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------------------
2005 2004
---------------------------------------- ------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
----------- --------- ---------- ---------- -------- ----------
INTEREST-EARNING ASSETS:
Loans held for sale (1) $ 8,150 $ 146 7.28% $ 9,210 $ 128 5.59%
Loans held for investment (1):
Taxable 2,367,303 39,670 6.80% 2,143,084 33,039 6.20%
Non-taxable 3,086 65 8.50% 4,188 67 6.43%
Securities:
Taxable 597,949 6,155 4.17% 528,063 5,020 3.82%
Non-taxable 64,967 628 3.92% 41,496 455 4.41%
Trading assets 27,786 312 4.56% 163,807 1,462 3.59%
Federal funds sold 6,274 37 2.42% 10,915 20 0.74%
Deposits in financial institutions 1,220 9 3.05% 1,480 15 4.08%
----------- --------- ---- ---------- -------- ----
Total interest-earning assets 3,076,735 47,022 6.20% 2,902,243 40,206 5.57%
NONINTEREST-EARNING ASSETS:
Cash and due from banks 102,316 104,978
Premises and equipment, net 39,905 48,854
Other assets 196,223 156,660
Allowance for credit losses (31,329) (31,555)
----------- ----------
Total noninterest-earning assets 307,115 278,937
----------- ----------
TOTAL ASSETS $ 3,383,850 $3,181,180
=========== ==========
INTEREST-BEARING LIABILITIES:
Deposits:
Demand and savings $ 1,009,359 $ 1,774 0.71% $ 941,006 $ 953 0.41%
Certificates and other time 591,830 3,372 2.31% 719,620 3,365 1.88%
Short-term borrowings 437,547 2,690 2.49% 247,794 681 1.11%
Subordinated debt 47,056 787 6.78% 47,112 595 5.08%
Junior subordinated debt 82,475 1,660 8.16% 82,475 1,591 7.76%
----------- --------- ---- ---------- -------- ----
Total interest-bearing liabilities 2,168,267 10,283 1.92% 2,038,007 7,185 1.42%
NONINTEREST-BEARING SOURCES:
Demand deposits 870,059 808,109
Other liabilities 27,166 38,012
----------- ----------
Total noninterest-bearing liabilities 897,225 846,121
Shareholders' equity 318,358 297,052
----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,383,850 $3,181,180
=========== ==========
--------- ---- -------- ----
NET INTEREST INCOME & MARGIN $ 36,739 4.84% $ 33,021 4.58%
========= ==== ======== ====
(1) For the purpose of calculating loan yields, average loan balances included
nonaccrual loans with no related interest income.
20
NONINTEREST INCOME - Noninterest income for the three months ended March 31,
2005 and 2004, respectively, is summarized as follows (in thousands):
FOR THE THREE MONTHS ENDED
MARCH 31, 2005 MARCH 31, 2004
-------------- --------------
Customer service fees $ 2,896 $ 3,921
Net gain on the sale of securities 85 143
Net gain on trading assets 82 348
Bank owned life insurance 710 473
Debit card income 416 357
Other 2,458 1,975
-------- --------
6,647 $ 7,217
======== ========
Customer service fees for the three months ended March 31, 2005 decreased $1.0
million compared to the same period in 2004. This decrease was due in part to a
higher earnings credit rate on certain commercial accounts, lower insufficient
fund fees and increased competition for deposits.
Net gains on securities transactions for the three months ended March 31, 2005
and 2004 were not significant and were the result of routine portfolio
management activities in the securities portfolio. Net gains on trading assets
decreased $266 thousand for the three months ended March 31, 2005 compared to
the same period in 2004. This decrease is attributable to a decrease in trading
activity resulting from current market conditions for these types of assets.
Other noninterest income increased $483 thousand for the three months ended
March 31, 2005 compared to the same period in 2004 due in part to a special
distribution of $278 thousand received as a result of the merger of PULSE EFT
Association with Discover Financial Services.
NONINTEREST EXPENSE - Noninterest expense for the three months ended March 31,
2005 and 2004, respectively, is summarized as follows (in thousands):
FOR THE THREE MONTHS ENDED
MARCH 31, 2005 MARCH 31, 2004
-------------- --------------
Salaries and employee benefits $ 17,181 $ 17,687
Occupancy expense 3,642 3,597
Technology 1,214 1,388
Professional fees 1,296 1,062
Postage, delivery and supplies 750 875
Marketing 645 386
Core deposit intangibles amortization 112 124
Net losses and carrying costs of
other real estate and foreclosed property 56 19
Other 3,836 3,924
---------- ----------
$ 28,732 $ 29,062
========== ==========
Salaries and employee benefits for the three month period ended March 31, 2005
decreased $506 thousand or 2.9% compared to the same period in 2004. This
decrease is due in part to a reduction in staffing levels through attrition and
modification of certain perquisite benefit programs. Staffing levels decreased
from 1,044 full-time equivalent employees at March 31, 2004 to 962 at March 31,
2005.
Technology expense decreased $174 thousand or 12.5% for the three months ended
March 31, 2005 over the comparable period in 2004. This decrease was due
primarily to the costs of upgrading the bank's computer systems in 2004.
Professional fees increased $234 thousand or 22.0% for the three months ended
March 31, 2005 compared to the same period of 2004. This increase was primarily
the result of higher legal and consulting fees incurred in connection with the
Company's ongoing Sarbanes-Oxley efforts.
Marketing expense increased $259 thousand or 67.1% for the three month period
ended March 31, 2005 compared to the same period in 2004. This increase was due
to additional marketing efforts during the first three months of 2005 through
television, print and radio advertising.
21
Other noninterest expense was $3.8 million for the three-months ended March 31,
2005, down $88 thousand or 2.2% compared with the same period of 2004. No single
component of other noninterest expense made up a significant portion of the
change from the first quarter of 2004.
INCOME TAXES - We provided $3.6 million for federal and state income taxes
during the first quarter of 2005 and $2.4 million for the same period of 2004.
The effective tax rates for each period were 31.4% and 31.8%, respectively.
FINANCIAL CONDITION
LOANS HELD FOR INVESTMENT - The following table summarizes our loan portfolio by
type, excluding loans held for sale (dollars in thousands):
MARCH 31, 2005 DECEMBER 31, 2004
AMOUNT % AMOUNT %
-------------- ----- ----------- -----
Commercial and industrial $ 699,125 28.6% $ 682,209 29.2%
Real estate:
Commercial 1,061,240 43.6% 1,015,114 43.4%
Construction 400,852 16.5% 363,044 15.5%
Residential mortgage 174,250 7.2% 179,623 7.7%
Consumer/other 68,737 2.8% 72,997 3.1%
Foreign loans 32,222 1.3% 25,109 1.1%
---------- ----- ----------- -----
Total loans held for investment $2,436,426 100.0% $ 2,338,096 100.0%
========== ===== =========== =====
At March 31, 2005, loans held for investment were $2.4 billion, an increase of
$98.3 million or 4.2% over loans held for investment at December 31, 2004. We
experienced good growth in the commercial and industrial and construction
lending portfolios. Our primary lending focus is commercial loans and
owner-occupied real estate loans to local businesses. At March 31, 2005,
commercial and industrial loans and commercial real estate loans were 28.7% and
43.6%, respectively of loans held for investment.
At March 31, 2005, loans held for investment were 97.7% of deposits and 70.7% of
total assets. As of March 31, 2005, we had no material concentrations of loans.
LOANS HELD FOR SALE - Loans held for sale were $10.6 million at March 31, 2005,
as compared with $6.9 million at December 31, 2004. Loans held for sale
consisted primarily of the guaranteed portion of SBA loans we originate. Due to
the timing of the sales of these loans to investors, the balance of loans in the
held for sale category at any given time may vary.
TRADING ASSETS - Trading assets were $13.6 million at March 31, 2005, as
compared with $36.7 million at December 31, 2004, a decrease of $23.1 million or
62.9%. These assets consist primarily of the government guaranteed portion of
SBA loans purchased. Trading assets are purchased with the anticipation of sale
in the near term and are carried at market value. The size of this portfolio is
dependent upon the current market conditions for SBA loans. We have reduced our
holdings of these assets in response to the current market conditions.
SECURITIES - The Company's securities portfolio at March 31, 2005 totaled $673.8
million, as compared to $658.1 million at December 31, 2004, an increase of
$15.6 million or 2.4%. Net unrealized losses on the available-for-sale
securities were $7.9 million at March 31, 2005 as compared to $358 thousand at
December 31, 2004. Net unrealized losses on our securities portfolio were caused
primarily by interest rate increases. We do not consider these investments to be
other-than-temporarily impaired at March 31, 2005.
22
DEPOSITS - The following table summarizes the Company's deposit portfolio by
type (dollars in thousands):
MARCH 31, 2005 DECEMBER 31, 2004
AMOUNT % AMOUNT %
----------- ----- ---------- ------
Noninterest-bearing demand $ 888,384 35.6% $ 884,017 36.2%
Interest-bearing demand 995,462 39.9% 970,281 39.7%
Certificates and other time deposits
Jumbo 365,405 14.7% 345,785 14.1%
Regular 200,481 8.0% 197,561 8.1%
Brokered 44,131 1.8% 46,323 1.9%
----------- ----- ---------- -----
Total deposits $ 2,493,863 100.0% $2,443,967 100.0%
=========== ===== ========== =====
Total deposits as of March 31, 2005 increased $49.9 million to $2.5 billion, up
2.0% compared to $2.4 billion at December 31, 2004. The percentage of
noninterest bearing deposits to total deposits as of March 31, 2005 was 35.6%.
SHORT-TERM BORROWINGS - As of March 31, 2005, we had $476.3 million in
short-term borrowing compared to $420.6 million at December 31, 2004, an
increase of $55.7 million or 13.3%. The Company's primary source of short-term
borrowings is the Federal Home Loan Bank. The weighted-average interest rate on
federal funds purchased from the Federal Home Loan Bank was 2.52% for the first
quarter of 2005. Short-term borrowings are used to fund a portion of our lending
activities and for liquidity purposes. Generally, these borrowings have
maturities of less than 30 days and are replaced at maturity either with
additional borrowings or through increased customer deposits.
ASSET QUALITY
RISK ELEMENTS - Nonperforming assets includes restructured loans, nonaccrual
loans, real estate acquired by foreclosure and other repossessed assets.
Nonperforming and past-due 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.
Nonperforming assets and potential problem loans consisted of the following
(dollars in thousands):
MARCH 31, DECEMBER 31,
2005 2004
--------- ------------
Nonperforming loans - nonaccrual $ 17,860 $ 20,605
Real estate acquired by foreclosure 957 1,536
Other repossessed assets 226 216
--------- --------
Total nonperforming assets $ 19,043 $ 22,357
========= ========
Potential problem loans $ 58,257 $ 54,293
========= ========
Accruing loans past due 90 days or more $ 1,910 $ 2,395
========= ========
Period-end allowance for credit losses to
nonperforming loans 176.90% 146.72%
Nonperforming loans to period-end loans 0.73% 0.88%
Nonperforming assets to period-end assets 0.55% 0.67%
Nonperforming assets to period-end loans and
foreclosed assets 0.78% 0.95%
At March 31, 2005, we had $19.0 million in nonperforming assets, a decrease of
$3.3 million or 14.8% from $22.4 million at December 31, 2004. Accruing loans
past due 90 days or more at March 31, 2005 totaled $1.9 million.
ALLOWANCE FOR CREDIT LOSSES - The provision for credit losses for the three
months ended March 31, 2005 was $3.3 million as compared to $3.5 million for the
first quarter of 2004.
The allowance for credit losses and the related provision for credit losses are
determined based on the historical credit loss experience, changes in the loan
portfolio including size, mix and risk of the individual loans and current
economic conditions. We continuously
23
monitor economic conditions in our local market areas and the probable impact on
borrowers, on past-due amounts, on related collateral values, on the number and
size of the non-performing loans and on the resulting amount of charges-offs for
the period.
Net charge-offs were $2.0 million or 0.34% (annualized) of average loans for the
three month period ended March 31, 2005. Net charge-offs decreased $5.6 million
or 74.0% compared to the same period in 2004. During the first quarter of 2004,
the Company decided to minimize its loss exposure by selling $10.7 million of
nonperforming loans, which resulted in an increase in charge-offs of $4.6
million.
Overall, the allowance for credit losses at March 31, 2005 was $31.6 million and
represented 1.29% of total loans. The allowance for credit losses at March 31,
2005 was 176.9% of nonperforming loans, up favorably from 162.6% at December 31,
2004, principally because of improvements in asset quality.
The following table presents an analysis of the allowance for credit losses and
other related data (dollars in thousands):
THREE MONTHS ENDED
MARCH 31,
2005 2004
---------- ---------
Allowance for credit losses at beginning of period $ 30,232 $ 30,722
Charge-offs:
Commercial, financial, and industrial 1,339 5,574
Real estate, mortgage and construction 511 2,295
Consumer 515 499
---------- ---------
Total charge-offs 2,365 8,368
---------- ---------
Recoveries
Commercial, financial, and industrial 313 586
Real estate, mortgage and construction 5 91
Consumer 69 78
---------- ---------
Total recoveries 387 755
---------- ---------
Net charge-offs 1,978 7,613
Provision for credit losses 3,340 3,500
---------- ---------
Allowance for credit losses at end of period $ 31,594 $ 26,609
========== =========
Period-end allowance for credit losses to
period-end loans 1.29% 1.24%
Net charge-offs to average loans (annualized) 0.34% 1.42%
Period-end allowance for credit losses to
nonperforming loans 176.90% 162.56%
INTEREST RATE SENSITIVITY
Interest rate risk is the risk to interest income attributed to the repricing
characteristics of interest sensitive assets and liabilities. An interest
sensitive asset or liability is one that experiences changes in cashflows as a
direct result of changes in market interest rates.
We manage interest rate risk by positioning the balance sheet to maximize net
interest income while maintaining an acceptable level of risk, remaining mindful
of the relationship between profitability, liquidity and interest rate risk. The
overall interest rate risk position and strategies for the management of
interest rate risk are reviewed by senior management, the Asset/Liability
Management Committee and our Board of Directors on an ongoing basis.
We measure interest rate risk using a variety of methodologies including, but
not limited to, dynamic simulation analysis, GAP analysis and static balance
sheet rate shocks. Dynamic simulation analysis is the primary tool used to
measure interest rate risk. We model the effects of non-parallel movements in
multiple yield curves, changes in borrower and depositor behaviors, changes in
loan and deposit pricing, and changes in loan and deposit portfolio compositions
and growth rates over a 24 month horizon.
We utilize static balance sheet rate shocks to estimate the potential impact on
net interest income from changes in interest rates under various rate scenarios.
This analysis estimates a percentage of change in these metrics from the stable
rate base scenario versus alternative scenarios of rising and falling market
interest rates by instantaneously shocking a static balance sheet. The following
table summarizes the simulated change over a 12-month horizon as of March 31,
2005 and December 31, 2004:
24
INCREASE
CHANGES IN (DECREASE) IN
INTEREST RATES NET INTEREST
(BASIS POINTS) INCOME
----------------- -------------
MARCH 31, 2005
+200 5.80%
+100 2.99%
Base 0.00%
-100 -4.74%
-200 -9.33%
DECEMBER 31, 2004
+200 5.96%
+100 3.14%
Base 0.00%
-100 -5.43%
-200 -6.69%
These sensitivities are all within the thresholds set by our Asset/Liability
Committee. Each rate scenario reflects unique prepayment and repricing
assumptions. Because of uncertainties related to customer behaviors, loan and
deposit pricing levels, competitor behaviors, and socio-economic factors that
could effect the shape of the yield curves, this analysis is not intended to and
does not provide a precise forecast of the affect actual changes in market rates
will have on the Company. The interest rate sensitivity analysis includes
assumptions that (i) the composition of our interest sensitive assets and
liabilities existing at period-end will remain constant over the measurement
period; and (ii) that changes in market rates are parallel and instantaneous
across the yield curve regardless of duration or repricing characteristics of
specific assets or liabilities. Further, this analysis does not contemplate any
actions that we might undertake in response to changes in market factors.
Accordingly, this analysis is not intended to and does not provide a precise
forecast of the affect actual changes in market rates will have on the Company.
The objectives of our liquidity management is to maintain our ability to meet
day-to-day deposit withdrawals and other payment obligations, to raise funds to
support asset growth, to maintain reserve requirements and otherwise operate on
an ongoing basis. We strive to manage a liquidity position sufficient to meet
operating requirements while maintaining an appropriate balance between assets
and liabilities to meet the expectations of our shareholders. In recent years,
our liquidity needs have primarily been met by growth in core deposits. In
addition to core deposits, we have access to funds from correspondent banks and
from the Federal Home Loan Bank, supplemented by amortizing securities and loan
portfolios. The Bank also accepts brokered certificates of deposit.
Sterling Bancshares must provide for its own liquidity and fund its own
obligations. The primary source of Sterling Bancshares' revenues is from
dividends declared by the Bank. There are statutory and regulatory provisions
that could limit the ability of the Bank to pay dividends to Sterling
Bancshares. At March 31, 2005, the Bank had approximately $21.5 million in the
aggregate available to be paid as dividends to Sterling Bancshares. It is not
anticipated that such restrictions will have an impact on the ability of
Sterling Bancshares to meet its ongoing cash obligations. As of March 31, 2005,
we did not have any material commitments for capital expenditures.
CAPITAL RESOURCES AND LIQUIDITY
CAPITAL RESOURCES - At March 31, 2005, shareholders' equity totaled $314.9
million or 9.14% of total assets, as compared to $313.2 million or 9.39% of
total assets at December 31, 2004. Our risk-based capital ratios at March 31,
2005 remain above the levels designated by regulatory agencies for us to be
considered as "well capitalized." Our capital ratios at March 31, 2005 were as
follows (dollars in thousands):
FOR MINIMUM CAPITAL
ACTUAL ADEQUACY PURPOSES
------------------- -------------------
AMOUNT RATIO AMOUNT RATIO
--------- ----- --------- -----
Total capital (to risk weighted assets) $ 413,282 14.0% $ 236,152 8.0%
Tier 1 capital (to risk weighted assets) 335,660 11.4% 118,076 4.0%
Tier 1 capital (to average assets) 335,660 10.1% 133,128 4.0%
LIQUIDITY - We manage balance sheet liquidity to fund growth in earning assets
and to pay liability maturities, depository withdrawals and shareholders'
dividends. We strive to manage a liquidity position sufficient to meet operating
requirements while maintaining an
25
appropriate balance between assets and liabilities to meet the expectations of
our shareholders. The Company's primary source of funds is its core deposits.
Core deposits exclude brokered deposits and time deposits over $100,000. Average
core deposits funded 67.6% of total interest-earning assets for the three months
ended March 31, 2005. In addition to core deposits, we have access to funds from
correspondent banks and from the Federal Home Loan Bank. The bank also accepts
brokered certificates of deposit. As part of our ongoing business, we regularly
evaluate acquisition possibilities and similar transactions with other financial
service companies. Potential acquisitions may involve the payment of cash or
issuance of debt or equity securities. We believe that our liquidity position is
adequate to meet our current and anticipated needs. For more information
regarding liquidity, please refer to our 2004 Annual Report on Form 10-K.
On April 25, 2005, our Board of Directors authorized us to repurchase up to
2,500,000 shares of our common stock, not to exceed 500,000 shares in any
calendar year. We may repurchase our shares of common stock from time to time in
the open market or through privately negotiated transactions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes in market risk we face since December 31,
2004. For more information regarding quantitative and qualitative disclosures
about market risk of our financial instruments, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Interest Rate
Sensitivity." Our principal market risk exposure is to interest rates.
ITEM 4. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES - Based on their evaluation of
the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
under the Securities and Exchange Act of 1934) as of the end of the period
covered by this report, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures are effective as of the end of the period covered by this report.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING - There were no changes in
our internal control over financial reporting that occurred during the most
recent fiscal quarter that have 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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On April 25, 2005, the Company's Board of Directors authorized the repurchase of
up to 2,500,000 shares of common stock, not to exceed 500,000 shares in any
calendar year. The Company may repurchase shares of its common stock from time
to time in the open market or through privately negotiated transactions. No
shares were repurchased by the Company during the quarter ended March 31, 2005.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS.
(a) Exhibits:
26
+10.1 -- Severance and Non-Competition Agreement dated effective January
1, 2005, by and among Sterling Bancshares, Inc., Sterling Bank, and
Robert S. Smith. [Incorporated by reference to Exhibit 10.1 of the
Company's Current Report on Form 8-K filed on January 13, 2005 (File
No. 000-20750).]
+10.2 -- Form of Restricted Stock Agreement. [Incorporated by reference to
Exhibit 10.1 of the Company's Current Report on Form 8-K filed on
February 4, 2005 (File No. 000-207500).]
+10.3 -- Form of Incentive Stock Agreement. [Incorporated by reference to
Exhibit 10.2 of the Company's Current Report on Form 8-K filed on
February 4, 2005 (File No. 000-207500).]
11 -- Statement Regarding Computation of Earnings Per Share (included as
Note (6) to Consolidated Financial Statements on page 12 of this
Quarterly Report on Form 10-Q).
*31.1 -- Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 of J. Downey Bridgwater, President and Chief Executive Officer.
*31.2 -- Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 of Stephen C. Raffaele, Executive Vice President and Chief
Financial Officer.
**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.
** As furnished herewith.
+ Management Compensation Agreement.
27
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.
DATE: MAY 9, 2005 BY: /s/ J. DOWNEY BRIDGWATER
-----------------------------------
J. DOWNEY BRIDGWATER
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
DATE: MAY 9, 2005 BY: /s/ STEPHEN C. RAFFAELE
-----------------------------------
STEPHEN C. RAFFAELE
EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
28
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
+10.1 -- Severance and Non-Competition Agreement dated effective January
1, 2005, by and among Sterling Bancshares, Inc., Sterling Bank, and
Robert S. Smith. [Incorporated by reference to Exhibit 10.1 of the
Company's Current Report on Form 8-K filed on January 13, 2005 (File
No. 000-20750).]
+10.2 -- Form of Restricted Stock Agreement. [Incorporated by reference to
Exhibit 10.1 of the Company's Current Report on Form 8-K filed on
February 4, 2005 (File No. 000-207500).]
+10.3 -- Form of Incentive Stock Agreement. [Incorporated by reference to
Exhibit 10.2 of the Company's Current Report on Form 8-K filed on
February 4, 2005 (File No. 000-207500).]
11 -- Statement Regarding Computation of Earnings Per Share (included
as Note (6) to Consolidated Financial Statements on page 12 of this
Quarterly Report on Form 10-Q).
*31.1 -- Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 of J. Downey Bridgwater, President and Chief Executive Officer.
*31.2 -- Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 of Stephen C. Raffaele, Executive Vice President and Chief
Financial Officer.
**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.
** As furnished herewith.
+ Management Compensation Agreement.
29