-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BcP27MCppGwnhRe6wKQW2zqdomv4/MIWqtC3Zg5YlesLaG5yoQCum2Zef3gXBimn by5DNhdyr6G/GMAxWF67cQ== 0000950129-01-504060.txt : 20020410 0000950129-01-504060.hdr.sgml : 20020410 ACCESSION NUMBER: 0000950129-01-504060 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STERLING BANCSHARES INC CENTRAL INDEX KEY: 0000891098 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 742175590 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20750 FILM NUMBER: 1787500 BUSINESS ADDRESS: STREET 1: 15000 NORTHWEST FRWY STE 308 CITY: HOUSTON STATE: TX ZIP: 77040 BUSINESS PHONE: 7134668300 10-Q 1 h92267e10-q.txt STERLING BANCSHARES, INC. - 9/30/2001 ================================================================================ 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 SEPTEMBER 30, 2001 [ ] 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 September 30, 2001, there were outstanding 42,318,328 shares of common stock, par value $1.00 per share, of the registrant. ================================================================================ PART I. FINANCIAL INFORMATION ITEM 1. INTERIM FINANCIAL STATEMENTS STERLING BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ (UNAUDITED) ASSETS Cash and cash equivalents $ 123,579 $ 122,112 Interest-bearing deposits in financial institutions 1,329 440 Securities purchased with an agreement to resell 82,577 37,863 Trading assets 61,547 -- Available-for-sale securities, at fair value 270,708 217,275 Held-to-maturity securities, at amortized cost 80,504 90,927 Loans held for sale 177,868 139,148 Loans held for investment 1,564,291 1,345,842 Allowance for credit losses (21,431) (16,862) ------------- ------------ Loans, net 1,542,860 1,328,980 Accrued interest receivable 12,365 12,159 Real estate acquired by foreclosure 1,887 1,702 Premises and equipment, net 54,904 47,099 Goodwill, net 26,475 5,952 Other assets 103,950 73,557 ------------- ------------ TOTAL ASSETS $ 2,540,553 $ 2,077,214 ============= ============ LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits: Noninterest-bearing $ 757,883 $ 598,251 Interest-bearing 843,345 642,918 Certificates of deposit and other time deposits 547,712 477,653 ------------- ------------ Total deposits 2,148,940 1,718,822 Securities sold under agreements to repurchase and other borrowed funds 112,568 140,364 Note payable 1,600 1,600 Accrued interest payable and other liabilities 24,594 18,801 ------------- ------------ Total liabilities 2,287,702 1,879,587 COMPANY-OBLIGATED MANDITORILY REDEEMABLE TRUST PREFERRED SECURITIES OF SUBSIDIARY TRUST 57,500 28,750 MINORITY INTEREST IN STERLING CAPITAL MORTGAGE COMPANY 3,434 2,052 Shareholders' equity: Convertible preferred stock, $1 par value, 1 million shares authorized 59 76 Common stock, $1 par value, 50 million shares authorized 42,318 41,728 Capital surplus 24,328 21,332 Retained earnings 120,700 102,652 Accumulated other comprehensive income--net unrealized gain on available-for-sale securities, net of tax 4,512 1,037 ------------- ------------ Total shareholders' equity 191,917 166,825 ------------- ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,540,553 $ 2,077,214 ============= ============
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS. 2 STERLING BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data)
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, 2001 2000 2001 2000 ---------- ---------- ---------- ---------- (Unaudited) Interest income: Loans, including fees $ 37,375 $ 33,815 $ 111,086 $ 95,852 Securities: Taxable 4,400 7,148 13,202 22,264 Tax-exempt 814 867 2,504 2,640 Federal funds sold and securities purchased under agreements to resell 1,164 1,621 2,934 3,403 Trading assets 1,120 -- 1,917 -- Deposits in financial institutions 22 18 57 59 ---------- ---------- ---------- ---------- Total interest income 44,895 43,469 131,700 124,218 Interest expense: Demand and savings deposits 4,473 5,204 14,068 14,408 Certificates and other time deposits 6,269 6,432 20,751 17,378 Other borrowed funds 1,794 5,384 5,830 14,816 Note payable 20 1 86 1 ---------- ---------- ---------- ---------- Total interest expense 12,556 17,021 40,735 46,603 ---------- ---------- ---------- ---------- NET INTEREST INCOME 32,339 26,448 90,965 77,615 Provision for credit losses 3,120 2,405 8,592 6,774 ---------- ---------- ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 29,219 24,043 82,373 70,841 Noninterest income: Customer service fees 4,027 2,785 10,713 8,182 Gain on sale of mortgage loans 6,489 3,050 17,964 7,811 Other 3,655 4,642 17,707 12,016 ---------- ---------- ---------- ---------- Total noninterest income 14,171 10,477 46,384 28,009 Noninterest expense: Salaries and employee benefits 15,187 13,714 51,633 39,462 Occupancy expense 4,549 3,580 12,991 10,110 Net loss and carrying costs of real estate acquired by foreclosure 35 25 132 224 FDIC assessment 89 97 299 233 Technology 1,296 1,028 3,968 2,914 Postage and delivery charges 691 450 1,862 1,305 Supplies 582 381 1,484 1,192 Professional fees 737 594 2,062 1,585 Minority interest expense: Company-obligated mandatorily redeemable trust preferred securities of subsidiary trusts 1,329 667 3,390 2,001 Sterling Capital Mortgage Company 617 209 1,475 428 Conversion costs related to acquisitions 1,194 -- 2,224 -- Other 4,795 3,344 12,994 9,793 ---------- ---------- ---------- ---------- Total noninterest expense 31,101 24,089 94,514 69,247 NET INCOME BEFORE INCOME TAXES 12,289 10,431 34,243 29,603 Provision for income taxes 4,416 3,232 11,841 9,205 ---------- ---------- ---------- ---------- NET INCOME $ 7,873 $ 7,199 $ 22,402 $ 20,398 ========== ========== ========== ========== Earnings per share: Basic $ 0.19 $ 0.17 $ 0.53 $ 0.49 ========== ========== ========== ========== Diluted $ 0.18 $ 0.17 $ 0.52 $ 0.48 ========== ========== ========== ==========
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS. 3 STERLING BANCSHARES, INC. AND SUBSIDIARIES STATEMENTS OF CASH FLOWS (In thousands)
NINE MONTHS ENDED SEPTEMBER 30, 2001 2000 ------------ ------------ (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 22,402 $ 20,398 Adjustments to reconcile net income to net cash used in operating activities: Amortization and accretion of premiums and discounts on securities, net 304 137 Net gain on the sale of available-for-sale securities and trading assets (157) (16) Provision for credit losses 8,592 6,774 Write-downs, less gains on sale, of real estate acquired by foreclosure and repossessed assets 117 125 Depreciation and amortization 6,807 5,536 Net increase in loans held for sale (38,720) (55,680) Gain on the sale of credit card portfolio -- (211) Net increase in accrued interest receivable and other assets (31,709) (12,981) Net increase (decrease) in accrued interest payable and other liabilities 4,524 (6,402) ------------ ------------ NET CASH USED IN OPERATING ACTIVITIES (27,840) (42,320) CASH FLOWS FROM INVESTING ACTIVITIES: Net (increase) decrease in securities purchased under agreements to resell (44,714) 7,735 Proceeds from maturity and paydowns of held-to-maturity securities 10,238 17,426 Proceeds from the sale of available-for-sale securities 84,182 8,652 Proceeds from maturity and paydowns of available-for-sale securities 65,937 43,105 Purchases of available-for-sale securities (102,479) (12,136) Proceeds from the sale of trading assets 23,400 -- Purchases of trading assets (84,923) -- Net increase in loans held for investment (75,500) (94,762) Proceeds from sale of real estate acquired by foreclosure 1,053 454 Net (increase) decrease in interest-bearing deposits in financial institutions (889) 912 Purchase of CaminoReal Bancshares, Inc. (51,813) -- Cash and cash equivalents acquired with CaminoReal Bancshares, Inc. 35,583 -- Proceeds from sale of premises and equipment 6,415 377 Purchase of premises and equipment (14,401) (8,911) ------------ ------------ NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (147,911) (37,148) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposit accounts 181,263 153,687 Net decrease in repurchase agreements/funds purchased (32,010) (41,809) Increase in notes payable -- 1,600 Proceeds from issuance of common stock and preferred stock 3,569 1,435 Issuance of company-obligated madatorily redeemable trust preferred securities 28,750 -- Purchase of treasury stock -- (612) Dividends paid (4,354) (3,930) ------------ ------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 177,218 110,371 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,467 30,903 CASH AND CASH EQUIVALENTS: Beginning of period 122,112 100,399 ------------ ------------ End of period $ 123,579 $ 131,302 ============ ============ SUPPLEMENTAL INFORMATION: Income taxes paid $ 7,127 $ 14,969 ============ ============ Interest paid $ 41,597 $ 46,830 ============ ============ Noncash investing and financing activities: Acquisitions of real estate through foreclosure of collateral $ 1,156 $ 745 ============ ============
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS. 4 STERLING BANCSHARES, INC., AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 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 nine-month period ended September 30, 2001, 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, 2000. 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 2001 2000 2001 2000 --------------------- --------------------- --------------------- --------------------- AMOUNT PER SHARE AMOUNT PER SHARE AMOUNT PER SHARE AMOUNT PER SHARE ---------- --------- ---------- --------- ---------- --------- ---------- --------- Net income $ 7,873 $ 7,199 $ 22,402 $ 20,398 ========== ========== ========== ========== Basic: Weighted average shares outstanding 42,263 $ 0.19 41,645 $ 0.17 42,052 $ 0.53 41,565 $ 0.49 ========= ========= ========= ========= Diluted: Add incremental shares for: Assumed exercise of outstanding options 902 553 828 433 Assumed conversion of preferred stock 59 125 62 111 ---------- ---------- ---------- ---------- Total 43,224 $ 0.18 42,323 $ 0.17 42,942 $ 0.52 42,109 $ 0.48 ========== ========= ========== ========= ========== ========= ========== =========
5 3. SHAREHOLDERS' EQUITY The following table displays the changes in shareholders' equity for the three-month and nine-month periods ended September 30, 2001 and 2000 (in thousands):
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 2001 2000 2001 2000 --------------------- --------------------- --------------------- --------------------- AMOUNT PER SHARE AMOUNT PER SHARE AMOUNT PER SHARE AMOUNT PER SHARE ---------- --------- ---------- --------- ---------- --------- ---------- --------- Equity, beginning of period $ 182,272 $ 151,694 $ 166,825 $ 141,069 Comprehensive income: Net income $ 7,873 $ 7,199 $ 22,402 $ 20,398 Net change in net unrealized gains on AFS securities 1,995 1,528 3,475 752 ---------- ---------- ---------- ---------- Total comprehensive income 9,868 8,727 25,877 21,150 Issuance of common stock 1,232 233 3,569 1,050 Issuance of preferred stock -- 385 - 385 Cash dividends paid (1,455) (1,315) (4,354) (3,930) Purchase of treasury stock -- (612) - (612) --------- --------- ------------ --------- Equity, end of period $ 191,917 $ 159,112 $ 191,917 $ 159,112 ========= ========= ============ =========
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. Summarized financial information by operating segment as of and for the nine-month periods ended September 30, (in thousands) follows:
2001 2000 --------------------------------------- -------------------------------------- COMMERCIAL MORTGAGE COMMERCIAL MORTGAGE BANKING BANKING TOTAL BANKING BANKING TOTAL ---------- ---------- ---------- ---------- ---------- ---------- Net interest income $ 90,965 $ -- $ 90,965 $ 77,615 $ -- $ 77,615 Noninterest income 17,212 29,172 46,384 14,068 13,941 28,009 ---------- ---------- ---------- ---------- ---------- ---------- Total revenue 108,177 29,172 137,349 91,683 13,941 105,624 Provision for credit losses 8,592 -- 8,592 6,774 -- 6,774 Noninterest expense 73,114 19,176 92,290 58,224 11,023 69,247 Conversion cost related to acquisition 2,224 -- 2,224 -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Income before income taxes 24,247 9,996 34,243 26,685 2,918 29,603 Provision for income taxes 7,746 4,095 11,841 7,999 1,206 9,205 ---------- ---------- ---------- ---------- ---------- ---------- Net income $ 16,501 $ 5,901 $ 22,402 $ 18,686 $ 1,712 $ 20,398 ========== ========== ========== ========== ========== ========== Total assets, September 30, $2,530,695 $ 9,858 $2,540,553 $2,178,053 $ 7,201 $2,185,254 ========== ========== ========== ========== ========== ==========
Intersegment interest was paid to Sterling by SCMC in the amount of $6.3 million for the nine-month period ended September 30, 2001. Total loans of $172.4 million in the mortgage warehouse were eliminated in consolidation as of September 30, 2001. 6 5. ACQUISITIONS AND SIGNIFICANT DEVELOPMENTS On October 2, 2001, the Company announced that it had entered into a definitive merger agreement to acquire Community Bancshares, Inc. of Katy, Texas and its subsidiary bank, Community Bank in a cash and stock merger. As of September 30, 2001, Community Bancshares, Inc. had total assets of $118 million, loans of $80 million, and deposits of $110 million. Subject to receipt of all requisite regulatory approvals, the Company anticipates closing the transaction during the fourth quarter of 2001. 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 1,760,000 shares of the Company's common stock for all of the outstanding common stock of Lone Star Bancorporation, Inc. The stock issuance occurred prior to the stock split in September 2001. All previously reported amounts have been restated to reflect this transaction which is accounted for using the pooling of interests method. The following table reflects the results of operations of the Company and Lone Star as separate entities and the combined amounts after the pooling of interest.
NINE MONTHS ENDED SEPTEMBER 30, -------------------------------------------------------------------------------------- 2001 2000 ------------------------------------------ ----------------------------------------- STERLING STERLING (WITHOUT (WITHOUT LONESTAR) LONESTAR COMBINED LONESTAR) LONESTAR COMBINED --------- --------- --------- --------- --------- --------- Interest income $ 122,146 $ 9,554 $ 131,700 $ 116,438 $ 7,780 $ 124,218 Interest expense 36,480 4,255 40,735 43,360 3,243 46,603 --------- --------- --------- --------- --------- --------- Net interest income 85,666 5,299 90,965 73,078 4,537 77,615 Provision for credit losses 7,884 708 8,592 6,379 395 6,774 --------- --------- --------- --------- --------- --------- Net interest income after provision for loan losses 77,782 4,591 82,373 66,699 4,142 70,841 Noninterest income 45,711 673 46,384 27,213 796 28,009 Noninterest expense 87,678 4,612 92,290 65,472 3,775 69,247 Acquisition conversion costs 1,030 1,194 2,224 -- -- -- --------- --------- --------- --------- --------- --------- Net income (loss) before income taxes 34,785 (542) 34,243 28,440 1,163 29,603 Provision for income taxes 11,996 (155) 11,841 8,831 374 9,205 --------- --------- --------- --------- --------- --------- Net income (loss) $ 22,789 $ (387) $ 22,402 $ 19,609 $ 789 $ 20,398 ========= ========= ========= ========= ========= =========
On July 24, 2001, the Company's Board of Directors declared a three-for-two stock split that was effected in the form of a stock dividend on its common stock. Stockholders of record on September 4, 2001, received one additional share of common stock for every two shares of the Company's common stock held on that date. 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., based in San Antonio, Texas ("CaminoReal Bancshares") and its subsidiary bank, CaminoReal Bank, National Association. CaminoReal Bancshares was privately held and was the bank holding company of 7 CaminoReal Bank, National Association, which operated four banking offices in San Antonio and four banking offices in the south Texas cities of Eagle Pass, Carrizo Springs, Crystal City and Pearsall. This acquisition was accounted for using the purchase method of accounting. Goodwill totaling $25.1 million was recorded. 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 has 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. 6. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued two new pronouncements: Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 141 is effective as follows: a) use of the pooling-of-interest method is prohibited for business combinations initiated after June 30, 2001; and b) the provisions of SFAS 141 also apply to business combinations accounted for by the purchase method that are completed after June 30, 2001 (that is, the date of the acquisition is July 2001 or later). There are also transition provisions that apply to business combinations completed before July 1, 2001, that were accounted for by the purchase method. SFAS 142 is effective for fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized in an entity's statement of financial position at that date, regardless of when those assets were initially recognized. The Company is currently evaluating the provisions of SFAS 141 and SFAS 142 and has not adopted such provisions in its September 30, 2001 condensed consolidated financial 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. 8 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, 2000, filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934. RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO SAME PERIOD IN 2000 NET INCOME - Net income for the nine-month period ended September 30, 2001 was $22.4 million or $.52 per diluted share. Included in this amount is $2.2 million in before-tax charges relating to the Lone Star Bancshares and CaminoReal Bancshares acquisitions. Excluding the acquisition charges, operating income for the nine months ended September 30, 2001 was $23.9 million or $.56 per diluted share, up 17.0% from the $.48 per diluted share earned in the first nine months of 2000. This increase was attributable to continued loan and deposit growth and increased mortgage banking activity. NET INTEREST INCOME - Net interest income for the nine-month period ended September 30, 2001, was $91.0 million, as compared to $77.6 million for the same period in 2000, an increase of $13.4 million or 17.2% during the nine-month period ended September 30, 2001. The growth in net interest income is attributable primarily to the 27.1% increase in average loans. The loan growth related to the CaminoReal acquisition was 8.1%. However, average earning assets during the nine-month period ended September 30, 2001 increased 12.3%. During the later part of 2000, the Bank deleveraged its balance sheet resulting in a decrease in average securities of 32.5% from the first nine months of 2000 as compared to the first nine months of 2001. The yield on average earning assets decreased 48 basis points from 8.80% for the nine-month period ended September 30, 2000, to 8.32% for the same period in 2001. Additionally, during the first nine months of 2000, the Board of Governors of the Federal Reserve System ("Federal Reserve") increased the discount rates a total of 100 basis points whereas in the first nine-months of 2001, the Federal Reserve decreased the discount rates eight times for a total of 350 basis points. The cost of interest bearing liabilities decreased 91 basis points from 4.58% in 2000 to 3.67% in 2001. This decrease in rates was due to a combination of the Federal Reserve rate decreases as well as the deleveraging of the balance sheet. The Company's 5.82% tax equivalent net interest margin for the first nine months of 2001 increased from the 5.57% net interest margin recorded during the same period in 2000. The increase is a result of a deleverage of the balance sheet during the fourth quarter of 2000 partially offset by the purchase of CaminoReal. 9 The following schedule gives a comparative analysis of the Company's daily average interest-earning assets and interest-bearing liabilities for the nine-month periods ended September 30, 2001 and 2000, respectively: CONSOLIDATED YIELD ANALYSIS NINE MONTHS ENDED SEPTEMBER 30, (DOLLARS IN THOUSANDS)
2001 2000 ----------------------------- --------------------------- YIELD ANALYSIS AVERAGE AVERAGE BALANCE INTEREST YIELD BALANCE INTEREST YIELD ---------- -------- ------- ---------- -------- ----- INTEREST EARNING ASSETS: Interest bearing deposits in financial institutions $ 1,176 $ 57 6.48% $ 1,339 $ 59 5.89% Federal funds sold 25,841 854 4.42% 17,252 817 6.33% Securities purchased under agreements to resell 47,084 2,080 5.91% 44,087 2,586 7.84% Trading assets 34,098 1,917 7.52% -- -- -- Investment securities (taxable) 272,585 13,202 6.48% 438,202 22,264 6.79% Investment securities (tax-exempt) 76,919 2,504 4.35% 79,510 2,640 4.44% Loans (taxable) 1,655,403 110,873 8.95% 1,305,204 95,825 9.81% Loans (tax-exempt) 4,016 213 7.09% 428 27 8.43% ---------- -------- ------- ---------- -------- ------ Total Interest Earning Assets 2,117,122 131,700 8.32% 1,886,022 124,218 8.80% NONINTEREST EARNING ASSETS: Cash and due from banks 86,814 70,321 Premises and equipment, net 53,070 45,490 Other assets 144,692 96,249 Allowance for credit losses (19,577) (15,207) ---------- ---------- Total Noninterest Earning Assets 264,999 196,853 ---------- ---------- TOTAL ASSETS $2,382,121 $2,082,875 ========== ========== INTEREST BEARING LIABILITIES: Demand and savings deposits $ 761,749 $ 14,068 2.47% $ 614,585 $ 14,408 3.13% Certificates and other time deposits 545,877 20,751 5.08% 430,662 17,378 5.39% Other borrowed funds 173,857 5,830 4.48% 314,853 14,816 6.29% Note payable 1,600 86 7.19% 18 1 7.42% ---------- -------- ------- ---------- -------- ------ Total Interest Bearing Liabilities 1,483,083 40,735 3.67% 1,360,118 46,603 4.58% NONINTEREST BEARING LIABILITIES: Demand deposits 647,388 530,133 Other liabilities 21,726 13,189 Trust preferred securities 51,287 28,750 Shareholders' equity 178,637 150,685 ---------- ---------- 899,038 722,757 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,382,121 $2,082,875 ========== ========== NET INTEREST INCOME & MARGIN $ 90,965 5.74% $ 77,615 5.50% ======== ======= ======== ====== Net Interest Income & MARGIN (TAX EQUIVALENT) $ 92,165 5.82% $ 78,695 5.57% ======== ======= ======== ======
PROVISION FOR CREDIT LOSSES - The provision for credit losses for the first nine months of 2001 was $8.6 million, as compared to $6.8 million for the same period in 2000, an increase of $1.8 million or 26.8%. This increase in the provision for credit losses is to support the loan growth for the year. The acquisition of CaminoReal Bancshares increased the allowance for credit losses by $1.9 million. After net charge-offs of $5.9 million, provisions for the first nine months of 2001 and the acquisition of CaminoReal Bancshares, the Company's allowance for credit losses increased by $4.6 million from $16.9 million on December 31, 2000, to $21.4 million on September 30, 2001. 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. 10 NONINTEREST INCOME - Total non-interest income for the nine-month period ended September 30, 2001 was $46.4 million, as compared to $28.0 million for the same period in 2000, an increase of $18.4 million or 65.6%. Noninterest income for the nine months ended September 30, 2001 and 2000, respectively, is summarized as follows:
2001 2000 --------------------------------------- -------------------------------------- COMMERCIAL MORTGAGE COMMERCIAL MORTGAGE BANKING BANKING TOTAL BANKING BANKING TOTAL ---------- ---------- ---------- ---------- ---------- ---------- Customer service fees $ 10,713 $ -- $ 10,713 $ 8,182 $ -- $ 8,182 Bank-owned life insurance income 1,520 -- 1,520 1,388 -- 1,388 Gain on the sale of credit card loan portfolio -- -- -- 237 -- 237 Gain on sale of mortgage loans -- 17,964 17,964 -- 7,811 7,811 Debit card fees 599 -- 599 78 -- 78 Other 4,380 11,208 15,588 4,183 6,130 10,313 ---------- ---------- ---------- ---------- ---------- ---------- $ 17,212 $ 29,172 $ 46,384 $ 14,068 $ 13,941 $ 28,009 ========== ========== ========== ========== ========== ==========
COMMERCIAL BANKING SEGMENT - Noninterest income from commercial banking for the nine-month period ending September 30, 2001 was $17.2 million, as compared to $14.1 million for the same period in 2000, an increase of $3.1 million or 22.3%. During the first quarter of 2000, the bank sold its credit card portfolio to a correspondent bank for a net gain of $237.0 thousand. Also during the latter half of 2000, the bank introduced its debit card. Fees related to the debit cards totaled $599.3 thousand for the first nine months of 2001 compared to $78.0 thousand for the same period in 2000. Interest credits for the bank-owned life insurance increased $132.1 thousand during the nine-month period ended September 30, 2001. Customer service fees increased 30.9% primarily as a result of growth in deposit transaction accounts and the acquisition of CaminoReal Bank. MORTGAGE BANKING SEGMENT - Noninterest income from the mortgage banking segment increased 109.3% from $13.9 million for the first nine months of 2000 to $29.2 million for the same period in 2001. The income from the mortgage banking segment typically consists of origination fees and gains on sale of mortgage loans. During the first nine months of 2001, SCMC had $1.8 billion in loan fundings as compared to $988.4 million in 2000. The increase in the mortgage banking segment is primarily due to the favorable rate environment. NONINTEREST EXPENSE - Noninterest expense increased $25.3 million, or 36.5%, to $94.5 million for the first nine months of 2001 as compared to $69.2 million for the same period in 2000. Noninterest expense for the nine months ended September 30, 2001 and 2000, respectively, is summarized as follows:
--------------------------------------- -------------------------------------- COMMERCIAL MORTGAGE COMMERCIAL MORTGAGE BANKING BANKING TOTAL BANKING BANKING TOTAL ---------- ---------- ---------- ---------- ---------- ---------- Salaries and employee benefits $ 40,761 $ 10,872 $ 51,633 $ 33,760 $ 5,702 $ 39,462 Occupancy expense 9,887 3,104 12,991 7,613 2,497 10,110 Net loss and carrying costs of real estate acquired by foreclosure 132 -- 132 224 -- 224 FDIC assessment 299 -- 299 233 -- 233 Technology 3,698 270 3,968 2,822 92 2,914 Postage and delivery charges 1,532 330 1,862 1,083 222 1,305 Supplies 1,161 323 1,484 892 300 1,192 Professional fees 1,894 168 2,062 1,483 102 1,585 Minority interest expense 3,390 1,475 4,865 2,001 428 2,429 Conversion costs related to acquisitions 2,224 -- 2,224 -- -- -- Other 10,360 2,634 12,994 8,113 1,680 9,793 ---------- ---------- ---------- ---------- ---------- ---------- $ 75,338 $ 19,176 $ 94,514 $ 58,224 $ 11,023 $ 69,247 ========== ========== ========== ========== ========== ==========
11 COMMERCIAL BANKING SEGMENT - Noninterest expenses related to commercial banking for the nine-month period ended September 30, 2001 were $75.3 million, as compared to $58.2 million for the same period in 2000, an increase of $17.1 million or 29.4%. Salaries and employee benefits from commercial banking for the nine-month period ended September 30, 2001 were $40.8 million, as compared to $33.8 million for the same period in 2000, an increase of $7.0 million or 20.7%. Salaries and employee benefit expense related to the CaminoReal offices since the acquisition was $2.7 million. The increase is also attributable to the hiring of personnel for the new Dallas and Deer Park offices and for the new central departments such as internet banking, document imaging and community affairs. Additionally, medical insurance expense increased $981.9 thousand. Occupancy expenses from commercial banking for the nine-month period ended September 30, 2001 were $9.9 million, as compared to $7.6 million for the same period in 2000, an increase of $2.3 million or 29.9%. The increase is primarily due to leasing additional space for central departments as well as leasing space for the new Dallas office. The occupancy expenses related to the CaminoReal offices was $791 thousand. Technology expense relating to commercial banking for the nine-month period ended September 30, 2001 was $3.7 million, as compared to $2.8 million for the same period in 2000, an increase of 31.0%. This increase is the result of the purchase of a new intranet wire transfer system and technology charges related to the new departments such as internet banking and document imaging. Minority interest expense increased $1.4 million or 69.4% from the nine-month period ended September 30, 2000 as compared to the same period in 2001. 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. Conversion costs related to the acquisition of Lone Star Bancshares in August totaled $1.2 million and CaminoReal Bancshares 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 Lone Star Bancshares' and CaminoReal Bancshares' systems. Other expense relating to commercial banking for the nine-month period ended September 30, 2001 was $10.4 million, as compared to $8.1 million for the same period in 2000, an increase of 27.7%. The increase in other expense related to the CaminoReal acquisition was $1.2 million including goodwill amortization of $526.1 thousand. Also, charges related to the new debit card program were $250.1 thousand. MORTGAGE BANKING SEGMENT - Noninterest expenses related to mortgage banking for the nine-month period ended September 30, 2001 were $19.2 million, as compared to $11.0 million for the same period in 2000, an increase of $8.2 million or 74.0%. The increase in expenses is due to variable expenses related to the increase in loan fundings. At September 30, 2001 loan fundings were $1.8 billion, a 80.2% increase over the $988.4 million at September 30, 2000. PROVISION FOR INCOME TAXES - The provision for income taxes as a percent of net income before taxes increased from 31.1% for the first nine months of 2000 to 34.6% for the same period of 2001. THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO SAME PERIOD IN 2000 NET INCOME - Net income for the three-month period ended September 30, 2001 was $7.9 million as compared to $7.2 million for the same period in 2000, an increase of approximately $674 thousand or 9.4%. This increase is attributable to continued loan and deposit growth and increased mortgage banking activity. 12 NET INTEREST INCOME - Net interest income for the three-month period ended September 30, 2001, was $32.3 million, as compared to $26.4 million for the same period in 2000, an increase of $5.9 million or 22.3%. The growth in net interest income is attributable primarily to the 28.7% increase in average loans. The loan growth for the three-month period ended September 30, 2001 related to the CaminoReal acquisition was 11.2%. Average earning assets increased 16.0%. During the later part of 2000, the Bank deleveraged its balance sheet resulting in a decrease in average securities of 28.3% from the third quarter of 2000 as compared to the third quarter of 2001. The yield on average earning assets decreased 100 basis points from 8.92% for the three-month period ended September 30, 2000, to 7.92% for the same period in 2001. Additionally, during the first nine months of 2000, the Federal Reserve increased the discount rates a total of 100 basis points whereas in the first nine-months of 2001, the Federal Reserve decreased the discount rates eight times for a total of 350 basis points. The cost of interest bearing liabilities decreased 167 basis points from 4.86% in 2000 to 3.19% in 2001. This decrease in rates was due to a combination of the Federal Reserve rate decreases as well as the deleveraging of the balance sheet. The Company's 5.78% tax equivalent net interest margin for the three months ended September 30, 2001 increased from the 5.50% net interest margin recorded during the same period in 2000. The increase is a result of a deleverage of the balance sheet during the fourth quarter of 2000 partially offset by the acquisition of CaminoReal. 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 September 30, 2001 and 2000, respectively: CONSOLIDATED YIELD ANALYSIS THREE MONTHS ENDED SEPTEMBER 30, (DOLLARS IN THOUSANDS)
2001 2000 ----------------------------- --------------------------- YIELD ANALYSIS AVERAGE AVERAGE BALANCE INTEREST YIELD BALANCE INTEREST YIELD ---------- -------- ------- ---------- -------- ----- INTEREST EARNING ASSETS: Interest bearing deposits in financial institutions $ 1,297 $ 22 6.73% $ 1,116 $ 18 6.42% Federal funds sold 26,297 298 4.50% 25,443 425 6.65% Securities purchased under agreements to resell 60,591 866 5.67% 58,362 1,196 8.15% Trading assets 62,346 1,120 7.13% -- -- -- Investment securities (taxable) 285,914 4,400 6.11% 426,424 7,148 6.67% Investment securities (tax-exempt) 75,359 814 4.29% 77,586 867 4.45% Loans (taxable) 1,731,870 37,299 8.54% 1,348,460 33,807 9.97% Loans (tax-exempt) 4,437 76 6.80% 369 8 8.62% ---------- -------- ------- ---------- -------- ----- Total Interest Earning Assets 2,248,111 44,895 7.92% 1,937,760 43,469 8.92% NONINTEREST EARNING ASSETS: Cash and due from banks 94,319 71,392 Premises and equipment, net 55,631 46,250 Other assets 161,391 103,185 Allowance for credit losses (20,977) (15,744) ---------- ---------- Total Noninterest Earning Assets 290,364 205,083 ---------- ---------- TOTAL ASSETS $2,538,475 $2,142,843 ========== ========== INTEREST BEARING LIABILITIES: Demand and savings deposits $ 820,334 $ 4,473 2.16% $ 619,828 $ 5,204 3.34% Certificates and other time deposits 554,536 6,269 4.49% 451,140 6,432 5.67% Other borrowed funds 183,164 1,794 3.89% 322,245 5,384 6.65% Note payable 1,600 20 4.96% 52 1 7.65% ---------- -------- ------- ---------- -------- ----- Total Interest Bearing Liabilities 1,559,634 12,556 3.19% 1,393,265 17,021 4.86% NONINTEREST BEARING LIABILITIES: Demand deposits 706,271 550,847 Other liabilities 25,118 12,324 Trust preferred securities 57,500 28,750 Shareholders' equity 189,952 157,657 ---------- ---------- 978,841 749,578 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,538,475 $2,142,843 ========== ========== NET INTEREST INCOME & MARGIN $ 32,339 5.71% $ 26,448 5.43% ======== ======= ======== ====== NET INTEREST INCOME & MARGIN (TAX EQUIVALENT) $ 32,744 5.78% $ 26,796 5.50% ======== ======= ======== ======
PROVISION FOR CREDIT LOSSES - The provision for credit losses for the third quarter of 2001 was $3.1 million, as compared to $2.4 million for the same period in 2000, an increase of $715.0 thousand or 29.7%. This increase in the provision for credit losses is to support the loan growth for the quarter. After net charge-offs of $2.0 million, the Company's allowance for credit losses increased by $1.1 million and from $20.3 million on June 30, 2001, to $21.4 million on September 30, 2001. 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. 14 NONINTEREST INCOME - Total non-interest income for the quarter ended September 30, 2001 was $14.2 million, as compared to $10.5 million for the same period in 2000, an increase of $3.7 million or 35.3%. Noninterest income for the three months ended September 30, 2001 and 2000, respectively, is summarized as follows:
2001 2000 ----------------------------------- ---------------------------------- COMMERCIAL MORTGAGE COMMERCIAL MORTGAGE BANKING BANKING TOTAL BANKING BANKING TOTAL ---------- -------- ------- ---------- -------- ------- Customer service fees $ 4,027 $ -- $ 4,027 $ 2,785 $ -- $ 2,785 Bank-owned life insurance income 518 -- 518 491 -- 491 Gain on sale of mortgage loans -- 6,489 6,489 -- 3,050 3,050 Debit card fees 248 -- 248 76 -- 76 Other 1,483 1,406 2,889 1,388 2,687 4,075 ---------- -------- ------- ---------- -------- ------- $ 6,276 $ 7,895 $14,171 $ 4,740 $ 5,737 $10,477 ========== ======== ======= ========== ======== =======
COMMERCIAL BANKING SEGMENT - Noninterest income from commercial banking for the three-month period ended September 30, 2001 was $6.3 million, as compared to $4.7 million for the same period in 2000, an increase of $1.5 million or 32.4%. During the latter half of 2000, the bank introduced its debit card. Fees related to the debit cards totaled $248.0 thousand for the third quarter of 2001, with income of $76 thousand recorded in for the same period in 2000. Interest credits for the bank-owned life insurance increased $27.9 thousand. Excluding these items, customer service fees increased 44.6% as a result of the acquisition of CaminoReal and the growth in deposit transaction accounts. MORTGAGE BANKING SEGMENT - Noninterest income from the mortgage banking segment increased 37.6% from $5.7 million for the third quarter of 2000 to $7.9 million for the same period in 2001. The income from the mortgage banking segment typically consists of origination fees and gains on sale of mortgage loans. During the third quarter of 2001, SCMC had $615.2 million in loan fundings as compared to $381.3 million in 2000. NONINTEREST EXPENSE - Noninterest expense increased $7.0 million, or 29.1%, to $31.1 million for the three month period ending September 30, 2001 as compared to $24.1 million for the same period in 2000. Noninterest expense for the three months ended September 30, 2001 and 2000, respectively, is summarized as follows:
2001 2000 ----------------------------------- ---------------------------------- COMMERCIAL MORTGAGE COMMERCIAL MORTGAGE BANKING BANKING TOTAL BANKING BANKING TOTAL ---------- -------- ------- ---------- -------- ------- Salaries and employee benefits $ 14,500 $ 687 $15,187 $ 11,389 $ 2,325 $13,714 Occupancy expense 3,426 1,123 4,549 2,631 949 3,580 Net loss and carrying costs of real estate acquired by foreclosure 35 -- 35 25 -- 25 FDIC assessment 89 -- 89 97 -- 97 Technology 1,214 82 1,296 1,000 28 1,028 Postage and delivery charges 569 122 691 368 82 450 Supplies 467 115 582 289 92 381 Professional fees 651 86 737 559 35 594 Minority interest expense 1,329 617 1,946 667 209 876 Conversion costs related to acquisitions 1,194 -- 1,194 -- -- -- Other 3,917 878 4,795 2,749 595 3,344 ---------- -------- ------- ---------- -------- ------- $ 27,391 $ 3,710 $31,101 $ 19,774 $ 4,315 $24,089 ========== ======== ======= ========== ======== =======
COMMERCIAL BANKING SEGMENT - Noninterest expenses related to commercial banking for the third quarter of 2001 were $27.4 million, as compared to $19.8 million for the same period in 2000, an increase of $7.6 million or 38.5%. Salaries and employee benefits from commercial banking for the 15 three-month period ended September 30, 2001 were $14.5 million, as compared to $11.4 million for the same period in 2000, an increase of $3.1 million or 27.3%. Salaries and employee benefits related to CaminoReal for the third quarter of 2001 were $1.2 million. The Company hired personnel for the new Dallas and Deer Park offices and for the new central departments such as internet banking, document imaging and community affairs. Also, medical insurance expense increased $298.0 thousand. Occupancy expenses from commercial banking for the three-month period ended September 30, 2001 were $3.4 million, as compared to $2.6 million for the same period in 2000, an increase of $795 thousand or 30.2%. Expenses related to CaminoReal for the third quarter of 2001 were $376.2 million. The remaining increase is primarily due to leasing additional space for central departments as well as leasing space for the new Dallas office. Technology expense relating to commercial banking for the three-month period ended September 30, 2001 was $1.2 million, as compared to $1.0 million for the same period in 2000, an increase of 21.4%. This increase is the result of the purchase of a new intranet wire transfer system and technology charges related to the new departments such as internet banking and document imaging. Conversion costs related to the acquisition of Lone Star Bancshares in August totaled $1.2 million The costs include retention and severance expenses as well as data processing costs related to the conversion of Lone Star Bancshares' systems. Minority interest expense increased $662 thousand or 99.3% from the third quarter of 2000 as compared to the third quarter of 2001. 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 September 30, 2001 were $3.9 million, as compared to $2.7 million for the same period in 2000, and increase of $1.2 million or 42.5%. The increase in other expense related to the CaminoReal acquisition was $706.1 thousand which includes amortization of the acquisition goodwill of $261.4 thousand. MORTGAGE BANKING SEGMENT - Noninterest expenses related to mortgage banking for the three-month period ended September 30, 2001 were $3.7 million, as compared to $4.3 million for the same period in 2000, a decrease of $605 thousand or 14.0%. The decrease in expenses is due to variable expenses related to the increase in loan fundings. For the quarter ended September 30, 2001, loan fundings were $615.2 million, a 65.9% increase over the $370.9 million for the same period in 2000. PROVISION FOR INCOME TAXES - The provision for income taxes as a percent of net income before taxes increased from 31.0% for the third quarter of 2000 to 35.9% for the same period in 2001. FINANCIAL CONDITION TOTAL ASSETS - The total consolidated assets of the Company increased from $2.1 billion at December 31, 2000 to $2.5 billion at September 30, 2001, an increase of $463.3 million, or 22.3%. Assets acquired with CaminoReal Bancshares totaled $307.8 million. CASH AND CASH EQUIVALENTS - The Company had cash and cash equivalents of $123.6 million at September 30, 2001. Comparatively, the Company had $122.1 million in cash and cash equivalents on December 31, 2000, an increase of $1.5 million or 1.2%. Cash and cash equivalents acquired with CaminoReal Bancshares totaled $35.6 million. 16 SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL - As of September 30, 2001, securities purchased under agreements to resell totaled $82.6 million as compared to $37.9 million as of December 31, 2000. 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 September 30, 2001 were $61.5 million. During the second quarter of 2001, the Company began trading government loans and pools. These assets are held up to 120 days. SECURITIES - The Company's securities portfolio as of September 30, 2001, totaled $351.2 million, as compared to $308.2 million on December 31, 2000, an increase of $43.0 million or 14.0%. Securities acquired with CaminoReal Bancshares totaled $95.7 million. On September 30, 2001, the unrealized gain on the available for sale securities was $6.7 million. LOANS HELD FOR SALE - Total loans held for sale increased from $139.1 million at December 31, 2000 to $177.9 million at September 30, 2001, an increase of $38.7 million, or 27.8%. These loans represent loans funded by the Bank through a mortgage warehouse line to SCMC. LOANS HELD FOR INVESTMENT - As of September 30, 2001, loans held for investment were $1.6 billion which was a $218 million, or 16.2%, increase from the balance of $1.3 billion on December 31, 2000. Loans acquired with CaminoReal Bancshares totaled $150.2 million. At September 30, 2001, loans held for investment as a percentage of assets and deposits were 61.6% and 72.8%, respectively. The following table summarizes the Company's held for investment loan portfolio by type of loan as of September 30, 2001 (in thousands):
PERCENT OF AMOUNT TOTAL ---------- ---------- Commercial, financial and industrial $ 485,542 27.87% Real estate - commercial 492,646 28.28% Real estate - residential mortgage 173,425 9.95% Real estate - construction 261,874 15.03% Foreign commercial and industrial 6,615 0.38% Consumer and other 144,276 8.28% Unearned discounts (87) 0.00% ---------- ---------- Total loans held for investment 1,564,291 89.79% Loans held for sale 177,868 10.21% ---------- ---------- Total loans $1,742,159 100.00% ========== ==========
17 ALLOWANCE FOR CREDIT LOSSES - The following is a summary of the changes in the allowance for credit losses for the nine months ended September 30, 2001 and September 30, 2000, respectively, (in thousands):
NINE MONTHS ENDED SEPTEMBER 30, 2001 2000 ------------- ------------- Allowance for credit losses, December 31, $ 16,862 $ 13,998 Charge-offs (6,839) (5,569) Recoveries 921 706 Acquisition of CaminoReal Bancshares, Inc. 1,895 -- Provision for credit losses 8,592 6,774 ------------- ------------- Allowance for credit losses, September 30, $ 21,431 $ 15,909 ============= ============= Net charge-offs as a percentage of average loans (annualized) 0.48% 0.50% ============= ============= Provision for credit losses as a percentage of average loans (annualized) 0.69% 0.69% ============= =============
The following is a summary of the relationship of the allowance to total loans at September 30, 2001, and December 31, 2000 (in thousands):
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ----------- Loans held for investment at period-end $ 1,564,291 $ 1,345,842 Allowance for credit losses $ 21,431 $ 16,862 Allowance as a percent of period-end loans held for investment 1.37% 1.25%
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. Eighteen properties make up the $1.9 million of other real estate owned ("ORE") at September 30, 2001. 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 September 30, 2001, 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, 2000 and at September 30, 2001:
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ (IN THOUSANDS) Nonaccrual loans $ 11,585 $ 8,297 Restructured loans -- 1,298 Accruing loans past due 90 days or more 1,867 626 ------------- ------------ Total nonperforming loans 13,452 10,221 Other real estate ("ORE") and other foreclosed assets 2,092 1,894 ------------- ------------ Total nonperforming assets $ 15,544 $ 12,115 ============= ============ Total nonperforming assets as a % of loans, ORE and other foreclosed assets 0.89% 0.81% Allowance for credit losses as a percentage of nonperforming assets 137.87% 139.18% Potential problem loans, other than those shown above as nonperforming $ 48,473 $ 38,901
PREMISES AND EQUIPMENT - The Company's premises and equipment, net of depreciation, as of September 30, 2001, were $54.9 million, as compared to $47.1 million as of December 31, 2000, an increase of $7.8 million or 16.6%. Premises and equipment acquired with CaminoReal Bancshares totaled $5.8 million. DEPOSITS - Total deposits as of September 30, 2001, were $2.1 billion, as compared to $1.7 billion on December 31, 2000, an increase of $430.1 million, or 25.0%. Deposits acquired with CaminoReal Bancshares totaled $248.8 million. Non-interest bearing demand deposits at September 30, 2001, were $757.9 million, as compared to $598.3 million at December 31, 2000, an increase of $159.6 million of which $57.0 million related to the CaminoReal Bancshares acquisition. The percentage of noninterest bearing deposits to total deposits as of September 30, 2001 was 35.0%. 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 19 the Trust Preferred Securities or a change in existing laws that requires Trust II to register as an investment company. CAPITAL RESOURCES AND LIQUIDITY SHAREHOLDERS' EQUITY - 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 September 30, 2001, with Tier-I capital, total risk-based capital, and leverage capital ratios of 10.22%, 11.21%, and 8.80%, 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 $30 million line of credit with Wells Fargo Bank Minnesota, National Association. No amounts were outstanding under this line of credit as of September 30, 2001. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. There have been no material changes since December 31, 2000. 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, 2000, 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 There were no changes in securities during the nine months ended September 30, 2001. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. 20 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: 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 July 19, 2001 announcing the release of Sterling Bancshares' preliminary earnings report for the second quarter ended June 30, 2001. (2) Current Report on Form 8-K filed August 27, 2001 announcing the closing of Sterling Bancshares' acquisition of Lone Star Bancorporation, Inc. 21 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: November 14, 2001 BY: /s/ George Martinez ------------------------- -------------------------------------- GEORGE MARTINEZ CHAIRMAN DATE: November 14, 2001 BY: /s/ Eugene S. Putnam, Jr. ------------------------- -------------------------------------- EUGENE S. PUTNAM, JR. EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER 22 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 11 Statement Regarding Computation of Earnings Per Share (included as Note (2) to Interim Consolidated Financial Statements on page 5 of this Current Report on Form 10-Q).
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