<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, 1997
[ ] Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number: 0-20750
STERLING BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Texas 74-2175590
------------------------- ---------------------------------
(State of Incorporation) (IRS Employer ID Number)
</TABLE>
15000 Northwest Freeway, Suite 200
Houston, Texas 77040
(Address of principal executive office)
713-466-8300
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 ("Act") during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days
Yes [X] No [ ]
The number of shares outstanding of each class of the registrant's capital
stock as of September 30, 1997:
<TABLE>
<S> <C>
Class of Stock Shares Outstanding
- ------------------------------------ ------------------
Common Stock, Par Value $1.00 13,743,308
</TABLE>
<PAGE> 2
PART 1. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
STERLING BLANDISHERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30,
1997 1996
----------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 69,630 $ 57,951
Federal funds sold 16,384 27,593
Interest bearing deposits in financial institutions 488 13,785
Investment securities:
Available-for-sale 81,432 57,179
Held-to-maturity 202,199 141,662
----------------------------
Total investment securities 283,631 198,841
Equity in unconsolidated subsidiary 2,365 2,167
Loans:
Loans held for sale 50,371 39,388
Loans held for investment 618,595 483,350
Total loans ----------------------------
Allowance for credit losses 668,966 522,738
(7,363) (7,127)
Total loans, net ----------------------------
Real estate acquired by foreclosure and certain other real estate 661,603 515,611
Premises and equipment, net 1,254 2,016
Goodwill 29,269 22,058
Accrued interest receivable and other assets 1,598 1,921
15,011 9,925
Total assets ----------------------------
1,081,233 851,868
============================
LIABILITIES AND SHAREHOLDERS' EQUITY $ 306,534 $246,957
Demand deposits: 430,925 346,737
217,033 181,452
Interest-bearing ----------------------------
Certificates of deposit and other time deposits 954,492 775,146
Total deposits
Federal funds purchased and securities sold under 14,585 2,770
agreements to repurchase 6,384 5,133
Accrued interest payable and other liabilities - 4,400
Notes payable and senior debentures ----------------------------
Total liabilities 975,461 787,449
Company-obligated mandatorily redeemable trust preferred securities
of subsidiary trust 28,750 -
Shareholders' equity:
Preferred stock, $1 par value, 1 million shares authorized 177 49
Common stock, $1 par value, 30 million shares authorized 13,743 13,622
Capital surplus 25,805 22,909
Retained earnings 37,488 28,234
Net unrealized losses available-for-sale securities, net of tax (191) (395)
Total shareholders' equity ----------------------------
Total liabilities and shareholders' equity 77,022 64,419
----------------------------
$1,081,233 $851,868
============================
</TABLE>
See Notes to Interim Consolidated Financial Statements.
2
<PAGE> 3
STERLING BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
--------------------- -----------------------
(Unaudited)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees: $16,059 $12,584 $44,595 $35,189
Federal funds sold 116 289 1,261 879
Deposits in financial institutions 368 146 549 298
Investment securities:
Taxable 4,100 2,667 10,318 8,157
Tax-exempt 275 278 829 844
-----------------------------------------------------
Total interest income 20,918 15,964 57,552 45,367
Interest expense:
Demand and savings deposits 3,532 2,707 9,782 7,534
Certificates and other time deposits 2,674 2,211 7,611 6,434
Federal funds purchased and repurchase
agreements 448 42 621 267
Senior debentures and notes payable -- 87 147 308
-----------------------------------------------------
Total interest expense 6,654 5,047 18,161 14,543
NET INTEREST INCOME 14,264 10,917 39,391 30,824
Provision for credit losses 695 587 2,095 1,718
-----------------------------------------------------
NET INTEREST INCOME AFTER PROVISION 13,569 10,330 37,296 29,106
Noninterest income:
Customer service fees 1,680 1,377 4,697 4,104
Earnings of unconsolidated subsidiary 144 167 199 167
Other 898 683 2,280 2,033
-----------------------------------------------------
Total noninterest income 2,722 2,227 7,176 6,304
Noninterest expenses:
Salaries and employee benefits 5,657 4,655 16,319 13,627
Net occupancy expense 863 691 2,352 1,890
Equipment expense 513 505 1,543 1,359
Losses and carrying costs of real estate
acquired by foreclosure 153 27 201 129
Data processing 565 277 1,584 803
Telephone 221 168 647 521
Supplies 327 164 649 476
Legal and professional fees 689 365 1,187 951
Minority interest expense 674 - 852 -
Other 1,544 1,158 4,907 3,158
-----------------------------------------------------
Total noninterest expenses 11,206 8,010 30,241 22,914
EARNINGS BEFORE INCOME TAXES 5,085 4,547 14,231 12,496
Provision for income taxes 1,675 1,448 4,703 3,918
-----------------------------------------------------
NET EARNINGS $ 3,410 $ 3,099 $ 9,528 $ 8,578
=====================================================
</TABLE>
See Notes to Interim Consolidated Financial Statements.
3
<PAGE> 4
STERLING BANCSHARES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1997 1996
-------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 9,528 $ 8,578
Adjustments to reconcile net earnings to net cash provided by operating activities
Amortization and accretion of premiums and discounts on investment securities, net 99 340
Equity in undistributed earnings of unconsolidated subsidiary (199) (167)
Gain on sale of available-for-sale investment securities - 1,718
Provision for credit losses 2,095 (42)
Loss (gain) on sale of premises and equipment 115 (29)
Writedown of real estate acquired by foreclosure 6 34
Loss on sale of real estate acquired by foreclosure and repossessed assets 49 1
Depreciation and amortization 2,413 2,007
Mortgage loans originated for sale (355,661) (78,858)
Proceeds from sale of mortgage loans originated for sale 346,188 47,552
(Decrease) increase in accrued interest receivable and other assets (3,491) 651
Decrease in accrued interest payable and other liabilities (847) (552)
--------------------------
Total adjustments (9,233) (27,345)
--------------------------
Net cash (used in ) provided by operating activities 295 (18,767)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity and paydowns of "held-to-maturity'' investment securities 21,247 21,833
Purchases of held-to-maturity investment securities (75,415) -
Proceeds from sales of available-for-sale investment securities _ 13,303
Proceeds from maturity & paydowns of "available for sale" investment securities 19,257 16,800
Purchases of available-for-sale investment securities (43,223) (34,958)
Purchase of investment in unconsolidated subsidiary - (2,000)
Redemption of preferred stock of unconsolidated subsidiary 150 -
Net increase in loans (106,704) (52,427)
Proceeds from sale of real estate acquired by foreclosure 514 417
Capital additions to real estate acquired by foreclosure - (12)
Net increase in interest-bearing deposits in financial institutions (466) (12.555)
Proceeds from sale of premises and equipment 195 131
Purchase of premises and equipment (5,878) (5,893)
--------------------------
Net cash used in investing activities (190,323) (55,361)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts 114,148 88,032
Net increase (decrease) in repurchase agreements/funds purchased 10,834 (9,313)
Repayments of notes payable (4,000) (1,200)
Proceeds from issuance of common stock 1,252 573
Proceeds from issuance of preferred stock 1,226 -
Dividends paid (2,022) (1,909)
Proceeds on sale of trust preferred securities 28,750 -
Repayment of senior debentures - (200)
--------------------------
Net cash provided by financing activities 150,188 75,973
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (39,840) 1,845
CASH AND CASH EQUIVALENTS:
Beginning of period $ 125,854 $ 83,699
--------------------------
End of period $ 86,014 $ 85,544
--------------------------
</TABLE>
See Notes to Interim Consolidated Financial Statements.
4
<PAGE> 5
STERLING BANCSHARES, INC., AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(1) Basis of Presentation:
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring items) considered necessary for a fair
presentation have been included. Operating results for the nine month period
ended September 30, 1997, are not necessarily indicative of the results that
may be expected for the year ended December 31, 1997. For further information,
refer to the consolidated financial statements and footnotes thereto included
in the annual report on Form 10-K of Sterling Bancshares, Inc. (the "Company"),
for the year ended December 31, 1996. On September 30, 1997, the Company
acquired First Houston Bancshares, Inc. ("First Houston") and its subsidiary
Houston National Bank in a stock-for-stock merger. The transaction was
accounted for as a pooling of interests. All prior year information has been
restated to reflect the merger.
(2) Earnings Per Common Share
Earnings per common share was computed based on the following (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Three Months Nine Months Nine Months
Ended Ended Ended
September 30, September 30, September 30,
1997 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Common shares 13,732 13,703 13,616
Common share equivalents 787 729 451
------------- ------------- -------------
14,519 14,432 14,067
============= ============= =============
Net earnings $ 3,410 $ 9,528 $ 8,578
Earnings per share $ 0.23 $ 0.66 $ 0.61
</TABLE>
Note: Common shares, common share equivalents, and earnings per share
for 1996 have been adjusted to reflect the merger of First Houston and
a three-for-two stock split effective February 24, 1997. See note (3)
below for additional information regarding the stock split.
(3) Capital Stock
Common Stock
The Company paid first and second quarter cash dividends of $0.055 per share.
On July 21, 1997, the Company's board of directors declared a third quarter
dividend of $0.055 per share. This dividend was paid on August 11, 1997, to
share holders of record on August 1, 1997.
As of September 30, 1997, an additional 881,251 shares of common stock were
issuable, subject to vesting restrictions, upon exercise of the Company's
outstanding employee stock options under the 1994 Stock Incentive Plan and the
1984 Stock Option Plan, and pursuant to outstanding subscriptions under the
Company's 1994 Employee Stock Purchase Plan.
The Company's Non-Employee Director Compensation Plan provides that payment of
outside directors will be effected by issuance of shares of the Company's stock
in lieu of cash fees. Accordingly, in April 1997 the Company issued 20,582
shares as payment in full of outside director fees for director and committee
service during the period April 1997 through March 1998, inclusive. The
Company expects to continue to pay stock compensation to outside directors
during future periods.
5
<PAGE> 6
Preferred Stock
The Company's Board of Directors has designated four series of Convertible
Preferred Stock. Each of the four series has been issued in conjunction with
the opening of four new bank offices (see "Significant Developments" below on
this Form 10-Q). The conversion ratio of the Convertible Preferred Stock to
Common Stock will depend upon the performance of the new offices in reaching
certain defined deposit goals.
(4) Recent Accounting Standards
In February 1997, SFAS No. 128, "Earnings per Share" ("EPS") was issued. This
statement established standards for computing and presenting EPS. It replaces
the presentation of primary EPS with basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income statement for
entities with complex capital structures and requires a reconciliation of the
basic EPS computation to the diluted EPS computation. This statement is
effective for financial statements issued for the periods ending after December
15, 1997, including interim periods; earlier application is not permitted and
all prior period EPS data must be restated. The implementation of SFAS No. 128
should have no material effect on the Company's reported EPS.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" was issued. This
statement requires that all components of comprehensive income and total
comprehensive income be reported on one of the following (1) the statement of
operations, (2) the statement of stockholders' equity or (3) a new separate
statement of comprehensive income. Comprehensive income is comprised of net
income and all changes to stockholders' equity, except those due to investments
by owners (changes in paid in capital) and distributions to owners (dividends).
This statement is effective for fiscal years beginning after December 15, 1997.
Earlier application is permitted. This statement does not change the current
accounting treatment for components of comprehensive income and thus the
implementation of SFAS No. 130 will have no material impact on the Company's
Consolidated Financial Statements.
In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information" was issued. This statement requires public companies to
report certain information about their operating segments in their annual
financial statements and quarterly reports issued to shareholders. It also
requires public companies to report certain information about their products
and service, the geographic areas in which they operate, and their major
customers. This statement is effective for fiscal years beginning after
December 15, 1997. Earlier application is encouraged. Implementation of SFAS
No. 131 should have no material effect on the Company's Consolidated Financial
Statements.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SIGNIFICANT DEVELOPMENTS
Expansion
During 1996, the Company opened two new community banking offices, the first in
the Upper Kirby district of central Houston, and the second in the Galleria
area of Houston. The Company opened its fourteenth banking office in the
Cypress Station area, north of the city, in January 1997.
On September 30, 1997, the Company completed its acquisition of First Houston
in a stock-for-stock merger. At September 30, 1997, First Houston had total
assets of approximately $135 million and total deposits of approximately $125
million. In conjunction with the merger the Company issued approximately 1.686
million shares of the Company's common stock to the shareholders of First
Houston in exchange for all of the issued and outstanding shares of stock of
First Houston. On October 27, 1997, First Houston was dissolved and the
Company merged Houston National Bank into Sterling Bank, creating the Bank's
fifteenth banking office.
FINANCIAL CONDITION
Investments in Subsidiaries
Sterling Bank, which currently operates 14 community banking offices in the
greater Houston area, is a wholly-owned banking subsidiary. At September 30,
1997, the Company also owned 100% of First Houston and its only subsidiary
Houston National Bank. In September 1996, the Company purchased a 40% equity
and 44 % voting interest in Sterling Capital Mortgage Company ("SCMC"), an
originator and servicer of single family residential mortgage loans
headquartered in Houston, Texas. The Company also owns a 100% beneficial
interest in Sterling Bancshares Capital Trust I.
Total Assets
The total consolidated assets of the Company as of September 30, 1997, were
$1.08 billion, as compared to $851.87 million on the same date in 1996, an
increase of $228.13 million or 26.8%.
Federal Funds Sold and Federal Funds Purchased
The Bank had federal funds sold of $16.4 million at September 30, 1997.
Comparatively, the Bank had $27.6 million in federal funds sold on the same
date in 1996, a decrease of $11.2 million or 40.6%.
Loans Held for Investment
As of September 30, 1997, loans held for investment were $618.6 million, as
compared to $483.4 million on the same date in 1996, an increase of $135.2
million or 28.0% due primarily to continued strong loan demand. When compared
to loans held for investment of $513.4 million on December 31, 1996, the
September 30, 1997, loan balance represents a year-to-date $105.2 million
increase in internal loan production, net of payoffs, or an annualized
percentage increase of 27.4%. At September 30, 1997, loans held for investment
as a percentage of assets and deposits were 57.2% and 64.8%, respectively.
7
<PAGE> 8
The following table summarizes the Bank's loan portfolio by type of loan as of
September 30, 1997 (in thousands):
<TABLE>
<CAPTION>
September 30,
1997 Percent
Balance of Total
------------- ------------
<S> <C> <C>
Commercial, financial and industrial $ 234,040 $ 37.83%
Real estate - commercial 175,402 28.35%
Real estate - residential mortgage 80,435 13.00%
Real estate - construction 49,833 8.06%
Installment and other 80,727 13.05%
Less unearned discount (1,842) (0.30)%
------------- -----------
Total Loans $ 618,595 100.00%
============= ===========
</TABLE>
Investment Securities
The Bank's investment portfolio as of September 30, 1997, totaled $283.6
million, as compared to $198.8 million on the same date in 1996. The increase
of $84.8 million or 42.7% is a result of the Bank's reinvestment of excess
liquidity in U.S. Agency and mortgage-backed securities. The Bank has
designated its total securities portfolio into (a) Held-to-maturity ("HTM")
and (b) Available-for-sale ("AFS"). As of September 30, 1997, the HTM
portfolio totaled $202.2 million. The AFS portfolio totaled $81.4 million and
consisted of U.S Treasury and Agency securities owned by First Houston and the
Bank's portfolio of investment assets which were held for reasons other than
solely for investment, such as the Bank's stock in the regional FHLB. The Bank
tracks but does not record market changes on its HTM portfolio. At September
30, 1997, the market value of the HTM portfolio was $284.9 million.
Allowance for Credit Losses
Following is a summary of the changes in the allowance for credit losses for
the nine months ended September 30, 1997, and the relationship of the allowance
to total loans at September 30, 1997, and December 31, 1996 (in thousands):
Allowance for credit losses, December 31, 1996 $ 7,053
Chargeoffs (2,010)
Recoveries 225
Provision for credit losses 2,095
-------
Allowance for credit losses, September 30, 1997 $ 7,363
=======
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Loans held for investment at period end $ 618,595 $ 513,356
Allowance for credit losses $ 7,363 $ 7,053
Allowance as a percent of period-end loans 1.19% 1.37%
</TABLE>
8
<PAGE> 9
In order to determine the adequacy of the allowance for credit losses,
management considers the risk classification and delinquency status of loans
and other factors. Management also establishes specific allowances for credits
which management believes require allowances greater than those allocated
according to their risk classification. An unallocated allowance is also
established based on the Bank's historical charge-off experience over the last
ten years. The Bank may reduce the provision for credit losses where
appropriate. The Bank will continue to monitor the adequacy of the allowance
for credit losses to determine the appropriate accrual for the Bank's bad debt
expense.
Risk Elements
Non-performing, past due, and restructured loans are fully or substantially
secured by assets, with any excess of loan balances over collateral values
specifically allocated in the allowance for credit losses. Nine properties
make up the $1,254,000 of other real estate owned ("ORE") at September 30,
1997, the largest of which is carried at $647,000 and consists of one
commercial property in north Houston. This property is included in ORE
although it was not acquired by foreclosure, but is a tract of unimproved land
previously acquired by the Bank for future expansion. No loss is anticipated.
The Bank carries all properties at the lower of the book value of the loan at
foreclosure or the current fair market value, less estimated closing costs.
The Bank defines potential problem loans as those loans not classified as
non-performing, but where information known by management indicates serious
doubt that the borrower will be able to comply with the present payment terms.
Management identifies these loans through its continuous loan review process
and defines potential problem loans as those loans classified as substandard,
doubtful, or loss, excluding all non-performing loans. As of September 30,
1997, the Bank has no material foreign loans outstanding or loan
concentrations. The Bank, however, continues to monitor the potential risk of
foreign borrowers and concentrations of credit.
The following schedule summarizes consolidated non-performing loans,
non-performing assets and potential problem loans at year-end 1996 and at
September 30, 1997.
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Nonaccrual loans $ 3,190 $ 2,438
Restructured loans 44 45
Accruing loans past due 90 days or more 437 229
------------- ------------
Total nonperforming loans 3,671 2,712
ORE and other foreclosed assets 1,604 2,377
------------- ------------
Total nonperforming assets $ 5,275 $ 5,089
============= ============
Total nonperforming loans as a
% of gross loans 0.59% 0.59%
Total nonperforming loans as a
% of total assets 0.49% 0.64%
Potential problem loans $ 14,850 $ 12,738
============= ============
</TABLE>
Premises and Equipment
The Bank's premises and equipment, net of depreciation, as of September 30,
1997, were $29.3 million, as compared to $22.1 million on the same date in
1996, an increase of $7.2 million or 32.6%. This increase is due to the
opening of two banking offices since December of 1996, and the relocation of
the Champions office in March 1997, and the Highway 6 office in September 1997.
In addition, the Bank completed the installation of its new core processing
system and teller technology and has continued to upgrade its technology and
telecommunications equipment to keep pace with the Bank's volume growth and to
position itself for future growth.
9
<PAGE> 10
Deposits
Total deposits as of September 30, 1997, were $954.5 million, as compared to
$775.1 million on the same date in 1996, an increase of $179.4 million or
23.1%, resulting from growth in same location deposits, combined with the
additional deposits of the new banking offices. When compared to total
deposits of $855.3 million on December 31, 1996, the amount at September 30,
1997, represents a year-to-date increase of $99.2 million, as the strong
deposit growth experienced in 1996 continued through the three quarters of
1997.
Non-interest bearing demand deposits at September 30, 1997, were $306.5
million, as compared to $247.0 million at September 30, 1996, an increase of
$59.5 million or 24.1%. The percentage of non-interest bearing deposits to
total deposits as of September 30, 1997, continued strong at 32.1%.
Notes Payable
In June of 1997, the Bank repaid the remaining note payable of $3.6 million
with proceeds from the sale of its Trust Preferred Stock. During the first
nine months of 1997, the note accrued interest at a LIBOR-based rate of
7.6875%.
CAPITAL RESOURCES AND LIQUIDITY
Shareholders' Equity
The following table displays the changes in shareholders' equity from December
31, 1996, to September 30,1997: (in thousands)
Equity, December 31, 1996 $ 67,004
Net earnings 9,528
Sale of preferred stock 1,226
Sale of common stock 1,217
Cash dividends paid (1,987)
Net change in net unrealized losses on AFS securities 34
--------
Equity, September 30, 1997 $ 77,022
========
The Company's risk based capital ratios remain above the levels designated as
"Well Capitalized" on September 30, 1997, with Tier-1 Capital, Total Risk-Based
Capital, and Leverage Capital Ratios of 15.42%, 13.44%, and 13.18%,
respectively.
Liquidity
Effective management of balance sheet liquidity is necessary to fund growth in
earning assets and to pay liability maturities, depository customers'
withdrawal requirements and shareholders' dividends. The Company has
instituted Asset/Liability Management policies, including but not limited to a
computer simulation model, to improve liquidity controls and to enhance its
management of interest rate risk and financial condition. The Company has
numerous sources of liquidity including a significant portfolio of shorter term
assets, marketable investment securities (excluding those presently classified
as "Held-to-maturity"), increases in customers' deposits, and access to
borrowing arrangements. Available borrowing arrangements maintained by the
Bank include informal federal funds lines with other commercial banks, an
advancement arrangement with the Federal Home Loan Bank ("FHLB"), and reverse
repurchase lines with other commercial banks and the FHLB.
10
<PAGE> 11
RESULTS OF OPERATIONS
Net Income
Net income for the nine month period ended September 30, 1997, was $9.5 million
as compared to $8.6 million for the same period in 1996, an increase of
approximately $900,000 or 10.5%. For the nine months ended September 30, 1997,
net income was impacted by a acquisition and mergers costs of approximately
$550,000, net of tax and approximately $690,000 in additional expenses incurred
as a result of the opening of the three new banking offices since August 1996.
Net Interest Income
Net interest income for the nine month period ended September 30, 1997, was
$39.4 million, as compared to $30.8 million for the same period in 1996, an
increase of $8.6 million or 27.9%. The growth in net interest income is
attributable primarily to increases in average earning assets, enhanced by the
maintenance of a strong net interest margin. Average earning assets for
September 30, 1997, were $892.8 million, up $178.4 million, or 25.0% from
$714.4 million for the same period in 1996. The yield on average earning
assets for the nine month period ended September 30, 1997, was 8.62%, as
compared to 8.48% for the same period in 1996, an increase of 14 basis points.
This increase is due primarily to an increase in the yield on investment
securities as the Bank reinvested its excess liquidity in higher yielding U.S.
Agency and mortgage-backed securities. In addition, the Bank increased its
yield on loans by 8 basis points, while also increasing the average balance by
$123.9 million. At September 30, 1997, total loans represented 67.6% of total
interest earning assets, compared to 67.1% for the same period in 1996. The
cost of interest bearing liabilities rose 17 basis points from 3.92% to 3.75%
for the same period. The Company's 5.84% net interest margin for the first
nine months of 1997 remained flat from the 5.85% net interest margin registered
during the same period in 1996.
The data used in the analysis of the changes in net interest income is derived
from the daily average levels of earning assets and interest-bearing
liabilities as well as from the rates earned and paid on such amounts. The
rates earned and paid on each major type of asset and liability are shown
beside the average balance in the account for the period. The average yields
on all interest-earning assets and the average cost of all interest-bearing
liabilities also are summarized.
11
<PAGE> 12
The following schedule gives a comparative analysis of the Company's daily
average interest-earning accounts and interest-bearing accounts for the
three-month periods ended September 30, 1997 and 1996:
CONSOLIDATED AVERAGE BALANCE SHEET SCHEDULE
NET INTEREST INCOME AND NET INTEREST MARGIN
<TABLE>
<CAPTION>
Nine Months Ended September 30,
(Dollars in thousands)
1997 1996
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 $ 13,577 $ 549 5.41% $ 7,531 $ 298 5.29%
Federal funds sold 31,019 1,261 5.44% 21,750 879 5.40%
Investment securities (taxable) 223,115 10,318 6.18% 183,715 8,157 5.93%
Investment securities (tax-exempt) 21,960 829 5.05% 22,268 844 5.06%
Loans, net of unearned discount (taxable) 602,261 44,544 9.89% 478,381 35,145 9.81%
Loans, net of unearned discount (tax-exempt) 891 51 7.65% 750 $ 44 7.84%
--------------------------------- ------------------------------
Total Interest Earning Assets $892,823 $57,552 8.62% $ 714,395 $45,367 8.48%
Noninterest Earning Assets:
Cash and due from banks $ 67,361 $ 56,310
Premises and equipment, net 28,189 20,346
Other assets 18,658 14,296
Allowance for credit losses (7,384) (6,786)
-------- ---------
Total Noninterest Earning Assets $106,824 $ 84,166
TOTAL ASSETS $999,647 $ 798,561
======== =========
INTEREST BEARING LIABILITIES:
Demand and savings deposits $417,671 $ 9,782 3.13% $ 330,715 $ 7,534 3.04%
Certificates and other time deposits 199,936 7,611 5.09% 174,781 6,434 4.92%
Other borrowing 16,670 767 6.15% 7,763 267 4.59%
Debentures and notes payable 14,927 852 7.63% 5,093 308 8.08%
--------------------------------- ------------------------------
Total Interest Bearing Liabilities $649,204 19,012 3.92% $ 518,352 14,543 3.75%
Noninterest Bearing Liabilities:
Demand deposits $271,631 $ 214,264
Other liabilities 6,411 4,526
Shareholders' equity 72,400 61,419
-------- ---------
Total Noninterest Bearing Liabilities $350,442 $ 280,209
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $999,646 $ 798,561
======== =========
NET INTEREST INCOME & MARGIN $ 38,540 5.77% $ 30,824 5.76%
===================== ==================
NET INTEREST INCOME & MARGIN (TAX EQUIVALENT) $ 38,999 5.84% $ 31,287 5.85%
===================== ==================
</TABLE>
12
<PAGE> 13
Provision for Credit Losses
The provision for credit losses for the first nine months of 1997 was $2.1
million, as compared to $1.7 million for the same period in 1996, an increase
of $400,000 or 23.5%. After net charge-offs of $1.8 million and provisions for
the first nine months of 1997, the Bank's allowance for credit losses increased
by $310,000 from $7,053,000 on December 31, 1996, to $7,363,000 on September
30, 1997. Please refer to the earlier discussion of Allowances for Credit
Losses and Non-performing Loans for additional insight to management's approach
and methodology in estimating the allowance for credit losses.
Non-interest Income
Total non-interest income increased for the nine month period ended September
30, 1997, at $7.2 million, as compared to $6.3 million for the same period in
1996, an increase of $900,000 or 14.3%. The increase is due primarily to
growth in the Bank's deposit base, resulting in increased fee income.
Non-interest Expense
Non-interest expenses increased $7.3 million, or 31.9%, to $30.2 million for
the first nine months of 1997 as compared to $22.9 million for the same period
in 1996. The increase is due to the additional expenses incurred by the
startup of three new banking offices in the last year, the costs associated
with the merger of First Houston, and the implementation of a new marketing
strategy. The following schedule summarizes the expenses, including salaries,
associated with these new initiatives (in thousands):
<TABLE>
<CAPTION>
September 30, 1997
Expense
-------
<S> <C>
New initiatives:
Three new banking offices $ 1,925
Technology 460
Marketing 190
Merger of First Houston 826
-------
Total expenses for new
initiatives $ 3,401
=======
</TABLE>
Salaries and employee benefits for the nine month period ended September 30,
1997, were $16.3 million, as compared to $13.6 million for the same period in
1996, an increase of $2.7 million or 19.9%. The increase is due to an increase
in the number of employees, caused primarily by additional staffing of the
central operations areas as well as the new Upper Kirby, Fountainview, and
Cypress Station offices. In addition, the Company also paid severance to those
employees not retained after the merger of First Houston. The remaining
increase in personnel costs may be attributed to normal merit and
cost-of-living pay increases, which averaged less than 3%.
For the nine months ended September 30, 1997, net occupancy expense and
equipment expense, including net gain or loss on sale of premises and
equipment, increased by a combined $646,000 over the prior period amounts.
These increases are attributed to the opening of the three new offices and the
renovation of the Mangum office. In conjunction with this renovation, the
office sold its former remote motor bank facility, which resulted in a loss of
$130,000. Going forward, this loss will be offset by the efficiencies
resulting from combining a new motor bank facility with the existing lobby
facility.
Technology expense for the nine month period ended September 30, 1997, was $1.6
million as compared to $800,000 for the same period in 1996, an increase of
$800,000 or 100.0%. The increase is due to the installation of the Bank's
local and wide-area network during the third quarter of 1996 and the new core
processing system in the second quarter of 1997. In addition, the Company
incurred expenses associated with the merger of First Houston. The Bank
expects ongoing increases in its technology expenses for the remainder of the
year as it continues to implement its long-term technology strategy.
13
<PAGE> 14
Other non-interest expense was $4.9 million for the nine month period ended
September 30, 1997, as compared to $3.2 million for the same period in 1996, an
increase of $1.7 million or 53.1%. The increase in other expenses is due
primarily to the costs associated with the merger of First Houston. In
addition the Bank experience increases in franchise taxes, Federal Reserve Bank
check processing charges, and marketing expenses associated with the
implementation of a new marketing initiative.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
There were no changes in securities during the period ending September 30,
1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the period
ending September 30, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit 11. Computation of Earnings Per Share
----------------------------------------------
Included as Note (2) to Interim Consolidated Financial Statements on page
5 of this Form 10-Q
Exhibit 27. Financial Data Schedule
------------------------------------
The required Financial Data Schedule has been included as Exhibit 27 of
the Form 10-Q filed electronically with the Securities and Exchange
Commission.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sterling Bancshares, Inc.
-------------------------
(Registrant)
By: /s/ George Martinez
--------------------------
George Martinez
(Chief Executive Officer and Principal Financial Officer)
14
<PAGE> 15
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
11 Computation of Earnings Per Share
Included as Note (2) to Interim Consolidated Financial
Statements on page 6 of this Form 10-Q
27 Financial Data Schedule
The required Financial Data Schedule has been
included as Exhibit 27 of the Form 10-Q filed
electronically with the Securities and Exchange
Commission.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 69,630
<INT-BEARING-DEPOSITS> 488
<FED-FUNDS-SOLD> 16,384
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 81,432
<INVESTMENTS-CARRYING> 202,199
<INVESTMENTS-MARKET> 284,900
<LOANS> 668,966
<ALLOWANCE> (7,363)
<TOTAL-ASSETS> 1,081,233
<DEPOSITS> 954,492
<SHORT-TERM> 14,585
<LIABILITIES-OTHER> 6,384
<LONG-TERM> 26,750
0
177
<COMMON> 12,040
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 1,081,233
<INTEREST-LOAN> 44,595
<INTEREST-INVEST> 11,147
<INTEREST-OTHER> 1,810
<INTEREST-TOTAL> 57,552
<INTEREST-DEPOSIT> 17,393
<INTEREST-EXPENSE> 768
<INTEREST-INCOME-NET> 39,391
<LOAN-LOSSES> 2,095
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 30,241
<INCOME-PRETAX> 14,231
<INCOME-PRE-EXTRAORDINARY> 9,528
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,528
<EPS-PRIMARY> 0.66
<EPS-DILUTED> 0.66
<YIELD-ACTUAL> 5.84
<LOANS-NON> 3,190
<LOANS-PAST> 437
<LOANS-TROUBLED> 44
<LOANS-PROBLEM> 14,850
<ALLOWANCE-OPEN> 7,053
<CHARGE-OFFS> 2,010
<RECOVERIES> 225
<ALLOWANCE-CLOSE> 6,960
<ALLOWANCE-DOMESTIC> 2,698
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,262
</TABLE>
