<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 September 30, 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 September 30, 1996:
Class of Stock Shares Outstanding
- ----------------------------- ------------------
Common Stock, Par Value $1.00 7,956,951
1
<PAGE> 2
STERLING BANCSHARES, INC.
INDEX TO FORM 10-Q
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PART I. - FINANCIAL INFORMATION Page No.
-------
<S> <C> <C>
Item 1. Financial Statements
The September 30, 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 September 30, 1996 and 1995 and at
December 31, 1995 and 1994......................................... 3
Consolidated Statements of Earnings for the Nine Months and Year-to-
Date Ended September 30, 1996 and 1995............................. 4
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1996 and 1995........................................ 5
Notes to Interim Consolidated Financial Statements for the Period
Ended September 30, 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.................................... 12
Results of Operations.............................................. 12
Supplemental Tables................................................ 17
PART II. - OTHER INFORMATION
Item 2. - Changes in Securities............................................. 20
Item 4. - Submission of Matters to a Vote of Security Holders............... 20
Item 6. - Exhibits and Reports on Form 8-K.................................. 21
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
STERLING BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995 1995 1994
---------- ---------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 53,864 $ 49,725 $ 60,075 $ 49,759
Federal funds sold 18,000 -- 5,000 10,013
Interest bearing deposits in financial institutions 13,785 139 1,135 401
Investment securities:
Available-for-sale 4,110 58,088 3,931 65,883
Held-to-maturity 141,662 114,650 163,581 126,074
---------- ---------- ---------- ----------
Total investment securities 145,772 172,738 167,512 191,957
Investment in unconsolidated subsidiary 2,167 -- -- --
Loans:
Loans held for sale 39,388 6,848 7,868 5,311
Loans held for investment 428,823 361,370 384,777 323,249
Total loans 468,211 368,218 392,645 328,560
Allowance for credit losses (6,616) (6,187) (5,907) (5,810)
---------- ---------- ---------- ----------
Total loans, net 461,595 362,031 386,738 322,750
Real estate acquired by foreclosure and certain other
real estate 2,016 1,718 1,716 1,706
Premises and equipment, net 19,255 14,423 14,823 12,941
Goodwill 1,921 2,248 2,166 2,493
Accrued interest receivable and other assets 8,161 6,483 8,184 6,634
---------- ---------- ---------- ----------
Total assets $ 726,536 $ 609,505 $ 647,349 $ 598,654
========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits:
Noninterest bearing $ 221,671 $ 175,300 $ 190,333 $ 178,372
Interest bearing 274,818 207,691 237,778 214,887
Certificates of deposit and other time deposits 161,991 148,462 146,613 145,076
---------- ---------- ---------- ---------
Total deposits 658,480 531,453 574,724 538,335
Federal funds purchased and securities sold
under agreements to repurchase 2,770 21,231 12,083 8,520
Accrued interest payable and other liabilities 4,508 3,618 5,051 4,126
Notes payable 4,400 6,000 5,600 7,200
Senior debentures -- 400 200 850
---------- ---------- ---------- ----------
Total liabilities 670,158 562,702 597,658 559,031
Shareholders' equity:
Preferred stock, $1 par value, 1 million shares auth. 49 -- 49 --
Common stock, $1 par value, 20 million shares auth. 7,957 7,854 7,859 7,818
Capital surplus 15,465 14,382 14,985 14,204
Retained earnings 33,054 25,002 27,005 19,829
Net unrealized gain (loss) on available- for-sale
securities -- (435) -- (2,228)
Net unrealized gain (loss) on held-to-maturity
securities transferred from available-for-sale (147) -- (207) --
----------- --------- ---------- ----------
Total shareholders' equity 56,378 46,803 49,691 39,623
---------- ---------- ---------- ----------
Total liabilities and shareholders' equity $ 726,536 $ 609,505 $ 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 Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
-------- -------- ------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees:
Taxable $ 11,131 $ 9,089 $ 31,201 $ 26,097
Tax-exempt 44 17 44 63
Federal funds sold 106 -- 416 36
Deposits in financial institutions 139 44 289 67
Investment securities:
Taxable 1,983 2,384 6,249 7,323
Tax-exempt 278 289 844 868
-------- -------- -------- --------
Total interest income 13,681 11,823 39,043 34,454
Interest expense:
Demand and savings deposits 2,137 1,359 6,010 3,917
Certificates and other time deposits 1,970 1,814 5,710 5,132
Federal funds purchased and repurchase agreements 42 419 267 1,185
Debentures and notes payable 87 145 308 473
-------- -------- -------- --------
Total interest expense 4,236 3,737 12,295 10,707
NET INTEREST INCOME 9,445 8,086 26,748 23,747
Provision for credit losses 532 186 1,565 703
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION 8,913 7,900 25,183 23,044
Noninterest income:
Customer service fees 1,267 1,275 3,793 3,769
Earnings from unconsolidated subsidiary 167 -- 167 --
Other 656 638 1,909 1,832
-------- -------- -------- --------
Total noninterest income 2,090 1,913 5,869 5,601
Noninterest expenses:
Salaries and employee benefits 4,193 3,903 12,216 11,277
Net occupancy expense 636 511 1,733 1,610
Losses (gains) and carrying costs of real estate
acquired by foreclosure 27 (2) 129 --
FDIC assessment 1 (35) 2 534
Equipment expense 397 633 1,078 1,710
Legal and professional fees 128 190 363 395
Data processing 244 101 700 471
Telephone 153 132 485 380
Supplies 136 90 388 452
Other 989 821 2,689 2,373
-------- -------- -------- --------
Total noninterest expenses 6,904 6,344 19,783 19,202
EARNINGS BEFORE INCOME TAXES 4,099 3,469 11,269 9,443
Provision for income taxes 1,308 1,129 3,544 3,001
-------- -------- -------- --------
NET EARNINGS $ 2,791 $ 2,340 $ 7,725 $ 6,442
======== ======== ======== ========
</TABLE>
See Notes to Interim Consolidated Financial Statements.
4
<PAGE> 5
STERLING BANCSHARES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1996 1995
--------------------
(dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 7,725 $ 6,442
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Amortization and accretion of premiums and discounts on investment securities, net 177 297
Equity in undistributed earnings of unconsolidated subsidiary (167) --
Provision for credit losses 1,565 703
(Gain) loss on sale of premises and equipment (29) --
(Gain) loss on sale of real estate acquired by foreclosure 1 (91)
Depreciation and amortization 1,813 1,856
Writedown of real estate acquired by foreclosure 34 146
Increase in accrued interest receivable and other assets (8) 376
Decrease in accrued interest payable and other liabilities (543) (1,656)
--------------------
Total adjustments 2,843 1,631
--------------------
Net cash provided by operating activities 10,568 8,073
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity and paydowns of held-to-maturity investment securities 21,833 11,942
Purchase of held-to-maturity investment securities -- (774)
Proceeds from maturity and paydowns of available-for-sale investment securities -- 13,278
Purchase of available-for-sale investment securities (179) (2,808)
Purchase of investment in unconsolidated subsidiary (2,000) --
Net increase in loans (76,491) (40,384)
Proceeds from sale of real estate acquired by foreclosure 417 333
Capital additions to real estate acquired by foreclosure (12) --
Net (increase) decrease in interest-bearing deposits in financial institutions (12,650) 262
Proceeds from sale of premises and equipment 130 --
Purchase of premises and equipment (6,772) (3,093)
--------------------
Net cash used in investing activities (75,724) (21,244)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposit accounts 83,756 (6,882)
Net (decrease) increase in repurchase agreements/funds purchased (9,313) 12,711
Repayments of notes payable (1,200) (1,200)
Proceeds from issuance of common stock 567 200
Dividends paid (1,665) (1,255)
Repayment of senior debentures (200) (450)
--------------------
Net cash provided by (used in) financing activities 71,945 3,124
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,789 (10,047)
CASH AND CASH EQUIVALENTS:
Beginning of period $ 65,075 $ 59,772
--------------------
End of period $ 71,864 $ 49,725
--------------------
</TABLE>
See Notes to Interim Consolidated Financial Statements.
5
<PAGE> 6
STERLING BANCSHARES, INC., AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 nine
month period ended September 30, 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 September 30, 1996, are as
follows:
<TABLE>
<CAPTION>
Three Months Nine Months Nine Months
Ended Ended Ended
September 30, September 30, September 30,
1996 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Common shares (See below) 7,953,620 7,919,552 7,839,047
Common share equivalents (See below) 226,544 250,902 231,483
============ ============ ============
8,180,164 8,170,454 8,070,530
============ ============ ============
Net earnings $ 2,790,692 $ 7,725,047 $ 6,441,920
Earnings per share (See below) $ 0.34 $ 0.95 $ 0.80
</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
Dividends of $0.07 per share for the first, second, and third quarters were
paid February 14, 1996, May 10, 1996, and August 8, 1996. The fourth quarter
dividend, also $0.07 per share, was declared October 21, 1996, to be paid on
November 11, 1996, to shareholders of record on November 1, 1996.
As of September 30, 1996, an additional 492,615 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 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 1996 the Company issued
11,250 shares as payment in full of outside director fees for director and
committee service during the period April 1996 through March 1997, inclusive.
The Company expects to continue to pay stock compensation to outside directors
during future periods.
Preferred Stock
The Company's Board of Directors has designated four series of Convertible
Preferred Stock. Each of the four series has been or will be issued in
conjunction with the opening of four new bank offices (see "Significant
Developments" on page 8 of this Form 10-Q). The conversion 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 have
been or will be offered pursuant to Private Placement Memoranda to qualified
investors who are bona fide Texas residents and who the Company believes will
be beneficial to the development and support of the new banking office. 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 nearby businesses. Accordingly, 49,500
shares of Series A Convertible Preferred Stock were sold to 29 investors in
connection with the opening of the Company's new Cypress office during a
subscription period that ended October 20, 1995. Similarly, 38,880 shares of
Series B Convertible Preferred Stock were sold to 22 investors in connection
with the opening of the Company's new Upper Kirby office during a subscription
period that ended October 1, 1996. On November 15, 1996, the Company intends
to issue two separate Private Placement Memoranda offering shares of Series C
and Series D Convertible Preferred Stock to investors in connection with the
opening of the Company's new Fountainview and Cypress Station offices,
respectively. Each of the Series C and Series D offerings will be limited to
150,000 shares and will be scheduled to terminate February 14, 1997, unless
extended pursuant to their stated terms.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SIGNIFICANT DEVELOPMENTS
Sterling Bank Begins Mortgage Company Relationship
Upon receipt of regulatory approval in September 1996, the Company's banking
subsidiary, Sterling Bank (the "Bank"), acquired 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.
SCMC has offices in most large Texas housing markets, including Houston,
Dallas-Fort Worth, Austin and El Paso, as well as an office in Phoenix,
Arizona.
The Bank has continued its Temporary Mortgage Loan Purchasing Program with
SCMC. Under the program, the Bank funds and purchases single family
residential loans originated by SCMC, which loans have been pre-sold to
qualified investors. Upon the sale of each loan to secondary market investors,
the Bank receives interest income for each mortgage loan for the period it is
temporarily owned by the Bank based upon the mortgage rate of each such loan,
in addition to repayment of principal. The Bank anticipates no material change
in its Temporary Mortgage Loan Purchasing Program.
Four New Banking Offices Opened or Under Development
The Bank has continued its planned expansion of banking services in the
greater Houston market, with two new offices having opened in the past year
and two more currently under development. The Cypress office, at 13386 Jones
Road in the Cypress area of northwest Houston, opened on September 25, 1995,
and has completed its first year of operations. The Upper Kirby office,
located at the intersection of Westheimer Road and Kirby Drive in the Upper
Kirby district of Houston, opened on August 12, 1996. As previously announced,
the Bank intends to open a new office in the Cypress Station area of north
Houston near the intersection of Interstate 45 and FM 1960. The Cypress
Station office is under construction; and completion is expected in late
December 1996 or in January 1997. A fourth new office will operate from a
location on Fountainview Drive one block north of Westheimer Road, west of
Houston's Galleria. The Fountainview office is expected to open in early
December 1996.
Convertible Preferred Stock Series A and Series B Offerings Concluded, two new
offerings planned
The Company's Board of Directors has designated four series of Convertible
Preferred Stock (designated as Series A, B, C, and D) for offer and sale to
persons the Company believes will be beneficial to the development and support
of the four new banking offices discussed above. In conjunction with the
opening of the new Upper Kirby office in August, the Series B shares were
offered in a Confidential Private Placement Memorandum to qualified investors
beginning May 1, 1996. The offering terminated October 1, 1996, with the
issuance of 38,880 Series B shares. Additional information regarding the
offerings 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 currently operates 12 community banking offices in the
greater Houston area, constitutes the Company's only subsidiary.
Total Assets
The total consolidated assets of the Company as of September 30, 1996, were
$726.5 million, as compared to $609.5 million on the same date in 1995, an
increase of $117.0 million or 19.2%.
8
<PAGE> 9
Federal Funds Sold and Federal Funds Purchased
The Bank had federal funds sold as of September 30, 1996, in the amount of
$18.0 million. On the same date in 1995, the Bank had no federal funds sold.
The Bank had no federal funds purchased at September 30, 1996, as compared to
$8.0 million at September 30, 1995. The net federal funds position shifted by
$26.0 million between September 30, 1995 and 1996, primarily as a result of
the increase in deposits realized over this time period.
Loans
As of September 30, 1996, loans (excluding student and residential mortgage
loans held for resale in the amounts of $39.4 million in 1996 and $6.8 million
in 1995) were $428.8 million, as compared to $361.4 million on the same date
in 1995, an increase of $67.4 million or 18.6% due primarily to continued
strong loan demand. When compared to total loans of $384.8 million on December
31, 1995, the September 30, 1996, loan balance represents a year-to-date $44.0
million increase in internal loan production, net of payoffs, or an annualized
percentage increase of 15.2%. At September 30, 1996, loans as a percentage of
assets and deposits were 59.0% and 65.1%, respectively. The following table
summarizes the Bank's loan portfolio by type of loan as of September 30, 1996
(in thousands):
<TABLE>
<CAPTION>
September 30, Percent
1996 of
Balance Total
-------- ------
<S> <C> <C>
Commercial, financial and industrial 160,884 37.52%
Real estate - commercial 110,377 25.74%
Real estate - residential mortgage 47,499 11.08%
Real estate - construction 38,538 8.98%
Installment and other 74,786 17.44%
Less unearned discount (3,261) (0.76)%
======== ======
Total loans 428,823 100.00%
======== ======
</TABLE>
Investment Securities
The Bank's investment portfolio as of September 30, 1996, totaled $145.8
million, as compared to $172.7 million on the same date in 1995. The decrease
of $26.9 million or 15.6% is a result of the Bank's reinvestment of cash into
other uses. Funds provided by the reduction in investment securities were used
primarily to fund the Bank's strong loan growth. As required by generally
accepted accounting principles, the Bank has designated its total securities
portfolio into (a) Held-to-maturity and (b) Available-for-sale. As of
September 30, 1996, the "Held-to-maturity" ("HTM") portfolio totaled $141.7
million and included substantially all of the investment securities maintained
by the Bank for investment purposes. The Available-for-sale ("AFS") portfolio
totaled $4.1 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 September 30, 1996. The Bank tracks
but does not record market changes on its HTM portfolio. At September 30,
1996, the market value of the HTM portfolio was $139.9 million.
The Company analyzes its interest rate risk position by use of a simulation
model. As of September 30, 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 1.36%. Correspondingly, in the
event of a 200 basis point decrease in market interest rates, the Company's
net interest income would decrease by 1.46%. 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 interest bearing liabilities should provide
reasonable protection from 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
9
<PAGE> 10
Assets (RSA) to Rate Sensitive Liabilities (RSL) indicates a positive GAP of
1.0686 through the first year and a positive 1.1001 through three years
cumulative.
Allowance for Credit Losses
Following is a summary of the changes in the allowance for credit losses for
the nine months ended September 30, 1996, and the relationship of the
allowance to total loans at September 30, 1996, and December 31,1995 (in
thousands):
Allowance for credit losses, December 31, 1995 $ 5,907
Chargeoffs (1,165)
Recoveries 309
Provision for credit losses 1,565
-------
Allowance for credit losses, September 30, 1996 $ 6,616
=======
September 30, December 31,
1996 1995
------------ -----------
Loans outstanding at period-end $ 428,823 $ 384,777
Allowance for credit losses $ 6,616 $ 5,907
Allowance as a percent of period-end loans 1.54% 1.54%
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. 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
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. Thirteen properties
make up the $2,016,000 of other real estate owned ("ORE") at September 30,
1996, the largest of which is carried at $683,000 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. Because the Bank
recently opted to acquire a second, preferable, tract nearby, the first tract
has been reclassified as ORE and is being marketed for sale. 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
nonperforming, 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 nonperforming loans. As of
September 30, 1996, the Bank has no material foreign outstandings or loan
concentrations. The Bank, however, continues to monitor the potential risk of
foreign borrowers and concentrations of credit.
10
<PAGE> 11
The following schedule summarizes consolidated nonperforming loans,
nonperforming assets and potential problem loans at year-end 1995 and at
September 30, 1996.
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------- -------
(in thousands)
<S> <C> <C>
Nonaccrual loans $ 2,138 $ 2,858
Restructured loans 58 103
Accruing loans past due 90 days or more 643 446
------- -------
Total nonperforming loans 2,839 3,407
ORE and other foreclosed assets 2,202 1,745
------- -------
Total nonperforming assets $ 5,041 $ 5,152
======= =======
Total nonperforming loans as a % of gross loans 0.66% 0.89%
Total nonperforming assets as a % of total assets 0.69% 0.80%
Potential problem loans $11,432 $ 9,101
======= =======
</TABLE>
Premises and Equipment
The Bank's premises and equipment, net of depreciation, as of September 30,
1996, were $19.3 million, as compared to $14.4 million on the same date in
1995, an increase of $4.9 million or 34.0%. This increase is due primarily to
the purchase of land for the relocation of the Champions office and the new
Cypress Station office. The Bank also completed the opening of the Cypress and
Upper Kirby offices during 1996. Other additions include the renovation of the
Bank's West office during 1995 and upgrades to the electronic technology and
telephone systems in all offices to handle increased volume. Additional
increases in premises and equipment are expected during the last quarter of
1996 as the Bank completes facilities for the de novo banking offices
discussed elsewhere in this Form 10-Q, completes a renovation of the Guardian
office and a relocation of the Champions office, and continues to upgrade its
computer and technology resources. Additional expenditures are expected during
1997 with the planned replacement of the Bank's core technology system and
installation of new teller and document imaging technology.
Deposits
Total deposits as of September 30, 1996, were $658.5 million, as compared to
$531.5 million on the same date in 1995, an increase of $127.0 million or
23.9%, reflecting strong growth in the Bank's deposit base. When compared to
total deposits of $574.7 million on December 31, 1995, the September 30, 1996,
amount represents a year-to-date increase of $83.8 million, as the strong
deposit growth experienced in the last months of 1995 continued through the
first three quarters of 1996.
Noninterest bearing demand deposits at September 30, 1996, were $221.7
million, as compared to $175.3 million at September 30, 1995, an increase of
$46.4 million or 26.5%. When compared to noninterest bearing demand deposits
of $190.3 million on December 31, 1995, the September 30 amount represents a
year-to-date increase of $31.4 million, consistent with the overall growth in
deposits. The percentage of noninterest bearing deposits to total deposits as
of September 30, 1996, continued strong at 33.7%.
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 7.6875% until it resets in the first quarter
of 1997. 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 through June 30, 1999. As of September 30, 1996,
the Company had made nine regularly scheduled principal payments totaling $3.6
million, and the balance remaining on the note was $4.4 million.
11
<PAGE> 12
Senior Debentures
The Company's outstanding senior debentures were fully redeemed as of
September 30, 1996, as compared to an existing balance of $400,000 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 September 30,1996: (in thousands)
<TABLE>
<S> <C>
Equity, December 31, 1995 $ 49,691
Net earnings 7,725
Sale of common stock 567
Cash dividends paid (1,665)
Net change in net unrealized loss on HTM securities
transferred from AFS 60
--------
Equity, September 30, 1996 $ 56,378
========
</TABLE>
The Company's risk based capital ratios remain above the levels designated as
"Well Capitalized" on September 30, 1996, with Tier-1 Capital, Total
Risk-Based Capital, and Leverage Capital Ratios of 10.29%, 11.66%, and 8.00%,
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 FHLB, and reverse repurchase lines with
other commercial banks and the FHLB.
RESULTS OF OPERATIONS
Net Income
Net income for the nine month period ended September 30, 1996, was $7.7
million as compared to $6.4 million for the same period in 1995, an increase
of $1.3 million or 20.3%. The Company attributes the increase to its
maintenance of a strong net interest margin and to its containment of
operating expense increases despite the ongoing growth of the Bank. Thus,
primarily as a result of the Bank's strong deposit and loan growth, average
earning assets for the nine months ending September 30, 1996, were $603.8
million, an increase of $73.2 million or 13.8% over average earning assets of
$530.6 million at September 30, 1995. In addition, operating efficiencies
realized during the first three quarters of 1996, combined with the reduction
of the Federal Deposit Insurance Corporation (the "FDIC") assessment,
contributed to the increase in net income.
12
<PAGE> 13
Net Interest Income
Net interest income for the nine month period ended September 30, 1996, was
$26.7 million, as compared to $23.7 million for the same period in 1995, an
increase of $3.0 million or 12.6%. As discussed above, the Company attributes
the growth in net interest income primarily to increases in average earning
assets, enhanced by the maintenance of a strong net interest margin. The yield
on average earning assets for the nine month period ended September 30, 1996,
was 8.64%, as compared to 8.68% for the same period in 1995, a decrease of 4
basis points. This decrease is due primarily to an increase in total loan
volume coupled with a 27 basis point decrease in loan yield, combined with a
change in the investment portfolio mix from longer term investment securities
to lower yielding, more liquid federal funds sold and interest bearing
deposits. At September 30, 1996, total loans represented 71.1% of total
interest earning assets, compared to 65.9% for the same period in 1995. The
cost of interest bearing liabilities rose 5 basis points from 3.77% to 3.82%
for the same period. The Company's 6.02% net interest margin for the first
nine months of 1996 represents a decrease of 8 basis points from the 6.10% 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.
13
<PAGE> 14
The following schedule gives a comparative analysis of the Company's daily
average interest-earning accounts and interest-bearing accounts for the
nine-month periods ended September 30, 1996 and 1995:
STERLING BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEET SCHEDULE
NET INTEREST INCOME AND NET INTEREST MARGIN
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
(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 institutions $ 7,473 $ 289 5.17% $ 1,527 $ 67 5.87%
Federal funds sold 10,264 416 5.41% 1,238 36 3.89%
Investment securities (taxable) 134,567 6,249 6.20% 154,929 7,323 6.32%
Investment securities (tax-exempt) 22,268 844 5.06% 23,044 868 5.04%
Loans, net of unearned discount (taxable) 428,520 31,201 9.73% 348,815 26,097 10.00%
Loans, net of unearned discount (tax-exempt) 750 44 7.84% 1,059 63 7.95%
--------- --------- ---- --------- --------- ----
Total Interest Earning Assets $ 603,842 $ 39,043 8.64% $ 530,612 $ 34,454 8.68%
Noninterest Earning Assets:
Cash and due from banks $ 52,396 $ 41,259
Premises and equipment, net 17,581 13,871
Other assets 10,668 10,915
Allowance for credit losses (6,239) (6,059)
--------- ---------
Total Noninterest Earning Assets $ 74,406 $ 59,986
Total Assets $ 678,248 $ 590,598
========= =========
Interest Bearing Liabilities:
Demand and savings deposits $ 261,795 $ 6,010 3.07% $ 200,439 $ 3,917 2.61%
Certificates and other time deposits 155,650 5,710 4.90% 144,800 5,132 4.74%
Other borrowings 7,763 267 4.59% 26,774 1,185 5.92%
Debentures and notes payable 5,093 308 8.08% 7,456 473 8.48%
--------- --------- ---- --------- --------- ----
Total Interest Bearing Liabilities $ 430,301 $ 12,295 3.82% $ 379,469 $ 10,707 3.77%
Noninterest Bearing Liabilities:
Demand deposits $ 190,990 $ 164,785
Other liabilities 3,319 3,277
Shareholders' equity 53,638 43,067
--------- ---------
Total Noninterest Bearing Liabilities $ 247,947 $ 211,129
Total Liabilities and Shareholders' Equity $ 678,248 $ 590,598
========= =========
Net Interest Income & Margin $ 26,748 5.92% $ 23,747 5.98%
========= ==== ========= ====
Net Interest Income & Margin (tax equivalent) $ 27,212 6.02% $ 24,227 6.10%
========= ==== ========= ====
</TABLE>
14
<PAGE> 15
Provision for Credit Losses
Provision for credit losses for the first nine months of 1996 was $1,565,000,
as compared to $703,000 for the same period in 1995, an increase of $862,000
or 122.6%. After net chargeoffs of $856,000 and provisions for the first nine
months of 1996, the Bank's allowance for credit losses increased by $709,000
from $5,907,000 on December 31, 1995, to $6,616,000 on September 30, 1996.
Please refer to the earlier discussion of 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 remained relatively unchanged for the nine month
period ended September 30, 1996, at $5.9 million, as compared to $5.6 million
for the same period in 1995, an increase of $0.3 million or 5.4%.
Noninterest Expense
Noninterest expenses increased $0.6 million, or 3.1%, to $19.8 million for the
first nine months of 1996 as compared to $19.2 for the same period in 1995.
Year-to-year improvements in equipment, FDIC assessment, and supplies expenses
were offset by higher costs for salaries and other expenses.
Salaries and employee benefits for the nine month period ended September 30,
1996, were $12.2 million, as compared to $11.3 million for the same period in
1995, an increase of $900,000 or 8.0%. 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 $400,000 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, Upper Kirby, and Cypress Station offices. At September 30, 1996, the
Company employed 349 full time equivalent employees, as compared to 319 at
September 30, 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 September 30, 1996, increased to $2,082,000 from $1,911,000 on
the same date in 1995.
Net occupancy expenses for the period ended September 30, 1996, were $1.7
million, relatively unchanged from $1.6 million for the same period in 1995.
Rental reductions at the Westheimer office offset renovation and
reconstruction expenses incurred at the Westheimer and Gulf Freeway offices in
addition to expenses related to the new Cypress and Upper Kirby offices.
Management expects increases in net occupancy expenses during the remainder of
1996 as additional expenses are recognized due to the new Upper Kirby office
and renovation of the Guardian office.
The FDIC assessment for the nine month period ended September 30, 1996, was
$2,000, as compared to $534,000 for the same period in 1995, a decrease of
$532,000 or 99.6%. 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 nine month period ended September 30, 1996, was
$1,078,000, as compared to $1,710,000 for the same period in 1995, a decrease
of $632,000 or 37.0%. The decrease is reflective primarily of
higher-than-normal expenditures occurring in the first nine months 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 recent opening of the Upper Kirby office, the renovation of the
Guardian office, and construction of new banking offices at Champions and
Cypress Station.
15
<PAGE> 16
Data processing expense for the nine month period ended September 30, 1996,
was $700,000, as compared to $471,000 for the same period in 1995, an increase
of $229,000 or 48.6%. The increase is due to the completion of the Bank's
local and wide-area network during 1996. The Bank expects ongoing increases in
its data processing expenses for the remainder of the year as it continues to
implement its long-term technology strategy.
Net carrying costs of other real estate were $129,000 at September 30, 1996,
as compared to $0 for the same period in 1995. In 1995, carrying costs were
offset by gains recognized on sales of other real estate. During 1996, the
increase in other real estate combined with a decrease in gains on sale of such
properties has resulted in a net increase in costs to carry other real estate.
All other noninterest expenses, including legal and professional fees,
supplies, telephone, and other expenses were $3.9 million for the nine month
period ended September 30, 1996, as compared to $3.6 million for the same
period in 1995, an increase of $300,000 or 8.3%. Increases in telephone and
other expenses were partly offset by a $96,000 decrease in legal and
professional fees and supplies expense. The decrease in these costs related to
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 increase in telephone expense of $105,000 is due to new
office expansion and upgrade of the Bank's telecommunications equipment. The
increase in other expenses is attributed to increases in marketing and
business development and general operating costs. The Company expects that in
future periods other noninterest expenses will rise due to planned new office
expansion and growth in central operations to accommodate the Bank's growing
volume.
16
<PAGE> 17
SUPPLEMENTAL TABLES
STERLING BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL HIGHLIGHTS
(UNAUDITED)
(in thousands except for per share data and ratios)
<TABLE>
<CAPTION>
3rd Qtr 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr
1996 1996 1996 1995 1995
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Common Stock Data (A):
Earnings per common share: primary $ 0.34 $ 0.31 $ 0.30 $ 0.30 $ 0.29
Earnings per common share: fully diluted 0.34 0.31 0.30 0.30 0.29
Dividends paid per common share 0.07 0.07 0.07 0.05 0.05
Book value per common share [EOP] (no dilution) 7.09 6.80 6.54 6.33 5.96
Tangible book value [EOP] (no dilution) 6.84 6.55 6.28 6.05 5.67
Market price [EOP]:
High 15.25 15.50 14.00 12.17 12.00
Low 13.75 13.31 11.25 11.00 8.67
Close 14.88 14.00 14.00 11.67 11.50
Market price capitalization (mktprice x #shrs) [EOP] 118,360 111,301 110,642 91,688 90,321
Market price / book value [EOP] 209.80% 205.88% 214.07% 184.40% 192.95%
Common share dividend 556 554 554 419 419
Dividend payout ratio (DPCS / EPCS) 20.59% 22.58% 23.33% 17.78% 18.60%
Dividend yield (DPCS / mktprice) [EOP] 1.88% 2.00% 2.00% 1.83% 1.86%
Price / earnings ratio (mktprice / 4 qtrs. earnings) 11.90 11.70 12.10 10.54 10.85
Common shares [EOP] 7,957 7,950 7,903 7,859 7,854
Common shares: primary (average) 8,167 8,163 8,121 8,086 8,042
Common shares: fully diluted (average) 8,180 8,163 8,144 8,086 8,079
Preferred shares: [EOP] 49 49 49 49 --
Income Statement:
Interest income $ 13,681 $ 12,927 $ 12,435 $ 12,280 $ 11,822
Interest expense 4,236 4,091 3,968 3,850 3,737
--------------------------------------------------------
Net interest income 9,445 8,836 8,467 8,430 8,086
Provision for loan losses 532 520 513 216 186
Noninterest income 2,090 1,849 1,930 1,935 1,913
Noninterest expense 6,904 6,551 6,328 6,579 6,344
Provision for income taxes 1,308 1,083 1,153 1,146 1,129
--------------------------------------------------------
Net income $ 2,791 $ 2,531 $ 2,403 $ 2,424 $ 2,340
========================================================
</TABLE>
(A) Figures have been restated where appropriate to reflect a 3-for-2
stock split in the form of a 50% stock dividend paid in February 1996.
17
<PAGE> 18
STERLING BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL HIGHLIGHTS, CONTINUED
(UNAUDITED)
(in thousands except for per share data and ratios)
<TABLE>
<CAPTION>
3rd Qtr 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr
1996 1996 1996 1995 1995
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet - End of Period:
Federal Funds Sold 18,000 10,000 10,000 5,000 --
Interest bearing deposits in other financial institutions 13,785 1,240 9,192 1,135 139
Investment securities available-for-sale 4,110 4,552 3,994 3,931 58,088
Investment securities held-to-maturity 141,662 148,657 155,989 163,581 114,650
Investment in unconsolidated subsidiary 2,167 -- -- -- --
Loans held for sale 39,388 34,419 9,680 7,868 6,848
Loans, net of unearned income 428,823 414,015 404,109 384,777 361,370
--------------------------------------------------
Total interest-earning assets 647,935 612,883 592,964 566,292 541,095
Allowance for loan losses (6,616) (6,334) (6,256) (5,907) (6,187)
Cash and due from banks 53,864 55,652 46,684 60,075 49,725
Other real estate 2,016 2,028 1,833 1,716 1,718
Other assets 27,416 24,645 24,237 23,007 20,906
Intangible assets 1,921 2,003 2,085 2,166 2,248
--------------------------------------------------
Total assets 726,536 690,877 661,547 647,349 609,505
Noninterest-bearing deposits 221,671 203,908 184,875 190,333 175,300
Interest-bearing deposits 436,809 421,323 406,402 384,391 356,153
--------------------------------------------------
Total deposits 658,480 625,231 591,277 574,724 531,453
Federal funds purchased and securities sold under
agreements to repurchase 2,770 3,689 9,494 12,083 21,231
Note payable and senior debentures 4,400 4,800 5,200 5,800 6,400
--------------------------------------------------
Total other interest-bearing liabilities 7,170 8,489 14,694 17,883 27,631
Other liabilities 4,508 3,070 3,884 5,051 3,618
Total shareholders' equity 56,378 54,087 51,692 49,691 46,803
Problem Assets & Potential Problem Loans [EOP]
Nonaccrual loans 2,138 2,052 2,159 2,858 2,482
Restructured loans 58 77 90 103 129
Accruing loans past due 90 days or more 643 293 698 446 458
--------------------------------------------------
Total nonperforming loans 2,839 2,422 2,947 3,407 3,069
ORE & other repossessed assets 2,202 2,131 1,899 1,745 1,824
--------------------------------------------------
Total nonperforming assets 5,041 4,553 4,846 5,152 4,893
Potential problem loans 11,432 11,004 10,643 9,101 N/A
Nonperforming loans as a % of total loans 0.66% 0.59% 0.73% 0.89% 0.85%
Nonperforming assets as a % of total assets 0.69% 0.66% 0.73% 0.80% 0.80%
Reconciliation of the Allowance for Credit Losses:
Allowance for credit losses, beginning of period 6,334 6,256 5,907 6,187 6,236
Chargeoffs (306) (582) (277) (572) (294)
Recoveries 56 140 113 76 59
Provision for credit losses 532 520 513 216 186
--------------------------------------------------
Allowance for credit losses, end of period 6,616 6,334 6,256 5,907 6,187
==================================================
Reserve for credit losses [EOP] /:
Total loans 1.54 1.53 1.55 1.54 1.71
Nonaccrual loans 309.45 308.67 289.76 206.68 249.27
Nonaccrual and accruing loans past due 90 days 237.90 270.11 218.97 178.78 210.44
Selected Ratios:
Overhead ratio 59.82% 61.31% 60.86% 63.47% 63.45%
Stockholders' equity / total assets [EOP] 7.76% 7.83% 7.81% 7.68% 7.68%
Loans / deposits [EOP] 65.12% 66.22% 68.35% 66.95% 68.00%
</TABLE>
18
<PAGE> 19
STERLING BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL HIGHLIGHTS, CONTINUED
(UNAUDITED)
(in thousands except for per share data and ratios)
<TABLE>
<CAPTION>
YTD YTD YTD YTD YTD
3rd Qtr 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr
1996 1996 1996 1995 1995
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet and Interest Margin [YTD AVG]
Federal Funds Sold 10,264 11,500 7,445 1,857 1,238
Interest bearing deposits in other financial institutions 7,473 5,941 1,785 2,297 1,527
Investment securities (taxable) 134,567 137,935 141,891 153,005 154,929
Investment securities (tax exempt) 22,268 22,341 22,450 22,930 23,044
Loans, net of unearned income (taxable) 428,520 412,807 404,637 356,665 348,815
Loans, net of unearned income (tax exempt) 750 -- -- 795 1,059
---------------------------------------------------
Total interest-earning assets 603,842 590,524 578,208 537,549 530,612
Cash and due from banks 52,396 51,214 49,946 42,575 41,259
Bank premises and equipment, net 17,581 17,168 16,446 14,116 13,871
Other assets 10,668 10,384 10,436 10,281 10,915
Allowance for loan losses (6,239) (6,124) (5,986) (6,080) (6,059)
---------------------------------------------------
Total assets 678,248 663,166 649,050 598,441 590,598
===================================================
Noninterest-bearing deposits 190,990 183,331 176,967 168,987 164,785
Interest-bearing deposits 417,445 409,431 401,660 351,374 345,239
---------------------------------------------------
Total deposits 608,435 592,762 578,627 520,361 510,024
Federal funds purchased and securities sold under
agreements to repurchase 7,763 9,851 10,811 23,518 26,774
Note payable and senior debentures 5,093 5,306 5,532 6,990 7,456
---------------------------------------------------
Total interest-bearing liabilities 430,301 424,588 418,003 381,882 379,469
Other liabilities 3,319 3,137 3,075 2,955 3,277
Total shareholders' equity 53,638 52,110 51,005 44,617 43,067
---------------------------------------------------
Total liabilities and shareholders' equity 678,248 663,166 649,050 598,441 590,598
===================================================
Yield on interest earning assets 8.64% 8.64% 8.63% 8.69% 8.68%
Yield on interest bearing liabilities 3.82% 3.82% 3.81% 3.81% 3.77%
Net interest margin 5.92% 5.89% 5.87% 5.99% 5.98%
Net interest margin (tax equivalent) 6.02% 5.99% 5.98% 6.10% 6.10%
Selected Ratios:
Return on average assets [YTD] 1.52% 1.50% 1.49% 1.48% 1.46%
Return on average stockholders' equity [YTD] 19.24% 19.04% 18.95% 19.87% 20.00%
Stockholders' equity / total assets [YTD AVG] 7.91% 7.86% 7.86% 7.46% 7.29%
</TABLE>
19
<PAGE> 20
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
Convertible Preferred Stock Authorized and Issued
The Convertible Preferred Stock designated as Series A, Series B, Series C,
and Series D has a liquidation preference over the Company's Common Stock. The
stock 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. Similarly, the subscription period for
Series B shares ended October 1, 1996, with issuance of 38,880 shares to 22
investors. The Company intends to distribute two Confidential Private
Placement Memoranda on November 15, 1996, offering up to 150,000 Series C
shares and up to 150,000 Series D shares to qualified investors who are bona
fide Texas residents. The offering of Series C and Series D shares is
presently expected to end on February 14, 1997, although either offering will
be extendible for a period of up to 60 days. Certificates are expected to be
issued on the termination date or shortly thereafter.
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, C,
and D shares is related to the performance of the Cypress, Upper Kirby,
Fountainview, 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, August 1998 for
Series B, and later dates for the two other offices). The ratios for the
conversion of the Preferred Stock into Common Stock are contingent upon the
deposit performances of the respective offices, and range 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 within two years of
opening of the new office. Because of the size and structure of the offering,
management does not expect material dilution of the Company's per share
earnings regardless of the applicable conversion ratio.
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, 1996.
20
<PAGE> 21
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 6 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.
b) Reports of Form 8-K
No reports on Form 8-K were filed during the period ending September 30,
1996.
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/ Seth A. McMeans
---------------------------
Seth A. McMeans
(Executive Officer and Principal
Financial Officer)
21
<PAGE> 22
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
Exhibit 11. Computation of Earnings Per Share
Included as Note (2) to Interim Consolidated Financial
Statements on page 6 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.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 53,864
<INT-BEARING-DEPOSITS> 13,785
<FED-FUNDS-SOLD> 18,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,110
<INVESTMENTS-CARRYING> 141,662
<INVESTMENTS-MARKET> 143,961
<LOANS> 468,211
<ALLOWANCE> (6,616)
<TOTAL-ASSETS> 726,536
<DEPOSITS> 658,480
<SHORT-TERM> 2,770
<LIABILITIES-OTHER> 4,508
<LONG-TERM> 4,400
0
49
<COMMON> 7,957
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 726,536
<INTEREST-LOAN> 31,245
<INTEREST-INVEST> 7,093
<INTEREST-OTHER> 705
<INTEREST-TOTAL> 39,043
<INTEREST-DEPOSIT> 11,720
<INTEREST-EXPENSE> 575
<INTEREST-INCOME-NET> 26,748
<LOAN-LOSSES> 1,565
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 19,783
<INCOME-PRETAX> 11,269
<INCOME-PRE-EXTRAORDINARY> 7,725
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,725
<EPS-PRIMARY> 0.95
<EPS-DILUTED> 0.95
<YIELD-ACTUAL> 6.02
<LOANS-NON> 2,138
<LOANS-PAST> 643
<LOANS-TROUBLED> 58
<LOANS-PROBLEM> 11,432
<ALLOWANCE-OPEN> (5,907)
<CHARGE-OFFS> (1,165)
<RECOVERIES> 309
<ALLOWANCE-CLOSE> 6,616
<ALLOWANCE-DOMESTIC> 4,934
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,682
</TABLE>
