<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------
FORM 10 - Q/A
------------
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter ended September 30, 1997
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 0-20750
STERLING BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Texas 74-2175590
---------------------- ----------------------
(State of Incorporation) (IRS Employer ID Number)
15000 Northwest Freeway, Suite 200
Houston, Texas 77040
(Address of principal executive office)
713-466-8300
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
("Act") during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days
Yes X No
---- ----
The number of shares outstanding of each class of the registrant's capital stock
as of September 30, 1997:
Class of Stock Shares Outstanding
----------------------------- ------------------
Common Stock, Par Value $1.00 13,743,308
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM I. CONDENSED FINANCIAL STATEMENTS
STERLING BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996 1996
------------------------------------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 69,630 $ 57,951 $ 85,291
Federal funds sold 16,384 27,593 40,563
Interest bearing deposits in financial institutions 488 13,785 22
----------- ----------- -----------
Total cash and cash equivalents 86,502 99,329 125,876
Investment securities:
Available-for-sale 81,432 57,179 57,382
Held-to-maturity 202,199 141,662 148,083
----------- ----------- -----------
Total investment securities 283,631 198,841 205,465
Equity in unconsolidated subsidiary 2,365 2,167 2,316
Loans:
Loans held for sale 50,371 39,388 40,969
Loans held for investment 618,595 483,350 513,356
----------- ----------- -----------
Total loans 668,966 522,738 554,325
Allowance for credit losses (7,363) (7,127) (7,053)
----------- ----------- -----------
Total loans, net 661,603 515,611 547,272
Real estate acquired by foreclosure and certain other real estate 1,254 2,016 2,072
Premises and equipment, net 29,269 22,058 25,873
Goodwill 1,598 1,921 1,839
Accrued interest receivable and other assets 15,011 9,925 11,617
----------- ----------- -----------
Total assets $ 1,081,233 $ 851,868 $ 922,330
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits:
Noninterest-bearing $ 306,534 $ 246,957 $ 272,583
Interest-bearing 430,925 346,737 380,141
Certificates of deposit and other time deposits 217,033 181,452 187,620
----------- ----------- -----------
Total deposits 954,492 775,146 840,344
Federal funds purchased and securities sold under
agreements to repurchase 14,585 2,770 3,751
Accrued interest payable and other liabilities 6,384 5,133 7,231
Notes payable and senior debentures -- 4,400 4,000
----------- ----------- -----------
Total liabilities 975,461 787,449 855,326
Company-obligated mandatorily redeemable trust preferred securites
of subsidiary trust 28,750 -- --
Shareholders' equity:
Preferred stock, $1 par value, 1 million shares authorized 177 49 88
Common stock, $1 par value, 30 million shares authorized 13,743 13,622 13,635
Capital surplus 25,805 22,909 23,508
Retained earnings 37,488 28,234 29,998
Net unrealized losses available-for-sale securities, net of tax (191) (395) (225)
----------- ----------- -----------
Total shareholders' equity 77,022 64,419 67,004
----------- ----------- -----------
Total liabilities and shareholders' equity $ 1,081,233 $ 851,868 $ 922,330
=========== =========== ===========
</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
======== ======== ======== ========
Primary earnings per share $ 0.24 $ 0.22 $ 0.66 $ 0.61
======== ======== ======== ========
Fully diluted earnings per share $ 0.23 $ 0.22 $ 0.66 $ 0.61
======== ======== ======== ========
</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
----------------------
(Unaudited)
<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)
Provision for credit losses 2,095 1,718
Gain on sale of available-for-sale investment securities -- (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 and 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)
Proceeds from sale of premises and equipment 195 131
Purchase of premises and equipment (5,878) (5,893)
--------- ---------
Net cash used in investing activities (189,857) (42,806)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts 114,148 88,022
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 (39,374) 14,400
CASH AND CASH EQUIVALENTS:
Beginning of period $ 125,876 $ 84,929
--------- ---------
End of period $ 86,502 $ 99,329
========= =========
</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") in exchange for 1,686,014 shares of the Company's common stock
for First Houston's outstanding common and preferred stock. The transaction has
been accounted for as a pooling of interests and previously issued financial
statements have been restated. There were no material adjustments to the net
assets of First Houston as a result of adopting the same accounting practices as
Sterling Bancshares, Inc., and its subsidiaries. At September 30, 1997, First
Houston had total assets of approximately $135 million and total deposits of
approximately $125 million. The effect of the pooling of interest on previously
reported operations is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1996 September 30, 1996
------------------------------------------- ---------------------------------------
Originally Originally
Reported Combination Restated Reported Combination Restated
---------- ----------- -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest income $13,681 $ 7,237 $20,918 $39,043 $ 6,324 $45,367
Interest expense 4,236 2,418 6,654 12,295 2,248 14,543
------- ------- ------- ------- ------- -------
NET INTEREST INCOME 9,445 4,819 14,264 26,748 4,076 30,824
Provision for credit losses 532 163 695 1,565 153 1,718
------- ------- ------- ------- ------- -------
NET INTEREST INCOME 8,913 4,656 13,569 25,183 3,923 29,106
AFTER PROVISION
Noninterest income 2,090 632 2,722 5,869 435 6,304
Noninterest expense 6,904 4,302 11,206 19,783 3,131 22,914
------- ------- ------- ------- ------- -------
EARNINGS BEFORE 4,099 986 5,085 11,269 1,227 12,496
INCOME TAXES
Provision for income taxes 1,308 367 1,675 3,544 374 3,918
------- ------- ------- ------- ------- -------
NET EARNINGS $ 2,791 $ 619 $ 3,410 $ 7,725 $ 853 $ 8,578
======= ======= ======= ======= ======= =======
EARNINGS PER SHARE $ 0.23 $ 0.23 $ 0.63 $ 0.61
======= ======= ======= =======
Average common and common
equivalent shares outstanding 12,270 14,519 12,255 14,067
======= ======= ======= =======
</TABLE>
5
<PAGE> 6
(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 Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Weighted average:
Common shares outstanding 13,732 13,616 13,703 13,565
Primary common share equivalents 767 432 668 459
Additional common share equivalents,
assuming full dilution 61 20 61 29
====== ====== ====== ======
14,560 14,068 14,432 14,053
====== ====== ====== ======
</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
shareholders 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.
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) Trust Preferred Securities
In June 1997, the Company formed Sterling Bancshares Capital Trust I, a trust
formed under the laws of the State of Delaware, (the "Trust"). The Company is
the owner of all of the beneficial interest represented by common securities of
the Trust, and Bankers Trust Company is the Property Trustee. The Trust exists
for the exclusive purposes of issuing the Trust Preferred Securities (the "Trust
Securities") and investing the proceeds thereof in the 9.28% Junior Subordinated
Deferrable Interest Debentures (the "Junior Subordinated Debentures"), issued by
the Company, and certain other limited activities. The net proceeds to the
Company from the sale of the Junior Subordinated Debentures of approximately
$??.? million have been used to repay its outstanding long-term indebtedness of
$3.7 million with the balance being invested in short-term investment securities
until needed for other general corporate purposes (which could include the
financing of one or more future cash acquisitions by the Company).
6
<PAGE> 7
(5) Recent Accounting Standards
SFAS No. 128, "Earnings per Share" ("EPS") establishes 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.
SFAS No. 130, "Reporting Comprehensive Income" 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.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information" 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.
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 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, 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%. The growth in total assets was due to a
combination of internal growth and the opening of de novo offices.
7
<PAGE> 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%. This decrease was due to the
reinvestment of excess liquidity into investment securities during 1997.
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.
The following table summarizes the Bank's loan portfolio by type of loan as of
September 30, 1997 (in thousands):
<TABLE>
<CAPTION>
September 30, Percent of
1997 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 held for investment $ 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):
<TABLE>
<S> <C> <C>
Allowance for credit losses, December 31, 1996 $ 7,053
Chargeoffs (2,010)
Recoveries 225
Provision for credit losses 2,095
-------
Allowance for credit losses, September 30, 1997 $ 7,363
=======
September 30, December 31,
1997 1996
------------- ------------
Loans held for investment at period-end $ 618,595 $ 513,356
Allowance for credit losses $ 7,363 $ 7,053
Allowance as a percent of period-end loans 1.19% 1.37%
</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
----------------- -----------------
(In thousands)
<S> <C> <C>
Nonaccrual loans $ 3,190 $ 2,535
Restructured loans 44 45
Accruing loans past due 90 days or more 437 231
----------------- -----------------
Total nonperforming loans 3,671 2,811
ORE and other foreclosed assets 1,604 2,454
----------------- -----------------
Total nonperforming assets $ 5,275 $ 5,265
================= =================
Total nonperforming loans as a % of gross loans 0.59% 0.62%
Total nonperforming assets as a % of total assets 0.49% 0.67%
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 $840.3
million on December 31, 1996, the amount at September 30, 1997, represents a
year-to-date increase of $114.2 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)
<TABLE>
<S> <C>
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
========
</TABLE>
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 13.44%, 15.42%, 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 special charge for acquisition and mergers costs of
approximately $826,000 and approximately $1,925,000 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
nine-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
--------------------------------------- ----------------------------------
INTEREST EARNING ASSETS:
<S> <C> <C> <C> <C> <C>
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 borrowings 16,670 621 4.98% 7,763 267 4.59%
Debentures and notes payable 2,079 147 9.45% 5,093 308 8.08%
--------- --------- ---- --------- --------- ----
Total Interest Bearing Liabilities $ 636,356 $ 18,161 3.82% $ 518,352 $ 14,543 3.75%
Noninterest Bearing Liabilities:
Demand deposits $ 271,632 $ 214,264
Other liabilities 6,411 4,526
Trust preferred securities 12,848
Shareholders' equity 72,400 61,419
--------- ---------
Total Noninterest Bearing Liabilities $ 363,291 $ 280,209
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 999,647 $ 798,561
========= =========
NET INTEREST INCOME & MARGIN $ 39,391 5.90% $ 30,824 5.76%
========= ==== ========= ====
NET INTEREST INCOME & MARGIN (TAX EQUIVALENT) $ 39,851 5.97% $ 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 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.
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
EXHIBIT INDEX
27 -- Financial Data Schedule
<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>
