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