10-Q/A 1 h10634e10vqza.txt STERLING BANCSHARES, INC. - 3/31/2003 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ---------- FORM 10 - Q/A AMENDMENT NO. 1 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2003 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------- --------- Commission File Number: 0-20750 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) (Zip Code) 713-466-8300 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 ("Act") during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act). Yes [X] No [ ] As of May 7, 2003, there were outstanding 44,064,511 shares of common stock, par value $1.00 per share, of the registrant. ================================================================================ EXPLANATORY NOTE The purpose of this Amendment No. 1 to the Quarterly Report on Form 10-Q of Sterling Bancshares, Inc. (the "Company") for the quarterly period ended March 31, 2003 (the "Original Form 10-Q") is to restate the Company's interim condensed consolidated financial statements as of and for the quarterly period ended March 31, 2003 and to revise related disclosures in the Original Form 10-Q. This restatement is described in detail in Note 9 to the interim condensed consolidated financial statements. On October 21, 2003, in connection with the Company's earnings release for the quarter ending September 30, 2003, we issued a press release that described our intention to restate these interim condensed consolidated financial statements. We filed the press release as an exhibit to our Current Report on Form 8-K filed October 21, 2003. Subsequent to the issuance of our interim condensed consolidated financial statements as of December 31, 2002 and the filing of the Original Form 10-Q, we determined that the pending sales of our banking offices in Eagle Pass, Carrizo Springs, Crystal City and Pearsall and the financial results and condition pertaining to these offices should not have been separately reported as discontinued operations. The Company initially determined that the sales of the banking offices met the requirements of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", for presentation as discontinued operations. However, after further consideration, we have determined that the proposed sales of the banking offices in Eagle Pass, Carrizo Springs, Crystal City and Pearsall do not meet such requirements. Net income, basic and diluted earnings per share and shareholders' equity were not affected by such presentation. As a result of our determination, we have determined it necessary to amend the Original Form 10-Q so that the financial results and condition pertaining to these banking offices are not separately reported as discontinued operations. This Amendment No. 1 amends and restates in its entirety Part I, Items 1, 2 and 4, and Part II, Item 6 of the Original Form 10-Q. This Amendment No. 1 continues to reflect circumstances as of the date of the filing of the Original Form 10-Q and does not reflect events occurring after the filing of the Original Form 10-Q, or modify or update those disclosures in any way, except as required to reflect the effects of the restatement as described in Note 9 to the interim condensed consolidated financial statements. 1 PART I. FINANCIAL INFORMATION ITEM 1. INTERIM FINANCIAL STATEMENTS (UNAUDITED) STERLING BANCSHARES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
MARCH 31, DECEMBER 31, 2003 2002 ----------- ----------- (AS RESTATED, NOTE 9) (UNAUDITED) ASSETS Cash and cash equivalents $ 124,952 $ 147,000 Interest-bearing deposits in financial institutions 1,413 1,302 Trading assets 100,252 142,803 Available-for-sale securities, at fair value 232,172 251,165 Held-to-maturity securities, at amortized cost 56,593 61,889 Loans held for sale 481,789 701,301 Loans held for investment 1,979,438 1,943,561 Allowance for credit losses (29,503) (27,621) ----------- ----------- Loans, net 1,949,935 1,915,940 Accrued interest receivable 12,296 15,800 Real estate acquired by foreclosure 5,177 3,358 Premises and equipment, net 53,857 56,704 Goodwill, net 57,714 61,284 Mortgage servicing rights 24,674 26,467 Other assets 141,571 197,732 ----------- ----------- TOTAL ASSETS $ 3,242,395 $ 3,582,745 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits: Noninterest-bearing $ 964,014 $ 1,016,818 Interest-bearing 882,115 919,477 Certificates of deposit and other time deposits 683,551 736,777 ----------- ----------- Total deposits 2,529,680 2,673,072 Other borrowed funds 301,575 509,590 Notes payable 20,360 21,430 Accrued interest payable and other liabilities 46,888 44,252 ----------- ----------- Total liabilities 2,898,503 3,248,344 COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES OF SUBSIDIARY TRUSTS 80,000 80,000 MINORITY INTEREST IN STERLING CAPITAL MORTGAGE COMPANY 5,498 5,074 Shareholders' equity: Convertible preferred stock, $1 par value, 1 million shares authorized 59 59 Common stock, $1 par value, 100 million shares authorized 43,993 43,983 Capital surplus 44,717 44,633 Retained earnings 165,919 156,664 Accumulated other comprehensive income--net unrealized gain on available-for-sale securities, net of tax 3,706 3,988 ----------- ----------- Total shareholders' equity 258,394 249,327 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,242,395 $ 3,582,745 =========== ===========
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS WHICH ARE AN INTEGRAL PART OF THESE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 2 STERLING BANCSHARES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data)
THREE MONTHS ENDED MARCH 31, 2003 2002 ------- ------- (AS RESTATED, NOTE 9) (UNAUDITED) Interest income: Loans, including fees $40,024 $34,814 Securities: Taxable 2,724 3,883 Tax-exempt 649 781 Federal funds sold 47 215 Trading assets 862 1,050 Deposits in financial institutions 19 29 ------- ------- Total interest income 44,325 40,772 Interest expense: Demand and savings deposits 1,461 2,380 Certificates and other time deposits 4,226 4,512 Other borrowed funds 1,348 726 Note payable 165 203 ------- ------- Total interest expense 7,200 7,821 ------- ------- NET INTEREST INCOME 37,125 32,951 Provision for credit losses 5,392 2,623 ------- ------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 31,733 30,328 Noninterest income: Customer service fees 4,314 4,102 Gain on sale of mortgage loans 11,571 4,129 Mortgage origination income 8,173 3,393 Other 9,301 4,659 ------- ------- Total noninterest income 33,359 16,283 Noninterest expense: Salaries and employee benefits 25,288 19,069 Occupancy expense 6,601 5,182 Mortgage servicing rights amortization 3,904 800 Technology 1,493 1,214 Minority interest expense: Company-obligated mandatorily redeemable trust preferred securities of subsidiary trusts 1,552 1,330 Sterling Capital Mortgage Company 424 215 Other 8,743 6,547 ------- ------- Total noninterest expense 48,005 34,357 INCOME BEFORE INCOME TAXES 17,087 12,254 Provision for income taxes 5,850 3,956 ------- ------- NET INCOME $11,237 $ 8,298 ======= ======= EARNINGS PER SHARE: Basic $ 0.26 $ 0.19 ======= ======= Diluted $ 0.25 $ 0.19 ======= =======
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS WHICH ARE AN INTEGRAL PART OF THESE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 3 STERLING BANCSHARES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
THREE MONTHS ENDED MARCH 31, 2003 2002 --------- --------- (AS RESTATED, NOTE 9) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 11,237 $ 8,298 Adjustments to reconcile income from operations to net cash provided by (used in) operating activities: Amortization and accretion of premiums and discounts on securities, net 2,371 18 Net gain on the sale of assets (382) (195) Net gain on the sale of trading assets (347) -- Gain on the sale of the Eagle Pass banking office (3,382) -- Provision for credit losses 5,392 2,623 Write-downs, less gains on sale, of real estate acquired by foreclosure and repossessed assets (91) 54 Depreciation and amortization 2,744 2,486 Net decrease (increase) in loans held for sale 219,512 (29,964) Capitalized mortgage servicing rights (10,644) (1,928) Sale of mortgage servicing rights 8,533 -- Amortization of mortgage servicing rights 3,904 800 Net (increase) decrease in accrued interest receivable and other 59,604 (9,798) assets Net increase in accrued interest payable and other liabilities 3,217 6,228 --------- --------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 301,668 (21,378) CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in securities purchased under agreements to resell -- 10,581 Proceeds from maturity and paydowns of held-to-maturity securities 5,256 6,080 Proceeds from the sale of available-for-sale securities 16,870 4,981 Proceeds from maturity and paydowns of available-for-sale 48,295 32,199 securities Purchases of available-for-sale securities (48,554) (22,500) Proceeds from the sale of trading assets 134,878 129,374 Purchases of trading assets (93,040) (112,737) Proceeds from principal paydowns of trading securities 1,060 3,535 Net increase in loans held for investment (58,806) (40,659) Proceeds from sale of real estate acquired by foreclosure 1,231 674 Net decrease (increase) in interest-bearing deposits in financial (111) 15 institutions Proceeds from sale of Eagle Pass banking office 6,952 -- Cash and cash equivalents sold with the Eagle Pass banking office (78,138) -- Proceeds from sale of premises and equipment 281 558 Purchase of premises and equipment (1,250) (2,701) --------- --------- NET CASH PROVIDED BY INVESTING ACTIVITIES (65,076) 9,400 CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposit accounts (47,667) 7,529 Repayment of notes payable (1,070) -- Net decrease in repurchase agreements/funds purchased (208,015) (9,107) Proceeds from issuance of common stock and preferred stock 94 537 Dividends paid (1,982) (1,753) --------- --------- NET CASH USED IN FINANCING ACTIVITIES (258,640) (2,794) NET DECREASE IN CASH AND CASH EQUIVALENTS (22,048) (14,772) CASH AND CASH EQUIVALENTS: Beginning of period 147,000 148,295 --------- --------- End of period $ 124,952 $ 133,523 ========= ========= SUPPLEMENTAL INFORMATION: Income taxes paid $ 1,178 $ -- ========= ========= Interest paid $ 7,649 $ 13,835 ========= ========= Noncash investing and financing activities: Acquisitions of real estate through foreclosure of collateral $ 2,959 $ 568 ========= =========
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS WHICH ARE AN INTEGRAL PART OF THESE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 STERLING BANCSHARES, INC., AND SUBSIDIARIES NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2003 (UNAUDITED) 1. BASIS OF PRESENTATION: The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q as prescribed by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2003, are not necessarily indicative of the results that may be expected for the entire year or any interim period. For further information, refer to the consolidated financial statements and notes thereto included in Amendment No. 1 to the Annual Report on Form 10-K/A of Sterling Bancshares, Inc. (the "Company") for the year ended December 31, 2002. Certain reclassifications have been made to prior year amounts to conform to current period presentation, as restated. All reclassifications have been applied consistently for the periods presented and had no effect on net income or stockholders' equity. 2. EARNINGS PER COMMON SHARE Earnings per common share ("EPS") were computed based on the following (in thousands, except per share amounts):
THREE MONTHS ENDED MARCH 31, 2003 2002 ------------ ------------ AMOUNT AMOUNT ------------ ------------ Net income $ 11,237 $ 8,298 ============ ============ Basic: Weighted average shares outstanding 43,987 43,779 Diluted: Add incremental shares for: Assumed exercise of outstanding options 651 806 Assumed conversion of preferred stock 89 80 ------------ ------------ Total 44,727 44,665 ============ ============ Earnings per share: Basic $ 0.26 $ 0.19 ============ ============ Diluted $ 0.25 $ 0.19 ============ ============
5 3. SHAREHOLDERS' EQUITY The following table displays the changes in shareholders' equity for the three-month periods ended March 31, 2003 and 2002 (in thousands):
THREE MONTHS ENDED MARCH 31, 2003 2002 --------- --------- Equity, beginning of period $ 249,327 $ 217,369 Comprehensive income: Net income $ 11,237 $ 8,298 Net change in net unrealized gains on available-for-sale securities (282) (449) --------- --------- Total comprehensive income 10,955 7,849 Issuance of common stock 94 295 Issuance of preferred stock -- 242 Cash dividends paid (1,982) (1,753) --------- --------- Equity, end of period $ 258,394 $ 224,002 ========= =========
4. SEGMENTS The Company has two reportable operating segments: commercial banking and mortgage banking. Sterling Bank (the "Bank") has an 80 percent ownership interest in Sterling Capital Mortgage Company ("SCMC") and reports its financial position and results of operations on a consolidated basis. The commercial banking and mortgage banking segments are managed separately because each business requires different marketing strategies and each offers different products and services. Summarized below is the financial information by operating segment as of and for the three-month periods ended March 31, (in thousands).
2003 2002 ---------------------------------------- ---------------------------------------- COMMERCIAL MORTGAGE COMMERCIAL MORTGAGE BANKING BANKING TOTAL BANKING BANKING TOTAL ---------- ---------- ---------- ---------- ---------- ---------- Net interest income $ 37,125 $ -- $ 37,125 $ 32,951 $ -- $ 32,951 Noninterest income 11,228 22,131 33,359 6,853 9,430 16,283 ---------- ---------- ---------- ---------- ---------- ---------- Total revenue 48,353 22,131 70,484 39,804 9,430 49,234 Provision for credit losses 4,450 942 5,392 2,623 -- 2,623 Noninterest expense 29,643 18,362 48,005 26,389 7,968 34,357 ---------- ---------- ---------- ---------- ---------- ---------- Income before income taxes 14,260 2,827 17,087 10,792 1,462 12,254 Provision for income taxes 4,719 1,131 5,850 3,355 601 3,956 ---------- ---------- ---------- ---------- ---------- ---------- Net income 9,541 1,696 11,237 7,437 861 8,298 ========== ========== ========== ========== ========== ========== Total assets, March 31, $3,213,517 $ 28,878 $3,242,395 $2,772,778 $ 16,595 $2,789,373 ========== ========== ========== ========== ========== ==========
Intersegment interest was paid to the Bank by SCMC in the amount of $6.9 million for the three-month period ended March 31, 2003. Total loans of $395.0 million in the mortgage warehouse were eliminated in consolidation as of March 31, 2003. 5. DISPOSITIONS OF BANKING OFFICES On October 29, 2002, the Bank entered into an agreement to sell its banking office located in Eagle Pass, Texas. On March 20, 2003, the Bank completed the sale of its banking office located in Eagle Pass, Texas 6 to South Texas National Bank of Laredo. Assets of $18.7 million, loans of $16.8 million and deposits of $95.7 million were sold in the transaction. A before-tax net gain of $3.2 million related to the sale of the Eagle Pass banking office was recorded in the first quarter of 2003. On July 16, 2002, the Bank entered into an agreement to sell its banking offices located in Carrizo Springs, Crystal City and Pearsall to an investor group headed by the current executive officers of these three locations. As of March 31, 2003, these three banking offices had combined assets of $16.2 million, loans of $14.9 million and deposits of $43.4 million. The sale of these three banking offices was completed on May 8, 2003. Assets of $16.6 million, loans of $15.2 million and deposits of $42.1 million were sold in the transaction. A before-tax loss of $142 thousand was recorded on the sale in the second quarter of 2003. 6. STOCK OPTIONS The Company accounts for its employee stock options using the intrinsic value-based method. If the compensation cost for the Company's stock-based compensation plan had been determined based on the fair value at the grant dates for awards, there would have been no material impact on the Company's reported net income or earnings per share. Pro forma information regarding net income and earnings per share is required under Statement of Financial Accounting Standard No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation" and has been determined as if the Company accounted for its employee stock option plans under the fair value method of SFAS 123. The fair value of options was estimated using a Black-Scholes option pricing model. Option valuation models require use of highly subjective assumptions. Also, employee stock options have characteristics that are significantly different from those of traded options, including vesting provisions and trading limitations that impact their liquidity. Because employee stock options have differing characteristics and changes in the subjective input assumptions can materially affect the fair value estimate, the Black-Scholes valuation model does not necessarily provide a reliable measure of the fair value of employee stock options. The following table shows information related to stock-based compensation in both the reported and pro forma earnings per share amounts (dollars in thousands except for per share amounts):
THREE MONTHS ENDED MARCH 31, 2003 2002 -------- -------- Net income, as reported $ 11,237 $ 8,298 Total stock-based employee compensation expense determined under fair value based method for all awards granted since January 1, 1995, net of related tax effects 259 260 -------- -------- Pro Forma net income $ 10,978 $ 8,038 ======== ======== Earnings per share: Basic- as reported $ 0.26 $ 0.19 ======== ======== Basic- pro forma $ 0.25 $ 0.18 ======== ======== Diluted - as reported $ 0.25 $ 0.19 ======== ======== Diluted - pro forma $ 0.25 $ 0.18 ======== ========
7 7. INTANGIBLE ASSETS The changes in the carrying amount of goodwill by reportable segment for the year ended December 31, 2002 and the three months ended March 31, 2003 are as follows (in thousands):
(Unaudited) COMMERCIAL BANKING --------------------------------------------------- SOUTH MORTGAGE HOUSTON SAN ANTONIO DALLAS TEXAS BANKING TOTAL -------- ----------- -------- -------- --------- -------- Balance, January 1, 2002 $ 29,641 $ 15,079 $ -- $ 5,312 $ 4,780 $ 54,812 Purchase price adjustment (28) -- -- -- 838 810 Eagle National acquisition -- -- 5,662 -- -- 5,662 -------- ----------- -------- -------- --------- -------- Balance, December 31, 2002 29,613 15,079 5,662 5,312 5,618 61,284 Sale of Eagle Pass office -- -- -- (3,570) -- (3,570) -------- ----------- -------- -------- --------- -------- Balance, March 31, 2003 $ 29,613 $ 15,079 $ 5,662 $ 1,742 $ 5,618 $ 57,714 ======== =========== ======== ======== ========= ========
The changes in the carrying amounts of intangible assets other than goodwill for the year ended December 31, 2002 and three months ended March 31, 2003 are as follows (in thousands):
CORE MORTGAGE (Unaudited) DEPOSIT SERVICING INTANGIBLE RIGHTS TOTAL ---------- ---------- ---------- Balance, January 1, 2002 $ 2,036 $ 19,592 $ 21,628 Amortization and impairment (426) (13,150) (13,576) Servicing rights originated -- 20,025 20,025 Eagle National acquisition 486 -- 486 ---------- ---------- ---------- Balance, December 31, 2002 2,096 26,467 28,563 Amortization (114) (3,904) (4,018) Servicing rights originated -- 10,644 10,644 Sale of servicing rights -- (8,533) (8,533) ---------- ---------- ---------- Balance, March 31, 2003 $ 1,982 $ 24,674 $ 26,656 ========== ========== ==========
8. SUBSEQUENT EVENTS On April 10, 2003, the Bank completed a private placement of $50 million of subordinated unsecured notes. The subordinated notes issued by the Bank bear interest at a fixed rate of 7.375% and mature over a ten year period ending April 15, 2013, with semi-annual interest payments. The subordinated notes are not convertible or redeemable. The Bank intends to use the proceeds from the sale of the subordinated notes, after the payment of expenses related to the private placement, for general corporate purposes. On May 8, 2003, the Bank completed the sale of its banking offices located in Carrizo Springs, Crystal City and Pearsall, Texas to an investor group headed by the current executive officers of these three locations. Assets of $16.6 million, loans of $15.2 million and deposits of $42.1 million were sold. 9. RESTATEMENT Subsequent to the filing of Form 10-Q for the quarter ended March 31, 2003, the Company determined that the sales of its banking offices in Eagle Pass, Carrizo Springs, Crystal City and Pearsall and the financial results and condition pertaining to these offices should not have been reported separately as discontinued operations. The Company initially determined that the sales of banking offices met the requirements in SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, for presentation as discontinued operations. However after further consideration, we have determined that the sale of the Eagle Pass banking office and the proposed sale of banking offices in Carrizo Springs, Crystal City and Pearsall do not meet such requirements. Net income, basic and diluted earnings per share and 8 shareholders' equity were not affected by such presentation. The Company determined that it was necessary to amend the Quarterly Reports on Form 10-Q for the quarterly periods ending March 31, 2003 and June 30, 2003 and the Annual Report on Form 10-K for the year ended December 31, 2002 so that the financial results and condition pertaining to these banking offices are not separately reported as discontinued operations. The following table shows the effect of the restatement on the interim condensed consolidated balance sheet as previously reported in the Quarterly Report on form 10-Q ended March 31, 2003:
MARCH 31, 2003 DECEMBER 31, 2002 -------------------------------- -------------------------------- AS AS PREVIOUSLY AS AS PREVIOUSLY RESTATED REPORTED RESTATED REPORTED ---------- -------------- ---------- -------------- Cash and cash equivalents $ 124,952 $ 124,321 $ 147,000 $ 139,209 Loans held for investment 1,979,438 1,964,521 1,943,561 1,910,565 Accrued interest receivable 12,296 12,188 15,800 15,637 Premises and equipment, net 53,857 53,313 56,704 54,919 Other assets 141,571 141,548 197,732 197,695 Assets related to discontinued operations -- 16,223 -- 42,772 Demand deposits: Noninterest-bearing $ 964,014 $ 952,776 $1,016,818 $ 991,271 Interest-bearing 882,115 859,389 919,477 867,942 Certificates of deposit and other time deposits 683,551 674,165 736,777 673,689 Accrued interest payable and other liabilities 46,888 46,836 44,252 44,082 Liabilities related to discontinued operations -- 43,402 -- 140,340
The following table shows the effect of the restatement on the interim condensed consolidated income statements as previously reported in the Quarterly Report on form 10-Q ended March 31, 2003 :
FOR THE THREE MONTHS FOR THE THREE MONTHS ENDED MARCH 31, 2003 ENDED MARCH 31, 2002 ------------------------- ------------------------- AS AS PREVIOUSLY AS AS PREVIOUSLY RESTATED REPORTED RESTATED REPORTED -------- ------------ -------- ------------ Interest income: Loans, including fees $ 40,024 $ 39,480 $ 34,814 $ 34,197 Interest expense: Demand deposits and savings deposits 1,461 1,357 2,380 2,208 Certificates and other time deposits 4,226 3,932 4,512 4,120 Noninterest income: Customer service fees 4,314 3,963 4,102 3,669 Other noninterest income 9,301 5,826 4,659 4,554 Noninterest expense: Salaries and employee benefits 25,288 24,849 19,069 18,645 Occupancy expense 6,601 6,520 5,182 5,089 Technology 1,493 1,485 1,214 1,201 Other noninterest expense 8,743 8,417 6,547 6,398 Income from continuing operations before income taxes 17,087 13,969 12,254 12,342 Provision for income taxes from continuing operations 5,850 4,759 3,956 3,985 Income from continuing operations 11,237 9,210 8,298 8,357 Income (loss) from discontinued operations before income taxes -- 3,118 -- (88) Provision (benefit) for income taxes -- 1,091 -- (29) Income (loss) from discontinued operations -- 2,027 -- (59) Earnings per share from continuing operations: Basic $ 0.26 $ 0.21 $ 0.19 $ 0.19 Diluted $ 0.25 $ 0.21 $ 0.19 $ 0.19
9 The following table shows the effect of the restatement on the interim condensed consolidated statement of cash flows as previously reported in the Quarterly Report on form 10-Q ended March 31, 2003:
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED MARCH 31, 2003 MARCH 31, 2002 -------------------------- -------------------------- AS AS PREVIOUSLY AS AS PREVIOUSLY RESTATED REPORTED RESTATED REPORTED --------- ------------ --------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income from continuing operations $ 11,237 $ 9,210 $ 8,298 $ 8,357 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Amortization and accretion of premiums and discounts on 2,371 2,371 18 18 securities, net Gain on the sale of the Eagle Pass banking office (3,382) -- -- -- Depreciation and amortization 2,744 2,704 2,486 2,486 Net (increase) decrease in accrued interest receivable and other assets 59,604 63,203 (9,798) (9,772) Net increase in accrued interest payable and other liabilities 3,217 3,178 6,228 6,246 CASH FLOWS FROM INVESTING ACTIVITIES: Net increase in loans in loans held for investment (58,806) (60,425) (40,659) (40,991) Proceeds from the sale of the Eagle Pass banking office3 6,952 -- -- -- Cash and cash equivalents sold with the Eagle Pass banking office (78,138) -- -- -- Proceeds from sale of premises and equipment 281 266 558 558 Purchase of premises and equipment (1,250) (1,250) (2,701) (2,396) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposit accounts (47,667) (46,572) 7,529 5,616 Net cash provided by (used in) discontinued operations -- (68,362) -- 2,488 Cash and cash equivalents at beginning of year 147,000 139,209 148,295 141,399 Cash and cash equivalents at end of year 124,952 124,321 133,523 127,278
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following "Management's Discussion and Analysis of Financial Condition and Results of Operation" reflects certain restatements to the Company's previously reported interim condensed consolidated financial statements for the quarter ended March 31, 2003. (See "Restatement of Financial Statements" below). FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q/A, 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 10 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 Amendment No. 1 to the Annual Report on Form 10-K/A for the year ended December 31, 2002, filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934. CRITICAL ACCOUNTING POLICIES The Company's accounting policies are integral to understanding the results reported. Accounting policies are described in detail in Note A to the consolidated financial statements in the 2002 Annual Report. The Company believes that of its significant accounting policies, the allowance for credit losses may involve a higher degree of judgment and complexity. Allowance for credit losses - The allowance for credit losses is a valuation allowance for probable losses incurred on loans. Loans are charged to the allowance when the loss actually occurs or when a determination is made that a probable loss has occurred. Recoveries are credited to the allowance at the time of recovery. Throughout the year, management estimates the probable level of losses to determine whether the allowance for credit losses is adequate to absorb losses in the existing portfolio. Based on these estimates, an amount is charged to the provision for credit losses and credited to the allowance for credit losses in order to adjust the allowance to a level determined to be adequate to absorb losses. Management's judgment as to the level of probable losses on existing loans involves the consideration of current economic conditions and their estimated effects on specific borrowers; an evaluation of the existing relationships among loans, potential credit losses and the present level of the allowance; results of examinations of the loan portfolio by regulatory agencies; and management's internal review of the loan portfolio. In determining the collectibility of certain loans, management also considers the fair value of any underlying collateral. The amount ultimately realized may differ from the carrying value of these assets because of economic, operating or other conditions beyond the Company's control. Please refer to the subsequent discussion of "Allowance for Credit Losses" below as well as Note A to the consolidated financial statements in the annual report for additional insight into management's approach and methodology in estimating the allowance for credit losses. RESTATEMENT OF FINANCIAL STATEMENTS As discussed in Note 9, the accompanying interim condensed consolidated financial statements for the quarter ended March 31, 2003 and 2002 have been restated so that the pending sales of our banking offices in Eagle Pass, Carrizo Springs, Crystal City and Pearsall and the financial results and condition pertaining to these four (4) South Texas banking offices are not separately reported as discontinued operations. The Company had previously reported the pending sales of these four (4) banking offices and their related financial results and condition as discontinued operations. The restatement no longer separately reports these banking offices and their respective financial results and condition as discontinued operations and reflects all required adjustments. Net income, basic and diluted earnings per share and shareholders' equity for the previously reported period were not affected by the restatement. The accompanying management's discussion and analysis gives effect to the restatement. SIGNIFICANT DEVELOPMENTS On July 12, 2002, the Company entered into a definitive agreement to sell three offices in south Texas to an investor group headed by the current executive officers of the three locations. As of March 31, 2003, the three offices, Carrizo Springs, Crystal City and Pearsall, had combined assets of $16.2 million, loans of 11 $14.9 million and deposits of $43.4 million. The sale of these three banking offices was completed on May 8, 2003. Assets of $16.6 million, loans of $15.2 million and deposits of $42.1 million were sold in the transaction. A before-tax net gain of $3.2 million related to the sale of the Eagle Pass banking office was recorded in the first quarter of 2003. On March 20, 2003, the Bank sold its banking office located in Eagle Pass, Texas to South Texas National Bank of Laredo. Assets of $18.7 million, loans of $16.8 million and deposits of $95.7 million were sold in the transaction. A before-tax loss of $142 thousand was recorded on the sale during the second quarter of 2003. On April 10, 2003, the Bank completed a private placement of $50 million of subordinated unsecured notes. The subordinated notes issued by the Bank bear interest at a fixed rate of 7.375% and mature over a ten year period ending April 15, 2013, with semi-annual interest payments. The subordinated notes are not convertible or redeemable. The Bank intends to use the proceeds from the sale of the subordinated notes, after the payment of expenses related to the private placement, for general corporate purposes. NON-GAAP PRESENTATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains financial information determined by methods other than in accordance with Generally Accepted Accounting Principles ("GAAP"). Management uses these non-GAAP measures in their analysis of the business and its performance. In particular, net interest income and net interest margin are as reflected in the Consolidated Yield Analysis table are calculated on both a GAAP based measurement and on a fully tax-equivalent basis ("FTE"). Management believes that these measures calculated on a FTE basis provide a useful picture of net interest income and net interest margin for comparative purposes. The GAAP based measures do not take into consideration the tax-exempt status of certain income. Net interest income and net interest margin calculated on a FTE basis are determined by adjusting net interest income to reflect tax-exempt interest income on an equivalent before-tax basis. Non-GAAP information presented by other companies may not be comparable to that presented herein, since each company may define non-GAAP measured differently. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO SAME PERIOD IN 2002 NET INCOME - Net income for the three-month period ended March 31, 2003 was $11.2 million as compared to $8.3 million for the same period in 2002, an increase of approximately $2.9 million or 35.4%. Included in net income is a before-tax gain of $3.4 million related to the sale of the Eagle Pass office. NET INTEREST INCOME - Net interest income for the three-month period ended March 31, 2003, was $37.1 million, as compared to $33.0 million for the same period in 2002, an increase of $4.2 million or 12.7%. The increase is primarily due to the average loan growth of 30.9%. The growth in average loans related to the acquisition of Eagle National was 2.9%. In November 2002, the Federal Reserve Bank decreased the discount rate 50 basis points. Consequently, the Bank's yields decreased in the first quarter of 2003 as a result of the Bank lowering its prime rate in the fourth quarter of 2002 in relation to the Federal Reserve decrease. While average earning assets for the period ended March 31, 2003 increased over a year ago, the yield decreased 87 basis points from 6.97% for the three-month period ended March 31, 2002, to 6.10% for the same period in 2003. As of March 31, 2003, average interest bearing liabilities were $2.1 billion, an increase of $418.2 million or 25.5% from March 31, 2002. Average interest bearing deposits at March 31, 2003 were $1.6 billion, an increase of 12.3% from March 31, 2002. The increase in average interest bearing deposits related to the acquisition of Eagle National was 2.9%. The cost of interest bearing 12 liabilities decreased 52 basis points from 1.94% for the three months end March 31, 2002 to 1.42% during the same period in 2003. The decrease in the cost of interest bearing liabilities is primarily the result of the decrease in the Federal Reserve Bank's discount rate in November 2002. The Company's 5.11% net interest margin for the three months ended March 31, 2003 decreased from the 5.64% net interest margin recorded during the same period in 2002. Additionally, the Company's 5.16% tax equivalent net interest margin for the three months ended March 31, 2003 decreased from the 5.71% tax equivalent net interest margin recorded during the same period in 2002. 13 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, 2003 and 2002, respectively: CONSOLIDATED YIELD ANALYSIS THREE MONTHS ENDED MARCH 31, (DOLLARS IN THOUSANDS)
2003 2002 ------------------------------------ ------------------------------------- AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST YIELD BALANCE INTEREST YIELD ----------- ----------- ------- ----------- ----------- ------- INTEREST EARNING ASSETS: Interest bearing deposits in financial institutions $ 1,149 $ 19 6.71% $ 2,181 $ 29 5.39% Federal funds sold and securities purchased under agreements to resell 16,293 47 1.17% 44,107 215 1.98% Trading assets 121,181 862 2.88% 103,262 1,050 4.12% Investment securities (taxable) 260,308 2,724 4.24% 246,875 3,883 6.38% Investment securities (tax-exempt) 58,942 649 4.47% 72,633 781 4.36% Loans held for sale (taxable) 515,814 7,142 5.62% 227,239 4,076 7.27% Loans held for investment (taxable) 1,968,588 32,803 6.76% 1,670,009 30,655 7.44% Loans (tax-exempt) 4,958 79 6.46% 5,138 83 6.55% ----------- ----------- ------- ----------- ----------- ------- Total Interest Earning Assets 2,947,233 44,325 6.10% 2,371,444 40,772 6.97% NONINTEREST EARNING ASSETS: Cash and due from banks 102,343 99,745 Premises and equipment, net 56,045 54,096 Other assets 279,692 210,509 Allowance for credit losses (29,116) (23,758) ----------- ----------- Total Noninterest Earning Assets 408,964 340,592 ----------- ----------- TOTAL ASSETS $ 3,356,197 $ 2,712,036 =========== =========== INTEREST BEARING LIABILITIES: Demand and savings deposits 921,551 $ 1,461 0.64% $ 873,071 $ 2,380 1.11% Certificates and other time deposits 714,873 4,226 2.40% 583,790 4,512 3.13% Other borrowed funds 400,184 1,348 1.37% 161,353 726 1.82% Notes payable 20,717 165 3.23% 20,879 203 3.94% ----------- ----------- ------- ----------- ----------- ------- Total Interest Bearing Liabilities 2,057,325 7,200 1.42% 1,639,093 7,821 1.94% NONINTEREST BEARING LIABILITIES: Demand deposits 913,969 756,798 Other liabilities 49,159 35,173 ----------- ----------- Total Noninterest Bearing Liabilities 963,128 791,971 Trust preferred securities 80,000 57,500 Shareholders' equity 255,744 223,472 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,356,197 $ 2,712,036 =========== =========== NET INTEREST INCOME & MARGIN $ 37,125 5.11% $ 32,951 5.64% =========== ======= =========== ======= NET INTEREST INCOME & MARGIN (TAX EQUIVALENT) (1) $ 37,492 5.16% $ 33,374 5.71% =========== ======= =========== =======
(1) In order to present pretax income and resultant yields on tax-exempt investments and loans on a comparable basis to those on taxable investments and loans, a tax-equivalent adjustment has been made equally to interest income and income tax expense with no effect on after tax income. The tax equivalent adjustment has been computed using a federal income tax rate of 35%. 14 PROVISION FOR CREDIT LOSSES - The provision for credit losses for the first quarter of 2003 was $5.4 million, as compared to $2.6 million for the same period in 2002, an increase of $2.8 million or 105.6%. A provision for credit losses of $1.0 million was recorded in the first quarter of 2003 for loans purchased with Eagle National. Additionally, the increase in the provision for credit losses is to support the loan growth for the quarter ended March 31, 2003. The Company's allowance for credit losses increased by $1.9 million from $27.6 million at December 31, 2002, to $29.5 million on March 31, 2003. The increase in the allowance for credit losses is primarily due to the $5.4 million provision for credit losses offset by $3.2 million in net charge-offs. Additionally, an allowance of credit losses of $353 thousand was sold with the Eagle Pass office. 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 noninterest income for the quarter ended March 31, 2003 was $33.4 million, as compared to $16.3 million for the same period in 2002, an increase of $17.1 million or 104.9%. Noninterest income for the three months ended March 31, 2003 and 2002, respectively, is summarized as follows (in thousands):
2003 2002 ------------------------------------ ------------------------------------ COMMERCIAL MORTGAGE COMMERCIAL MORTGAGE BANKING BANKING COMBINED BANKING BANKING COMBINED ---------- ---------- ---------- ---------- ---------- ---------- Customer service fees $ 4,314 $ -- $ 4,314 $ 4,102 $ -- $ 4,102 Gain on sale of mortgage loans -- 11,571 11,571 -- 4,129 4,129 Mortgage origination income -- 8,173 8,173 -- 3,393 3,393 Gain on the sale of Eagle Pass office 3,382 -- 3,382 -- -- -- Other 3,532 2,387 5,919 2,751 1,908 4,659 ---------- ---------- ---------- ---------- ---------- ---------- $ 11,228 $ 22,131 $ 33,359 $ 6,853 $ 9,430 $ 16,283 ========== ========== ========== ========== ========== ==========
COMMERCIAL BANKING SEGMENT - Noninterest income from commercial banking for the three-month period ended March 31, 2003 was $11.2 million, as compared to $6.9 million for the same period in 2002, an increase of $4.4 million or 63.8%. In March 2003, the Company sold the Eagle Pass banking office for a gain of $3.4 million. Customer service fees increased $212 thousand as a result in the growth in deposit transaction accounts and the acquisition of Eagle National in September 2002. During the first quarter of 2003, the Bank had a gain on the sale of securities of $374 thousand. Also the Bank had an increase of $226 thousand in gains on the sale of trading assets. For the first quarter of 2003, a premium of $175 thousand was recognized from the Company's sale of the guaranteed portion of SBA loans. The Bank began selling the guaranteed portion of SBA loans in the second quarter of 2002. MORTGAGE BANKING SEGMENT - Total noninterest income from the mortgage banking segment increased 134.7% from $9.4 million for the first quarter of 2003 to $22.1 million for the same period in 2003. The income from the mortgage banking segment typically consists of origination fees and gains on sale of mortgage loans. During the first quarter of 2003, SCMC had $1.5 billion in loan fundings as compared to $676.5 million for the same period in 2002, an increase of 117.0%. 15 NONINTEREST EXPENSE - Noninterest expense increased $13.6 million or 39.7%, to $48.0 million for the three-month period ending March 31, 2003 as compared to $34.4 million for the same period in 2002. Noninterest expense for the three months ended March 31, 2003 and 2002, respectively, is summarized as follows (in thousands):
2003 2002 ------------------------------------- ------------------------------------ COMMERCIAL MORTGAGE COMMERCIAL MORTGAGE BANKING BANKING COMBINED BANKING BANKING COMBINED ---------- ---------- ---------- ---------- ---------- ---------- Salaries and employee benefits $ 17,251 $ 8,037 $ 25,288 $ 14,976 $ 4,093 $ 19,069 Occupancy expense 3,752 2,849 6,601 3,677 1,505 5,182 Net loss and carrying costs of real estate acquired by foreclosure (6) -- (6) 66 -- 66 Mortgage servicing rights amortization -- 3,904 3,904 -- 800 800 FDIC assessment 108 -- 108 52 -- 52 Technology 1,200 293 1,493 1,157 57 1,214 Postage and delivery charges 597 409 1,006 563 167 730 Supplies 354 458 812 357 182 539 Professional fees 694 225 919 614 95 709 Minority interest expense 1,552 424 1,976 1,330 215 1,545 Other 4,141 1,763 5,904 3,597 854 4,451 ---------- ---------- ---------- ---------- ---------- ---------- $ 29,643 $ 18,362 $ 48,005 $ 26,389 $ 7,968 $ 34,357 ========== ========== ========== ========== ========== ==========
COMMERCIAL BANKING SEGMENT - Noninterest expenses related to commercial banking for the first quarter of 2003 were $29.6 million, as compared to $26.4 million for the same period in 2002, an increase of $3.3 million or 12.3%. Salaries and employee benefits from commercial banking for the three-month period ended March 31, 2003 were $17.3 million, as compared to $15.0 million for the same period in 2002, an increase of $2.3 million or 15.2%. Total full-time equivalent employees increased 6.7% from 973 at March 31, 2002 to 1,038 at March 31, 2003. Increased salaries and employee benefits expenses related to the acquisition of Eagle National were $335 thousand. Expenses related to hospital and medical insurance increased $284 thousand. Minority interest expense increased $222 thousand or 16.7% from the three months ended March 31, 2002 as compared to the same period in 2003. The increase is related to the interest due on the additional trust preferred securities issued in August 2002 and September 2002 offset by the redemption of trust preferred securities in November 2002. MORTGAGE BANKING SEGMENT - Noninterest expenses related to mortgage banking for the three-month period ended March 31, 2003 were $18.4 million, as compared to $8.0 million for the same period in 2002, an increase of $10.4 million or 130.4%. The increase in expenses is due to variable expenses related to the increase in loan fundings. During the first quarter of 2003, SCMC had $1.5 billion in loan fundings as compared to $676.5 million for the same period in 2002, an increase of 117.0%. PROVISION FOR INCOME TAXES - The provision for income taxes as a percent of net income before taxes increased from 32.3% for the first quarter of 2002 to 34.2% for the same period in 2003. FINANCIAL CONDITION TOTAL ASSETS - The total consolidated assets of the Company decreased $340.4 million from $3.6 billion at December 31, 2002 to $3.2 billion at March 31, 2003. Assets sold with the Eagle Pass office in March 2003 totaled $18.7 million. 16 CASH AND CASH EQUIVALENTS - The Company had cash and cash equivalents of $125.0 million at March 31, 2003. Comparatively, the Company had $147.0 million in cash and cash equivalents on December 31, 2002, a decrease of $22.0 million. . TRADING ASSETS - The Company trades government guaranteed loans and pools. Trading assets as of March 31, 2003 were $100.3 million, a decrease of $42.6 million from December 31, 2002. These assets are generally held up to 120 days. The trading assets are carried at fair market value. The realized and unrealized gains and losses are included in income. SECURITIES - The Company's securities portfolio as of March 31, 2003, totaled $288.8 million, as compared to $313.1 million on December 31, 2002, a decrease of $24.3 million or 7.8%. During the first quarter of 2003, the Bank sold $16.5 million of originator's fees. At March 31, 2003, the unrealized gain on the available for sale securities was $5.7 million. LOANS HELD FOR SALE - Total loans held for sale decreased from $701.3 million at December 31, 2002 to $481.8 million at March 31, 2003, a decrease of $219.5 million, or 31.3%. These loans represent loans funded by the Bank through a mortgage warehouse line to SCMC. Due to the timing of the sales of loans to investors, the balance of these loans at any given time is somewhat volatile. LOANS HELD FOR INVESTMENT - As of March 31, 2003, loans held for investment were $1.98 billion which was a $35.9 million increase from the balance of $1.94 billion at December 31, 2002. Loans sold with the Eagle Pass banking office totaled $16.5 million. At March 31, 2003, loans held for investment as a percentage of total assets and total deposits were 61.0% and 78.2%, respectively. The following table summarizes the Company's held for investment loan portfolio by type of loan as of March 31, 2003 (in thousands):
PERCENT OF AMOUNT TOTAL ------------ ------------ Commercial, financial and industrial $ 601,870 24.45% Real estate - commercial 653,643 26.56% Real estate - residential mortgage 197,606 8.03% Real estate - construction 383,459 15.58% Foreign commercial and industrial 6,586 0.27% Consumer and other 136,276 5.54% Unearned discounts (2) 0.00% ------------ ------------ Total loans held for investment 1,979,438 80.43% Loans held for sale 481,789 19.57% ------------ ------------ Total loans $ 2,461,227 100.00% ============ ============
17 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, 2003 and March 31, 2002, respectively, (in thousands):
THREE MONTHS ENDED MARCH 31, ----------------------------- 2003 2002 ------------ ------------ Allowance for credit losses, January 1, $ 27,621 $ 22,927 Charge-offs (3,468) (2,179) Recoveries 311 427 Provision for credit losses 5,392 2,623 Allowance related to Eagle Pass divestiture (353) -- ------------ ------------ Allowance for credit losses, March 31, $ 29,503 $ 23,798 ============ ============ Net charge-offs as a percentage of average loans (annualized) 0.51% 0.37% ============ ============ Provision for credit losses as a percentage of average loans (annualized) 0.88% 0.56% ============ ============
The following is a summary of the relationship of the allowance for credit losses to total loans at March 31, 2003, and December 31, 2002 (in thousands):
MARCH 31, DECEMBER 31, 2003 2002 ------------ ------------ Loans at period-end $ 2,461,227 $ 2,644,862 Allowance for credit losses $ 29,503 $ 27,621 Allowance as a percent of period-end loans held for investment 1.20% 1.04%
In order to determine the adequacy of the allowance for credit losses, management considers the risk classification and delinquency status of loans and other factors. Management also establishes specific allowances for credits which management believes require allowances greater than those allocated according to their risk classification. An unallocated allowance is also established based on the Company's historical charge-off experience. The Company will continue to monitor the adequacy of the allowance for credit losses to determine the appropriate accrual for the Company's provision for credit losses. 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. Twenty-seven properties make up the $5.2 million of other real estate owned ("ORE") at March 31, 2003. All properties are carried at the lower of cost or fair market value. The Company defines potential problem loans as those loans for which information known by management indicates serious doubt that the borrower will be able to comply with the present payment terms. Management identifies these loans through its continuous loan review process and defines potential problem loans as those loans classified as "substandard", "doubtful", or "loss". As of March 31, 2003, the Company has no material foreign loans outstanding or loan concentrations. 18 The following table summarizes total nonperforming assets and potential problem loans at December 31, 2002 and at March 31, 2003:
MARCH 31, DECEMBER 31, 2003 2002 ------------ ------------ (IN THOUSANDS) Nonaccrual loans $ 20,569 $ 19,654 Restructured loans -- -- ------------ ------------ Total nonperforming loans 20,569 19,654 Other real estate ("ORE") and other foreclosed assets 5,274 3,424 ------------ ------------ Total nonperforming assets $ 25,843 $ 23,078 ============ ============ Total nonperforming assets as a % of loans, ORE and other foreclosed assets 1.05% 0.87% Allowance for credit losses as a percentage of nonperforming assets 114.16% 119.69% Accruing loans past due 90 days or more 334 984 Potential problem loans, other than those shown above as nonperforming $ 65,897 $ 62,189
PREMISES AND EQUIPMENT - The Company's premises and equipment, net of depreciation, as of March 31, 2003, was $53.9 million, as compared to $56.7 million as of December 31, 2002, a decrease of $2.8 million. Premises and equipment sold with the Eagle Pass banking office were $1.2 million. DEPOSITS - Total deposits as of March 31, 2003, were $2.53 billion, as compared to $2.67 billion on December 31, 2002, a decrease of $143.4 million. Deposits sold with the Eagle Pass banking office were $95.7 million. The percentage of noninterest bearing deposits to total deposits as of March 31, 2003 was 38.1%. CAPITAL RESOURCES AND LIQUIDITY SHAREHOLDERS' EQUITY - At March 31, 2003, shareholders' equity totaled $258.4 million, as compared to $249.3 million at December 31, 2002. The Company's risk-based capital ratios remain above the levels designated by regulatory agencies for the Company to be considered as "well capitalized" on March 31, 2003, with Tier 1 capital, total risk-based capital, and leverage capital ratios of 10.03%, 11.10%, and 8.44%, 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, core deposits and access to borrowing arrangements. Available borrowing arrangements maintained by the Company include federal funds lines with other commercial banks and Federal Home Loan Bank ("FHLB") advances. Also in 2002, the Bank began accepting brokered certificates of deposits. 19 During April, 2003, the Bank raised approximately $50 million through a private offering of subordinated unsecured notes. The subordinated notes issued by the Bank bear interest at a fixed rate of 7.375% and mature over a ten year period ending April 15, 2013, with semi-annual interest payment. These subordinated notes are not convertible or redeemable. As of March 31, 2003, the Company had $20.0 million outstanding under a term loan with Wells Fargo Bank, National Association ("Wells Fargo"). The term note bears interest at a rate per annum of 1.95% above the federal funds rate from time to time. The federal funds rate is a fluctuating interest rate per annum set daily by Wells Fargo as the rate at which funds are offered to Wells Fargo by federal funds brokers. The indebtedness evidenced by the term note is payable in quarterly installments with a final maturity date of February 1, 2006. The Credit Agreement requires the Company and the Bank to maintain certain financial ratios and includes other restrictive covenants. At March 31, 2003, the Company and Bank were in compliance with all related financial covenants for this credit facility. ITEM 4. CONTROLS AND PROCEDURES. Based on their evaluation of the Company's disclosure controls and procedures as of March 31, 2003, the Chief Executive Officer and Chief Financial Officer of the Company have each concluded that as of the evaluation date, such disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. There were no changes in the Company's internal control over financial reporting during the quarter ending March 31, 2003 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 10.1-- First Amendment to Credit Agreement dated February 2, 2003 made by and between the Company and Wells Fargo Bank, National Association regarding a line of credit of $20,000,000. [Incorporated by reference to Exhibit 10.6 of the Company's Annual Report of Form 10-K for the year ended December 31, 2002.] 11 -- Statement Regarding Computation of Earnings Per Share (included as Note(2) to Interim Consolidated Financial Statements on page 5 of this Amendment No. 1 to Quarterly Report on Form 10-Q/A). *31.1 Certification of J. Downey Bridgwater, President and Chief Executive Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *31.2 Certification of Stephen C. Raffaele, Executive Vice President and Chief Financial Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *32.1-- Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 20 *32.2-- Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ---------- *As filed herewith. (b) Reports on Form 8-K: (1) Current Report on Form 8-K filed January 16, 2003 announcing the release of Sterling Bancshares' preliminary earnings report for the fourth quarter and year ended December 31, 2002. (2) Current Report on Form 8-K filed January 23, 2003 announcing the correction of the capital ratios reported in Sterling Bancshares' preliminary earnings report for the fourth quarter and year ended December 31, 2002 on January 16, 2003. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused the amendment to be signed on its behalf by the undersigned thereunto duly authorized. STERLING BANCSHARES, INC. ------------------------- (Registrant) DATE: November 14, 2003 BY: /s/ J. Downey Bridgwater ---------------------- -------------------------------- J. DOWNEY BRIDGWATER PRESIDENT AND CHIEF EXECUTIVE OFFICER DATE: November 14 2003 BY: /s/ Stephen C. Raffaele ---------------------- -------------------------------- STEPHEN C. RAFFAELE EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER 22 EXHIBIT INDEX
EXHIBIT DESCRIPTION ------- ----------- 10.1-- First Amendment to Credit Agreement dated February 2, 2003 made by and between the Company and Wells Fargo Bank, National Association regarding a line of credit of $20,000,000. [Incorporated by reference to Exhibit 10.6 of the Company's Annual Report of Form 10-K for the year ended December 31, 2002.] 11 Statement Regarding Computation of Earnings Per Share (included as Note (2) to Interim Consolidated Financial Statements on page 5 of this Amendment No. 1 to Quarterly Report on Form 10-Q/A). *31.1 Certification of J. Downey Bridgwater, President and Chief Executive Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *31.2 Certification of Stephen C. Raffaele, Executive Vice President and Chief Financial Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *32.1-- Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *32.2 -- Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
---------- *As filed herewith. 23