<PAGE> 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 March 31, 1996
[ ] 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 March 31, 1996:
Class of Stock Shares Outstanding
- -------------- ------------------
Common Stock, Par Value $1.00 7,903,468
<PAGE> 2
STERLING BANCSHARES, INC.
INDEX TO FORM 10-Q
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PART I. - FINANCIAL INFORMATION Page No.
-------
<S> <C>
Item 1. Financial Statements
The March 31, 1996 and 1995 financial statements included herein are unaudited; however, such information reflects all
adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management of the
registrant, necessary to a fair statement of the results for the interim periods.
Consolidated Balance Sheets at March 31, 1996 and 1995 and at
December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Earnings for the Three Months and Year-to-Date
Ended March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Interim Consolidated Financial Statements for the Period Ended
March 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Significant Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Capital Resources and Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
PART II. - OTHER INFORMATION
Item 2. - Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 4. - Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . 16
Item 6. - Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
STERLING BANCSHARES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995 1995 1994
--------- --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 46,684 $ 40,248 $ 60,075 $ 49,759
Federal funds sold 10,000 0 5,000 10,013
Interest bearing deposits in financial institutions 9,192 190 1,135 401
Investment securities:
Available-for-sale 3,994 58,098 3,931 65,883
Held-to-maturity 155,989 122,246 163,581 126,074
--------- --------- --------- ---------
Total investment securities 159,983 180,344 167,512 191,957
Loans held for sale 9,680 6,806 7,868 5,311
Loans:
Taxable 404,109 336,412 384,777 322,134
Tax-exempt 0 1,065 0 1,115
--------- --------- --------- ---------
Total loans 404,109 337,477 384,777 323,249
Allowance for credit losses (6,256) (6,047) (5,907) (5,810)
--------- --------- --------- ---------
Total loans, net 397,853 331,430 378,870 317,439
Real estate acquired by foreclosure 1,833 947 1,716 1,706
Premises and equipment, net 17,417 13,666 14,823 12,941
Goodwill 2,085 2,412 2,166 2,493
Accrued interest receivable and other assets 6,820 6,732 8,184 6,634
--------- --------- --------- ---------
Total assets $ 661,547 $ 582,775 $ 647,349 $ 598,654
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits:
Noninterest bearing $ 184,875 $ 167,024 $ 190,333 $ 178,372
Interest bearing 253,548 197,963 237,778 214,887
Certificates of deposit and other time deposits 152,854 143,734 146,613 145,076
--------- --------- --------- ---------
Total deposits 591,277 508,721 574,724 538,335
Federal funds purchased and securities sold under agreements to
repurchase 9,494 22,025 12,083 8,520
Accrued interest payable and other liabilities 3,884 2,484 5,051 4,126
Notes payable 5,200 6,800 5,600 7,200
Senior debentures 0 700 200 850
--------- --------- --------- ---------
Total liabilities 609,855 540,730 597,658 559,031
Shareholders' equity:
Preferred stock, $1 par value, 1 million shares auth. 49 0 49 0
Common stock, $1 par value, 20 million shares auth. 7,903 7,832 7,859 7,818
Capital surplus 15,087 14,233 14,985 14,204
Retained earnings 28,842 21,390 27,005 19,829
Net unrealized gain (loss) on assets available-for-sale 0 (1,410) 0 (2,228)
Net unrealized gain (loss) on held-to-maturity securities
transferred from available-for-sale (189) 0 (207) 0
--------- --------- --------- ---------
Total shareholders' equity 51,692 42,045 49,691 39,623
--------- --------- --------- ---------
Total liabilities and shareholders' equity $ 661,547 $ 582,775 $ 647,349 $ 598,654
========= ========= ========= =========
</TABLE>
See Notes to Interim Consolidated Financial Statements.
3
<PAGE> 4
STERLING BANCSHARES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1996 1995
-------- --------
<S> <C> <C>
Interest income: (dollars in thousands)
Loans, including fees:
Taxable $ 9,820 $ 8,148
Tax-exempt 0 23
Federal funds sold 104 36
Deposits in financial institutions 20 5
Investment securities:
Taxable 2,209 2,507
Tax-exempt 282 288
-------- --------
Total interest income 12,435 11,007
Interest expense:
Demand and savings deposits 1,868 1,463
Certificates and other time deposits 1,841 1,380
Federal funds purchased and repurchase agreements 129 269
Debentures and notes payable 130 168
-------- --------
Total interest expense 3,968 3,280
NET INTEREST INCOME 8,467 7,727
Provision for credit losses 513 286
-------- --------
NET INTEREST INCOME AFTER PROVISION 7,954 7,441
Noninterest income:
Customer service fees 1,309 1,231
Other 621 546
-------- --------
Total noninterest income 1,930 1,777
Noninterest expenses:
Salaries and employee benefits 3,956 3,572
Net occupancy expense 539 587
Losses (gains) and carrying costs of real estate acquired by foreclosure 46 (28)
FDIC assessment 1 288
Equipment expense 321 533
Legal and professional fees 103 150
Data processing 248 215
Telephone 146 117
Supplies 116 186
Other 852 714
-------- --------
Total noninterest expenses 6,328 6,334
EARNINGS BEFORE INCOME TAXES 3,556 2,884
Provision for income taxes 1,153 900
-------- --------
NET EARNINGS $ 2,403 $ 1,984
======== ========
</TABLE>
See Notes to Interim Consolidated Financial Statements.
4
<PAGE> 5
STERLING BANCSHARES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1996 1995
-------- --------
(dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 2,403 $ 1,984
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Amortization and accretion of premiums and discounts on
investment securities, net 56 96
Provision for credit losses 513 286
Gain on sale of premises and equipment (5) 0
Gain (loss) on sale of real estate acquired by foreclosure 4 (67)
Depreciation and amortization 595 567
Writedown of real estate acquired by foreclosure 0 65
Increase (decrease) in accrued interest receivable and other assets 1,354 (98)
Decrease in accrued interest payable and other liabilities (1,166) (2,064)
-------- --------
Total adjustments 1,351 (1,215)
-------- --------
Net cash provided by operating activities 3,754 769
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity and paydowns of held-to-maturity investment securities 7,563 3,773
Purchase of held-to-maturity investment securities 0 (30)
Proceeds from maturity and paydowns of available-for-sale investment
securities 0 9,014
Purchase of available-for-sale investment securities (63)
Net increase in loans (21,665) (15,111)
Proceeds from sale of real estate acquired by foreclosure 247 100
Capital additions to real estate acquired by foreclosure (11) 0
Net decrease (increase) in interest-bearing deposits in financial institutions (8,057) 211
Proceeds from sale of premises and equipment 12 0
Purchase of premises and equipment (3,115) (1,211)
-------- --------
Net cash used in investing activities (25,089) (3,254)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposit accounts 16,553 (29,614)
Net (decrease) increase in repurchase agreements/funds purchased (2,589) 13,505
Repayments of notes payable (400) (400)
Proceeds from issuance of common stock 134 36
Dividends paid (554) (416)
Repayment of senior debentures (200) (150)
-------- --------
Net cash provided by (used in) financing activities 12,944 (17,039)
NET DECREASE IN CASH AND CASH EQUIVALENTS (8,391) (19,524)
CASH AND CASH EQUIVALENTS:
Beginning of period $ 65,075 $ 59,772
-------- --------
End of period $ 56,684 $ 40,248
======== ========
</TABLE>
See Notes to Interim Consolidated Financial Statements.
5
<PAGE> 6
STERLING BANCSHARES, INC., AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(Unaudited)
(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 three month period ended March 31,
1996, are not necessarily indicative of the results that may be expected for
the year ended December 31, 1996. 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, 1995.
(2) Earnings per Share
Earnings per share is computed by dividing net earnings by the weighted average
number of common shares and common share equivalents outstanding during the
period. Dilutive common stock options have been included in the calculations.
The weighted average shares used in the calculation of fully diluted earnings
per share for the quarter ended March 31, 1996, are as follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
and and
Year-to-Date Year-to-Date
March 31, March 31,
1996 1995
------------------ ------------------
<S> <C> <C>
Common shares (See below) 7,882,429 7,826,511
Common share equivalents (See below) 261,078 143,146
---------- ----------
8,143,507 7,969,657
========== ==========
Net earnings $2,402,535 $1,983,757
Earnings per share (See below) $0.30 $0.25
</TABLE>
Note: Common shares, common share equivalents, and earnings per share for 1995
have been adjusted to reflect a three- for-two stock split effective February
14, 1996. See discussion item (3) below for additional information regarding
the stock split.
(3) Capital Stock
Common Stock
Pursuant to Board resolution dated January 22, 1996, the Company effected a
three-for-two stock split in the form of a 50% stock dividend to shareholders
of record on February 2, 1996. The Company plans to pay quarterly dividends at
the annual rate of $0.28 per share during 1996. The first quarterly dividend of
$0.07 per share (on a "post-split" basis) was paid concurrently with the stock
split on February 14, 1996.
As of March 31, 1996, an additional 515,711 shares of common stock were
issuable (without regard 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.
6
<PAGE> 7
The Company's Non-Employee Director Compensation Plan provides, subject to an
annual possibility of modification by the Company, 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 1995 the Company issued 6,600 shares
as payment in full of outside director fees for director and committee services
during the period April 1995 through March 1996, inclusive. The Company will
also pay directors during the period through March 1997 by means of stock, and
expects to continue a policy of such payments during future periods.
Preferred Stock
The Company's Board of Directors has approved issuance of three series of
Convertible Preferred Stock. Each of the three series is to be issued in
conjunction with the opening of one of three new offices of Sterling Bank (see
"Significant Developments" on page 8 of this Form 10-Q). The convertibility
ratio of the Convertible Preferred Stock to Common Stock will depend upon the
performance of the new office in reaching certain defined deposit goals. The
shares will be offered pursuant to Private Placement Memoranda to qualified
investors who are bona fide Texas residents approved by the executive officer
of the respective new banking offices, and who are either residents or
business- persons in the neighboring community. The intent of the Company is
to create a common interest between management of the new offices and members
of the neighboring community, and to promote acceptance of the new banking
office by its nearby businesses. Accordingly, 49,500 shares of Series A stock
were sold to 29 investors in the Company's new Cypress office during a
subscription period that ended October 20, 1995. The subscription period for
Series B shares, related to the Company's new Upper Kirby office, began May 1,
1996, and will terminate August 1, 1996. No more than 150,000 shares of Series
B Convertible Preferred Stock will be issued; and none will be issued prior to
the termination date of the offering. Similarly, 150,000 Series C shares are
expected to be offered for sale to potential investors in the new Cypress
Station office later in 1996.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SIGNIFICANT DEVELOPMENTS
Three New Offices Under Development
The Company's banking subsidiary, Sterling Bank (the "Bank"), has begun a
planned expansion of its banking services in the greater Houston market. The
first of three new community banking offices, the Cypress office, opened in
September 1995 near the intersection of Jones and Grant Roads in the northwest
part of the greater Houston area. A second new banking office is currently
under construction at the intersection of Westheimer Road and Kirby Drive in
the Upper Kirby district of Houston. The Company has signed a lease for office
space, has identified an executive officer to be in charge of the office, and
has begun deploying staff in anticipation of opening the new location. The
Company expects the Upper Kirby office to commence full operations in July
1996. The Bank intends to open a third new office in the Cypress Station area
of north Houston near the intersection of Interstate Highway 45 and FM 1960.
The Bank has identified a site and has hired two employees, including an
executive officer for the location. The new Cypress Station office is expected
to open in late 1996.
Convertible Preferred Stock Series B Offered
On July 17, 1995, the Company's Board of Directors authorized issuance of three
new series of Convertible Preferred Stock (designated as Series A, Series B,
and Series C) to be offered to persons the Company believes will be beneficial
to the development and support of the three new banking offices discussed
above. In conjunction with the opening of the new Upper Kirby office expected
in July, the Series B shares were offered in a Confidential Private Placement
Memorandum to qualified investors beginning May 1, 1996. The offering is
scheduled to terminate August 1, 1996. Additional information regarding the
offering and the new offices is discussed under Preferred Stock in Footnote 3
to the Company's unaudited financial statements in Part I and in Item 2 of Part
II of this Form 10-Q.
FINANCIAL CONDITION
Investments in Subsidiaries
Sterling Bank, which operates 11 community banking offices in the greater
Houston area, and which intends to add two new banking facilities during 1996,
constitutes the Company's only subsidiary.
Total Assets
The total consolidated assets of the Company as of March 31, 1996, were $661.5
million, as compared to $582.8 million on the same date in 1995, an increase of
$78.7 million or 13.5%.
Federal Funds Sold and Federal Funds Purchased
The Bank had federal funds sold as of March 31, 1996, in the amount of $10.0
million. On the same date in 1995, the Bank had no federal funds sold. The Bank
had no federal funds purchased at March 31, 1996, as compared $20.0 million at
March 31, 1995. The net federal funds position shifted by $30.0 million between
March 31, 1995 and 1996.
8
<PAGE> 9
Loans
As of March 31, 1996, loans (excluding student loans held for resale in the
amounts of $9.7 million in 1996 and $6.8 million in 1995) were $404.1 million,
as compared to $337.5 million on the same date in 1995, an increase of $66.6
million or 19.7% due primarily to continued strong loan demand. When compared
to total loans of $384.8 million on December 31, 1995, the March 31, 1996, loan
balance represents a year-to-date $19.3 million increase in internal loan
production net of payoffs, an annualized percentage increase of 20.1%. At March
31, 1996, loans as a percent of assets and deposits were 61.1% and 68.3%,
respectively. The following table summarizes the Bank's loan portfolio by type
of loan as of March 31, 1996 (in thousands):
<TABLE>
<S> <C> <C>
Commercial, financial and industrial $ 151,738 37.55%
Real estate mortgage
Commercial 104,693 25.91
Residential 44,565 11.03
Real estate - construction 34,953 8.65
Installment and other 71,082 17.59
Less unearned discount (2,922) (0.73)
--------- ------
$ 404,109 100.00%
========= ======
</TABLE>
Investment Securities
The Bank's investment portfolio as of March 31, 1996, totaled $160.0 million,
as compared to $180.3 million on the same date in 1995. The decrease of $20.3
million or 11.3% is a result of the Bank's reinvestment of cash provided by its
investment securities to other uses. Funds provided by the reduction in
investment securities were used primarily to fund the Bank's strong loan growth
and, additionally, to eliminate the Bank's net federal funds purchased
position. As required by generally accepted accounting principals, the Bank has
designated its total securities portfolio into (a) Held-to-maturity and (b)
Available-for-sale. As of March 31, 1996, the "Held-to-maturity" ("HTM")
portfolio totaled $156.0 million and included substantially all of the
investment securities maintained by the Bank for investment-related purposes.
The Available-for-sale ("AFS") portfolio totaled $4.0 million and consisted of
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 Federal
Home Loan Bank (the "FHLB"). Due to the nature of the securities classified as
AFS, there was no net unrealized gain or loss in the AFS portfolio as of March
31, 1996. The Bank tracks but does not record market changes on its HTM
portfolio. At March 31, 1996, the market value of the HTM portfolio was $155.6
million.
The Company analyzes its interest rate risk position by use of a simulation
model. As of March 31, 1996, the simulation model indicates that, in the event
of a 200 basis point increase in underlying market interest rates, the
Company's net interest income would increase 5.48%. Correspondingly, in the
event of a 200 basis point decrease in market interest rates, the Company's net
interest income would decrease by 6.42%. The results of this "rate stress
test", which assumes a parallel shift in the yield curve, indicate that the
present mix of earning assets and paying liabilities constitutes an
Asset/Liability portfolio with good protection from income shocks caused by
changes in interest rates. The simulation model also provides a detailed GAP
analysis, which the Company uses as a secondary source in analyzing its
Asset/Liability mix. The GAP measurement of Rate Sensitive Assets (RSA) to Rate
Sensitive Liabilities (RSL) indicates a positive GAP of 1.0301 through the
first year and a positive 1.0688 through three years cumulative.
9
<PAGE> 10
Allowance for Credit Losses and Nonperforming Loans
Following is a summary of the changes in the allowance for credit losses for
the three months ended March 31, 1996, and the relationship of the allowance
account to total loans at March 31, 1996, and December 31,1995 (in thousands):
<TABLE>
<S> <C>
Allowance for credit losses, December 31, 1995 $ 5,907
Chargeoffs (277)
Recoveries 113
Provision for credit losses 513
-------
Allowance for credit losses, March 31, 1996 $ 6,256
=======
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
<S> <C> <C>
Loans outstanding at period-end $404,109 $384,777
Allowance for credit losses $ 6,256 $ 5,907
Allowance as a percent of period-end loans 1.55% 1.54%
</TABLE>
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 chargeoff experience over the last
ten years. The Bank may reduce the provision for credit losses where
appropriate to adjust for significant recoveries. The Bank will continue to
monitor the adequacy of the allowance for credit losses to determine the
appropriate accrual of the Bank's bad debt expense.
Nonperforming 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. Thirteen properties make up the $1,833,000 of real
estate acquired by foreclosure at March 31, 1996, the largest of which is
carried at $498,000 and consists of four developed residential lots. The Bank
carries all properties at the lower of the book value of the loan at
foreclosure or the current fair market appraised values, less estimated closing
costs. The following schedule summarizes consolidated nonperforming assets at
year-end 1995 and at March 31, 1996.
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
(in thousands)
<S> <C> <C>
Nonaccrual loans $ 2,159 $ 2,858
Restructured loans 90 103
Real estate acquired by foreclosure 1,833 1,716
Other repossessed assets 66 29
Accruing loans past due 90 days or more 698 446
Total $ 4,846 $ 5,152
-------- --------
Total assets $661,547 $647,349
======== ========
Total nonperforming assets as a % of total assets 0.73% 0.80%
</TABLE>
Premises and Equipment
The Bank's premises and equipment, net of depreciation, as of March 31, 1996,
were $17.4 million, as compared to $13.7 million on the same date in 1995, an
increase of $3.7 million or 27.0%. This increase is due primarily to renovation
and improvements of the Bank's West, Gulf Freeway, and Westheimer banking
offices during 1995 and includes upgrades to the electronic technology and
telephone systems in all offices to handle increased lines and volume. The Bank
10
<PAGE> 11
also completed the opening of the Cypress Office during the period. Additional
increases in premises and equipment are expected during 1996 as the Bank
acquires facilities for the planned de novo banking offices discussed elsewhere
in this Form 10-Q and continues to upgrade its computer and technology
resources.
Deposits
Total deposits as of March 31, 1996, were $591.3 million, as compared to $508.7
million on the same date in 1995, an increase of $82.6 million or 16.2%,
reflecting strong growth in the Bank's deposit base. When compared to total
deposits of $574.7 million on December 31, 1995, the March 31, 1996, amount
represents a year-to-date increase of $16.6 million, as the strong deposit
growth experienced in the last months of 1995 continued through the first
quarter of 1996.
Noninterest bearing demand deposits at March 31, 1996, were $184.9 million, as
compared to $167.0 million at March 31, 1995, an increase of $17.9 million or
10.7%. When compared to noninterest bearing demand deposits of $190.3 million
on December 31, 1995, the March 31 amount represents a year-to-date decrease of
$5.4 million, as the Bank's noninterest bearing demand deposits reflected the
same seasonality seen in prior years. The percent of noninterest bearing
deposits to total deposits as of March 31, 1996, however, continued strong at
31.3%.
Notes Payable
In December 1993 and March 1994, the Company borrowed $6.6 million and $1.4
million, respectively, pursuant to an $8 million credit facility between the
Company and a large regional bank. Proceeds of the borrowings were used in the
Company's acquisition and merger of two Houston banks into the Bank. The note
will accrue interest at a rate of 7.13% until the third quarter of 1996. Since
September 30, 1994, the Company has paid regular quarterly principal payments
in the amount of $400,000 (5% of the original principal balance), which will
continue for 20 quarters. As of March 31, 1996, the Company had made seven
regularly-scheduled principal payments totaling $2.8 million, and the balance
remaining on the note was $5.2 million.
Senior Debentures
The Company's outstanding senior debentures were fully redeemed as of March 31,
1996, as compared to an existing balance of $700,000 on the same date in 1995.
CAPITAL RESOURCES AND LIQUIDITY
Shareholders' Equity
The following table displays the changes in shareholders' equity from December
31, 1995, to March 31,1996: (in thousands)
<TABLE>
<S> <C>
Equity, December 31, 1995 $ 49,691
Net earnings 2,403
Sale of common stock 134
Cash dividends paid (554)
Net change in net unrealized loss on HTM securities transferred from AFS 18
--------
Equity, March 31, 1996 $ 51,692
========
</TABLE>
The Company's risk based capital ratios remain above the levels designated as
"Well Capitalized" on March 31, 1996, with Tier-1 Capital, Total Risk-Based
Capital, and Leverage Capital Ratios of 10.78%, 12.03%, and 7.84% respectively.
11
<PAGE> 12
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 (not to include those presently classified as
"Held-to-maturity"), increases to its customers' base 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 FHLB, and reverse repurchase lines with other
commercial banks and the FHLB.
RESULTS OF OPERATIONS
Net Income
Net income for the three month period ended March 31, 1996, was $2,403,000, as
compared to $1,984,000 for the same period in 1995, an increase of $419,000 or
21.1%. The Company attributes the increase primarily to the maintenance of
strong net interest margins during the two periods, while loans and
non-interest bearing deposits grew strongly. As noted in the discussion of
Investment Securities, the Company actively attempts to manage its
Asset/Liability positions through simulation models and other analyses, and
seeks to minimize interest-rate related income variances. The Bank's strong
loan growth, however, resulted in favorable increases in the Company's interest
margins. In addition, average earning assets for the three months ending March
31, 1996, were $578.2 million, an increase of $55.1 million or 10.5% over
average earning assets of $523.1 million at March 31, 1995. During the first
quarter of 1996, operating efficiencies gained through growth of the size of
the Bank and the reduction of the Federal Deposit Insurance Corporation (the
"FDIC") assessment have also contributed to the increase in net income.
Net Interest Income
Net interest income for the three month period ended March 31, 1996, was $8.5
million, as compared to $7.7 million for the same period in 1995, an increase
of $800,000 or 10.4%. As discussed above, the Company attributes the growth in
net interest income primarily to increases in average earning assets, further
enhanced by the maintenance of a strong net interest margin. The yield on
average earning assets for the three month period ended March 31, 1996, was
8.63%, as compared to 8.53% for the same period in 1995, an increase of 10
basis points. The slight increase is due primarily to the change in the mix of
interest earning assets towards higher yielding instruments such as loans. At
March 31, 1996, total loans represented 70.0% of total interest earning assets,
compared to 63.8% for the same period in 1995. The cost of interest bearing
liabilities rose 28 basis points from 3.53% to 3.81% for the same period. The
Company's 5.98% net interest margin for the first three months of 1996
represents a decrease of 13 basis points from the 6.11% net interest margin
registered during the same period in 1995.
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. 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 March 31, 1996 and
1995:
12
<PAGE> 13
STERLING BANCSHARES, INC.
CONSOLIDATED AVERAGE BALANCE SHEET SCHEDULE
NET INTEREST INCOME AND NET INTEREST MARGIN
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
(dollars in thousands)
1996 1995
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------------------------------------ --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Interest bearing deposits in financial $ 1,785 $ 20 4.49% $ 452 5 4.49%
institutions
Federal funds sold 7,445 104 5.60% 3,754 36 3.89%
Investment securities (taxable) 141,891 2,209 6.24% 162,501 2,507 6.26%
Investment securities (tax-exempt) 22,450 282 5.04% 22,691 288 5.15%
Loans, net of unearned discount (taxable) 404,637 9,820 9.73% 332,628 8,148 9.93%
Loans, net of unearned discount (tax-exempt) 0 0 1,107 23 8.43%
---------------------------------- -------------------------------
Total interest earning assets: $578,208 $ 12,435 8.63% $523,133 $ 11,007 8.53%
Noninterest earning assets:
Cash and due from banks $ 49,946 $ 39,529
Premises and equipment, net 16,446 13,289
Other assets 10,436 11,555
Allowance for credit losses (5,986) (5,901)
-------- --------
Total noninterest earning assets: $ 70,842 $ 58,472
Total assets $649,050 $581,605
======== ========
Interest bearing liabilities:
Demand and savings deposits $252,806 $ 1,868 2.96% $206,552 $ 1,463 2.87%
Certificates and other time deposits 148,854 1,841 4.96% 143,325 1,380 3.90%
Other borrowings 10,811 129 4.79% 18,710 269 5.75%
Debentures and notes payable 5,532 130 9.43% 8,000 168 8.52%
---------------------------------- -------------------------------
Total interest bearing liabilities $418,003 $ 3,968 3.81% $376,587 $ 3,280 3.53%
Noninterest bearing liabilities:
Demand deposits $176,967 $159,045
Other liabilities 3,075 5,268
Shareholder's equity 51,005 40,705
-------- --------
Total noninterest bearing liabilities $231,047 $205,018
-------- --------
Total liabilities and shareholders' equity $649,050 $581,605
======== ========
Net interest income & margin $ 8,467 5.87% $ 7,727 5.99%
===================== ==================
Net interest income & margin (tax-equivalent basis) $ 8,619 5.98% $ 7,888 6.11%
===================== ==================
</TABLE>
13
<PAGE> 14
Provision for Credit Losses
Provision for credit losses for the first three months of 1996 was $513,000, as
compared to $286,000 for the same period in 1995, an increase of $227,000 or
79.3%. After net chargeoffs of $164,000 and provisions for the first three
months of 1996, the Bank's allowance for credit losses increased by $349,000
from $5,907,000 on December 31, 1995, to $6,256,000 on March 31, 1996. Please
refer to the earlier discussion on Allowances for Credit Losses and
Nonperforming Loans for additional insight to management's approach and
methodology in estimating the allowance for possible credit losses.
Noninterest Income
Total noninterest income for the three month period ended March 31, 1996, was
$1.9 million, as compared to $1.8 million for the same period in 1995, an
increase of $0.1 million or 5.5%. The increase is attributed to the growth in
the Bank's deposit base resulting in an increase in the number of fee
generating transactions.
Noninterest Expense
Noninterest expenses remained unchanged at $6.3 million for the first three
months of 1996 and 1995. Year-to-year improvements in occupancy, equipment,
FDIC assessment, and supplies expenses were offset by higher costs for salaries
and other expenses.
Salaries and employee benefits for the three month period ended March 31, 1996,
were $4.0 million, as compared to $3.6 million for the same period in 1995, an
increase of $400,000 or 11.1%. The increase is due in part to strong net income
growth, which caused corresponding increases in the Company's profit-sharing
and incentive plan costs of approximately $148,000 between the 1995 and 1996
periods. An additional portion of 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 inception of staffing of the new Cypress office,
which opened in mid 1995, and the new Upper Kirby and Cypress Station offices.
At March 31, 1996, the Company employed 326 full time equivalent employees, as
compared to 300 at March 31, 1995. The remaining increase in personnel costs
may be attributed to normal merit and cost-of-living pay increases, which
averaged less than 3%. The Company's ratio of total assets per full-time
equivalent employee as of March 31, 1996, increased slightly to $2,029,000, as
compared to $1,942,000 on the same date in 1995.
Net occupancy expenses for the period ended March 31, 1996, were $539,000, as
compared to $587,000 for the same period in 1995, a decrease of $48,000 or
8.2%. This decrease in occupancy expenses primarily reflects lower occupancy
expenses at the Westheimer office as a result of a new lease for that office
space. Management expects a modest increase to net occupancy expenses during
the remainder of 1996 to be caused by new depreciation expenses related to the
new Cypress, Upper Kirby, and Cypress Station offices.
The FDIC assessment for the three month period ended March 31, 1996, was
$1,000, as compared to $288,000 for the same period in 1995, a decrease of
$287,000 or 99.7%. The decrease is due to a reduction, effective in September
of 1995, but retroactive to the second quarter of 1995, in the FDIC premium on
deposits. This reduction resulted in a decrease of the Bank's FDIC assessment
rate from $0.23 to $.00 per $100 of deposits. Sterling now pays approximately
$500 per quarter to the FDIC for membership.
Equipment expense for the three month period ended March 31, 1996, was
$321,000, as compared to $533,000 for the same period in 1995, a decrease of
$212,000 or 39.8%. The decrease is reflective primarily of higher-than-normal
expenditures occurring in the first quarter of 1995 as the Company merged the
four banking offices of two acquired institutions into the Bank. The Company
expects that in future periods equipment expenses will rise due to planned
purchases
14
<PAGE> 15
relating to opening the new Upper Kirby and Cypress Station Offices and to
renovation work targeted for existing offices.
Data processing expense for the three month period ended March 31, 1996, was
$248,000, as compared to $215,000 for the same period in 1995, an increase of
$33,000 or 15.3%. The company expects ongoing increases in its data processing
expenses for the remainder of 1996 as it completes local and wide-area network
construction, the primary cause of the year-to-date increase over the prior
year, and also as it continues implementation of its long-term technology
strategy.
Supplies expense for the three month period ended March 31, 1996, was $116,000
as compared to $186,000 for the same period in 1995, a decrease of $70,000 or
37.6%. As with equipment expenses, the decrease in supplies expense is
reflective primarily of higher-than-normal expenditures occurring in the first
quarter of 1995 due to the Company's merger of the four banking offices of two
acquired institutions into the Bank. The Company expects that in future periods
supplies expenses will rise due to purchases relating to opening the new Upper
Kirby and Cypress Station Offices as well as to continued growth in loans and
bookkeeping operations.
Other noninterest expenses, including legal and professional fees, telephone
expenses, and costs associated with foreclosed and repossessed assets, for the
three month period ended March 31, 1996, were $1,147,000, as compared to
$953,000 in the prior year, an increase of $194,000 or 20.4%. The net increase
is due primarily to increases in the costs related to foreclosed assets,
advertising, and other losses, offset in part by reductions in electronic funds
transfer service costs and other charges.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
Convertible Preferred Stock Authorized and Issued
The Convertible Preferred Stock authorized by the Company's Board of Directors
and designated as Series A, Series B, and Series C has a liquidation preference
over the Company's Common Stock. The stock pays no dividend and is subject to
certain limitations and restrictions as to sale. The subscription period for
Series A shares ended October 20, 1995, with issuance of 49,500 shares to 29
investors. The subscription periods for the Series B and Series C shares had
not begun prior to March 31, 1996. Pursuant to a Confidential Private Placement
Memorandum of May 1, 1996, however, the Company has offered up to 150,000
shares of Series B shares for issue to qualified investors who are bona fide
Texas residents. The offering of Series B shares is scheduled to end on August
1, 1996, with certificates to be issued on that date or shortly thereafter.
Series C shares are expected to be issued beginning in late 1996.
Prior to conversion into shares of the Company's Common Stock, the Convertible
Preferred Shares will pay no dividend. Convertibility of the Series A, B, and
C shares is related to the performance of the Cypress, Upper Kirby, and Cypress
Station offices, respectively, and in any event the earliest possible
conversion date does not occur until two years after the initial office opening
date (September 1997 for Series A and later dates for the two other offices).
The ratios for the conversion of the Preferred Stock into Common Stock is
contingent upon the deposit performances of the respective offices, and ranges
from 1:1 (that is, one share of Common for each share of Preferred, the ratio
being adjusted to reflect stock splits occurring during the period in which the
Preferred Shares are outstanding) if deposit goals (as defined in the
Confidential Private Placement Memorandum) are not met, to 1.25:1 (similarly
adjusted for any splits or capital changes) if deposit goals are met
prior to two years of operation. Because of the size and structure of the
offering, management does not expect material dilution of the Company's per
share earnings regardless of which conversion ratio becomes applicable.
15
<PAGE> 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the regularly scheduled annual meeting of shareholders held on April 22,
1996, there were 6,477,805 shares present or represented by proxy, which was
equal to 81.965% of all voting shares outstanding. Votes were taken on the
following proposals:
Proposal #1 -- To elect Class I Directors to the Company's Board of
Directors to serve terms until the 1999 annual meeting of shareholders
or until their successors have been elected and qualified. All
nominees listed in the proxy statement were elected by the margins
noted:
<TABLE>
<CAPTION>
NOMINEE FOR WITHHOLD
------- --- --------
<S> <C> <C>
John H. Buck 6,471,535 6,270
Walter P. Gibbs, Jr. 6,469,935 7,870
Bruce J. Harper 6,471,535 6,270
Glenn H. Johnson 6,471,685 6,120
Russell I. Orr 6,471,535 6,270
Christian A. Rasch 6,443,259 34,456
</TABLE>
Proposal #2 -- To authorize an amendment to the Company's Articles of
Incorporation to increase the number of authorized shares of the
Company's Common Stock, $1.00 par value, from 10,000,000 to 20,000,000
shares.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C>
6,416,509 54,284 4,762
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the period ending March 31, 1996.
The required financial data schedule has been included as exhibit 27 of the
Form 10-Q filed electronically with the Security and Exchange Commission.
All other items prescribed by Part-II of Form 10-Q are inapplicable and
accordingly have been omitted.
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:
-------------------------------
Seth A. McMeans
Chief Financial Officer and Secretary
(Executive Officer and Principal
Financial Officer)
16
<PAGE> 17
EXHIBIT INDEX
27 -- Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 46,684
<INT-BEARING-DEPOSITS> 9,192
<FED-FUNDS-SOLD> 10,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,994
<INVESTMENTS-CARRYING> 155,989
<INVESTMENTS-MARKET> 155,600
<LOANS> 404,109
<ALLOWANCE> (6,256)
<TOTAL-ASSETS> 661,547
<DEPOSITS> 591,277
<SHORT-TERM> 9,494
<LIABILITIES-OTHER> 3,884
<LONG-TERM> 5,200
<COMMON> 7,903
0
49
<OTHER-SE> 43,740
<TOTAL-LIABILITIES-AND-EQUITY> 661,547
<INTEREST-LOAN> 9,820
<INTEREST-INVEST> 2,491
<INTEREST-OTHER> 124
<INTEREST-TOTAL> 12,435
<INTEREST-DEPOSIT> 3,709
<INTEREST-EXPENSE> 3,968
<INTEREST-INCOME-NET> 8,467
<LOAN-LOSSES> 513
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,328
<INCOME-PRETAX> 3,556
<INCOME-PRE-EXTRAORDINARY> 2,403
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,403
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
<YIELD-ACTUAL> 5.98
<LOANS-NON> 2,159
<LOANS-PAST> 698
<LOANS-TROUBLED> 90
<LOANS-PROBLEM> 2,147
<ALLOWANCE-OPEN> (5,907)
<CHARGE-OFFS> (277)
<RECOVERIES> 113
<ALLOWANCE-CLOSE> (6,256)
<ALLOWANCE-DOMESTIC> (6,256)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
