-----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, TlwS9AvgdVHKu6XLBFPtedO7vn1pHNuQcHpi3vOgp4ER6pzTVmawP+xzvSHHc6HY wSp/AATqqd/AapoMTmduXw== 0000950129-97-004826.txt : 19971117 0000950129-97-004826.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950129-97-004826 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NASD 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: SEC FILE NUMBER: 000-20750 FILM NUMBER: 97722234 BUSINESS ADDRESS: STREET 1: 15000 NORTHWEST FRWY STE 308 CITY: HOUSTON STATE: TX ZIP: 77040 BUSINESS PHONE: 7134668300 10-Q 1 STERLING BANCSHARES, INC. 1 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, 1997 [ ] 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 of Incorporation) (IRS Employer ID Number)
15000 Northwest Freeway, Suite 200 Houston, Texas 77040 (Address of principal executive office) 713-466-8300 (Registrant's telephone number) 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 [ ] The number of shares outstanding of each class of the registrant's capital stock as of September 30, 1997: Class of Stock Shares Outstanding - ------------------------------------ ------------------ Common Stock, Par Value $1.00 13,743,308
2 PART 1. FINANCIAL INFORMATION ITEM 1. CONDENSED FINANCIAL STATEMENTS STERLING BLANDISHERS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)
September 30, 1997 1996 ---------------------------- (Unaudited) ASSETS Cash and due from banks $ 69,630 $ 57,951 Federal funds sold 16,384 27,593 Interest bearing deposits in financial institutions 488 13,785 Investment securities: Available-for-sale 81,432 57,179 Held-to-maturity 202,199 141,662 ---------------------------- Total investment securities 283,631 198,841 Equity in unconsolidated subsidiary 2,365 2,167 Loans: Loans held for sale 50,371 39,388 Loans held for investment 618,595 483,350 Total loans ---------------------------- Allowance for credit losses 668,966 522,738 (7,363) (7,127) Total loans, net ---------------------------- Real estate acquired by foreclosure and certain other real estate 661,603 515,611 Premises and equipment, net 1,254 2,016 Goodwill 29,269 22,058 Accrued interest receivable and other assets 1,598 1,921 15,011 9,925 Total assets ---------------------------- 1,081,233 851,868 ============================ LIABILITIES AND SHAREHOLDERS' EQUITY $ 306,534 $246,957 Demand deposits: 430,925 346,737 217,033 181,452 Interest-bearing ---------------------------- Certificates of deposit and other time deposits 954,492 775,146 Total deposits Federal funds purchased and securities sold under 14,585 2,770 agreements to repurchase 6,384 5,133 Accrued interest payable and other liabilities - 4,400 Notes payable and senior debentures ---------------------------- Total liabilities 975,461 787,449 Company-obligated mandatorily redeemable trust preferred securities of subsidiary trust 28,750 - Shareholders' equity: Preferred stock, $1 par value, 1 million shares authorized 177 49 Common stock, $1 par value, 30 million shares authorized 13,743 13,622 Capital surplus 25,805 22,909 Retained earnings 37,488 28,234 Net unrealized losses available-for-sale securities, net of tax (191) (395) Total shareholders' equity ---------------------------- Total liabilities and shareholders' equity 77,022 64,419 ---------------------------- $1,081,233 $851,868 ============================
See Notes to Interim Consolidated Financial Statements. 2 3 STERLING BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (In thousands)
Three Months Nine Months Ended September 30, Ended September 30, 1997 1996 1997 1996 --------------------- ----------------------- (Unaudited) Interest income: Loans, including fees: $16,059 $12,584 $44,595 $35,189 Federal funds sold 116 289 1,261 879 Deposits in financial institutions 368 146 549 298 Investment securities: Taxable 4,100 2,667 10,318 8,157 Tax-exempt 275 278 829 844 ----------------------------------------------------- Total interest income 20,918 15,964 57,552 45,367 Interest expense: Demand and savings deposits 3,532 2,707 9,782 7,534 Certificates and other time deposits 2,674 2,211 7,611 6,434 Federal funds purchased and repurchase agreements 448 42 621 267 Senior debentures and notes payable -- 87 147 308 ----------------------------------------------------- Total interest expense 6,654 5,047 18,161 14,543 NET INTEREST INCOME 14,264 10,917 39,391 30,824 Provision for credit losses 695 587 2,095 1,718 ----------------------------------------------------- NET INTEREST INCOME AFTER PROVISION 13,569 10,330 37,296 29,106 Noninterest income: Customer service fees 1,680 1,377 4,697 4,104 Earnings of unconsolidated subsidiary 144 167 199 167 Other 898 683 2,280 2,033 ----------------------------------------------------- Total noninterest income 2,722 2,227 7,176 6,304 Noninterest expenses: Salaries and employee benefits 5,657 4,655 16,319 13,627 Net occupancy expense 863 691 2,352 1,890 Equipment expense 513 505 1,543 1,359 Losses and carrying costs of real estate acquired by foreclosure 153 27 201 129 Data processing 565 277 1,584 803 Telephone 221 168 647 521 Supplies 327 164 649 476 Legal and professional fees 689 365 1,187 951 Minority interest expense 674 - 852 - Other 1,544 1,158 4,907 3,158 ----------------------------------------------------- Total noninterest expenses 11,206 8,010 30,241 22,914 EARNINGS BEFORE INCOME TAXES 5,085 4,547 14,231 12,496 Provision for income taxes 1,675 1,448 4,703 3,918 ----------------------------------------------------- NET EARNINGS $ 3,410 $ 3,099 $ 9,528 $ 8,578 =====================================================
See Notes to Interim Consolidated Financial Statements. 3 4 STERLING BANCSHARES, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Nine Months Ended September 30, 1997 1996 ------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 9,528 $ 8,578 Adjustments to reconcile net earnings to net cash provided by operating activities Amortization and accretion of premiums and discounts on investment securities, net 99 340 Equity in undistributed earnings of unconsolidated subsidiary (199) (167) Gain on sale of available-for-sale investment securities - 1,718 Provision for credit losses 2,095 (42) Loss (gain) on sale of premises and equipment 115 (29) Writedown of real estate acquired by foreclosure 6 34 Loss on sale of real estate acquired by foreclosure and repossessed assets 49 1 Depreciation and amortization 2,413 2,007 Mortgage loans originated for sale (355,661) (78,858) Proceeds from sale of mortgage loans originated for sale 346,188 47,552 (Decrease) increase in accrued interest receivable and other assets (3,491) 651 Decrease in accrued interest payable and other liabilities (847) (552) -------------------------- Total adjustments (9,233) (27,345) -------------------------- Net cash (used in ) provided by operating activities 295 (18,767) CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturity and paydowns of "held-to-maturity'' investment securities 21,247 21,833 Purchases of held-to-maturity investment securities (75,415) - Proceeds from sales of available-for-sale investment securities _ 13,303 Proceeds from maturity & paydowns of "available for sale" investment securities 19,257 16,800 Purchases of available-for-sale investment securities (43,223) (34,958) Purchase of investment in unconsolidated subsidiary - (2,000) Redemption of preferred stock of unconsolidated subsidiary 150 - Net increase in loans (106,704) (52,427) Proceeds from sale of real estate acquired by foreclosure 514 417 Capital additions to real estate acquired by foreclosure - (12) Net increase in interest-bearing deposits in financial institutions (466) (12.555) Proceeds from sale of premises and equipment 195 131 Purchase of premises and equipment (5,878) (5,893) -------------------------- Net cash used in investing activities (190,323) (55,361) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposit accounts 114,148 88,032 Net increase (decrease) in repurchase agreements/funds purchased 10,834 (9,313) Repayments of notes payable (4,000) (1,200) Proceeds from issuance of common stock 1,252 573 Proceeds from issuance of preferred stock 1,226 - Dividends paid (2,022) (1,909) Proceeds on sale of trust preferred securities 28,750 - Repayment of senior debentures - (200) -------------------------- Net cash provided by financing activities 150,188 75,973 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (39,840) 1,845 CASH AND CASH EQUIVALENTS: Beginning of period $ 125,854 $ 83,699 -------------------------- End of period $ 86,014 $ 85,544 --------------------------
See Notes to Interim Consolidated Financial Statements. 4 5 STERLING BANCSHARES, INC., AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 (1) Basis of Presentation: The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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, 1997, are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. For further information, refer to the consolidated financial statements and footnotes thereto included in the annual report on Form 10-K of Sterling Bancshares, Inc. (the "Company"), for the year ended December 31, 1996. On September 30, 1997, the Company acquired First Houston Bancshares, Inc. ("First Houston") and its subsidiary Houston National Bank in a stock-for-stock merger. The transaction was accounted for as a pooling of interests. All prior year information has been restated to reflect the merger. (2) Earnings Per Common Share Earnings per common share was computed based on the following (in thousands, except per share amounts):
Three Months Nine Months Nine Months Ended Ended Ended September 30, September 30, September 30, 1997 1997 1996 ------------- ------------- ------------- Common shares 13,732 13,703 13,616 Common share equivalents 787 729 451 ------------- ------------- ------------- 14,519 14,432 14,067 ============= ============= ============= Net earnings $ 3,410 $ 9,528 $ 8,578 Earnings per share $ 0.23 $ 0.66 $ 0.61
Note: Common shares, common share equivalents, and earnings per share for 1996 have been adjusted to reflect the merger of First Houston and a three-for-two stock split effective February 24, 1997. See note (3) below for additional information regarding the stock split. (3) Capital Stock Common Stock The Company paid first and second quarter cash dividends of $0.055 per share. On July 21, 1997, the Company's board of directors declared a third quarter dividend of $0.055 per share. This dividend was paid on August 11, 1997, to share holders of record on August 1, 1997. As of September 30, 1997, an additional 881,251 shares of common stock were issuable, subject to vesting restrictions, upon exercise of the Company's outstanding employee stock options under the 1994 Stock Incentive Plan and the 1984 Stock Option Plan, and pursuant to outstanding subscriptions under the Company's 1994 Employee Stock Purchase Plan. The Company's Non-Employee Director Compensation Plan provides that payment of outside directors will be effected by issuance of shares of the Company's stock in lieu of cash fees. Accordingly, in April 1997 the Company issued 20,582 shares as payment in full of outside director fees for director and committee service during the period April 1997 through March 1998, inclusive. The Company expects to continue to pay stock compensation to outside directors during future periods. 5 6 Preferred Stock The Company's Board of Directors has designated four series of Convertible Preferred Stock. Each of the four series has been issued in conjunction with the opening of four new bank offices (see "Significant Developments" below on this Form 10-Q). The conversion ratio of the Convertible Preferred Stock to Common Stock will depend upon the performance of the new offices in reaching certain defined deposit goals. (4) Recent Accounting Standards In February 1997, SFAS No. 128, "Earnings per Share" ("EPS") was issued. This statement established standards for computing and presenting EPS. It replaces the presentation of primary EPS with basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for entities with complex capital structures and requires a reconciliation of the basic EPS computation to the diluted EPS computation. This statement is effective for financial statements issued for the periods ending after December 15, 1997, including interim periods; earlier application is not permitted and all prior period EPS data must be restated. The implementation of SFAS No. 128 should have no material effect on the Company's reported EPS. In June 1997, SFAS No. 130, "Reporting Comprehensive Income" was issued. This statement requires that all components of comprehensive income and total comprehensive income be reported on one of the following (1) the statement of operations, (2) the statement of stockholders' equity or (3) a new separate statement of comprehensive income. Comprehensive income is comprised of net income and all changes to stockholders' equity, except those due to investments by owners (changes in paid in capital) and distributions to owners (dividends). This statement is effective for fiscal years beginning after December 15, 1997. Earlier application is permitted. This statement does not change the current accounting treatment for components of comprehensive income and thus the implementation of SFAS No. 130 will have no material impact on the Company's Consolidated Financial Statements. In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" was issued. This statement requires public companies to report certain information about their operating segments in their annual financial statements and quarterly reports issued to shareholders. It also requires public companies to report certain information about their products and service, the geographic areas in which they operate, and their major customers. This statement is effective for fiscal years beginning after December 15, 1997. Earlier application is encouraged. Implementation of SFAS No. 131 should have no material effect on the Company's Consolidated Financial Statements. 6 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SIGNIFICANT DEVELOPMENTS Expansion During 1996, the Company opened two new community banking offices, the first in the Upper Kirby district of central Houston, and the second in the Galleria area of Houston. The Company opened its fourteenth banking office in the Cypress Station area, north of the city, in January 1997. On September 30, 1997, the Company completed its acquisition of First Houston in a stock-for-stock merger. At September 30, 1997, First Houston had total assets of approximately $135 million and total deposits of approximately $125 million. In conjunction with the merger the Company issued approximately 1.686 million shares of the Company's common stock to the shareholders of First Houston in exchange for all of the issued and outstanding shares of stock of First Houston. On October 27, 1997, First Houston was dissolved and the Company merged Houston National Bank into Sterling Bank, creating the Bank's fifteenth banking office. FINANCIAL CONDITION Investments in Subsidiaries Sterling Bank, which currently operates 14 community banking offices in the greater Houston area, is a wholly-owned banking subsidiary. At September 30, 1997, the Company also owned 100% of First Houston and its only subsidiary Houston National Bank. In September 1996, the Company purchased a 40% equity and 44 % voting interest in Sterling Capital Mortgage Company ("SCMC"), an originator and servicer of single family residential mortgage loans headquartered in Houston, Texas. The Company also owns a 100% beneficial interest in Sterling Bancshares Capital Trust I. Total Assets The total consolidated assets of the Company as of September 30, 1997, were $1.08 billion, as compared to $851.87 million on the same date in 1996, an increase of $228.13 million or 26.8%. Federal Funds Sold and Federal Funds Purchased The Bank had federal funds sold of $16.4 million at September 30, 1997. Comparatively, the Bank had $27.6 million in federal funds sold on the same date in 1996, a decrease of $11.2 million or 40.6%. Loans Held for Investment As of September 30, 1997, loans held for investment were $618.6 million, as compared to $483.4 million on the same date in 1996, an increase of $135.2 million or 28.0% due primarily to continued strong loan demand. When compared to loans held for investment of $513.4 million on December 31, 1996, the September 30, 1997, loan balance represents a year-to-date $105.2 million increase in internal loan production, net of payoffs, or an annualized percentage increase of 27.4%. At September 30, 1997, loans held for investment as a percentage of assets and deposits were 57.2% and 64.8%, respectively. 7 8 The following table summarizes the Bank's loan portfolio by type of loan as of September 30, 1997 (in thousands):
September 30, 1997 Percent Balance of Total ------------- ------------ Commercial, financial and industrial $ 234,040 $ 37.83% Real estate - commercial 175,402 28.35% Real estate - residential mortgage 80,435 13.00% Real estate - construction 49,833 8.06% Installment and other 80,727 13.05% Less unearned discount (1,842) (0.30)% ------------- ----------- Total Loans $ 618,595 100.00% ============= ===========
Investment Securities The Bank's investment portfolio as of September 30, 1997, totaled $283.6 million, as compared to $198.8 million on the same date in 1996. The increase of $84.8 million or 42.7% is a result of the Bank's reinvestment of excess liquidity in U.S. Agency and mortgage-backed securities. The Bank has designated its total securities portfolio into (a) Held-to-maturity ("HTM") and (b) Available-for-sale ("AFS"). As of September 30, 1997, the HTM portfolio totaled $202.2 million. The AFS portfolio totaled $81.4 million and consisted of U.S Treasury and Agency securities owned by First Houston and the Bank's portfolio of investment assets which were held for reasons other than solely for investment, such as the Bank's stock in the regional FHLB. The Bank tracks but does not record market changes on its HTM portfolio. At September 30, 1997, the market value of the HTM portfolio was $284.9 million. Allowance for Credit Losses Following is a summary of the changes in the allowance for credit losses for the nine months ended September 30, 1997, and the relationship of the allowance to total loans at September 30, 1997, and December 31, 1996 (in thousands): Allowance for credit losses, December 31, 1996 $ 7,053 Chargeoffs (2,010) Recoveries 225 Provision for credit losses 2,095 ------- Allowance for credit losses, September 30, 1997 $ 7,363 =======
September 30, December 31, 1997 1996 ------------- ------------ Loans held for investment at period end $ 618,595 $ 513,356 Allowance for credit losses $ 7,363 $ 7,053 Allowance as a percent of period-end loans 1.19% 1.37%
8 9 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 Bank's historical charge-off experience over the last ten years. The Bank may reduce the provision for credit losses where appropriate. The Bank will continue to monitor the adequacy of the allowance for credit losses to determine the appropriate accrual for the Bank's bad debt expense. Risk Elements Non-performing, 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. Nine properties make up the $1,254,000 of other real estate owned ("ORE") at September 30, 1997, the largest of which is carried at $647,000 and consists of one commercial property in north Houston. This property is included in ORE although it was not acquired by foreclosure, but is a tract of unimproved land previously acquired by the Bank for future expansion. No loss is anticipated. The Bank carries all properties at the lower of the book value of the loan at foreclosure or the current fair market value, less estimated closing costs. The Bank defines potential problem loans as those loans not classified as non-performing, but where 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, excluding all non-performing loans. As of September 30, 1997, the Bank has no material foreign loans outstanding or loan concentrations. The Bank, however, continues to monitor the potential risk of foreign borrowers and concentrations of credit. The following schedule summarizes consolidated non-performing loans, non-performing assets and potential problem loans at year-end 1996 and at September 30, 1997.
September 30, December 31, 1997 1996 ------------- ------------ Nonaccrual loans $ 3,190 $ 2,438 Restructured loans 44 45 Accruing loans past due 90 days or more 437 229 ------------- ------------ Total nonperforming loans 3,671 2,712 ORE and other foreclosed assets 1,604 2,377 ------------- ------------ Total nonperforming assets $ 5,275 $ 5,089 ============= ============ Total nonperforming loans as a % of gross loans 0.59% 0.59% Total nonperforming loans as a % of total assets 0.49% 0.64% Potential problem loans $ 14,850 $ 12,738 ============= ============
Premises and Equipment The Bank's premises and equipment, net of depreciation, as of September 30, 1997, were $29.3 million, as compared to $22.1 million on the same date in 1996, an increase of $7.2 million or 32.6%. This increase is due to the opening of two banking offices since December of 1996, and the relocation of the Champions office in March 1997, and the Highway 6 office in September 1997. In addition, the Bank completed the installation of its new core processing system and teller technology and has continued to upgrade its technology and telecommunications equipment to keep pace with the Bank's volume growth and to position itself for future growth. 9 10 Deposits Total deposits as of September 30, 1997, were $954.5 million, as compared to $775.1 million on the same date in 1996, an increase of $179.4 million or 23.1%, resulting from growth in same location deposits, combined with the additional deposits of the new banking offices. When compared to total deposits of $855.3 million on December 31, 1996, the amount at September 30, 1997, represents a year-to-date increase of $99.2 million, as the strong deposit growth experienced in 1996 continued through the three quarters of 1997. Non-interest bearing demand deposits at September 30, 1997, were $306.5 million, as compared to $247.0 million at September 30, 1996, an increase of $59.5 million or 24.1%. The percentage of non-interest bearing deposits to total deposits as of September 30, 1997, continued strong at 32.1%. Notes Payable In June of 1997, the Bank repaid the remaining note payable of $3.6 million with proceeds from the sale of its Trust Preferred Stock. During the first nine months of 1997, the note accrued interest at a LIBOR-based rate of 7.6875%. CAPITAL RESOURCES AND LIQUIDITY Shareholders' Equity The following table displays the changes in shareholders' equity from December 31, 1996, to September 30,1997: (in thousands) Equity, December 31, 1996 $ 67,004 Net earnings 9,528 Sale of preferred stock 1,226 Sale of common stock 1,217 Cash dividends paid (1,987) Net change in net unrealized losses on AFS securities 34 -------- Equity, September 30, 1997 $ 77,022 ======== The Company's risk based capital ratios remain above the levels designated as "Well Capitalized" on September 30, 1997, with Tier-1 Capital, Total Risk-Based Capital, and Leverage Capital Ratios of 15.42%, 13.44%, and 13.18%, respectively. Liquidity Effective management of balance sheet liquidity is necessary to fund growth in earning assets and to pay liability maturities, depository customers' withdrawal requirements 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 shorter term assets, marketable investment securities (excluding those presently classified as "Held-to-maturity"), increases in customers' deposits, and access to borrowing arrangements. Available borrowing arrangements maintained by the Bank include informal federal funds lines with other commercial banks, an advancement arrangement with the Federal Home Loan Bank ("FHLB"), and reverse repurchase lines with other commercial banks and the FHLB. 10 11 RESULTS OF OPERATIONS Net Income Net income for the nine month period ended September 30, 1997, was $9.5 million as compared to $8.6 million for the same period in 1996, an increase of approximately $900,000 or 10.5%. For the nine months ended September 30, 1997, net income was impacted by a acquisition and mergers costs of approximately $550,000, net of tax and approximately $690,000 in additional expenses incurred as a result of the opening of the three new banking offices since August 1996. Net Interest Income Net interest income for the nine month period ended September 30, 1997, was $39.4 million, as compared to $30.8 million for the same period in 1996, an increase of $8.6 million or 27.9%. The growth in net interest income is attributable primarily to increases in average earning assets, enhanced by the maintenance of a strong net interest margin. Average earning assets for September 30, 1997, were $892.8 million, up $178.4 million, or 25.0% from $714.4 million for the same period in 1996. The yield on average earning assets for the nine month period ended September 30, 1997, was 8.62%, as compared to 8.48% for the same period in 1996, an increase of 14 basis points. This increase is due primarily to an increase in the yield on investment securities as the Bank reinvested its excess liquidity in higher yielding U.S. Agency and mortgage-backed securities. In addition, the Bank increased its yield on loans by 8 basis points, while also increasing the average balance by $123.9 million. At September 30, 1997, total loans represented 67.6% of total interest earning assets, compared to 67.1% for the same period in 1996. The cost of interest bearing liabilities rose 17 basis points from 3.92% to 3.75% for the same period. The Company's 5.84% net interest margin for the first nine months of 1997 remained flat from the 5.85% net interest margin registered during the same period in 1996. The data used in the analysis of the changes in net interest income is derived from the daily average levels of earning assets and interest-bearing liabilities as well as from the rates earned and paid on such amounts. The rates earned and paid on each major type of asset and liability are shown beside the average balance in the account for the period. The average yields on all interest-earning assets and the average cost of all interest-bearing liabilities also are summarized. 11 12 The following schedule gives a comparative analysis of the Company's daily average interest-earning accounts and interest-bearing accounts for the three-month periods ended September 30, 1997 and 1996: CONSOLIDATED AVERAGE BALANCE SHEET SCHEDULE NET INTEREST INCOME AND NET INTEREST MARGIN
Nine Months Ended September 30, (Dollars in thousands) 1997 1996 Average Average Average Average Balance Interest Yield/Rate Balance Interest Yield/Rate ----------------------------------- -------------------------------- INTEREST EARNING ASSETS: Interest bearing deposits in financial institutions $ 13,577 $ 549 5.41% $ 7,531 $ 298 5.29% Federal funds sold 31,019 1,261 5.44% 21,750 879 5.40% Investment securities (taxable) 223,115 10,318 6.18% 183,715 8,157 5.93% Investment securities (tax-exempt) 21,960 829 5.05% 22,268 844 5.06% Loans, net of unearned discount (taxable) 602,261 44,544 9.89% 478,381 35,145 9.81% Loans, net of unearned discount (tax-exempt) 891 51 7.65% 750 $ 44 7.84% --------------------------------- ------------------------------ Total Interest Earning Assets $892,823 $57,552 8.62% $ 714,395 $45,367 8.48% Noninterest Earning Assets: Cash and due from banks $ 67,361 $ 56,310 Premises and equipment, net 28,189 20,346 Other assets 18,658 14,296 Allowance for credit losses (7,384) (6,786) -------- --------- Total Noninterest Earning Assets $106,824 $ 84,166 TOTAL ASSETS $999,647 $ 798,561 ======== ========= INTEREST BEARING LIABILITIES: Demand and savings deposits $417,671 $ 9,782 3.13% $ 330,715 $ 7,534 3.04% Certificates and other time deposits 199,936 7,611 5.09% 174,781 6,434 4.92% Other borrowing 16,670 767 6.15% 7,763 267 4.59% Debentures and notes payable 14,927 852 7.63% 5,093 308 8.08% --------------------------------- ------------------------------ Total Interest Bearing Liabilities $649,204 19,012 3.92% $ 518,352 14,543 3.75% Noninterest Bearing Liabilities: Demand deposits $271,631 $ 214,264 Other liabilities 6,411 4,526 Shareholders' equity 72,400 61,419 -------- --------- Total Noninterest Bearing Liabilities $350,442 $ 280,209 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $999,646 $ 798,561 ======== ========= NET INTEREST INCOME & MARGIN $ 38,540 5.77% $ 30,824 5.76% ===================== ================== NET INTEREST INCOME & MARGIN (TAX EQUIVALENT) $ 38,999 5.84% $ 31,287 5.85% ===================== ==================
12 13 Provision for Credit Losses The provision for credit losses for the first nine months of 1997 was $2.1 million, as compared to $1.7 million for the same period in 1996, an increase of $400,000 or 23.5%. After net charge-offs of $1.8 million and provisions for the first nine months of 1997, the Bank's allowance for credit losses increased by $310,000 from $7,053,000 on December 31, 1996, to $7,363,000 on September 30, 1997. Please refer to the earlier discussion of Allowances for Credit Losses and Non-performing Loans for additional insight to management's approach and methodology in estimating the allowance for credit losses. Non-interest Income Total non-interest income increased for the nine month period ended September 30, 1997, at $7.2 million, as compared to $6.3 million for the same period in 1996, an increase of $900,000 or 14.3%. The increase is due primarily to growth in the Bank's deposit base, resulting in increased fee income. Non-interest Expense Non-interest expenses increased $7.3 million, or 31.9%, to $30.2 million for the first nine months of 1997 as compared to $22.9 million for the same period in 1996. The increase is due to the additional expenses incurred by the startup of three new banking offices in the last year, the costs associated with the merger of First Houston, and the implementation of a new marketing strategy. The following schedule summarizes the expenses, including salaries, associated with these new initiatives (in thousands):
September 30, 1997 Expense ------- New initiatives: Three new banking offices $ 1,925 Technology 460 Marketing 190 Merger of First Houston 826 ------- Total expenses for new initiatives $ 3,401 =======
Salaries and employee benefits for the nine month period ended September 30, 1997, were $16.3 million, as compared to $13.6 million for the same period in 1996, an increase of $2.7 million or 19.9%. The increase is due to an increase in the number of employees, caused primarily by additional staffing of the central operations areas as well as the new Upper Kirby, Fountainview, and Cypress Station offices. In addition, the Company also paid severance to those employees not retained after the merger of First Houston. The remaining increase in personnel costs may be attributed to normal merit and cost-of-living pay increases, which averaged less than 3%. For the nine months ended September 30, 1997, net occupancy expense and equipment expense, including net gain or loss on sale of premises and equipment, increased by a combined $646,000 over the prior period amounts. These increases are attributed to the opening of the three new offices and the renovation of the Mangum office. In conjunction with this renovation, the office sold its former remote motor bank facility, which resulted in a loss of $130,000. Going forward, this loss will be offset by the efficiencies resulting from combining a new motor bank facility with the existing lobby facility. Technology expense for the nine month period ended September 30, 1997, was $1.6 million as compared to $800,000 for the same period in 1996, an increase of $800,000 or 100.0%. The increase is due to the installation of the Bank's local and wide-area network during the third quarter of 1996 and the new core processing system in the second quarter of 1997. In addition, the Company incurred expenses associated with the merger of First Houston. The Bank expects ongoing increases in its technology expenses for the remainder of the year as it continues to implement its long-term technology strategy. 13 14 Other non-interest expense was $4.9 million for the nine month period ended September 30, 1997, as compared to $3.2 million for the same period in 1996, an increase of $1.7 million or 53.1%. The increase in other expenses is due primarily to the costs associated with the merger of First Houston. In addition the Bank experience increases in franchise taxes, Federal Reserve Bank check processing charges, and marketing expenses associated with the implementation of a new marketing initiative. PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES There were no changes in securities during the period ending September 30, 1997. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the period ending September 30, 1997. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits: Exhibit 11. Computation of Earnings Per Share ---------------------------------------------- Included as Note (2) to Interim Consolidated Financial Statements on page 5 of this Form 10-Q Exhibit 27. Financial Data Schedule ------------------------------------ The required Financial Data Schedule has been included as Exhibit 27 of the Form 10-Q filed electronically with the Securities and Exchange Commission. 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) By: /s/ George Martinez -------------------------- George Martinez (Chief Executive Officer and Principal Financial Officer) 14 15 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------ ----------- 11 Computation of Earnings Per Share Included as Note (2) to Interim Consolidated Financial Statements on page 6 of this Form 10-Q 27 Financial Data Schedule The required Financial Data Schedule has been included as Exhibit 27 of the Form 10-Q filed electronically with the Securities and Exchange Commission. EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1997 69,630 488 16,384 0 81,432 202,199 284,900 668,966 (7,363) 1,081,233 954,492 14,585 6,384 26,750 0 177 12,040 0 1,081,233 44,595 11,147 1,810 57,552 17,393 768 39,391 2,095 0 30,241 14,231 9,528 0 0 9,528 0.66 0.66 5.84 3,190 437 44 14,850 7,053 2,010 225 6,960 2,698 0 4,262
-----END PRIVACY-ENHANCED MESSAGE-----