<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________
FORM 10-Q
_________
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter ended March 31, 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 March 31, 1997:
Class of Stock Shares Outstanding
- ------------------------------------ ------------------
Common Stock, Par Value $1.00 12,004,400
<PAGE> 2
STERLING BANCSHARES, INC.
INDEX TO FORM 10-Q
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PART I. - FINANCIAL INFORMATION Page No.
-------
<S> <C>
Item 1. Financial Statements
The March 31, 1997 and 1996 financial statements included herein are unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring adjustments), which
are, in the opinion of management of the registrant, necessary to a fair statement of the
results for the interim periods.
Consolidated Balance Sheets at March 31, 1997 and 1996 and at December 31,
1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Earnings for the Three Months and Year-to-Date
Ended March 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the Three Months Ended March 31,
1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Interim Consolidated Financial Statements for the Period Ended March 31,
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Significant Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Capital Resources and Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . 10
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
PART II. - OTHER INFORMATION
Item 2. - Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 4. - Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . 14
Item 6. - Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
STERLING BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996 1996 1995
------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks $55,636 $46,684 $78,442 $60,075
Federal funds sold 30,000 10,000 30,000 5,000
Interest bearing deposits in financial institutions 25,427 9,192 22 1,135
Investment securities:
Available-for-sale 4,231 3,994 4,170 3,931
Held-to-maturity 168,573 155,989 148,083 163,581
------------------------------------------
Total investment securities 172,804 159,983 152,253 167,512
Investment in unconsolidated subsidiary 2,266 - 2,316 -
Loans:
Loans held for sale 29,795 9,680 40,731 7,868
Loans held for investment 481,632 404,109 456,698 384,777
------------------------------------------
Total loans 511,427 413,789 497,429 392,645
Allowance for credit losses (7,001) (6,256) (6,578) (5,907)
------------------------------------------
Total loans, net 504,426 407,533 490,851 386,738
Real estate acquired by foreclosure and certain other
real estate 1,667 1,833 2,035 1,716
Premises and equipment, net 25,023 17,417 23,100 14,823
Goodwill 1,758 2,085 1,839 2,166
Accrued interest receivable and other assets 9,187 6,820 9,215 8,184
------------------------------------------
Total assets $828,194 $661,547 $790,073 $647,349
==========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits:
Noninterest bearing $241,881 $184,875 $245,571 $190,333
Interest bearing 325,704 253,548 301,244 237,778
Certificates of deposit and other time deposits 182,839 152,854 170,598 146,613
------------------------------------------
Total deposits 750,424 591,277 717,413 574,724
Federal funds purchased and securities sold
under agreements to repurchase 7,822 9,494 3,751 12,083
Accrued interest payable and other liabilities 4,864 3,884 5,502 5,051
Notes payable 3,600 5,200 4,000 5,600
Senior debentures - - - 200
------------------------------------------
Total liabilities 766,710 609,855 730,666 597,658
Shareholders' equity:
Preferred stock, $1 par value, 1 million shares auth. 88 49 88 49
Common stock, $1 par value, 20 million shares auth. 12,004 11,856 11,949 11,790
Capital surplus 16,243 15,087 16,058 14,985
Retained earnings 33,269 24,889 31,443 23,074
Net unrealized gain (loss) on held-to-maturity
securities transferred from available-for-sale (120) (189) (131) (207)
------------------------------------------
Total shareholders' equity 61,484 51,692 59,407 49,691
------------------------------------------
Total liabilities and shareholders' equity $828,194 $661,547 $790,073 $647,349
==========================================
</TABLE>
See Notes to Interim Consolidated Financial Statements.
3
<PAGE> 4
STERLING BANCSHARES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1997 1996
--------------------
(In thousands)
<S> <C> <C>
Interest income:
Loans, including fees $11,973 $9,820
Federal funds sold 289 104
Deposits in financial institutions 126 20
Investment securities:
Taxable 2,334 2,209
Tax-exempt 283 282
--------------------
Total interest income 15,005 12,435
Interest expense:
Demand and savings deposits 2,383 1,868
Certificates and other time deposits 2,116 1,841
Federal funds purchased and repurchase agreements 61 129
Debentures and notes payable 93 130
--------------------
Total interest expense 4,653 3,968
NET INTEREST INCOME 10,352 8,467
Provision for credit losses 612 513
--------------------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 9,740 7,954
Noninterest income:
Customer service fees 1,332 1,309
Other 627 616
--------------------
Total noninterest income 1,959 1,925
Noninterest expenses:
Salaries and employee benefits 4,710 3,956
Net occupancy expense 690 539
Losses and carrying costs of real estate acquired by foreclosure 2 46
Losses (gains) on sale of premises and equipment 151 (5)
Equipment expense 472 321
Legal and professional fees 100 103
Technology 419 248
Telephone 164 146
Supplies 133 116
Other 1,120 853
--------------------
Total noninterest expenses 7,961 6,323
EARNINGS BEFORE INCOME TAXES 3,738 3,556
Provision for income taxes 1,233 1,153
--------------------
NET EARNINGS $2,505 $2,403
====================
</TABLE>
See Notes to Interim Consolidated Financial Statements.
4
<PAGE> 5
STERLING BANCSHARES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1997 1996
---------------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 2,505 $ 2,403
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Amortization and accretion of premiums and discounts on investment securities, net 20 56
Provision for credit losses 612 513
(Gain) loss on sale of premises and equipment 118 (5)
Loss on sale of real estate acquired by foreclosure and repossessed assets 2 4
Depreciation and amortization 742 595
Mortgage loans originated for sale (87,888) -
Proceeds from sale of mortgage loans originated for sale 98,824 -
(Decrease) increase in accrued interest receivable and other assets (16) 1,354
Decrease in accrued interest payable and other liabilities (638) (1,166)
---------------------
Total adjustments 11,776 1,351
---------------------
Net cash provided by operating activities 14,281 3,754
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity and paydowns of held-to-maturity investment securities 5,166 7,563
Purchase of held-to-maturity investment securities (25,660) -
Purchase of available-for-sale investment securities (61) (63)
Redemption of preferred stock of unconsolidated subsidiary 50 -
Net increase in loans (25,123) (21,665)
Proceeds from sale of real estate acquired by foreclosure 405 247
Capital additions to real estate acquired by foreclosure - (11)
Net increase in interest-bearing deposits in financial institutions (25,405) (8,057)
Proceeds from sale of premises and equipment 195 12
Purchase of premises and equipment (2,897) (3,115)
---------------------
Net cash used in investing activities (73,330) (25,089)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts 33,011 16,553
Net increase (decrease) in repurchase agreements/funds purchased 4,071 (2,589)
Repayments of notes payable (400) (400)
Proceeds from issuance of common stock 223 134
Dividends paid (662) (554)
Repayment of senior debentures - (200)
---------------------
Net cash provided by financing activities 36,243 12,944
NET DECREASE IN CASH AND CASH EQUIVALENTS (22,806) (8,391)
CASH AND CASH EQUIVALENTS:
Beginning of period $108,442 $ 65,075
---------------------
End of period $ 85,636 $ 56,684
=====================
</TABLE>
See Notes to Interim Consolidated Financial Statements.
5
<PAGE> 6
STERLING BANCSHARES, INC., AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(Unaudited)
(1) Basis of Presentation:
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring items) considered necessary for a fair
presentation have been included. Operating results for the three month period
ended March 31, 1997, are not necessarily indicative of the results that may be
expected for the year ending 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.
(2) Income Per Common Share
Income per common share was computed based on the following (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
March 31, March 31,
1997 1996
-------- --------
<S> <C> <C>
Common shares 12,004 11,824
Common share equivalents 478 392
-------- --------
12,482 12,216
======== ========
Net earnings $ 2,505 $ 2,403
Earnings per share $ 0.20 $ 0.20
</TABLE>
Note: Common shares, common share equivalents, and earnings per share
for 1996 have been adjusted to reflect a three-for-two stock split
effective February 24, 1997. See discussion item (3) below for
additional information regarding the stock split.
(3) Capital Stock
Common Stock
On January 27, 1997, the Company's directors declared a three-for-two stock
split to shareholders of record February 10, 1997, with shares distributed
February 24, 1997. Concurrently, the Company paid first quarter cash dividends
of $0.055 per share. The second quarter dividend, also $0.055 per share, was
declared April 22, 1997, to be paid on May 12, 1997, to shareholders of record
on May 1, 1997.
As of March 31, 1997, an additional 766,258 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.
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.
6
<PAGE> 7
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 bank offices (see "Significant Developments" on
page 7 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. In conjunction with the opening of the
Fountainview and Cypress Station offices, the Series C and D shares were offered
and sold to qualified investors pursuant to Confidential Private Placement
Memoranda. The offerings terminated on April 15, 1997, and May 5, 1997,
respectively.
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
during August in the Upper Kirby district of central Houston, and the second
during December 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 March 18, 1997, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") to acquire First Houston Bancshares, Inc. ("First
Houston") and its subsidiary, Houston National Bank, in a stock-for-stock
merger. At March 31, 1997, First Houston had total assets of approximately
$130 million and total deposits of approximately $120 million. The Merger
Agreement, which is subject to approval of First Houston's shareholders and
various banking regulatory authorities, provides that the Company will issue
approximately 1.72 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. The final purchase price is subject to
certain closing adjustments. The transaction is expected to be accounted for
as a pooling of interests.
FINANCIAL CONDITION
Investments in Subsidiaries
Sterling Bank, which currently operates 14 community banking offices in the
greater Houston area, is the Company's only banking subsidiary.
Total Assets
The total consolidated assets of the Company as of March 31, 1997, were $828.2
million, as compared to $661.5 million on the same date in 1996, an increase of
$166.7 million or 25.2%.
Federal Funds Sold and Federal Funds Purchased
The Bank had federal funds sold of $30.0 million at March 31, 1997, as compared
to $10.0 million on the same date in 1996. The increase of $20.0 million is
primarily as a result of the increase in deposits realized over this time
period.
Loans Held for Sale
As of March 31, 1997, loans held for sale were $29.8 million; as compared to
$9.7 million in 1996, an increase of $20.1 million. Loans held for sale
included student loans and temporary residential mortgage loans.
The increase is attributed to a new mortgage purchase program initiated in June
1996 with Sterling Capital Mortgage Company, an unconsolidated subsidiary of
the Bank.
Loans Held For Investment
As of March 31, 1997, loans held for investment were $481.6 million, as compared
to $404.1 million on the same date in 1996, an increase of $77.5 million or
19.2% due primarily to continued strong loan demand. When compared to $456.7
million on December 31, 1996, the March 31, 1997 loan balance represents a
year-to-date $24.9 million increase in internal loan production, net of payoffs,
or an annualized percentage increase of 22.1%. At March 31, 1997, loans as a
percentage of assets and deposits were 58.2% and 64.2%, respectively.
7
<PAGE> 8
The following table summarizes the Bank's loan portfolio by type of loan as of
March 31, 1997 (in thousands):
<TABLE>
<CAPTION>
March 31, 1997 Percent
Balance of Total
--------------- ---------
<S> <C> <C>
Commercial, financial and industrial $ 195,328 40.56%
Real estate - commercial 118,357 24.57%
Real estate - residential mortgage 49,958 10.37%
Real estate - construction 43,719 9.08%
Installment and other 76,921 15.97%
Less unearned discount (2,651) (0.55)%
--------------- ---------
Total loans $ 481,632 100.00%
=============== =========
</TABLE>
Investment Securities
The Bank's investment portfolio as of March 31, 1997, totaled $172.8 million, as
compared to $160.0 million on the same date in 1996. The increase of $12.8
million or 8.0% 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 March 31, 1997, the HTM portfolio totaled
$168.6 million and included substantially all of the investment securities
maintained by the Bank for investment purposes. The AFS portfolio totaled $4.2
million and consisted of the Bank's portfolio of investment assets which were
held for reasons other than solely for investment, such as the Bank's stock in
the regional Federal Home Loan Bank (the "FHLB"). Due to the nature of the
securities classified as AFS, there was no net unrealized gain or loss in the
AFS portfolio as of March 31, 1997. The Bank tracks but does not record market
changes on its HTM portfolio. At March 31, 1997, the market value of the HTM
portfolio was $166.9 million.
The Company analyzes its interest rate risk position by use of a simulation
model. As of March 31, 1997, 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 6.47%. Correspondingly, in the
event of a 200 basis point decrease in market interest rates, the Company's net
interest income would decrease by 7.99%. 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 Assets (RSA) to Rate Sensitive Liabilities (RSL) indicates a positive
GAP of 1.05 through the first year and a positive 1.07 through three years
cumulative.
Allowance for Credit Losses
Following is a summary of the changes in the allowance for credit losses for
the three months ended March 31, 1997, and the relationship of the allowance to
total loans at March 31, 1997, and December 31,1996 (in thousands):
<TABLE>
<S> <C>
Allowance for credit losses, December 31, 1996 $ 6,578
Chargeoffs (250)
Recoveries 61
Provision for credit losses 612
----------
Allowance for credit losses, March 31, 1997 $ 7,001
==========
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------- ------------
<S> <C> <C>
Loans held for investment outstanding at
period-end $ 481,632 $ 456,698
Allowance for credit losses $ 7,001 $ 6,578
Allowance as a percent of period-end loans 1.45% 1.44%
</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. Eleven properties
make up the $1.7 million of other real estate owned ("ORE") at March 31, 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 March 31, 1997,
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.
The following schedule summarizes consolidated non-performing loans,
non-performing assets and potential problem loans at year-end 1996 and at March
31, 1997.
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---------- ------------
(In thousands)
<S> <C> <C>
Nonaccrual loans $ 1,933 $ 2,438
Restructured loans 44 45
Accruing loans past due 90 days or more 487 229
---------- ------------
Total nonperforming loans 2,464 2,712
ORE and other foreclosed assets 2,115 2,377
---------- ------------
Total nonperforming assets $ 4,579 $ 5,089
========== ============
Total nonperforming loans as a % of gross loans 0.51% 0.59%
Total nonperforming assets as a % of total assets 0.55% 0.64%
Potential problem loans $ 17,323 $ 12,738
========== ============
</TABLE>
Premises and Equipment
The Bank's premises and equipment, net of depreciation, as of March 31, 1997,
were $25.0 million, as compared to $17.4 million on the same date in 1996, an
increase of $7.6 million or 43.7%. This increase is due primarily to the
opening of three banking offices since August of 1996. The Bank also
completed the relocation of the Champions office in March 1997, and has
purchased a parcel of land for the relocation of the Highway 6 office upon
expiration of its current lease. In addition, the Bank 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. Additional purchases
are expected during 1997, including the planned replacement of the Bank's core
processing system and installation of new teller technology.
9
<PAGE> 10
Deposits
Total deposits as of March 31, 1997, were $750.4 million, as compared to $591.3
million on the same date in 1996, an increase of $159.1 million or 26.9%,
resulting from growth in same location deposits, combined with the additional
deposits of the new banking offices. When compared to total deposits of $717.4
million on December 31, 1996, the amount at March 31, 1997, represents a
year-to-date increase of $33.0 million, as the strong deposit growth
experienced in 1996 continued through the first quarter of 1997.
Non-interest bearing demand deposits at March 31, 1997, were $241.9 million, as
compared to $184.9 million at March 31, 1996, an increase of $57.0 million or
30.8%. When compared to non-interest bearing demand deposits of $245.6 million
on December 31, 1996, the March 31, 1997, amount represents a year-to-date
decrease of $3.7 million. The percentage of non-interest bearing deposits to
total deposits as of March 31, 1997, was 32.2%.
Notes Payable
The note accrues interest at a LIBOR-based rate of 7.6875%. 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 March 31, 1997, the Company had made eleven regularly
scheduled principal payments totaling $4.4 million, and the balance remaining on
the note was $3.6 million.
CAPITAL RESOURCES AND LIQUIDITY
Shareholders' Equity
The following table displays the changes in shareholders' equity from December
31, 1996, to March 31,1997: (in thousands)
<TABLE>
<S> <C>
Equity, December 31, 1996 $ 59,407
Net earnings 2,505
Sale of common stock 223
Cash dividends paid (662)
Net change in net unrealized loss on HTM securities
transferred from AFS 11
---------
Equity, March 31, 1997 $ 61,484
=========
</TABLE>
The Company's risk based capital ratios remain above the levels designated as
"Well Capitalized" on March 31, 1997, with Tier-1 Capital, Total Risk-Based
Capital, and Leverage Capital Ratios of 9.97%, 11.37%, and 7.39%, 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.
10
<PAGE> 11
RESULTS OF OPERATIONS
Net Income
Net income for the three month period ended March 31, 1997, was $2.5 million as
compared to $2.4 million for the same period in 1996, an increase of $100,000 or
4.2%. For the three months ended March 31, 1997, net income was impacted by a
$130,000 loss recognized on the sale of a motor bank facility 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 three month period ended March 31, 1997, was $10.4
million, as compared to $8.5 million for the same period in 1996, an increase of
$1.9 million or 22.4%. 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 March 31, 1997, were
$697.6 million, up $119.4 million, or 20.7% from $578.2 million for the same
period in 1996. The yield on average earning assets for the three month period
ended March 31, 1997, was 8.72%, as compared to 8.63% for the same period in
1996, an increase of 9 basis points. This increase is due primarily to an
increase in the yield on investment securities as the Bank reinvested $25.7
million of excess liquidity in higher yielding U.S. Agency and mortgage-backed
securities. In addition, the Bank maintained a strong yield on loans, while
increasing the average balance by $92 million. At March 31, 1997, total loans
represented 71.2% of total interest earning assets, compared to 70.0% for the
same period in 1996. The cost of interest bearing liabilities fell 5 basis
points from 3.76% to 3.81% for the same period. The Company's 6.11% net
interest margin for the first three months of 1997 represents a increase of 13
basis points from the 5.98% 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 March 31, 1997 and 1996:
STERLING BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEET SCHEDULE
NET INTEREST INCOME AND NET INTEREST MARGIN
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
(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 $ 10,448 $ 126 4.89% $ 1,785 $ 20 4.49%
Federal funds sold 21,722 289 5.40% 7,445 104 5.60%
Investment securities (taxable) 146,709 2,334 6.45% 141,891 2,209 6.24%
Investment securities (tax-exempt) 22,105 283 5.19% 22,450 282 5.04%
Loans, net of unearned discount (taxable) 495,739 11,956 9.78% 404,637 9,820 9.73%
Loans, net of unearned discount (tax-exempt) 919 17 7.50% - - 0.00%
-------------------------------- ------------------------------
Total Interest Earning Assets 697,642 15,005 8.72% 578,208 12,435 8.63%
Noninterest Earning Assets:
Cash and due from banks 64,890 49,946
Premises and equipment, net 24,092 16,446
Other assets 15,323 10,436
Allowance for credit losses (6,712) (5,986)
--------- --------
Total Noninterest Earning Assets 97,593 70,842
Total Assets $ 795,235 $649,050
========= ========
Interest Bearing Liabilities:
Demand and savings deposits $ 318,450 2,383 3.03% $252,806 1,868 2.96%
Certificates and other time deposits 173,351 2,116 4.95% 148,854 1,841 4.96%
Other borrowings 5,614 61 4.41% 10,811 129 4.79%
Debentures and notes payable 3,867 93 9.75% 5,532 130 9.43%
-------------------------------- ------------------------------
Total Interest Bearing Liabilities 501,282 4,653 3.76% 418,003 3,968 3.81%
Noninterest Bearing Liabilities:
Demand deposits 228,081 176,967
Other liabilities 4,734 3,075
Shareholders' equity 61,138 51,005
Total Noninterest Bearing Liabilities 293,953 231,047
--------- --------
Total Liabilities and Shareholders' Equity $ 795,235 $649,050
========= ========
Net Interest Income & Margin 10,352 6.02% 8,467 5.87%
=================== ===================
Net Interest Income & Margin (tax equivalent) $ 10,508 6.11% $ 8,619 5.98%
=================== ===================
</TABLE>
12
<PAGE> 13
Provision for Credit Losses
The provision for credit losses for the first three months of 1997 was $612,000,
as compared to $513,000 for the same period in 1996, an increase of $99,000 or
19.3%. After net charge-offs of $189,000 and provisions for the first three
months of 1997, the Bank's allowance for credit losses increased by $423,000
from $6,578,000 on December 31, 1996, to $7,001,000 on March 31, 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 slightly for the three month period ended
March 31, 1997, to $1.96 million, as compared to $1.93 million for the same
period in 1996, an increase of $30,000 or 1.6%.
Non-interest Expense
Non-interest expenses increased $1.64 million, or 25.9%, to $7.96 million for
the first three months of 1997 as compared to $6.32 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, and additional
expenditures on technology and marketing. The following schedule summarizes
the expenses included in non-interest expense associated with these new
initiatives (in thousands):
<TABLE>
<CAPTION>
March 31, 1997
Expense
--------------
<S> <C>
New initiatives:
Three new banking offices $ 690
Technology 197
Marketing 64
--------------
Total expenses for new initiatives $ 951
==============
</TABLE>
Salaries and employee benefits for the three month period ended March 31, 1997,
were $ 4.7 million, as compared to $ 4.0 million for the same period in 1996, an
increase of $700,000 or 17.5%. 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.
At March 31, 1997, the Company employed 392 full time equivalent employees, as
compared to 326 at March 31, 1996. The remaining increase in personnel costs
may be attributed to normal merit and cost-of-living pay increases, which
averaged less than 3%. The Company's ratio of total assets per full-time
equivalent employee as of March 31, 1997, increased to $2,113,000 from
$2,029,000 on the same date in 1996.
Net occupancy expense and equipment expense for the quarter ended March 31, 1997
both increased by $151,000 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 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 three month period ended March 31, 1997, was
$419,000, as compared to $248,000 for the same period in 1996, an increase of
$171,000 or 69.0%. The increase is due to the installation of the Bank's local
and wide-area network during the third quarter of 1996. 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. All other
non-interest expenses were $1.5 million for the three month period ended March
31, 1997, as compared to $1.2 million for the same period in 1996, an increase
of $300,000, or 25.0%. Legal and professional fees, supplies, and telephone
expenses increased a combined $33,000. The remaining $267,000 pertained to other
non-interest expenses, such as franchise taxes, Federal Reserve Bank check
processing charges, and implementation of a new marketing initiative.
13
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
At the regularly scheduled annual meeting of shareholders held on April 21,
1997, an amendment to the Company's articles of incorporation was approved by
the requisite vote authorizing an increase in the number of authorized shares
of Common Stock, $1.00 par value per share, from 20 million to 30 million
shares.
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 March 31, 1997.
14
<PAGE> 15
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 on Form 8-K
Relating to the proposed acquisition of First Houston Bancshares, Inc.,
Inc., a Form 8-K was filed on April 3, 1997, as amended by the Form 8-K/A
filed on April 7, 1997.
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)
15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
- ----- -----------
<S> <C>
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>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 55,636
<INT-BEARING-DEPOSITS> 25,427
<FED-FUNDS-SOLD> 30,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,231
<INVESTMENTS-CARRYING> 168,573
<INVESTMENTS-MARKET> 166,851
<LOANS> 511,427
<ALLOWANCE> (7,001)
<TOTAL-ASSETS> 828,194
<DEPOSITS> 750,424
<SHORT-TERM> 7,822
<LIABILITIES-OTHER> 4,864
<LONG-TERM> 3,600
12,004
0
<COMMON> 88
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 828,194
<INTEREST-LOAN> 11,973
<INTEREST-INVEST> 2,617
<INTEREST-OTHER> 415
<INTEREST-TOTAL> 15,005
<INTEREST-DEPOSIT> 4,499
<INTEREST-EXPENSE> 154
<INTEREST-INCOME-NET> 10,352
<LOAN-LOSSES> 612
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,810
<INCOME-PRETAX> 3,738
<INCOME-PRE-EXTRAORDINARY> 2,505
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,505
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
<YIELD-ACTUAL> 6.11
<LOANS-NON> 1,933
<LOANS-PAST> 487
<LOANS-TROUBLED> 44
<LOANS-PROBLEM> 17,323
<ALLOWANCE-OPEN> (6,578)
<CHARGE-OFFS> (250)
<RECOVERIES> 61
<ALLOWANCE-CLOSE> 7,001
<ALLOWANCE-DOMESTIC> 3,353
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,648
</TABLE>
