-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WeJW0zSQIWWF783w7w8+Z9oUQSmMw9WgEuxTHMuNbN53C9NL5SERwoSrIA6Y5Rdq g5TsHv6QgsyeSPZPR1dKXA== 0000899243-02-001533.txt : 20020513 0000899243-02-001533.hdr.sgml : 20020513 ACCESSION NUMBER: 0000899243-02-001533 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STERLING BANCSHARES INC CENTRAL INDEX KEY: 0000891098 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 742175590 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20750 FILM NUMBER: 02643607 BUSINESS ADDRESS: STREET 1: 15000 NORTHWEST FRWY STE 308 CITY: HOUSTON STATE: TX ZIP: 77040 BUSINESS PHONE: 7134668300 10-Q 1 d10q.txt FORM 10-Q FOR THE QUARTER ENDED 3/31/2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ----------- FORM 10 - Q ----------- [X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarter ended March 31, 2002 [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 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 (IRS Employer incorporation or organization) Identification Number) 2550 North Loop West, Suite 600 Houston, Texas 77092 (Address of principal executive office and 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 [ ] As of March 31, 2002, there were outstanding 43,800,089 shares of common stock, par value $1.00 per share, of the registrant. PART I. FINANCIAL INFORMATION ITEM 1. INTERIM FINANCIAL STATEMENTS (UNAUDITED) STERLING BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)
March 31, December 31, 2002 2001 --------- ------------ (Unaudited) ASSETS Cash and cash equivalents $ 133,523 $ 148,295 Interest-bearing deposits in financial institutions 2,099 2,114 Securities purchased with an agreement to resell 1,732 12,313 Trading assets 98,461 118,511 Available-for-sale securities, at fair value 249,332 264,491 Held-to-maturity securities, at amortized cost 72,269 78,408 Loans held for sale 291,469 261,505 Loans held for investment 1,705,127 1,666,788 Allowance for credit losses (23,798) (22,927) ----------- ----------- Loans, net 1,681,329 1,643,861 Accrued interest receivable 12,078 11,593 Real estate acquired by foreclosure 1,677 1,837 Premises and equipment, net 53,927 54,175 Goodwill, net 54,812 54,812 Core deposit intangible 1,941 2,036 Mortgage servicing rights 20,720 19,592 Other assets 114,004 104,547 ----------- ----------- TOTAL ASSETS $ 2,789,373 $ 2,778,090 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits: Noninterest-bearing $ 817,644 $ 797,850 Interest-bearing 878,593 879,542 Certificates of deposit and other time deposits 580,272 591,588 ----------- ----------- Total deposits 2,276,509 2,268,980 Securities sold under agreements to repurchase and other borrowed funds 171,191 180,298 Notes payable 20,879 20,879 Accrued interest payable and other liabilities 34,845 28,832 ----------- ----------- Total liabilities 2,503,424 2,498,989 COMPANY-OBLIGATED MANDITORILY REDEEMABLE TRUST PREFERRED SECURITIES OF SUBSIDIARY TRUST 57,500 57,500 MINORITY INTEREST IN STERLING CAPITAL MORTGAGE COMPANY 4,447 4,232 Shareholders' equity Convertible preferred stock, $1 par value, 1 million shares authorized 59 39 Common stock, $1 par value, 50 million shares authorized 43,800 43,770 Capital surplus 43,013 42,526 Retained earnings 133,689 127,144 Accumulated other comprehensive income--net unrealized gain on available-for-sale securities, net of tax 3,441 3,890 ----------- ----------- Total shareholders' equity 224,002 217,369 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,789,373 $ 2,778,090 =========== ===========
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 Ended March 31, -------------------------- 2002 2001 ------ ------ (Unaudited) Interest income: Loans, including fees $34,814 $35,579 Securities: Taxable 3,976 3,757 Tax-exempt 781 853 Federal funds sold and securities purchased under agreements to resell 215 988 Trading assets 1,050 -- Deposits in financial institutions 29 10 ------- ------- Total interest income 40,865 41,187 Interest expense: Demand and savings deposits 2,380 4,783 Certificates and other time deposits 4,512 7,173 Other borrowed funds 726 1,989 Note payable 203 33 ------- ------- Total interest expense 7,821 13,978 ------- ------- NET INTEREST INCOME 33,044 27,209 Provision for credit losses 2,623 2,360 ------- ------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 30,421 24,849 Noninterest income: Customer service fees 4,102 2,797 Gain on sale of mortgage loans 4,129 4,284 Mortgage origination income 3,393 2,327 Other 4,566 3,413 ------- ------- Total noninterest income 16,190 12,821 Noninterest expense: Salaries and employee benefits 19,069 15,806 Occupancy expense 5,182 3,733 Net loss and carrying costs of real estate acquired by foreclosure 66 15 FDIC assessment 52 96 Technology 1,214 1,181 Postage and delivery charges 730 508 Supplies 539 407 Professional fees 709 667 Minority interest expense: Company-obligated mandatorily redeemable trust preferred securitites of subsidiary trusts 1,330 748 Sterling Capital Mortgage Company 215 331 Conversion costs related to acquisitions -- 1,030 Other 5,251 3,530 ------- ------- Total noninterest expense 34,357 28,052 NET INCOME BEFORE INCOME TAXES 12,254 9,618 Provision for income taxes 3,956 2,977 ------- ------- NET INCOME $ 8,298 $ 6,641 ======= ======= Earnings per share: Basic $ 0.19 $ 0.16 ======= ======= Diluted $ 0.19 $ 0.16 ======= =======
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)
Three months ended March 31, 2002 2001 ---------------------------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 8,298 $ 6,641 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Amortization and accretion of premiums and discounts on securities, net 18 47 Net gain on the sale of assets (195) (22) Provision for credit losses 2,623 2,360 Write-downs, less gains on sale, of real estate acquired by foreclosure and repossessed assets 54 (44) Depreciation and amortization 2,486 1,842 Net increase in loans held for sale (29,964) (76,673) Capitalized mortgage servicing rights (1,928) (1,277) Amortization of mortgage servicing rights 800 61 Net increase in accrued interest receivable and other assets (9,798) (16,235) Net increase in accrued interest payable and other liabilities 6,228 354 ------------ ------------ Net cash used in operating activities (21,378) (82,946) CASH FLOWS FROM INVESTING ACTIVITIES: Net (increase) decrease in securities purchased under agreements to resell 10,581 (11,018) Proceeds from maturity and paydowns of held-to-maturity securities 6,080 5,055 Proceeds from the sale of available-for-sale securities 4,981 42,624 Proceeds from maturity and paydowns of available-for-sale securities 32,199 19,364 Purchases of available-for-sale securities (22,500) (39,252) Proceeds from the sale of trading assets 129,374 - Purchases of trading assets (112,737) - Proceeds from principal paydowns of trading securities 3,535 - Net increase in loans held for investment (40,659) (31,834) Proceeds from sale of real estate acquired by foreclosure 674 345 Net decrease (increase) in interest-bearing deposits in financial institutions 15 (907) Purchase of CaminoReal Bancshares, Inc. - (51,813) Cash and cash equivalents acquired with CaminoReal Bancshares, Inc. - 35,468 Proceeds from sale of premises and equipment 558 1,414 Purchase of premises and equipment (2,701) (4,537) ------------ ------------ Net cash provided by (used in) investing activities 9,400 (35,091) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposit accounts 7,529 95,961 Net (increase) decrease in repurchase agreements/funds purchased (9,107) 10,812 Proceeds from issuance of common stock and preferred stock 537 1,142 Issuance of company-obligated manditorily redeemable trust preferred securities - 28,750 Dividends paid (1,753) (1,447) ------------ ------------ Net cash (used in) provided by financing activities (2,794) 135,218 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (14,772) 17,181 CASH AND CASH EQUIVALENTS: Beginning of period 148,295 122,122 ------------ ------------ End of period $ 133,523 $ 139,303 ============ ============ Supplemental information: Income taxes paid $ - $ 292 ============ ============ Interest paid $ 13,835 $ 14,571 ============ ============ Noncash investing and financing activities: Acquisitions of real estate through foreclosure of collateral $ 568 $ 450 ============ ============
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 March 31, 2002 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 with the rules and regulations of 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 three-month period ended March 31, 2002, 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, 2001. 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 March 31, 2002 2001 ------------------- ------------------- Amount Per Share Amount Per Share -------- --------- -------- --------- Net income $ 8,298 $ 6,641 ======== ======== Basic: Weighted average shares outstanding 43,779 $ 0.19 41,809 $ 0.16 ========= ========= Diluted: Add incremental shares for: Assumed exercise of outstanding options 806 834 Assumed conversion of preferred stock 80 68 -------- -------- Total 44,665 $ 0.19 42,711 $ 0.16 ======== ========= ======== ========= 5 3. Shareholders' Equity The following table displays the changes in shareholders' equity for the three-month periods ended March 31, 2002 and 2001 (in thousands):
Three Months Ended March 31, 2002 2001 ------------------ ------------------ Equity, beginning of period $ 217,369 $ 166,825 Comprehensive income: Net income $ 8,298 $ 6,641 Net change in net unrealized gains on AFS securities (449) 1,795 ------- ------- Total comprehensive income 7,849 8,436 Issuance of common stock 295 1,142 Issuance of preferred stock 242 - Cash dividends paid (1,753) (1,447) --------- --------- Equity, end of period $ 224,002 $ 174,956 ========= =========
On March 7, 2002, the Company completed a private placement of 20,000 shares of the Company's Series I Convertible Preferred Stock (the "Series I Preferred Stock"). Shares of the Series I Preferred Stock will convert into shares of the Company's common stock based upon performance goals for the Dallas banking office for which such shares were issued. The conversion ratio ranges from 1.25 shares of common stock if the performance goals are met prior to November 7, 2003, to 1.1 shares of common stock if the performance goals are met prior to November 7, 2004. After November 7, 2004, each share of Series I Convertible Preferred Stock will automatically convert into one share of common stock. 4. Segments 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. The Company evaluates each segment's performance based on the profit or loss from its operations before income taxes, excluding non-recurring items. Intersegment financing arrangements are accounted for at current market rates as if they were with third parties. 6 Summarized financial information by operating segment as of and for the three-month periods ended March 31, (in thousands) follows:
2002 2001 ---------------------------------- ---------------------------------- Commercial Mortgage Commercial Mortgage Banking Banking Total Banking Banking Total ----------- -------- ----------- ----------- -------- ----------- Net interest income $ 33,044 $ - $ 33,044 $ 27,209 $ - $ 27,209 Noninterest income 6,760 9,430 16,190 4,940 7,881 12,821 ----------- -------- ----------- ----------- -------- ----------- Total revenue 39,804 9,430 49,234 32,149 7,881 40,030 Provision for credit losses 2,623 - 2,623 2,360 - 2,360 Noninterest expense 26,389 7,968 34,357 21,236 5,786 27,022 Conversion cost related to acquisition - - - 1,030 - 1,030 ----------- -------- ----------- ----------- -------- ----------- Income before income taxes 10,792 1,462 12,254 7,523 2,095 9,618 Provision for income taxes 3,355 601 3,956 2,207 770 2,977 ----------- -------- ----------- ----------- -------- ----------- Net income $ 7,437 $ 861 $ 8,298 $ 5,316 $ 1,325 $ 6,641 =========== ======== =========== =========== ======== =========== Total assets, March 31, $ 2,772,778 $ 16,595 $ 2,789,373 $ 2,471,695 $ 5,248 $ 2,476,943 =========== ======== =========== =========== ======== ===========
Intersegment interest was paid to Bank by SCMC in the amount of $3.9 million for the three-month period ended March 31, 2002. Total loans of $261.0 million in the mortgage warehouse were eliminated in consolidation as of March 31, 2002. 5. Acquisitions and Significant Developments On December 17, 2001, the Company acquired Community Bancshares, Inc. ("Community") and its subsidiary bank, Community Bank in a stock and cash merger. The shareholders of Community Bancshares, Inc. received $14.6 million in cash and 1,443,753 shares of the Company's common stock for all of the outstanding shares of common stock of Community Bancshares, Inc. The stock issuance occurred after the three-for-two stock split effected by the Company in September 2001. Community Bank operates two banking offices in west Houston. As of March 31, 2002, Community Bank had total assets of $152 million, loans of $77 million and deposits of $111 million. The Company plans to merge Community Bank into Sterling Bank in the second quarter of 2002. This acquisition was accounted for using the purchase method of accounting. Goodwill of $28.7 million was recorded in connection with this acquisition. On August 23, 2001, the Company acquired Lone Star Bancorporation, Inc. and its subsidiary bank, Lone Star Bank in a stock-for-stock merger. The shareholders of Lone Star Bancorporation, Inc. received an aggregate of 1.76 million shares of the Company's common stock for all of the outstanding shares of common stock of Lone Star Bancorporation, Inc. The stock issuance occurred prior to the three-for-two stock split effected by the Company in September 2001. All previously reported amounts have been restated to reflect this transaction which was accounted for using the "pooling of interests" method. Lone Star Bank operated four banking offices in the Houston metropolitan area. The Company merged Lone Star Bank into Sterling Bank in February 2002. On July 24, 2001, the Company's Board of Directors declared a three-for-two stock split to be effected in the form of a stock dividend on its common stock to shareholders of record on September 4, 2001. Cash paid in lieu of fractional shares was based on the average of the high and low bids on the record date, as adjusted for the split. The payment date for the stock dividend was September 18, 2001. On March 22, 2001, the Company acquired CaminoReal Bancshares of Texas, Inc. ("CaminoReal") and its subsidiary bank, CaminoReal Bank, National Association, for an aggregate cash purchase price of $51.8 million. CaminoReal Bank had four banking offices in San Antonio, Texas and four 7 banking offices in the south Texas cities of Eagle Pass, Carrizo Springs, Crystal City and Pearsall. During June 2001, the Company completed the operational integration of CaminoReal Bank and Sterling Bank. This acquisition was accounted for using the purchase method of accounting. Goodwill of $21.2 million was recorded in connection with this acquisition. In February 2001, the Company formed Sterling Bancshares Capital Trust II ("Trust II") and Sterling Bancshares Capital Trust III, each is a trust formed under the laws of the State of Delaware. On March 21, 2001, Trust II issued $28,750,000 of 9.20% Trust Preferred Securities and invested the proceeds thereof in the 9.20% Junior Subordinated Deferrable Interest Debentures (the "9.20% Junior Subordinated Debentures") issued by the Company. The 9.20% Junior Subordinated Debentures will mature on March 21, 2031, which date may be shortened to a date not earlier than March 21, 2006 if certain conditions are met (including the Company having received prior approval of the Federal Reserve and any other required regulatory approvals). The 9.20% Trust Preferred Securities will be subject to mandatory redemption in a like amount contemporaneously with the optional prepayment of the 9.20% Junior Subordinated Debentures by the Company. The 9.20% Junior Subordinated Debentures may be prepaid upon the occurrence and continuation of certain events including a change in the tax statutes or regulatory capital treatment of the 9.20% Trust Preferred Securities. In each case, redemption will be made at a price equal to 100% of the face amount of the 9.20% Trust Preferred Securities, plus the accrued and unpaid distributions thereon through the redemption date. 6. Recent Accounting Pronouncements In June 2001, FASB issued Statement No. 141, "Business Combinations" ("SFAS 141") and Statement No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). These statements establish new standards for accounting and reporting for business combinations and for goodwill and intangible assets resulting from business combinations. SFAS 141 applies to all business combinations initiated after June 30, 2001, and requires the application of the purchase method of accounting to all business combinations. The Company implemented SFAS 141 on July 1, 2001 and SFAS 142 on January 1, 2002. This standard terminates the amortization of the goodwill presently on the Company's books. Such amortization was $1.3 million for the year ended December 31, 2001. Under SFAS 142, the Company is required to periodically assess its goodwill and other intangible assets for potential impairment, based on the fair value of the reporting unit at which the goodwill is recorded. Management is currently evaluating whether an impairment exists under SFAS 142. In August 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations ("SFAS 143"), and Statement No. 144, Accounting for Impairment or Disposal of Long Lived Assets ("SFAS 144"). SFAS 143 requires the recording of the fair value of a liability for an asset retirement obligation in the period in which it is incurred, and is effective January 1, 2003. SFAS 144 is effective January 1, 2002, and supersedes existing accounting literature dealing with impairment and disposal of long lived assets, including discontinued operations. It addresses financial accounting and reporting for the impairment of long lived assets and for long lived assets to be disposed of, and expands current reporting for discontinued operations to include disposals of a "component" of an entity that has been disposed of or is classified as held for sale. The Company's management does not believe that the implementation of these two standards will have a material impact on the Company's consolidated financial statements. 8 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, 2001, filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO SAME PERIOD IN 2001 Net Income - Net income for the three-month period ended March 31, 2002 was $8.3 million as compared to $6.6 million for the same period in 2001, an increase of approximately $1.7 million or 25.0%. This increase is primarily attributable to continued loan and deposit growth. Net Interest Income - Net interest income for the three-month period ended March 31, 2002, was $33.0 million, as compared to $27.2 million for the same period in 2001, an increase of $5.8 million or 21.4%. The increase in net interest income is primarily due to the growth in average earning assets of $497.1 million or 26.3% from the period ended March 31, 2001 to March 31, 2002. The growth in earning assets related to the acquisitions of CaminoReal and Community was 18.5%. While average earning assets for the period ended March 31, 2002 increased over a year ago, the yield decreased 190 basis points from 8.85% for the three-month period ended March 31, 2001, to 6.95% for the same period in 2002. During 2001, the Federal Reserve Bank decreased the discount rate 475 basis points. Consequently, the Bank's yields decreased in 2001 as a result of the Bank lowering its prime rate in relation to the Federal Reserve decreases. As of March 31, 2002, interest bearing liabilities were $1.6 billion, an increase of $314.8 million or 23.4% from March 31, 2001. Average interest bearing 9 deposits at March 31, 2002 were $1.5 billion, an increase of 23.5% from March 31, 2001. The increase in average interest bearing deposits related to the acquisition of CaminoReal and Community was 20.5%. The cost of interest bearing liabilities decreased 234 basis points from 4.28% for the first three months of 2001 to 1.94% during the same period in 2002. The Company's 5.69% tax equivalent net interest margin for the three months ended March 31, 2002 decreased from the 5.93% net interest margin recorded during the same period in 2001. 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 March 31, 2002 and 2001, respectively:
CONSOLIDATED YIELD ANALYSIS Three months ended March 31, (Dollars in thousands) 2002 2001 ------------------------------ ------------------------------ YIELD ANALYSIS Average Average Average Average Balance Interest Yield Balance Interest Yield ----------- -------- ------- ----------- -------- ------- Interest Earning Assets: Interest bearing deposits in financial institutions $ 2,181 $ 29 5.39% $ 666 $ 10 6.09% Federal funds sold 35,530 144 1.64% 24,117 339 5.70% Securites purchased under agreements to resell 8,577 71 3.36% 36,621 649 7.19% Trading assets 103,262 1,050 4.12% - - - Investment securities (taxable) 260,068 3,976 6.20% 229,064 3,757 6.65% Investment securities (tax-exempt) 72,633 781 4.36% 78,367 853 4.41% Loans (taxable) 1,897,248 34,731 7.42% 1,515,172 35,519 9.51% Loans (tax-exempt) 5,138 83 6.55% 3,523 60 6.91% ----------- -------- ------- ----------- -------- ------- Total Interest Earning Assets 2,384,637 40,865 6.95% 1,887,530 41,187 8.85% Noninterest Earning Assets: Cash and due from banks 99,745 77,916 Premises and equipment, net 54,096 48,692 Other assets 197,316 114,942 A llowance for credit losses (23,758) (17,377) ----------- ----------- Total Noninterest Earning Assets 327,399 224,173 ----------- ----------- Total Assets $ 2,712,036 $ 2,111,703 =========== =========== Interest Bearing Liabilities: Demand and savings deposits $ 873,071 $ 2,380 1.11% $ 674,738 $ 4,783 2.87% Certificates and other time deposits 583,790 4,512 3.13% 504,911 7,173 5.76% Other borrowed funds 161,353 726 1.82% 143,033 1,989 5.64% Notes payable 20,879 203 3.94% 1,600 33 8.36% ----------- -------- ------- ----------- -------- ------- Total Interest Bearing Liabilities 1,639,093 7,821 1.94% 1,324,282 13,978 4.28% Noninterest Bearing Liabilities: Demand deposits 756,798 566,869 Other liabilities 35,173 15,816 ----------- ----------- Total Noninterest Bearing Liabilities 791,971 582,685 Trust preferred securities 57,500 35,938 Shareholders' equity 223,472 168,798 ----------- ----------- Total Liabilities and Shareholders' Equity $ 2,712,036 $ 2,111,703 =========== =========== Net Interest Income & Margin $ 33,044 5.62% $ 27,209 5.85% ======== ======= ======== ======= Net Interest Income & Margin (tax equivalent) $ 33,467 5.69% $ 27,597 5.93% ======== ======= ======== =======
Provision for Credit Losses - The provision for credit losses for the first quarter of 2002 was $2.6 million, as compared to $2.4 million for the same period in 2001, an increase of $263 thousand or 11.1%. This increase in the provision for credit losses is to support the loan growth for the quarter. 10 After net charge-offs of $1.8 million, the Company's allowance for credit losses increased by $871 thousand from $22.9 million on December 31, 2001, to $23.8 million on March 31, 2002. Please refer to the subsequent discussion of Allowance for Credit Losses for additional insight to management's approach and methodology in estimating the allowance for credit losses. Noninterest Income - Total non-interest income for the quarter ended March 31, 2002 was $16.2 million, as compared to $12.8 million for the same period in 2001, an increase of $3.4 million or 26.3%. Noninterest income for the three months ended March 31, 2002 and 2001, respectively, is summarized as follows:
2002 2001 ------------------------------- ------------------------------- Commercial Mortgage Commercial Mortgage Banking Banking Combined Banking Banking Combined ---------- -------- -------- ---------- -------- -------- Customer service fees $ 4,102 $ - $ 4,102 $ 2,797 $ - $ 2,797 Gain on sale of mortgage loans - 4,129 4,129 - 4,284 4,284 Mortgage origination income - 3,393 3,393 - 2,327 2,327 Other 2,658 1,908 4,566 2,143 1,270 3,413 ---------- -------- -------- ---------- -------- -------- $ 6,760 $ 9,430 $ 16,190 $ 4,940 $ 7,881 $ 12,821 ========== ======== ======== ========= ======== ========
Commercial Banking Segment - Noninterest income from commercial banking for the three-month period ended March 31, 2002 was $6.8 million, as compared to $4.9 million for the same period in 2001, an increase of $1.8 million or 36.8%. Customer service fees increased $1.3 million as a result of the acquisitions of Community and CaminoReal and the growth in deposit transaction accounts. Mortgage Banking Segment - Noninterest income from the mortgage banking segment increased 19.7% from $7.9 million for the first quarter of 2001 to $9.4 million for the same period in 2002. The income from the mortgage banking segment typically consists of origination fees and gains on sale of mortgage loans. During the first quarter of 2002, SCMC had $676.5 million in loan fundings as compared to $495.2 million in 2001. Noninterest Expense - Noninterest expense increased $6.3 million or 22.5%, to $34.4 million for the three month period ending March 31, 2002 as compared to $28.1 million for the same period in 2001. Noninterest expense for the three months ended March 31, 2002 and 2001, respectively, is summarized as follows:
2002 2001 ------------------------------- ------------------------------- Commercial Mortgage Commercial Mortgage Banking Banking Combined Banking Banking Combined ---------- -------- -------- ---------- -------- -------- Salaries and employee benefits $ 14,976 $ 4,093 $ 19,069 $ 12,318 $ 3,488 $ 15,806 Occupancy expense 3,677 1,505 5,182 2,857 876 3,733 Net loss and carrying costs of real estate acquired by foreclosure 66 - 66 15 - 15 FDIC assessment 52 - 52 96 - 96 Technology 1,157 57 1,214 1,070 111 1,181 Postage and delivery charges 563 167 730 400 108 508 Supplies 357 182 539 304 103 407 Professional fees 614 95 709 623 44 667 Minority interest expense 1,330 215 1,545 748 331 1,079 Conversion costs related to acquisitions - - - 1,030 - 1,030 Other 3,597 1,654 5,251 2,805 725 3,530 ---------- -------- -------- ---------- -------- -------- $ 26,389 $ 7,968 $ 34,357 $ 22,266 $ 5,786 $ 28,052 ========== ======== ======== ========== ======== ========
Commercial Banking Segment - Noninterest expenses related to commercial banking for the first quarter of 2002 were $26.4 million, as compared to $22.3 million for the same period in 2001, an increase of $4.1 million or 18.5%. Salaries and employee benefits from commercial banking for the three-month period ended March 31, 2002 were $15.0 million, as compared to $12.3 million for the 11 same period in 2001, an increase of $2.7 million or 21.6%. Increased occupancy expenses related to the acquisitions of Community and CaminoReal for the first quarter of 2002 were $1.7 million. Additionally, the Company established a sales and trading department during the second quarter of 2001. Occupancy expenses from commercial banking for the three-month period ended March 31, 2002 were $3.7 million, as compared to $2.9 million for the same period in 2001, an increase of $820 thousand or 28.7%. Increased expenses related to the acquisitions of Community and CaminoReal for the first quarter of 2002 were $575.6 thousand. Conversion costs related to the acquisition of CaminoReal in March 2001 totaled $1.0 million. The costs include retention and severance expenses as well as data processing costs related to the conversion of CaminoReal's systems. Minority interest expense increased $582 thousand or 77.8% from the first quarter of 2001 as compared to the first quarter of 2002. The increase is related to the interest due on the additional trust preferred securities issued in March 2001. Please refer to the subsequent discussion of Trust Preferred Securities for additional details of the issuance. Other expenses from commercial banking for the three-month period ended March 31, 2002 were $3.6 million, as compared to $2.8 million for the same period in 2001, an increase of $792 thousand or 28.2%. The increase in other expenses related to the CaminoReal and Community acquisitions was $487.4 thousand which includes amortization of the core deposit intangible of $95.2 thousand. Mortgage Banking Segment - Noninterest expenses related to mortgage banking for the three-month period ended March 31, 2002 were $8.0 million, as compared to $5.8 million for the same period in 2001, an increase of $2.2 million or 37.7%. The increase in expenses is due to variable expenses related to the increase in loan fundings. For the quarter ended March 31, 2002, loan fundings were $676.5 million, a 36.6% increase over the $495.2 million for the same period in 2001. Provision for Income Taxes - The provision for income taxes as a percent of net income before taxes increased from 31.0% for the first quarter of 2001 to 32.3% for the same period in 2002. FINANCIAL CONDITION Total Assets - The total consolidated assets of the Company increased $11.3 million from $2.78 billion at December 31, 2001 to $2.79 billion at March 31, 2002. Cash and Cash Equivalents - The Company had cash and cash equivalents of $133.5 million at March 31, 2002. Comparatively, the Company had $148.3 million in cash and cash equivalents on December 31, 2001, a decrease of $14.8 million. Securities purchased under agreements to resell - As of March 31, 2002, securities purchased under agreements to resell totaled $1.7 million as compared to $12.3 million as of December 31, 2001. The securities purchased are SBA or USDA guaranteed loan certificates. These repurchase agreements generally have a term of nine months or less. Trading assets - Trading assets as of March 31, 2002 were $98.5 million. During the second quarter of 2001, the Company began trading government loans and pools. These assets are held up to 120 days and are carried at fair market value. The realized and unrealized gains and losses are included in income. On March 31, 2002, the unrealized gain on the trading assets was $8.6 thousand. 12 Securities - The Company's securities portfolio as of March 31, 2002, totaled $321.6 million, as compared to $342.9 million on December 31, 2001, a decrease of $21.3 million or 6.2%. On March 31, 2002, the unrealized gain on the available for sale securities was $5.3 million. Loans Held for Sale - Total loans held for sale increased from $261.5 million at December 31, 2001 to $291.5 million at March 31, 2002, an increase of $30.0 million, or 11.5%. These loans represent loans funded by the Bank through a mortgage warehouse line to SCMC. Loans Held for Investment - As of March 31, 2002, loans held for investment were $1.705 billion which was a $38.3 million, or 2.3%, increase from the balance of $1.667 billion on December 31, 2001. At March 31, 2002, loans held for investment as a percentage of assets and deposits were 61.1% and 74.9%, respectively. The following table summarizes the Company's held for investment loan portfolio by type of loan as of March 31, 2002 (in thousands): Percent of Amount Total ----------- ----------- Commercial, financial and industrial $ 512,645 25.67% Real estate - commercial 560,847 28.09% Real estate - residential mortgage 173,295 8.68% Real estate - construction 297,234 14.89% Foreign commercial and industrial 5,763 0.29% Consumer and other 155,380 7.78% Unearned discounts (37) 0.00% ----------- ---------- Total loans held for investment 1,705,127 85.40% Loans held for sale 291,469 14.60% ----------- ---------- Total loans $ 1,996,596 100.00% =========== ========== 13 Allowance for Credit Losses - The following is a summary of the changes in the allowance for credit losses for the three months ended March 31, 2002 and March 31, 2001, respectively, (in thousands): Three Months Ended March 31, 2002 2001 ----------- ----------- Allowance for credit losses, December 31, $ 22,927 $ 16,862 Charge-offs (2,179) (1,990) Recoveries 427 504 Acquisition of CaminoReal Bancshares, Inc. - 1,895 Provision for credit losses 2,623 2,360 ----------- ----------- Allowance for credit losses, March 31, $ 23,798 $ 19,631 =========== =========== Net charge-offs as a percentage of average loans (annualized) 0.37% 0.40% =========== =========== Provision for credit losses as a percentage of average loans (annualized) 0.56% 0.63% =========== =========== The following is a summary of the relationship of the allowance for credit losses to loans held for investment at March 31, 2002, and December 31, 2001 (in thousands): March 31, December 31, 2002 2001 ----------- ----------- Loans held for investment at period-end $ 1,705,127 $ 1,666,788 Allowance for credit losses $ 23,798 $ 22,927 Allowance as a percent of period-end loans held for investment 1.40% 1.38% 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. 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. Fourteen properties make up the $1.7 million of other real estate owned ("ORE") at March 31, 2002. All properties are carried at the current fair market value, less estimated selling and holding costs. 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 March 31, 2002, the Company has no material foreign loans outstanding or loan concentrations. 14 The following table summarizes total nonperforming assets and potential problem loans at December 31, 2001 and at March 31, 2002: March 31, December 31, 2002 2001 ----------- ----------- (In thousands) Nonaccrual loans $ 12,551 $ 14,179 Restructured loans 15 16 ----------- ----------- Total nonperforming loans 12,566 14,195 Other real estate ("ORE") and other foreclosed assets 1,753 1,964 ----------- ----------- Total nonperforming assets $ 14,319 $ 16,159 =========== =========== Total nonperforming assets as a % of loans, ORE and other foreclosed assets 0.72% 0.84% Allowance for credit losses as a percentage of nonperforming assets 166.20% 141.88% Accruing loans past due 90 days or more 1,888 1,360 Potential problem loans, other than those shown above as nonperforming $ 56,963 $ 51,456 Premises and Equipment - The Company's premises and equipment, net of depreciation, as of March 31, 2002, were $53.9 million, as compared to $54.2 million as of December 31, 2001, a decrease of $248 thousand. Deposits - Total deposits as of March 31, 2002, were $2.277 billion, as compared to $2.269 billion on December 31, 2001, an increase of $7.5 million. Non-interest bearing demand deposits at March 31, 2002, were $817.6 million, as compared to $797.8 million at December 31, 2001, an increase of $20 million. The percentage of noninterest bearing deposits to total deposits as of March 31, 2002 was 35.9%. Trust Preferred Securities - In February 2001, the Company formed Sterling Bancshares Capital Trust II ("Trust II") and Sterling Bancshares Capital Trust III. On March 21, 2001, Trust II issued 1,150,000 9.20% Trust Preferred Securities (the "Trust Preferred Securities") with an aggregate liquidation value of $28,750,000. Concurrent with the issuance of the Trust Preferred Securities, Trust II issued trust common securities to the Company in the aggregate liquidation value of $889,175. The proceeds of the issuance of the Trust Preferred Securities and trust common securities were invested in the Company's 9.20% Junior Subordinated Deferrable Interest Debentures (the "Junior Subordinated Debentures"). The proceeds of the issuance of the Junior Subordinated Debentures were used by the Company to fund a portion of the cash purchase price for the Company's acquisition of CaminoReal Bancshares of Texas, Inc. The Junior Subordinated Debentures will mature on March 21, 2031, which date may be shortened to a date not earlier than March 21, 2006, if certain conditions are met (including the Company have received prior approval of the Federal Reserve and any other required regulatory approvals). Trust II must redeem the Trust Preferred Securities when the Junior Subordinated Debentures are paid at maturity or upon any earlier prepayment of the Junior Subordinated Debentures. The Junior Subordinated Debentures may be prepaid if certain events occur, including a change in the tax status or regulatory capital treatment of the Trust Preferred Securities or a change in existing laws that requires Trust II to register as an investment company. 15 CAPITAL RESOURCES AND LIQUIDITY Shareholders' Equity - At March 31, 2002, the shareholders' equity totaled $224.0 million, as compared to $217.4 million at December 31, 2001. 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 March 31, 2002, with Tier-I capital, total risk-based capital, and leverage capital ratios of 9.69%, 10.72%, and 8.43%, 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 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, and access to borrowing arrangements. Available borrowing arrangements maintained by the Company include federal funds lines with other commercial banks, available Federal Home Loan Bank ("FHLB") advances, as well as a $20 million revolving credit facility with Wells Fargo Bank Minnesota, N. A. The Company currently has $20 million outstanding under the terms of the credit facility with Wells Fargo Bank Minnesota, N. A. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. There have been no material changes since December 31, 2001. 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, 2001, and in particular, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Interest Rate Sensitivity and Liquidity". PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Not applicable. ITEM 2. CHANGES IN SECURITIES (c) On March 7, 2002, the Company completed a private placement of 20,000 shares of the Company's Series I Convertible Preferred Stock (the "Series I Preferred Stock"). The sales price was $12.08 per share for an aggregate sales price of $241,600. No commissions were paid by the Company in connection with the private placement. It is expected that the proceeds of the private placement will be used for general corporate purposes. The Series I Preferred Stock is convertible into shares of the Company's common stock based upon performance goals for the Dallas banking office for which such shares were issued. The conversion ratio ranges from 1.25 shares of common stock if the performance goals are met prior to November 7, 2003, to 1.1 shares of common stock if the performance goals are met prior to November 7, 2004. After November 7, 2004, each share of Series I Convertible Preferred Stock will automatically convert into one share of common stock. The private placement was limited to accredited investors as defined in Rule 501 of Regulation D and the thirteen purchasers in the private placement consisted solely of accredited investors. The private placement was not registered under the Securities Act of 16 1933, as amended (the "Securities Act"), and was made in reliance on Section 4(2) of the Securities Act. 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 AND REPORTS ON FORM 8-K (a) Exhibits: * 10 -- Incentive Compensation Agreement between Sterling Bancshares, Inc. and Eugene S. Putnam effective as of January 1, 2002. 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). (b) Reports on Form 8-K: (1) Current Report on Form 8-K filed January 17, 2002 announcing the release of Sterling Bancshares' preliminary earnings report for the fourth quarter and year ended December 31, 2001. * Management Compensation Agreement 17 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: May 13, 2002 By: /s/ J. Downey Bridgwater --------------------------- ------------------------------- J. Downey Bridgwater President and Chief Executive Officer Date: May 13, 2002 By: /s/ Eugene S. Putnam, Jr. --------------------------- ------------------------------- Eugene S. Putnam, Jr. Executive Vice President and Chief Financial Officer 18 EXHIBIT INDEX Exhibit Description - ------- ----------- *10 Incentive Compensation Agreement between Sterling Bancshares, Inc. and Eugene S. Putnam effective as of January 1, 2002. 11 Statement Regarding Computation of Earnings Per Share (included as Note (2) to Interim Consolidated Financial Statements on page 6 of this Current Report on Form 10-Q). - ------- * Management Compensation agreement 19 EX-10 3 dex10.txt INCENTIVE COMPENSATION PLAN INCENTIVE COMPENSATION AGREEMENT THIS INCENTIVE COMPENSATION AGREEMENT ("Agreement") is made by and between STERLING BANCSHARES, INC., a Texas corporation ("Company") and EUGENE S. PUTNAM, JR. ("Putnam"). Capitalized terms used herein without definition shall have the respective meanings set forth in Section 5. W I T N E S S E T H: WHEREAS, Putnam is currently employed by the Company as a senior executive of Company and its wholly owned subsidiary, STERLING BANK, a banking association chartered by the State of Texas (the "Bank"), and the Company and Putnam are desirous of continuing such employment relationship; WHEREAS, to induce Putnam to continue his employment with the Company and the Bank, the Company has agreed to enter into this Agreement providing for certain incentive compensation payable to Putnam in accordance with the terms and conditions hereinafter set forth; WHEREAS, Putnam acknowledges that the incentive compensation herein provided has value and that such value will survive the termination of Putnam's employment under the terms and conditions set forth herein; and WHEREAS, Putnam and the Company acknowledge, each to the other, that such incentive compensation is subject to and contingent upon the execution of this Agreement and the respective terms, covenants and conditions hereof, and the execution of this Agreement constitutes a condition precedent to the Company's agreement to extend such incentive compensation benefits to Putnam. NOW, THEREFORE, for and in consideration of the mutual promises, covenants and obligations contained herein, Company and Putnam agree as follows: ARTICLE 1: INCENTIVE COMPENSATION 1.1 INCENTIVE AWARDS. During the Term of this Agreement, Putnam shall be entitled to receive, subject to the terms and conditions set forth herein, awards of additional options to purchase shares of the Company Stock (the "Bonus Options") and grants of additional shares of the Company Stock (the "Bonus Shares"). The bonus awards will be based upon the performance objectives for the Company and will be subject to the terms and conditions more specifically set forth in this Article 1 and the Schedules attached hereto and incorporated herein for all purposes; provided, however, that the Board of Directors shall have the ability to take into consideration extraordinary or non-recurring events in determining whether the performance objectives as more particularly described in the attached Schedules have been satisfied. Subject to the provisions of Section 1.5 below, the maximum number of fully diluted shares of Company Stock which may be awarded to Putnam pursuant to this Section 1.1 is 40,000 shares. (i) RETURN ON AVERAGE EQUITY. Putnam shall be awarded Bonus Options to purchase up to 8,000 shares of Company Stock in accordance with the terms and provisions of Schedule 1.1(i) attached hereto and incorporated herein for all purposes. (ii) GROWTH IN EARNINGS PER SHARE. Putnam shall be awarded Bonus Options to purchase up to 6,000 shares of Company Stock in accordance with the terms and provisions of Schedule 1.1(ii) attached hereto and incorporated herein for all purposes. (iii) NONPERFORMING LOANS. Putnam shall be awarded Bonus Options to purchase up to 6,000 shares of Company Stock in accordance with the terms and provisions of Schedule 1.1(iii) attached hereto and incorporated herein for all purposes. (iv) ANNUAL GROWTH STOCK AWARD. Putnam shall be awarded stock grants of up to 10,000 Bonus Shares of Company Stock in accordance with the terms and provisions of Schedule 1.1(iv) attached hereto and incorporated herein for all purposes. (v) TERM GROWTH STOCK AWARD. Putnam shall be awarded stock grants of up to 10,000 Bonus Shares of Company Stock in accordance with the terms and provisions of Schedule 1.1(v) attached hereto and incorporated herein for all purposes. 1.2 TERMS OF BONUS AWARDS. The Bonus Options and Bonus Shares, and Putnam's right to receive any award thereof pursuant to this Section 1 and Schedules 1.1(i), (ii), (iii), (iv), and (v) shall, in addition to the provisions set forth in the applicable Schedule, be subject to the following terms and conditions: (i) CONTINUED EMPLOYMENT. Except as expressly provided in the Schedules attached hereto, Putnam shall not be entitled to receive any award for any Annual Period or the Term under this Article 1 unless Putnam has been continuously employed by the Company during such Annual Period or the Term, as applicable. If Putnam's employment by Company is terminated following the expiration of an Annual Period or the Term but before any award with respect to such period is determined in accordance with the applicable Schedule, Putnam shall continue to be entitled to receive any award earned for such Annual Period or the Term. (ii) COMPANY STOCK INCENTIVE PLAN. The Bonus Options and Bonus Shares, if any, awarded to Putnam under this Article 1 and the applicable Schedules shall be granted pursuant to the Company's 1994 Stock Incentive Plan, or any successor plan adopted by the Company, as may be amended from time to time (the "Company Incentive Plan"). Each option and stock grant shall be reflected in a separate stock option agreement or restricted stock purchase agreement, as appropriate, which shall be subject to the Company Incentive Plan. 1.3 OPTIONS. The Bonus Options awarded to Putnam under this Article 1 and the applicable Schedules shall be incentive stock options under the Company Incentive Plan and shall have a ten (10) year term. Putnam acknowledges that no awards may be granted under the Company 1994 Stock Incentive Plan after April 18, 2004, and that a successor Company 2 Incentive Plan must be adopted by the Company to permit the Company to make additional awards of incentive stock options after such date. If a successor Company Incentive Plan is not adopted by the Company, the Bonus Options, if any, to be granted by the Company after such date shall instead be nonqualified stock options. Each Bonus Option shall vest and become exercisable as to twenty percent (20%) of the shares of Company Stock subject thereto on the effective date of grant and, subject to Putnam's continued employment by the Company on each subsequent anniversary date, shall thereafter become exercisable as to an additional twenty percent (20%) of such shares on each subsequent anniversary date of such Bonus Option, such that each Bonus Option shall be exercisable as to all shares subject to such Bonus Option on the fourth anniversary of the effective date of grant. Notwithstanding the preceding, each outstanding Bonus Option shall fully vest and become exercisable (1) if Putnam's employment by the Company shall be terminated by the Company for any reason other than for "Cause" (as herein defined), (2) upon a "Change of Control" (as herein defined) or (3) if Putnam terminates his employment with the Company for "Good Reason" (as herein defined). The exercise price of each Bonus Option awarded to Putnam under this Article 1 shall be the average between the high and low sales price per share of the Company Stock on the Nasdaq National Market for the last trading day of Annual Period for which such Bonus Option is awarded. In the event of a Change of Control, the exercise price of all Bonus Options awarded to Putnam as a result of such Change of Control in accordance with the provisions of the attached Schedules shall be the "Fair Market Value" of the Company's Common Stock, as such term is defined in the Company Incentive Plan, as of the date such Bonus Options are granted. 1.4 STOCK GRANTS. The Bonus Shares awarded to Putnam under this Article 1 shall be "Restricted Stock," within the terms of the Company Incentive Plan, and shall be subject to restrictions on transfer and vesting requirements. The Bonus Shares included in each award shall be twenty percent (20%) vested as of the effective date of grant and, subject to Putnam's continued employment by the Company on each subsequent anniversary date of such award, shall thereafter vest, and the forfeiture provisions shall lapse, as to an additional twenty percent (20%) of the Bonus Shares included in such award on each subsequent anniversary date, such that each grant of Bonus Shares shall be fully vested on the fourth anniversary of the effective date of grant. Notwithstanding the preceding, the outstanding Bonus Shares awarded under this Article 1 shall fully vest, and the forfeiture provisions shall fully lapse, (1) if Putnam's employment by the Company shall be terminated by the Company for any reason other than for Cause, (2) upon a Change in Control, or (3) if Putnam terminates his employment with the Company for Good Reason. 1.5 ADJUSTMENTS. The aggregate number of shares of Company Stock which may be awarded under this Article 1 to Putnam shall be appropriately adjusted for any increase or decrease in the number of outstanding shares of Company Stock resulting from a stock split or other subdivision or consolidation of shares of Company Stock or for other capital adjustments or payments of stock dividends or distributions or other similar increases or decreases in the outstanding shares of Company Stock without receipt of consideration by the Company. ARTICLE 2: CONFIDENTIAL INFORMATION 2.1 CONFIDENTIALITY. In Putnam's position with the Company and the Bank, the Company has previously (i) disclosed to Putnam, and placed Putnam in a position to have access 3 to or develop, trade secrets or confidential information of the Company or its affiliates, (ii) entrusted Putnam with business opportunities of the Company or its affiliates, and/or (iii) placed Putnam in a position to develop goodwill on behalf of Company or its affiliates. Putnam acknowledges that in his position with the Company and the Bank, the Company shall continue to (i) disclose to Putnam, or place Putnam in a position to have access to or develop, additional and subsequent trade secrets or confidential information of Company or its affiliates, (ii) entrust Putnam with future business opportunities of Company or its affiliates, and/or (iii) place Putnam in a position to develop business goodwill on behalf of Company or its affiliates. Putnam recognizes and acknowledges that Putnam has had, and will continue to have, access to certain information of Company and that such information is confidential and constitutes valuable, special and unique property of Company. Putnam shall not at any time, either during or subsequent to the term of his employment with Company, disclose to others, use, copy or permit to be copied, except in pursuance of Putnam's duties for and on behalf of Company, its affiliates and their respective successors, assigns or nominees, any Confidential Information of Company (regardless of whether developed by Putnam) without the prior written consent of Company. In the event Putnam becomes legally compelled (by oral questions, interrogatories, requests for information or documents, subpoena, civil investigative demand, regulatory demand or other similar process) to disclose any Confidential Information, Putnam will provide the Company with prompt written notice so that the Company may seek a protective order or other appropriate remedy and/or waive compliance with the provisions of this Article 2. In the event that a protective order or other remedy is not obtained, or the Company waives compliance with the provisions of this Article 2, Putnam will furnish only that portion of the Confidential Information which is legally required and exercise reasonable best efforts to obtain assurances that confidential treatment will be accorded the Confidential Information. The term "Confidential Information" means any secret or confidential information or know-how and shall include, but shall not be limited to, the plans, customers, costs, prices, uses, corporate opportunities, research, financial data, evaluations, prospects, and applications of products and services, results of investigations or studies owned or used by Company, and all apparatus, products, processes, compositions, samples, formulas, computer programs, computer hardware designs, computer firmware designs, and servicing, marketing or manufacturing methods and techniques at any time used, developed, investigated, made or sold by Company, before or during the term of employment with Company, that are not readily available to the public or that are maintained as confidential by Company. Putnam shall maintain in confidence any Confidential Information of third parties received as a result of Putnam's employment with Company in accordance with Company's obligations to such third parties and the policies established by Company. ARTICLE 3. NON-COMPETITION OBLIGATIONS 3.1 IN GENERAL. As a condition to and as part of the consideration for the Company's continued employment of Putnam, the incentive compensation and benefits to be paid to Putnam hereunder; to protect the Confidential Information of Company and its affiliates that has been and will in the future be disclosed or entrusted to Putnam, the business goodwill of Company and its affiliates that has been and will in the future be developed in Putnam, and the business opportunities that have been and will in the future be disclosed or entrusted to Putnam by Company and its affiliates; and as an additional incentive for Company to enter into this Agreement, Company and Putnam agree to the non-competition obligations hereunder. Putnam 4 shall not, directly or indirectly for Putnam or for others, in any geographic area or market where Company, Bank or any of its banking affiliates are conducting any banking business as of the date of the termination of the employment relationship or have during the previous twelve months conducted such banking business: (i) engage in any business competitive with the banking business conducted by Company, Bank, or its banking affiliates; (ii) render advice or services to, or otherwise assist, any other person, association, or entity who is engaged, directly or indirectly, in any banking business competitive with the banking business conducted by Company, Bank, or its banking affiliates with respect to such competitive business; (iii) own, manage, operate, control, invest or acquire an equity interest in any entity engaged in or conducting any banking business competitive with the banking business conducted by the Company, Bank or its banking affiliates; (iv) request or induce any customer, depositor or borrower of the Company, Bank or any of its banking affiliates, or any other person which has a business relationship with the Company, Bank or any of its banking affiliates to curtail, cancel or otherwise discontinue its business or relationship with the Company, Bank or any of its banking affiliates; or (v) induce any employee of Company or any of its affiliates to terminate his or her employment with Company or such affiliates, or hire or assist in the hiring of any such employee by any person, association, or entity not affiliated with Company. These non-competition obligations shall apply during the period that Putnam is employed by Company and shall extend two years after termination of the employment relationship if such termination is by Company for Cause or by Putnam other than for Good Reason. If Putnam's employment by the Company is terminated by the Company for any reason other than Cause or if Putnam terminates his employment for Good Reason, the covenants of this Article 3 shall no longer apply following such termination. Notwithstanding the foregoing, nothing contained in this Agreement shall prohibit Putnam from acquiring or holding any issue of stock or securities of any entity that has securities registered under Section 12 of the Securities Exchange Act of 1934 and either listed on a national securities exchange or quoted on the automated quotation system of the National Association of Securities Dealers, Inc. so long as (i) Putnam is not deemed to be an "affiliate" of such entity as such term as used in paragraphs (c) and (d) of Rule 145 under the Securities Act of 1933 and (ii) Putnam and members of his immediate family do not own or hold more than three percent (3%) of any voting securities of any such entity. 3.2 ENFORCEMENT AND REMEDIES. Putnam understands that the restrictions set forth in Section 3.1 may limit his ability to engage in certain businesses in the areas specified therein during the period provided for above, but acknowledges that he will receive sufficiently high remuneration and other benefits under this Agreement to justify such restriction. Putnam acknowledges that money damages would not be sufficient remedy for any breach of this 5 Article 3 by Putnam, and Company shall be entitled to enforce the provisions of this Article by terminating all incentive compensation hereunder and/or to specific performance and injunctive relief as remedies for such breach or any threatened breach. Such remedies shall not be deemed the exclusive remedies for a breach of this Article 3, but shall be in addition to all remedies available at law or in equity to Company, including without limitation, the recovery of damages from Putnam and Putnam's agents involved in such breach and remedies available to Company pursuant to other agreements with Putnam. 3.3 REFORMATION. It is expressly understood and agreed that Company and Putnam consider the restrictions contained in this Article 3 to be reasonable and necessary to protect the proprietary information of Company. Nevertheless, if any of the aforesaid restrictions are found by a court having jurisdiction to be unreasonable, or overly broad as to geographic area or time, or otherwise unenforceable, the parties intend for the restrictions therein set forth to be modified by such court so as to be reasonable and enforceable and, as so modified by the court, to be fully enforced. ARTICLE 4. EFFECT OF TERMINATION ON INCENTIVE COMPENSATION 4.1 TERM OF AGREEMENT. The term of this Agreement (the "Term") shall commence effective as of January 1, 2002, and will continue in effect until the sooner to occur of: (i) December 31, 2006, or (ii) the effective termination of Putnam's employment with the Company or any of its affiliates, for any reason, by either the Company or Putnam. Notwithstanding the termination of this Agreement and except as provided herein, termination shall not affect any right or obligation of any party which is accrued or vested prior to such termination. Furthermore, the parties expressly agree that the provisions of Article 2 and, except as otherwise provided therein, Article 3 shall continue to survive the termination of Putnam's employment relationship and/or the termination of this Agreement. 4.2 BY COMPANY. (i) If Putnam's employment shall be terminated by Company prior to expiration of the Term, then, upon such termination, all Incentive Compensation issuable to Putnam hereunder shall, except as otherwise provided herein, terminate contemporaneously with the termination by Company of such employment (except to the extent of any vested Bonus Options and/or Bonus Shares pursuant to the specific terms of the Schedules attached hereto, the applicable stock option agreement or restricted stock purchase agreement, and the Company Incentive Plan); provided, however, that the Company shall pay Putnam the Termination Payments (as herein defined) if (A) the Company terminates Putnam's employment as a result of his Disability, or (B) the Company otherwise terminates Putnam's employment for any reason other than for Cause. (ii) For purposes of this Agreement and the attached Schedules, the term "Termination Payments" shall mean, to the extent the applicable performance criteria under Section 1.1 and the applicable Schedule is satisfied, a pro rata payment and delivery of the Bonus Options and Bonus Shares earned by Putnam in accordance with the terms and conditions of the applicable Schedules. Putnam shall not be entitled to 6 receive any pro rata payment of any Bonus Options or Bonus Shares pursuant to Sections 1.1(i), (ii), (iii) or (iv) and the attached Schedules unless the performance criteria applicable to such Bonus Options and Bonus Shares are satisfied for the Annual Period during which the termination of Putnam's employment occurs. Further, Putnam shall not be entitled to receive any pro rata payment of any Bonus Shares pursuant to Section 1.1(v) and the attached Schedule 1.1(v) unless the performance criteria set forth in Schedule 1.1(v) are satisfied for the amended Term. Notwithstanding the preceding provisions of this Section 4.2, as a condition to the receipt of any Termination Payments pursuant to this Section 4.2, Putnam must first execute a release agreement, in a form mutually acceptable to Putnam and Company, which shall release Company, its affiliates and their officers, directors, employees and agents from any and all claims and from any and all causes of action of any kind or character, including but not limited to all claims or causes of action arising out of Putnam's employment with Company and the termination of such employment. In determining the "pro rata" amount of any award to Putnam under this Agreement or Schedules attached hereto, the award otherwise deliverable to Putnam hereunder shall be multiplied by a fraction, (i) the numerator of which shall be the number of days Putnam was employed by the Company during the Annual Period or Term, as applicable, and (ii) the denominator of which shall be the total number of days during such Annual Period or Term, as applicable. 4.3 BY PUTNAM. If Putnam's employment hereunder shall be terminated by Putnam prior to expiration of the Term, then, upon such termination, regardless of the reason therefor, all incentive compensation to Putnam hereunder shall terminate contemporaneously with the termination of such employment (except to the extent of any vested Bonus Options and/or Bonus Shares pursuant to the specific terms of the Schedules attached hereto the applicable stock option agreement or restricted stock purchase agreement, and the Company Incentive Plan); provided, however, that upon Putnam's death or Putnam's termination of his employment prior to the expiration of the Term for Good Reason, the Company shall pay Putnam the Termination Payments as provided in Section 4.2 above. 4.4 INCENTIVE AND DEFERRED COMPENSATION. This Agreement governs the rights and obligations of Putnam and Company with respect to Putnam's right to receive the Incentive Compensation provided for herein. Putnam's rights and obligations both during the term of his employment and thereafter with respect to the Bonus Options and Bonus Shares shall be governed by the separate agreements, plans and other documents and instruments governing such matters; provided, however, that such separate written agreements shall contain terms and provisions consistent with those set forth in this Agreement and the Schedules attached hereto. 4.5 ADDITIONAL PAYMENTS BY COMPANY. (i) Anything in this Agreement to the contrary notwithstanding, if it is determined that any compensation payable by Company to or for the benefit of Putnam pursuant to the terms of this Agreement, including, without limitation, any Bonus Option or Bonus Shares, or the lapse or termination of any restriction on or the vesting or 7 exercisability of any of the foregoing (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") by reason of being "contingent on a change of ownership or control" of the Company, within the meaning of Section 280G of the Code or to any similar tax imposed by state or local law, or any interest or penalties with respect to such excise tax (such tax or taxes, together with any such interest and penalties, being hereinafter collectively referred to as the "Excise Tax"), then Putnam will be entitled to receive an additional payment or payments (a "Gross-Up Payment") in an amount such that, after payment by Putnam of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, Putnam retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (ii) All determinations required to be made under this Section 4.5, including whether an Excise Tax is payable by Putnam and the amount of such Excise Tax and whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, will be made by Company's independent auditors. If the independent auditors determine that any Excise Tax is payable by Putnam, the Company shall pay to Putnam (on or before the date on which the Company is required to withhold such Excise Taxes) the required Gross-Up Payment. Any determination by the independent auditors as to whether a Gross-Up Payment is required and the amount of such Gross-Up Payment will be binding upon Company and Putnam. ARTICLE 5. DEFINITIONS 5.1 DEFINITIONS. As used in this Agreement and the Schedules attached hereto, terms defined in the preamble and recitals of or elsewhere in this Agreement and Schedules attached hereto shall have the meanings set forth therein and the following terms shall have the meanings set forth below: (i) "Annual Period" shall mean each consecutive twelve (12) month period commencing January 1 and ending December 31 of each calendar year during the Term. (ii) "Bonus Options" shall refer to the options awarded by Company to Putnam pursuant to Article 1, inclusive of the Annual ROAE Options, Annual GEPS Options and Annual NPL Options. (iii) "Bonus Shares" shall refer to the shares of Company Stock awarded to Putnam pursuant to Article 1, inclusive of the Annual Growth Stock Awards and the Term Growth Stock Awards. (iv) "Change of Control" shall be deemed to have occurred if: (i) any person, other than Company or any benefit plan of Company, acquires, directly or indirectly, the beneficial ownership (as defined in Section 13(d) of the Securities Exchange Act of 1934) of any voting security of Company and immediately after such acquisition such person is, directly or 8 indirectly, the beneficial owner of voting securities representing 35% or more of the total voting power of all of the then-outstanding voting securities of Company; (ii) the shareholders of Company shall approve a merger, consolidation, recapitalization or reorganization of Company, or a reverse stock split of outstanding voting securities, or consummation of any such transaction if shareholder approval is not obtained, other than any such transaction which would result in at least 75% of the total voting power represented by the voting securities of the surviving entity outstanding immediately after such transaction being beneficially owned by at least 75% of the holders of outstanding voting securities of Company immediately prior to the transactions with the voting power of each such continuing holder relative to other such continuing holders not substantially altered in the transaction; (iii) the shareholders of Company shall approve a plan of complete liquidation of Company or an agreement for the sale or disposition by Company of 50% or more of the total assets of Company; or (iv) the individuals who constitute the board of directors of Company as of the Effective Date (the "Incumbent Board") shall cease for any reason to constitute at least a majority of the members of the board of directors, provided that any person becoming a director after the Effective Date whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than any individual whose nomination for election to the board of directors was not endorsed by Company's management prior to, or at the time of, such individual's initial nomination for election) shall be, for purposes of this Agreement, considered as though such person were a number of the Incumbent Board. (v) "Cause" with respect to the Company's termination of Putnam's employment shall be deemed established if Putnam (A) has engaged in gross negligence or willful misconduct in the performance of the duties required of him in connection with his employment by the Company, (B) has been convicted of a misdemeanor involving moral turpitude or convicted of a felony, (C) has willfully refused without proper legal reason to perform the duties and responsibilities required of him in connection with his employment by the Company, (D) has materially breached any corporate policy or code of conduct established by Company, or (E) has willfully engaged in conduct that he knows or should know is materially injurious to Company or any of its affiliates. (vi) "Company Stock" shall mean the Company's common stock, $1.00 par value. (vii) "Disability" shall be deemed to have occurred upon Putnam being incapacitated by accident, sickness or other circumstance which renders him mentally or physically incapable of performing the duties and services required of him in connection with his employment by the Company on a full-time basis for a period of at least 180 9 consecutive days, at which time Putnam would be entitled benefits under the Company's Long Term Disability Plan. (viii) "Good Reason" with respect to Putnam's termination of his employment shall be deemed established upon any of the following events: (A) a material and permanent reduction by the Company in Putnam's authority, title, responsibilities or duties, (B) the relocation of the Company's principal executive offices to a location outside the Houston, Texas area, or (C) any diminution in Putnam's base salary or incentive compensation or any material diminution in employee benefits in which Putnam participates (except for any such diminution of employee benefits applicable to all other executive officers of the Company). (ix) "Schedules" shall collectively mean Schedule 1.1(i), Schedule 1.1(ii), Schedule 1.1(iii), Schedule 1.1(iv), and Schedule 1.1(v) attached hereto and incorporated herein for all purposes. "Schedule" shall refer to any one of the Schedules. (x) "SEC" shall mean the Securities and Exchange Commission. ARTICLE 6. MISCELLANEOUS 6.1 NOTICES. For purposes of this Agreement, notices and all other communications provided for herein shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows: IF TO COMPANY TO: Human Resources Programs Committee Sterling Bancshares, Inc. 2550 North Loop West, Suite 600 Houston, Texas 77092 IF TO PUTNAM TO: Eugene S. Putnam, Jr. c/o Sterling Bancshares, Inc. 2550 North Loop West, Suite 600 Houston, Texas 77092 or to such other address as either party may furnish to the other in writing in accordance herewith, except that notices of changes of address shall be effective only upon receipt. 6.2 APPLICABLE LAW. This Agreement is entered into under, and shall be governed for all purposes by, the laws of the State of Texas. 6.3 NO WAIVER. No failure by either party hereto at any time to give notice of any breach by the other party of, or to require compliance with, any condition or provision of this Agreement shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 6.4 SEVERABILITY. If a court of competent jurisdiction determines that any provision of this Agreement is invalid or unenforceable, then the invalidity or unenforceability of 10 that provision shall not affect the validity or enforceability of any other provision of this Agreement, and all other provisions shall remain in full force and effect. 6.5 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same Agreement. 6.6 WITHHOLDING OF TAXES AND OTHER EMPLOYEE DEDUCTIONS. Company may withhold from any benefits and payments made pursuant to this Agreement all federal, state, city and other taxes as may be required pursuant to any law or governmental regulation or ruling and all other normal employee deductions made with respect to Company's employees generally. 6.7 HEADINGS. The paragraph headings have been inserted for purposes of convenience and shall not be used for interpretive purposes. 6.8 GENDER AND PLURALS. Wherever the context so requires, the masculine gender includes the feminine or neuter, and the singular number includes the plural and conversely. 6.9 AFFILIATE. As used in this Agreement, the term "affiliate" shall mean any entity which owns or controls, is owned or controlled by, or is under common ownership or control with, Company. 6.10 SUCCESSOR OBLIGATIONS. This Agreement shall be binding upon and inure to the benefit of Company and any successor of Company, by merger or otherwise. 6.11 ASSIGNMENT. Except as provided in Section 6.10, this Agreement, and the rights and obligations of the parties hereunder, are personal and neither this Agreement, nor any right, benefit, or obligation of either party hereto, shall be subject to voluntary or involuntary assignment, alienation or transfer, whether by operation of law or otherwise, without the prior written consent of the other party. 6.12 ENTIRE AGREEMENT. Except as provided in (i) the written benefit plans and programs referenced in Section 4.4; and (ii) any signed written agreement contemporaneously or hereafter executed by Company and Putnam, this Agreement constitutes the entire agreement of the parties with regard to the subject matter hereof. Without limiting the scope of the preceding sentence, all prior understandings and agreements among the parties hereto relating to the subject matter hereof are hereby null and void and of no further force and effect. Any modification of this Agreement shall be effective only if it is in writing and signed by the party to be charged. 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of January 1, 2002. STERLING BANCSHARES, INC. BY: /s/ J. Downey Bridgwater ------------------------------------------------- J. Downey Bridgwater, CEO and President /s/ Eugene S. Putnam, Jr. ---------------------------------------------------- Eugene S. Putnam, Jr. 12 SCHEDULE 1.1(i) 1. Subject to the terms and conditions herein, during the Term Putnam shall be entitled to receive, and Company shall award to Putnam, on an annual basis, options to purchase up to 1,600 shares of the Company Stock. The maximum number of shares of Company Stock for which options may be awarded to Putnam pursuant to Section 1.1(i) and this Schedule 1.1(i) is 8,000 shares. The options to be granted to Putnam pursuant to Section 1.1(i) and this Schedule 1.1(i) with respect to each Annual Period are referred to as the "Annual ROAE Options." 2. The number of shares of Company Stock subject to the Annual ROAE Options to be awarded to Putnam will be calculated, on an annual basis, on the basis of the Company's Return on Average Equity (as herein defined) for each respective Annual Period in accordance with the following: (i) If the Company's Return on Average Equity for the Annual Period is equal to or less than 15%, then Putnam shall not be entitled to receive any award of the Annual ROAE Options for such Annual Period. (ii) If the Company's Return on Average Equity for the Annual Period is greater than 15% but less than 19%, the number of shares of Company Stock subject to the Annual ROAE Options awarded for such Annual Period shall be determined by (A) multiplying (1) 1,600 by (2) Return on Average Equity for such Annual Period less 15, and (B) dividing the product obtained in clause (A) by 4. Expressed as a formula, the calculation is as follows: Number of shares = 1,600 x (Return on Average Equity - 15) --------------------------------------- 4 By way of example, if the Return on Average Equity for the Annual Period is 16%, the number of shares of Common Stock subject to the Annual ROAE Options awarded for such Annual Period is determined as follows: Number of shares = 1,600 x (16 - 15) ----------------- 4 = 400 shares (iii) If the Company's Return on Average Equity for the Annual Period is equal to or greater than 19%, the number of shares of Company Stock subject to the Annual ROAE Options awarded for such Annual Period shall be 1,600 shares. The calculations set forth in this Paragraph 2 shall be made on an annual basis and will not be affected by the Company's cumulative Return on Average Equity in either preceding or succeeding Annual Periods. If the Company's Return on Average Equity in any Annual Period exceeds 19% or is less than 15%, such excess or deficit, as applicable, will not be taken into consideration for purposes of determining the Annual ROAE Options to be received by Putnam for any other Annual Period. 1.1(i)-1 3. As used in this Agreement and this Schedule 1.1(i), the Company's "Return on Average Equity" for any Annual Period shall be the ratio set forth in the Company's Annual Report on Form 10-K as filed with the SEC. If for any reason the Company is no longer required to file an Annual Report on Form 10-K with the SEC, the Company shall cause such ratio to be calculated in a manner consistent with the Company's most recently filed Annual Report on Form 10-K. 4. Promptly following the Company's filing of its Annual Report on Form 10-K for any Annual Period, but in no event later than the April 15 immediately following such Annual Period, the Company shall deliver to Putnam the Annual ROAE Options, if any, earned by Putnam for the preceding Annual Period. All Annual ROAE Options granted pursuant to this Schedule 1.1(i) shall be granted effective as of January 1 immediately following the Annual Period for which such Annual ROAE Options are granted. 5. In the event Putnam's employment by the Company is terminated prior to the expiration of the Term by Company for Cause or by Putnam other than for Good Reason, Putnam's right to receive any further compensation or awards under Section 1.1(i) or this Schedule 1.1(i) shall immediately terminate with such termination of employment and Putnam shall not be entitled to receive any pro rata award of Annual ROAE Options hereunder. 6. In the event Putnam's employment hereunder is terminated prior to the expiration of the Employment Term (i) by Company (A) as a result of Putnam's Disability, or (B) for any reason other than for Cause, (ii) by Putnam for Good Reason, or (iii) as a result of Putnam's death, Putnam shall be entitled to receive a pro rata award of any Annual ROAE Options otherwise earned for the Annual Period during which such termination occurs. Putnam shall not be entitled to receive any pro rata award of the Annual ROAE Options unless the performance criteria set forth in Paragraph 2 above for such Annual Period is satisfied. Following any such termination by the Company or Putnam, the Company shall calculate the Annual ROAE Options, if any, earned for such Annual Period in accordance with Paragraph 2 above. If any Annual ROAE Options are otherwise earned for such Annual Period, Putnam shall be entitled to a pro rata award and delivery of such Annual ROAE Options, such award to be delivered in accordance with the schedule set forth in Paragraph 4 above. 7. In the event of a Change of Control, (i) all outstanding Annual ROAE Options shall fully vest and become exercisable, and (ii) with respect to any Annual ROAE Options which may be awarded to Putnam for the Annual Period in which such Change of Control occurs and any Annual Period thereafter, the performance criteria set forth in this Schedule 1.1(i) with respect to such Annual ROAE Options shall be deemed to have been met in full to the maximum extent, such Annual ROAE Options shall be awarded to Putnam and all such Annual ROAE options shall fully vest and become exercisable. 1.1(i)-2 SCHEDULE 1.1(ii) 1. Subject to the terms and conditions herein, during the Term Putnam shall be entitled to receive, and the Company shall award to Putnam, on an annual basis, options to purchase up to 1,200 shares of the Company Stock. The maximum number of shares of Company Stock for which options may be granted pursuant to Section 1.1(ii) and this Schedule 1.1(ii) is 6,000 shares. The options to be granted to Putnam pursuant to Section 1.1(ii) and this Schedule 1.1(ii) with respect to each Annual Period are referred to as the "Annual GEPS Options." 2. The number of shares of Company Stock subject to the Annual GEPS Options to be awarded to Putnam will be calculated, on an annual basis, on the basis of Company's Growth in Earnings Per Share (as herein defined) for each respective Annual Period in accordance with the following: (i) If the Company's Growth in Earnings Per Share for the Annual Period is equal to or less than 15%, then Putnam shall not be entitled to receive any award of the Annual GEPS Options for such Annual Period. (ii) If the Company's Growth in Earnings Per Share for the Annual Period is greater than 15% but less than 19%, the number of shares of Company Stock subject to the Annual GEPS Options awarded for such Annual Period shall be determined by (A) multiplying (1) 1,200 by (2) the Growth in Earnings Per Share for such Annual Period less 15, and (B) dividing the product obtained in clause (A) by 4. Expressed as a formula, the calculation is as follows: Number of shares = 1,200 x (Growth in Earnings Per Share - 15) ------------------------------------------- 4 By way of example, if the earnings per share for the previous Annual Period is $0.65 and the earnings per share for the Annual Period for which such calculation is being made is $0.77, the number of shares of Company Stock subject to the Annual GEPS Options awarded for such Annual Period is determined as follows: Growth in Earnings Per Share = .77 - 1 = 18.4% --- .65 Number of shares = 1,200 (18.4 - 15) ----------------- 4 = 1,020 shares (iii) If the Company's Growth in Earnings Per Share for the Annual Period is equal to or greater than 19%, the number of shares of Company Stock subject to the Annual GEPS Options awarded for such Annual Period shall be 1,200 shares. The calculations set forth in this Paragraph 2 shall be made on an annual basis and will not be affected by the Company's cumulative Growth in Earnings Per Share in either preceding or 1.1(ii)-1 succeeding Annual Periods. If the Company's Growth in Earnings Per Share in any Annual Period exceeds 19% or is less than 15%, such excess or deficit, as applicable, will not be taken into consideration for purposes of determining the Annual GEPS Options to be received by Putnam for any other Annual Period. 3. As used in this Agreement and this Schedule 1.1(ii), the Company's "Growth in Earnings Per Share" for any Annual Period shall be calculated on the basis of the annual growth in the Company's diluted earnings per share as set forth in the Company's Annual Report on Form 10-K as filed with the SEC. The Company's Growth in Earnings Per Share for any Annual Period shall be expressed as a percentage and shall be determined by (A) dividing the Company's diluted earnings per share for such Annual Period by the Company's diluted earnings per share for the preceding Annual Period, and (B) subtracting 1 from the quotient obtained in clause (A). Expressed as a formula, the calculation is as follows: Growth in Earnings = [(diluted earnings per share for the Subject Annual Period)] - 1 -------------------------------------------- Per Share [(diluted earnings per share for the preceding Annual Period)] If for any reason the Company is no longer required to file an Annual Report on Form 10-K with the SEC, the Company shall cause its diluted earnings per share to be calculated in a manner consistent with the Company's most recently filed Annual Report on Form 10-K. 4. Promptly following the Company's filing of its Annual Report on Form 10-K for any Annual Period, but in no event later than the April 15 immediately following such Annual Period, Company shall deliver to Putnam the Annual GEPS Options, if any, earned by Putnam for the preceding Annual Period. All Annual GEPS Options granted pursuant to this Schedule 1.1(ii) shall be granted effective as of January 1 immediately following the Annual Period for which such Annual GEPS Options are granted. 5. In the event Putnam's employment is terminated prior to the expiration of the Term by Company for Cause or by Putnam other than for Good Reason, Putnam's right to receive any further compensation or awards under Section 1.1(ii) or this Schedule 1.1(ii) shall immediately terminate with such termination of employment and Putnam shall not be entitled to receive any pro rata award of Annual GEPS Options hereunder. 6. In the event Putnam's employment is terminated prior to the expiration of the Employment Term (i) by Company (A) as a result of Putnam's Disability, or (B) for any reason other than for Cause, (ii) by Putnam for Good Reason, or (iii) as a result of Putnam's death, Putnam shall be entitled to receive a pro rata award of any Annual GEPS Options otherwise earned for the Annual Period during which such termination occurs. Putnam shall not be entitled to receive any pro rata award of the Annual GEPS Options unless the performance criteria set forth in Paragraph 2 above for such Annual Period is satisfied. Following any such termination by the Company or Putnam, the Company shall calculate the Annual GEPS Options, if any, earned for such Annual Period in accordance with Paragraph 2 above. If any Annual GEPS Options are otherwise earned for such Annual Period, Putnam shall be entitled to a pro rata award and delivery of such Annual GEPS Options, such award to be delivered in accordance with the schedule set forth in Paragraph 4 above. 1.1(ii)-2 8. In the event of a Change of Control, (i) all outstanding Annual GEPS Options shall fully vest and become exercisable, and (ii) with respect to any Annual GEPS Options which may be awarded to Putnam for the Annual Period in which such Change of Control occurs and any Annual Period thereafter, the performance criteria set forth in this Schedule 1.1(ii) with respect to such Annual GEPS Options shall be deemed to have been met in full to the maximum extent, such Annual GEPS Options shall be awarded to Putnam and all such Annual GEPS options shall fully vest and become exercisable. 1.1(ii)-3 SCHEDULE 1.1(iii) 1. Subject to the terms and conditions herein, during the Term Putnam shall be entitled to receive, and Company shall award to Putnam, on an annual basis, options to purchase up to 1,200 shares of the Company Stock. The maximum number of shares of Company Stock for which options may be granted pursuant to Section 1.1(iii) and this Schedule 1.1(iii) is 6,000 shares. The options to be granted to Putnam pursuant to Section 1.1(iii) and this Schedule 1.1(iii) with respect to each Annual Period are referred to as the "Annual NPL Options." 2. The number of shares of Company Stock subject to the Annual NPL Options to be awarded to Putnam will be calculated, on an annual basis, on the basis of the Company's ratio (the "NPL Ratio") of Nonperforming Loans to Total Loans (as such terms are herein defined) for each respective Annual Period in accordance with the following: (i) If the Company's NPL Ratio for the Annual Period is equal to or greater than 73 basis points (.73%), then Putnam shall not be entitled to receive any grant of the Annual NPL Options for such Annual Period. (ii) If the Company's NPL Ratio for the Annual Period is less 73 basis points (.73%) but greater than 50 basis points (.50%), the number of shares of Company Stock subject to the Annual NPL Options awarded to Putnam for such Annual Period shall be determined by (A) multiplying (1) 1,200 by (2) 73 less the NPL Ratio for such Annual Period (expressed in basis points), and (B) dividing the product obtained in clause (A) by 23. Expressed as a formula, the calculation is as follows: Number of shares = 1,200 (73 - NPL Ratio) ---------------------- 23 By way of example, if the Ratio of Nonperforming Loans to Total Loans for the Annual Period is 60 basis points (.60%), the number of shares of Company Stock subject to the Annual NPL Options awarded for such Annual Period is determined as follows: Number of shares = 1,200 (73 - 60) --------------- 23 = 678 shares (iii) If the NPL Ratio for the Annual Period is equal to or less than 50 basis points (.50%), the number of shares of Company Stock subject to the Annual NPL Option awarded to Putnam for such Annual Period shall be 1,200 shares. The calculations set forth in this Paragraph 2 shall be made on an annual basis and will not be affected by the Company's cumulative ratio of Nonperforming Loans to Total Loans in either preceding or succeeding Annual Periods. If the Company's Nonperforming Loans to Total Loans in any Annual Period exceeds 73 basis points (.73%) or is less than 50 basis points (.50%), such excess or deficit, as applicable, will not be taken into consideration for purposes of determining the Annual NPL Options to be awarded to Putnam for any other Annual Period. 1.1(iii)-1 3. As used in this Agreement and this Schedule 1.1(iii), the Company's "Ratio of Nonperforming Loans to Total Loans" for any Annual Period shall be the ratio of nonperforming loans to total period-end loans set forth in the Company's Annual Report on Form 10-K as filed with the SEC. If for any reason the Company is no longer required to file an Annual Report on Form 10-K with the SEC, the Company shall cause such ratio to be calculated in a manner consistent with the Company's most recently filed Annual Report on Form 10-K. 4. Promptly following the Company's filing of its Annual Report on Form 10-K for any Annual Period, but in no event later than the April 15 immediately following such Annual Period, Company shall deliver to Putnam the Annual NPL Options, if any, earned by Putnam for the preceding Annual Period. All Annual NPL Options granted pursuant to this Schedule 1.1(iii) shall be granted effective as of January 1 immediately following the Annual Period for which such Annual NPL Options are granted. 5. In the event Putnam's employment is terminated prior to the expiration of the Term by Company for Cause or by Putnam other than for Good Reason, Putnam's right to receive any further compensation or awards under Section 1.1(iii) or this Schedule 1.1(iii) shall immediately terminate with such termination of employment and Putnam shall not be entitled to receive any pro rata award of Annual NPL Options hereunder. 6. In the event Putnam's employment hereunder is terminated prior to the expiration of the Term (i) by Company (A) as a result of Putnam's Disability, or (B) for any reason other than for Cause, (ii) by Putnam for Good Reason, or (iii) as a result of Putnam's death, Putnam shall be entitled to receive a pro rata award of any Annual NPL Options otherwise earned for the Annual Period during which such termination occurs. Putnam shall not be entitled to receive any pro rata award of the Annual NPL Options unless the performance criteria set forth in Paragraph 2 above for such Annual Period is satisfied. Following any such termination by the Company or Putnam, the Company shall calculate the Annual NPL Options, if any, earned for such Annual Period in accordance with Paragraph 2 above. If any Annual NPL Options are otherwise earned for such Annual Period, Putnam shall be entitled to a pro rata award and delivery of such Annual NPL Options, such award to be delivered in accordance with the schedule set forth in Paragraph 4 above. 7. In the event of a Change of Control, (i) all outstanding Annual NPL Options shall fully vest and become exercisable, and (ii) with respect to any Annual NPL Options which may be awarded to Putnam for the Annual Period in which such Change of Control occurs and any Annual Period thereafter, the performance criteria set forth in this Schedule 1.1(iii) with respect to such Annual NPL Options shall be deemed to have been met in full to the maximum extent, such Annual NPL Options shall be awarded to Putnam and all such Annual NPL options shall fully vest and become exercisable. 1.1(iii)-2 SCHEDULE 1.1(iv) 1. Subject to the terms and conditions herein, during the Term Putnam shall be entitled to receive, and the Company shall grant to Putnam, on an annual basis, up to 2,000 shares of the Company Stock. The maximum number of shares of Company Stock which may be awarded to Putnam pursuant to Section 1.1(iv) and this Schedule 1.1(iv) is 10,000 shares. The shares of Company Stock to be awarded to Putnam pursuant to Section 1.1(iv) and this Schedule 1.1(iv) are referred to as the "Annual Growth Stock Awards." 2. The number of shares of Company Stock to be awarded to Putnam pursuant to Section 1.1(iv) and this Schedule 1.1(iv) will be calculated, on an annual basis, on the basis of the annual increase in the market price of the Company Stock for such Annual Period relative to the annual growth in the Nasdaq Composite Bank Index for the same Annual Period in accordance with the following: (i) Subject to the provisions of clause (ii) below, the number of shares of Company Stock to be awarded to Putnam during any Annual Period shall be determined in accordance with the following formula: AGSA = [2,000 x (SAGI - NAGI)] / .064 ------------- NAGI where: AGSA = the Annual Growth Stock Award for such Annual Period SAGI = the Sterling Annual Growth Index for such Annual Period NAGI = the Nasdaq Bank Annual Growth Index (as herein defined) for such Annual Period By way of example, if the SAGI for an Annual Period is 1.14 and the NAGI for such Annual Period is 1.08, the number of shares of Company Stock to be awarded to Putnam for such Annual Period is determined as follows: AGSA = [2,000 x (1.14 - 1.08)] / .064 ----------- 1.08 = 1,736 shares (ii) The maximum Annual Growth Stock Award for any Annual Period is 2,000 shares of Company Stock. If the calculation under clause (i) above results in a number greater than 2,000, the maximum number of shares of Company Stock awarded to Putnam for such Annual Period shall be limited to 2,000 shares. The calculations set forth in this Paragraph 2 shall be made on an annual basis and will not be affected by the cumulative growth in the market price of the Company Stock in either preceding or succeeding Annual Periods. If the Nasdaq Bank Annual Growth Index is greater than the 1.1(iv)-1 Sterling Annual Growth Index for any Annual Period or as a result of the calculation as set forth in Paragraph 2 hereinabove, Putnam would otherwise be entitled to receive in excess of 2,000 shares for any Annual Period, the deficit or excess, as applicable, will not be taken into consideration for purposes of determining the Annual Growth Stock Award to be received by Putnam for any other Annual Period. 3. As used in this Agreement and this Schedule 1.1(iv), the following terms shall have the meanings indicated below: "Beginning Period Index Value" for any Annual Period shall mean the average daily midpoint index value of the Nasdaq Composite Bank Index for the ten consecutive trading days immediately preceding such Annual Period. "Beginning Period Stock Price" for any Annual Period shall mean the average daily midpoint price per share of the Company Stock on the Nasdaq National Market for the ten consecutive trading days immediately preceding such Annual Period. "Ending Period Index Value" for any Annual Period shall mean the average daily midpoint index value of the Nasdaq Composite Bank Index for the last ten consecutive trading days of such Annual Period. "Ending Period Stock Price" for any Annual Period shall mean the average daily midpoint price per share of the Company Stock on the Nasdaq National Market for the last ten consecutive trading days of such Annual Period. "Nasdaq Bank Annual Growth Index" for any Annual Period shall be the number obtained by dividing the Beginning Period Index Value by the Ending Period Index Value "Sterling Annual Growth Index" for any Annual Period shall be the number obtained by dividing the Beginning Period Stock Price by the Ending Period Stock Price. 4. The Annual Growth Stock Award, if any, earned by Putnam for any Annual Period shall be delivered to Putnam concurrently with the awards contemplated by Sections 1.1(i), (ii), and (iii), provided, however, if no such awards are to be granted for such Annual Period, the Annual Growth Stock Award, if any, shall be delivered no later than the April 15 immediately following such Annual Period. All Annual Growth Stock Awards awarded pursuant to this Schedule 1.1(iv) shall be granted effective as of January 1 immediately following the Annual Period for which such Annual Growth Stock Award is granted. 5. In the event Putnam's employment hereunder is terminated prior to the expiration of the Term by Company for Cause or by Putnam other than for Good Reason, Putnam's right to receive any further compensation or awards under Section 1.1(iv) or this Schedule 1.1(iv) shall immediately terminate with such termination of employment and Putnam shall not be entitled to receive any pro rata Annual Growth Stock Awards hereunder. 6. In the event Putnam's employment hereunder is terminated prior to the expiration of the Term (i) by Company (A) as a result of Putnam's Disability, or (B) for any reason other than for Cause, (ii) by Putnam for Good Reason, or (iii) as a result of Putnam's death, Putnam 1.1(iv)-2 shall be entitled to receive a pro rata award of any Annual Growth Stock Awards otherwise earned for the Annual Period during which such termination occurs. Putnam shall not be entitled to receive any pro rata award of the Annual Growth Stock Awards unless the performance criteria set forth in Paragraph 2 above for such Annual Period is satisfied. Following any such termination by the Company or Putnam, the Company shall calculate the Annual Growth Stock Awards, if any, earned for such Annual Period in accordance with Paragraph 2 above. If any Annual Growth Stock Awards are otherwise earned for such Annual Period, Putnam shall be entitled to a pro rata award and delivery of such Annual Growth Stock Awards, such award to be delivered in accordance with the schedule set forth in Paragraph 4 above. 7. In the event of a Change of Control, (i) all outstanding Annual Growth Stock Awards shall fully vest and the forfeiture provisions shall fully lapse with respect to such shares, and (ii) with respect to any Annual Growth Stock Awards which may be awarded to Putnam for the Annual Period in which such Change of Control occurs and any Annual Period thereafter, the performance criteria set forth in this Schedule 1.1(iv) with respect to such Annual Growth Stock Awards shall be deemed to have been met in full to the maximum extent, such Annual Growth Stock Awards shall be awarded to Putnam and all such Annual Growth Stock Awards shall fully vest and the forfeiture provisions shall fully lapse with respect to such shares. 1.1(iv)-3 SCHEDULE 1.1(v) 1. Subject to the terms and conditions herein, Putnam shall be entitled to receive, and the Company shall award to Putnam, up to 10,000 shares of Company Stock. The shares of Company Stock to be awarded pursuant to Section 1.1(v) and this Schedule 1.1(v) (the "Term Growth Stock Awards") shall be based upon the increase in the market price of the Company Stock over the five (5) year Term of this Agreement and shall be delivered to Putnam following the expiration of the Term. 2. The number of shares of Company Stock to be awarded to Putnam pursuant to Section 1.1(v) and this Schedule 1.1(v) will be calculated on the basis of the increase in the market price of the Company Stock over the Term which commences January 1, 2002 and ends December 31, 2006, relative to the increase in the Nasdaq Composite Bank Index over such Term in accordance with the following: (i) If the Sterling Term Growth Index (as herein defined) over the Term is equal to or less than one (1), Putnam shall not be entitled to receive any Term Growth Stock Awards under this Agreement. (ii) Subject to the provisions of clause (iii) below, if the Sterling Term Growth Index is greater than one (1), the number of shares of Company Stock to be awarded to Putnam shall be determined in accordance with the following formula. TGSA = [10,000 x (STGI - NTGI)] / .36 ----------------------------- NTGI where: TGSA = the Term Growth Stock Award STGI = the Sterling Term Growth Index NTGI = the Nasdaq Bank Term Growth Index (as herein defined) By way of example, if the STGI for the Term is 2.04 and the NTGI for the Term is 1.60, the number of shares of Company Stock to be awarded to Putnam is determined as follows: TGSA = [10,000 x (2.04 - 1.60)] / .36 ----------------------------- 1.60 = 7,639 shares (iii) The maximum Term Growth Stock Award is 10,000 shares of Company Stock. If the calculation under clause (ii) above results in a number greater than 10,000, the maximum number of shares of Company Stock awarded to Putnam shall be limited to 10,000 shares. 1.1(v)-1 3. As used in this Agreement and this Schedule 1.1(v), the following terms shall have the meanings indicated below: "Beginning Term Index Value" shall mean the average daily midpoint index value of the Nasdaq Composite Bank Index for the ten consecutive trading days immediately preceding January 1, 2002. "Beginning Term Stock Price" shall mean the average daily midpoint price per share of the Company Stock on the Nasdaq National Market for the ten consecutive trading days immediately preceding January 1, 2002. "Ending Term Index Value" shall mean the average daily midpoint index value of the Nasdaq Composite Bank Index for the last ten consecutive trading days of the Term. "Ending Term Stock Price" shall mean the average daily midpoint price per share of the Company Stock on the Nasdaq National Market for the last ten consecutive trading days of the Term. "Sterling Term Growth Index" shall be the number obtained by dividing the Beginning Term Stock Price by the Ending Term Stock Price. "Nasdaq Bank Term Growth Index" shall be the number obtained by dividing the Beginning Term Index Value by the Ending Term Index Value. 4. The Term Growth Stock Award, if any, earned by Putnam shall be delivered to Putnam concurrently with the awards contemplated by Sections 1.1(i), (ii), (iii), and (iv), provided, however, if no such awards are to be granted, the Term Growth Stock Award, if any, shall, except as otherwise provided in Paragraph 6 below, be delivered no later than April 15, 2007. 5. In the event Putnam's employment for any reason is terminated by Company for Cause or by Putnam other than for Good Reason prior to the expiration of the Term, Putnam's right to receive any further compensation or awards under Section 1.1(v) or this Schedule 1.1(v) shall immediately terminate with such termination of employment and Putnam shall not be entitled to receive any pro rata Term Growth Stock Award. 6. In the event Putnam's employment is terminated prior to the expiration of the Term (i) by Company (A) as a result of Putnam's Disability, or (B) for any reason other than for Cause, (ii) by Putnam for Good Reason, or (iii) as a result of Putnam's death, Putnam shall be entitled to receive a pro rata award of any Term Growth Stock Award otherwise earned for the Term. Putnam shall not be entitled to receive any pro rata award of the Term Growth Stock Award unless the performance criteria set forth in Paragraph 2, as amended herein, is satisfied. The performance criteria for the Term Growth Stock Award shall be determined as of the end of the Annual Period in which such termination occurs and for purposes of calculating the number of shares of Company Stock, if any, earned by Putnam through the date of termination, the formula set forth in Paragraph 2 above shall be modified as follows: 1.1(v)-2 TGSA = [10,000 x (STGI - NTGI)] / Target Rate ----------- NTGI where: Target Rate shall equal 6.4% compounded annually beginning with the Effective Date of this Agreement through the end of the Annual Period in which such termination occurs. Following the end of the Annual Period during which any such termination by the Company or Putnam shall occur, the Company shall calculate the pro rata Term Growth Stock Award, if any, earned by Putnam. If any Term Growth Stock Award is otherwise earned by Putnam through the end of the Annual Period during which such termination shall occur, Putnam shall be entitled to a pro rata award of the Term Growth Stock Award and delivery of such shares, such award to be delivered concurrently with the awards contemplated by Sections 1.1(i), (ii), (iii), and (iv), provided, however, if no such awards are to be granted, the pro rata Term Growth Stock Award, if any, shall be delivered no later than the April 15 immediately following the Annual Period in which such termination shall occur. 7. In the event of a Change of Control prior to the expiration of the Term, the performance criteria set forth in this Schedule 1.1(v) with respect to the Term Growth Stock Awards shall be deemed to have been met in full to the maximum extent, such Term Growth Stock Award shall be awarded to Putnam and all such shares of Company Stock awarded to Putnam shall fully vest, and the forfeiture provisions shall fully lapse with respect to such shares. 1.1(v)-3 -----END PRIVACY-ENHANCED MESSAGE-----