<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
---------------------
<TABLE>
<S> <C>
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED
SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
---------------------
COMMISSION FILE NUMBER: 0-20750
---------------------
STERLING BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-2175590
(State of (IRS Employer ID Number)
Incorporation)
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, 1998:
<TABLE>
<CAPTION>
CLASS OF STOCK SHARES OUTSTANDING
-------------- ------------------
<S> <C>
Common Stock, Par Value $1.00 22,254,517
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
STERLING BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
Cash and due from banks..................................... $ 66,311 $ 114,552
Federal funds sold.......................................... 51,400 7,500
Interest-bearing short-term deposits in financial
institutions.............................................. 10,756 --
Interest-bearing long-term deposits in financial
institutions.............................................. 100 409
Securities purchased with an agreement to resell............ 36,245 15,496
Available-for-sale investment securities, at fair value..... 70,372 93,669
Held-to-maturity investment securities, at amortized cost... 170,234 197,970
Investment in Sterling Capital Mortgage Company............. -- 2,510
Loans held for sale......................................... 82,302 70,193
Loans....................................................... 772,163 691,394
Allowance for credit losses................................. (9,515) (7,629)
---------- ----------
Loans, net................................................ 762,648 683,765
Accrued interest receivable................................. 7,621 7,958
Real estate acquired by foreclosure......................... 1,219 515
Premises and equipment, net................................. 31,976 31,013
Goodwill, net............................................... 5,994 1,518
Other assets................................................ 13,946 9,981
---------- ----------
Total Assets...................................... $1,311,124 $1,237,049
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits:
Noninterest-bearing....................................... $ 402,240 $ 359,137
Interest-bearing.......................................... 483,631 475,890
Certificates of deposit and other time deposits............. 268,945 236,756
---------- ----------
Total deposits.................................... 1,154,816 1,071,783
Securities sold under agreements to repurchase and other
borrowed funds............................................ 15,562 44,501
Accrued interest payable and other liabilities.............. 10,299 8,571
---------- ----------
Total liabilities................................. 1,180,677 1,124,855
COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED
SECURITIES OF SUBSIDIARY TRUST............................ 28,750 28,750
Shareholders' equity:
Convertible preferred stock, $1 par value, 1 million
shares authorized...................................... 163 177
Common stock, $1 par value, 50 million shares
authorized............................................. 22,255 21,496
Capital surplus........................................... 22,926 16,306
Retained earnings......................................... 55,863 45,523
Net unrealized gains(losses) on available-for-sale
investment securities, net of tax...................... 490 (58)
---------- ----------
Total shareholders' equity........................ 101,697 83,444
---------- ----------
Total Liabilities and Shareholders' Equity........ $1,311,124 $1,237,049
========== ==========
</TABLE>
See Notes to Interim Consolidated Financial Statements.
1
<PAGE> 3
STERLING BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees................................ $19,733 $16,710 $57,735 $46,341
Federal funds sold................................... 490 470 952 1,336
Deposits in financial institutions................... 58 52 299 549
Securities purchased under agreements to resell...... 645 -- 1,516 --
Investment securities:
Taxable........................................... 3,113 4,282 10,497 10,921
Tax-exempt........................................ 517 297 1,075 884
------- ------- ------- -------
Total interest income........................ 24,556 21,811 72,074 60,031
Interest expense:
Demand and savings deposits.......................... 3,453 3,594 10,678 10,039
Certificates and other time deposits................. 3,462 2,879 10,004 8,118
Securities sold under agreements to repurchase and
other borrowed funds.............................. 195 449 641 621
Notes payable........................................ -- -- -- 147
------- ------- ------- -------
Total interest expense....................... 7,110 6,922 21,323 18,925
------- ------- ------- -------
NET INTEREST INCOME.................................... 17,446 14,889 50,751 41,106
Provision for credit losses.................. 1,321 716 3,986 2,170
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION.................... 16,125 14,173 46,765 38,936
Noninterest income:
Customer service fees................................ 1,895 2,014 5,590 5,461
Equity in earnings of Sterling Capital Mortgage
Company........................................... -- 144 462 199
Other................................................ 4,877 895 7,174 2,390
------- ------- ------- -------
Total noninterest income..................... 6,772 3,053 13,226 8,050
Noninterest expense:
Salaries and employee benefits....................... 8,062 5,905 21,024 17,077
Occupancy expense.................................... 2,065 1,435 5,061 4,240
Technology........................................... 800 674 3,108 1,844
Supplies............................................. 389 279 893 723
Professional fees.................................... 402 740 1,297 1,357
Minority interest expense............................ 857 674 2,191 852
Other................................................ 3,122 2,150 7,374 6,097
------- ------- ------- -------
Total noninterest expense.................... 15,697 11,857 40,948 32,190
NET INCOME BEFORE INCOME TAXES......................... 7,200 5,369 19,043 14,796
Provision for income taxes................... 2,425 1,765 6,148 4,871
------- ------- ------- -------
NET INCOME............................................. $ 4,775 $ 3,604 $12,895 $ 9,925
======= ======= ======= =======
Earnings per share:
Basic................................................ $ 0.22 $ 0.17 $ 0.59 $ 0.46
======= ======= ======= =======
Diluted.............................................. $ 0.21 $ 0.16 $ 0.56 $ 0.44
======= ======= ======= =======
</TABLE>
See Notes to Interim Consolidated Financial Statements.
2
<PAGE> 4
STERLING BANCSHARES, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1998 1997
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 12,895 $ 9,925
Adjustments to reconcile net income to net cash used in
operating activities:
Amortization and accretion of premiums and discounts on
investment securities, net............................ 320 99
Equity in undistributed earnings of Sterling Capital
Mortgage Company...................................... (437) (199)
Provision for credit losses............................ 3,986 2,170
Write-downs, less gains on sale, of real estate
acquired by foreclosure and repossessed assets........ (101) 170
Depreciation and amortization.......................... 3,766 2,526
Net increase in loans held for sale.................... (12,109) (9,473)
Increase in accrued interest receivable and other
assets................................................ (215) (3,181)
Decrease in accrued interest payable and other
liabilities........................................... (1,470) (694)
-------- ---------
Net cash used in operating activities............. 6,635 1,343
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in securities purchased under agreements to
resell................................................. (20,749) --
Proceeds from maturity and paydowns of held-to-maturity
investment securities.................................. 61,123 22,072
Purchases of held-to-maturity investment securities....... (27,660) (75,415)
Proceeds from maturity and paydowns of available-for-sale
investment securities.................................. 55,372 19,822
Purchases of available-for-sale investment securities..... (37,181) (43,223)
Net increase in loans..................................... (84,719) (112,090)
Proceeds from sale of real estate acquired by
foreclosure............................................ 1,417 742
Net decrease in interest-bearing long-term deposits in
financial institutions................................. 309 --
Cash and cash equivalents acquired with Sterling Capital
Mortgage Company....................................... 1,219 --
Proceeds from sale of premises and equipment.............. 821 195
Purchase of premises and equipment........................ (4,446) (5,942)
-------- ---------
Net cash used in investing activities............. (54,494) (193,839)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts.......................... 83,033 118,739
Net increase (decrease) in repurchase agreements/funds
purchased.............................................. (28,939) 10,834
Repayment of notes payable................................ -- (4,000)
Proceeds from issuance of common stock.................... 2,341 1,252
Proceeds from issuance of preferred stock................. 394 1,226
Proceeds from issuance of trust preferred securities of
subsidiary trust....................................... -- 28,750
Dividends paid............................................ (2,555) (2,022)
-------- ---------
Net cash provided by financing activities......... 54,274 154,779
NET DECREASE IN CASH AND CASH EQUIVALENTS................... 6,415 (37,717)
CASH AND CASH EQUIVALENTS:
Beginning of period....................................... 122,052 131,371
-------- ---------
End of period............................................. $128,467 $ 93,654
======== =========
Supplemental information:
Income taxes paid......................................... $ 5,115 $ 4,798
======== =========
Interest paid............................................. $ 21,127 $ 18,690
======== =========
Noncash investing and financing activities:
Acquisitions of real estate through foreclosure of
collateral............................................ $ 2,020 $ 71
======== =========
</TABLE>
See Notes to Interim Consolidated Financial Statements.
3
<PAGE> 5
STERLING BANCSHARES, INC., AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
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,
1998, are not necessarily indicative of the results that may be expected for the
entire year or any interim period. For further information, refer to the
consolidated financial statements and notes thereto included in the annual
report on Form 10-K of Sterling Bancshares, Inc. (the "Company") for the year
ended December 31, 1997.
2. EARNINGS PER COMMON SHARE
Earnings per common share ("EPS") were computed based on the following (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------- ----------------------------------------
1998 1997 1998 1997
------------------ ------------------ ------------------- ------------------
AMOUNT PER SHARE AMOUNT PER SHARE AMOUNT PER SHARE AMOUNT PER SHARE
------ --------- ------ --------- ------- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income............... $4,775 $3,604 $12,895 $9,925
====== ====== ======= ======
Basic:
Weighted average shares
outstanding......... 22,184 $0.22 21,457 $0.17 21,861 $0.59 21,411 $0.46
===== ===== ===== =====
Diluted:
Add incremental shares
for:
Assumed exercise of
outstanding
options........... 476 701 644 694
Assumed conversion
of preferred
stock............. 440 388 440 309
------ ------ ------- ------
Total.......... 23,100 $0.21 22,546 $0.16 22,945 $0.56 22,414 $0.44
====== ===== ====== ===== ======= ===== ====== =====
</TABLE>
All 1997 amounts have been restated to reflect the acquisition of Humble
National Bank ("Humble") on June 30, 1998, which was accounted for using the
"pooling of interests" method, and a three-for-two stock split on February 20,
1998.
4
<PAGE> 6
STERLING BANCSHARES, INC., AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. COMPREHENSIVE INCOME
The following table displays the changes in shareholders' equity for the
three-and nine-month periods ended September 30, 1998 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
------------------- ------------------
<S> <C> <C> <C> <C>
Equity, beginning of period............................. $ 91,980 $ 83,444
Comprehensive income:
Net income............................................ $4,775 $12,895
Net change in net unrealized losses on AFS
securities......................................... 524 548
------ -------
Total comprehensive income.................... 5,299 13,443
Issuance of common stock, in exchange for cash.......... 278 2,341
Issuance of common stock, in exchange for an additional
40 percent interest in Sterling Capital Mortgage
Company............................................... 4,630 4,630
Issuance of preferred stock............................. 394 394
Cash dividends paid..................................... (884) (2,555)
-------- --------
Equity, September 30, 1998.............................. $101,697 $101,697
======== ========
</TABLE>
4. RECENT ACCOUNTING STANDARDS
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", which 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 capital surplus) and distributions to
owners (dividends). The Company will report comprehensive income on the
statement of shareholders' equity. Comprehensive income for the Company includes
net income and the changes in unrealized gains and losses.
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, for years beginning after implementation. It
also requires public companies to report certain information about their
products and services, the geographic areas in which they operate, and their
major customers. This statement is effective for fiscal years beginning after
December 15, 1997. The Company will implement SFAS No. 131 for its 1998 Annual
Report on Form 10-K. Implementation of SFAS No. 131 should have no material
effect on the Company's Consolidated Financial Statements.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and for
Hedging Activities," was issued. This statement requires companies to recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS No. 133 requires that changes in fair
value of a derivative be recognized currently in earnings unless specific hedge
accounting criteria are met. This statement is effective for fiscal years
beginning after June 15, 1999 but early adoption is allowed. The Company does
not currently have any derivative instruments.
5
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SIGNIFICANT DEVELOPMENTS
Expansion -- In January 1998, the Company opened its sixteenth banking
office on Spencer Highway in Pasadena. In conjunction with the opening of this
office, the Company's Board designated 50,000 shares of Series E convertible
preferred stock and authorized the offering and sale of such shares to investors
who may assist in the business development efforts of the office. Pursuant to
the offering, which was completed in September 1998, 27,000 shares of Series E
convertible preferred stock were sold to qualified investors. These preferred
shares will be convertible into a maximum of 33,750 shares of the Company's
common stock. The conversion ratio is dependent upon the Spencer Highway office
meeting certain performance goals.
On May 13, 1998, the Company opened its seventeenth banking office in Fort
Bend County. In conjunction with the opening of this office, in April 1998, the
Company's Board designated two additional series of convertible preferred stock
consisting of 30,000 shares of Series F Convertible Preferred Stock and 50,000
shares of Series G Convertible Preferred Stock. The shares of Series F and
Series G Convertible Preferred Stock were offered and sold to prospective
investors who the Company believes will be helpful in the development of the
office. Pursuant to the offerings, which were completed in October 1998, 25,500
shares of Series F convertible preferred stock and 34,500 shares of Series G
convertible preferred stock were sold to qualified investors. The Series F and
Series G preferred shares are convertible into a maximum of 75,000 shares of the
Company's common stock. The conversion ratio for the Series F and Series G
preferred shares is dependent upon the Fort Bend office meeting certain
performance goals.
On June 30, 1998, Humble was acquired by the Company in a stock-for-stock
merger. The Company merged Humble into Sterling Bank effective August 24, 1998,
to create Sterling Bank's eighteenth banking office.
On July 2, 1998, the Company acquired an additional 40% equity ownership in
CMCR Holding Company, the parent company of Sterling Capital Mortgage Company
("SCMC"), resulting in a total of 80% equity ownership. This acquisition has
been accounted for as a purchase transaction and the results of operations since
July 2, 1998 have been consolidated into the Company's results of operations.
On June 12, 1998, the Company entered into an Agreement and Plan of Merger
(the "Agreement") with Hometown Bancshares, Inc. ("Hometown"), which is a bank
holding company owning 100% of Clear Lake National Bank. 1,375,000 shares of the
Company's stock will be exchanged for all of the issued and outstanding stock of
Hometown. Hometown had approximately $84.7 million in assets and $77.6 million
in deposits as of September 30, 1998. The Agreement, as amended, is subject to
approval by the shareholders of Hometown.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO SAME PERIOD IN 1997
Net Income -- Net income for the nine-month period ended September 30,
1998, was $12.9 million as compared to $9.9 million for the same period in 1997,
an increase of approximately $3.0 million or 29.9%. This increase was a result
of the overall growth in the asset base of the bank as well as the acquisition
of an additional 40 percent of Sterling Capital Mortgage Company.
Net Interest Income -- Net interest income for the nine-month period ended
September 30, 1998, was $50.8 million, as compared to $41.1 million for the same
period in 1997, an increase of $9.6 million or 23.5%. 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 the nine months ended September 30, 1998, were $1.14 billion, up
$205.7 million, or 22.1% from $932.3 million for the same period in 1997. The
yield on average earning assets for the nine-month period ended September 30,
1998, was 8.47%, as compared to 8.61% for the same period in 1997. This decrease
is due primarily to an increase in mortgage loans held for resale, which have a
lower yield than most other loan types. For the first nine months of 1998,
average total loans represented 72.2% of average total interest earning assets,
compared to 67.2% for the same period in 1997. The cost of interest bearing
liabilities declined 6 basis points from 3.80% in 1997 to 3.74% in
6
<PAGE> 8
1998. The Company's 5.96% net interest margin for the first nine months of 1998
increased from the 5.89% net interest margin recorded during the same period in
1997. This is the result of growth in average non-interest bearing demand
deposits of $78.6 million, or 27.6%; reinvestment of earnings and issuance of
stock, resulting in an increase of average equity of $16.1 million, or 21.2%;
and the issuance of the Trust Preferred Securities of $28.8 million in June
1997.
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.
7
<PAGE> 9
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, 1998 and 1997, respectively:
CONSOLIDATED YIELD ANALYSIS
NINE MONTHS ENDED SEPTEMBER 30,
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
----------------------------- -----------------------------
AVERAGE AVERAGE
BALANCE INTEREST YIELD BALANCE INTEREST YIELD
---------- -------- ----- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Interest bearing deposits in
financial institutions............ $ 6,847 $ 299 5.84% $ 13,577 $ 549 5.41%
Federal funds sold.................. 23,195 952 5.49% 32,917 1,336 5.43%
Securities purchased under
agreements to resell.............. 28,573 1,516 7.09% -- -- --
Investment securities (taxable)..... 228,066 10,497 6.15% 235,818 10,921 6.19%
Investment securities
(tax-exempt)...................... 29,724 1,075 4.84% 23,534 884 5.02%
Loans (taxable)..................... 820,884 57,690 9.40% 625,584 46,290 9.89%
Loans (tax-exempt).................. 761 45 7.91% 891 51 7.65%
---------- ------- ---- ---------- ------- ----
Total Interest Earning
Assets.................. 1,138,050 72,074 8.47% 932,321 60,031 8.61%
Noninterest Earning Assets:
Cash and due from banks............. 69,907 70,930
Premises and equipment, net......... 31,426 29,595
Other assets........................ 24,506 19,654
Allowance for credit losses......... (8,445) (7,598)
---------- ----------
Total Noninterest Earning
Assets.................. 117,394 112,581
---------- ----------
Total Assets.............. $1,255,444 $1,044,902
========== ==========
Interest Bearing Liabilities:
Demand and savings deposits......... $ 483,708 10,678 2.95% $ 433,354 10,039 3.10%
Certificates and other time
deposits.......................... 259,545 10,004 5.15% 213,115 8,118 5.09%
Other borrowings.................... 18,608 641 4.61% 16,681 621 4.98%
Notes payable....................... -- -- -- 2,079 147 9.45%
---------- ------- ---- ---------- ------- ----
Total Interest Bearing
Liabilities............. 761,861 21,323 3.74% 665,229 18,925 3.80%
Noninterest Bearing Liabilities:
Demand deposits................... 362,863 284,271
Other liabilities................. 10,192 6,858
Trust preferred securities.......... 28,750 12,848
Shareholders' equity................ 91,778 75,696
---------- ----------
493,583 379,673
---------- ----------
Total Liabilities and
Shareholders' Equity.... $1,255,444 $1,044,902
========== ==========
Net Interest Income & Margin........ $50,751 5.96% $41,106 5.89%
======= ==== ======= ====
Net Interest Income & Margin (tax
equivalent)....................... $51,253 6.02% $41,524 5.95%
======= ==== ======= ====
</TABLE>
8
<PAGE> 10
Provision for Credit Losses -- The provision for credit losses for the
first nine months of 1998 was $4.0 million, as compared to $2.2 million for the
same period in 1997, an increase of $1.8 million or 83.7%. This increase in the
provision for credit losses is due to an increase in net charge-offs as well as
to provide for loan growth. After net charge-offs of $2.1 million and provisions
for the first nine months of 1998, the Company's allowance for credit losses
increased by $1.9 million from $7.6 million on December 31, 1997, to $9.5
million on September 30, 1998. Please refer to the subsequent discussion of
ALLOWANCES FOR CREDIT LOSSES for additional insight to management's approach and
methodology in estimating the allowance for credit losses.
Non-interest Income -- Total non-interest income for the nine-month period
ended September 30, 1998 was $13.2 million, as compared to $8.0 million for the
same period in 1997, an increase of $5.2 million or 64.3%. As previously
discussed in the EXPANSION section of this report, on July 2, 1998, the Bank
acquired an additional 40 percent interest in SCMC. The Bank therefore now has a
total of 80 percent ownership in SCMC and must show its financial position and
results of operations on a consolidated basis. Whereas previously, earnings from
the SCMC were shown on the income statement as "Equity in earnings from Sterling
Capital Mortgage Company", earnings subsequent to July 2, 1998 are shown as
components of their natural classifications. As a result of this change in
reporting presentation, fees from SCMC of $3.7 million are now consolidated into
the Bank's fees. Also, the Company recorded equity earnings of $462 thousand
from SCMC during the first half of 1998 (through the acquisition date for the
additional 40% ownership of July 2, 1998), compared to $199 thousand for the
first nine months of 1997. Furthermore, in June of 1998, Humble obtained a
condemnation award, net of legal fees, of $478 thousand for damages to real
property seized by the Texas Department of Transportation. Finally, growth in
the Company's deposit base resulted in increased fee income at the bank level
(excluding SCMC).
Non-interest income for the nine months ended September 30, is summarized
as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------- --------------------------------
COMMERCIAL MORTGAGE COMMERCIAL MORTGAGE
BANKING BANKING COMBINED BANKING BANKING COMBINED
---------- -------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Customer service fees.......... $5,590 $ -- $ 5,590 $5,461 $ -- $5,461
Equity in earnings of Sterling
Capital Mortgage Company..... 462 462 199 199
Condemnation award............. 478 478 -- --
Other.......................... 2,909 3,787 6,696 2,390 2,390
------ ------ ------- ------ ---- ------
$8,977 $4,249 $13,226 $7,851 $199 $8,050
====== ====== ======= ====== ==== ======
</TABLE>
Non-interest Expense -- Non-interest expenses increased $8.8 million, or
27.2%, to $40.9 million for the first nine months of 1998 as compared to $32.2
million for the same period in 1997. As discussed in the previous section,
results of operations from SCMC were included in their natural classifications
subsequent to July 2, 1998. This accounts for $2.3 million of the increase in
other non-interest expenses, as shown in the table below. Also, in the third
quarter of 1997, the Company incurred expenses totaling $826,000 relating to the
acquisition of First Houston Bancshares, Inc. In the second quarter of 1998, the
Company incurred expenses of $456,000 relating to the acquisition of Humble
National Bank. Other increases in expenses are due to the opening of two de novo
offices, costs associated with addressing Year 2000 issues, and other internal
growth initiatives.
9
<PAGE> 11
Non-interest expense for the nine months ended September 30, is summarized
as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------- --------------------------------
COMMERCIAL MORTGAGE COMMERCIAL MORTGAGE
BANKING BANKING COMBINED BANKING BANKING COMBINED
---------- -------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits...... $19,863 $1,161 $21,024 $17,077 $-- $17,077
Occupancy expenses.................. 4,546 515 5,061 4,240 -- 4,240
Technology.......................... 3,108 -- 3,108 1,844 -- 1,844
Supplies............................ 797 96 893 723 -- 723
Professional fees................... 1,257 40 1,297 1,357 -- 1,357
Minority interest expense........... 2,001 190 2,191 852 -- 852
Other............................... 7,072 302 7,374 6,097 -- 6,097
------- ------ ------- ------- --- -------
$38,644 $2,304 $40,948 $32,190 $-- $32,190
======= ====== ======= ======= === =======
</TABLE>
Salaries and employee benefits from commercial banking for the nine-month
period ended September 30, 1998 were $19.9 million, as compared to $17.1 million
for the same period in 1997, an increase of $2.8 million or 16.3%. The increase
is due to an increase in headcount as a result of supporting a larger customer
base. The remaining increase in personnel costs is attributable to normal market
adjustments and cost-of-living pay increases.
Occupancy expense relating to commercial banking for the nine-month period
ended September 30, 1998 was $4.5 million, as compared to $4.2 million for the
same period in 1997, increase of 7.2%. This increase is the result of opening
two de novo offices during 1997 as well as additional leased office space for
back-office departments.
Technology expense for the nine-month period ended September 30, 1998, was
$3.1 million as compared to $1.8 million for the same period in 1997, an
increase of $1.3 million or 68.5%. The increase is principally due to
depreciation expense relating to the new mainframe computer system installed in
April 1997 and an enhanced teller platform installed during September 1997.
These new systems provide the infrastructure for future expansion. Also, costs
associated with the acquisition and conversion of Humble totaling $197 thousand
were accrued during the second quarter of 1998. These increases were partially
offset by expenses incurred during the third quarter of 1997 relating to the
acquisition of First Houston Bancshares, Inc.
Minority interest expense of $2.0 million represents interest expense of
the subsidiary trust on the Trust Preferred Securities. These securities were
issued during the second quarter of 1997. Also, $190 thousand represents the 20
percent minority interest in earnings from SCMC.
Other non-interest expense from commercial banking was $7.1 million for the
nine-month period ended September 30, 1998, as compared to $6.1 million for the
same period in 1997, an increase of $1.0 million or 16.0%. This increase is due
to the opening of two de novo offices and expenses relating to the Humble
National Bank acquisition incurred during the second quarter of 1998. Offsetting
these increases were expenses incurred during the third quarter of 1997 relating
to the acquisition of First Houston Bancshares, Inc.
The provision for income taxes as a percent of net income before taxes
decreased from 32.9% for the first nine months of 1997 to 32.3% for the first
nine months of 1998. This decrease is related to a $240 thousand adjustment
recorded in the second quarter of 1998 to reduce the valuation allowance for
deferred tax assets.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO SAME PERIOD IN 1997
Net Income -- Net income for the three-month period ended September 30,
1998, was $4.8 million as compared to $3.6 million for the same period in 1997,
an increase of approximately $1.2 million or 32.5%. This increase was a result
of the overall growth in the asset base of the Company as well as the
acquisition of an additional 40 percent ownership in Sterling Capital Mortgage
Company.
Net Interest Income -- Net interest income for the three-month period ended
September 30, 1998, was $17.4 million, as compared to $14.9 million for the same
period in 1997, an increase of $2.6 million or 17.2%. The growth in net interest
income is attributable primarily to increases in average earning assets,
enhanced by
10
<PAGE> 12
the maintenance of a strong net interest margin. Average earning assets for the
three months ended September 30, 1998, were $1.17 billion, up $152.7 million, or
15.0% from $1.02 billion for the same period in 1997. The yield on average
earning assets for the three-month period ended September 30, 1998, was 8.34%,
as compared to 8.52% for the same period in 1997. This decrease is due primarily
to an increase in mortgage loans held for resale, which have a lower yield than
most other loan types. For the third quarter of 1998, average total loans
represented 72.6% of average total interest earning assets, compared to 66.9%
for the same period in 1997. The cost of interest bearing liabilities declined
25 basis points from 3.88% in 1997 to 3.63% in 1998. Even though average rates
on earning assets declined, the Company's 5.93% net interest margin for the
third quarter of 1998 increased from the 5.82% net interest margin recorded
during the same period in 1997. This is the result of growth in average
non-interest bearing demand deposits of $73.0 million, or 23.8% and reinvestment
of earnings and issuance of stock resulting in an increase of average equity of
$19.0 million, or 24.0%.
11
<PAGE> 13
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, 1998 and 1997, respectively:
CONSOLIDATED YIELD ANALYSIS
THREE MONTHS ENDED SEPTEMBER 30,
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
----------------------------- -----------------------------
AVERAGE AVERAGE
BALANCE INTEREST YIELD BALANCE INTEREST YIELD
---------- -------- ----- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Interest bearing deposits in
financial institutions............ $ 3,737 $ 58 6.16% $ 3,461 $ 52 5.96%
Federal funds sold.................. 35,837 490 5.42% 33,627 470 5.55%
Securities purchased under
agreements to resell.............. 36,089 645 7.09% -- -- --
Investment securities (taxable)..... 200,807 3,113 6.15% 275,475 4,282 6.17%
Investment securities
(tax-exempt)...................... 44,155 517 4.65% 23,705 297 4.97%
Loans (taxable)..................... 846,768 19,718 9.24% 678,304 16,693 9.76%
Loans (tax-exempt).................. 716 15 8.31% 869 17 7.76%
---------- ------- ---- ---------- ------- ----
Total Interest Earning
Assets.................. 1,168,109 24,556 8.34% 1,015,441 21,811 8.52%
Noninterest Earning Assets:
Cash and due from banks............. 67,173 69,734
Premises and equipment, net......... 32,123 30,592
Other assets........................ 32,252 22,701
Allowance for credit losses......... (9,063) (7,596)
---------- ----------
Total Noninterest Earning
Assets.................. 122,485 115,432
---------- ----------
Total Assets.............. $1,290,594 $1,130,873
========== ==========
Interest Bearing Liabilities:
Demand and savings deposits......... $ 489,922 3,453 2.80% $ 451,375 3,594 3.16%
Certificates and other time
deposits.......................... 270,696 3,462 5.07% 222,645 2,879 5.13%
Other borrowings.................... 15,995 195 4.84% 34,409 449 5.18%
Notes payable....................... -- -- -- 255 -- --
---------- ------- ---- ---------- ------- ----
Total Interest Bearing
Liabilities............. 776,613 7,110 3.63% 708,685 6,922 3.88%
Noninterest Bearing Liabilities:
Demand deposits................... 379,294 306,306
Other liabilities................. 8,058 8,229
Trust preferred securities.......... 28,750 28,750
Shareholders' equity................ 97,878 78,903
---------- ----------
513,981 422,188
---------- ----------
Total Liabilities and
Shareholders' Equity.... $1,290,594 $1,130,873
========== ==========
Net Interest Income & Margin........ $17,446 5.93% $14,889 5.82%
======= ==== ======= ====
Net Interest Income & Margin (tax
equivalent)....................... $17,684 6.01% $15,029 5.87%
======= ==== ======= ====
</TABLE>
12
<PAGE> 14
Provision for Credit Losses -- The provision for credit losses for the
third quarter of 1998 was $1.3 million, as compared to $716 thousand for the
same period in 1997, an increase of $605 thousand or 84.5%. This increase in the
provision for credit losses is to provide for loan growth.
Non-interest Income -- Total non-interest income for the three-month period
ended September 30, 1998 was $6.8 million, as compared to $3.1 million for the
same period in 1997, an increase of $3.7 million or 122%. The increase is due to
fees earned by SCMC of $3.7 million in the third quarter of 1998. These fees are
now consolidated with the bank subsequent to July 2, 1998 when the Bank acquired
an additional 40 percent ownership.
Non-interest income for the nine months ended September 30, is summarized
as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------- --------------------------------
COMMERCIAL MORTGAGE COMMERCIAL MORTGAGE
BANKING BANKING COMBINED BANKING BANKING COMBINED
---------- -------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Customer service fees.......... $1,895 $ -- $1,895 $2,014 $ -- $2,014
Equity in earnings of Sterling
Capital Mortgage Company..... -- -- -- -- 144 144
Other.......................... 1,123 3,754 4,877 895 895
------ ------ ------ ------ ---- ------
$3,018 $3,754 $6,772 $2,909 $144 $3,053
====== ====== ====== ====== ==== ======
</TABLE>
Non-interest Expense -- Non-interest expense increased $3.8 million, or
32.4%, to $15.7 million for the third quarter of 1998 as compared to $11.9
million for the same period in 1997. The majority of this increase, $2.3
million, is due to the consolidation of earnings of SCMC subsequent to July 2,
1998, as discussed in previous sections. Also, during the third quarter of 1997,
the Company incurred expenses totaling $826 thousand relating to the acquisition
of First Houston Bancshares, Inc. Excluding the acquisition costs in 1997, non-
interest expense from commercial banking increased $2.4 million or 21.4%. The
increase in expense relates to the opening of two de novo offices during 1998,
costs associated with addressing Year 2000 issues, and increasing the
infrastructure of the company to allow for growth.
Non-interest expense for the three months ended September 30, is summarized
as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------- ---------------------------------
COMMERCIAL MORTGAGE COMMERCIAL MORTGAGE
BANKING BANKING COMBINED BANKING BANKING COMBINED
---------- -------- --------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee
benefits.................... $ 6,901 $1,161 $ 8,062 $ 5,905 $ -- $ 5,905
Occupancy expenses............ 1,550 515 2,065 1,435 -- 1,435
Technology.................... 800 -- 800 674 -- 674
Supplies...................... 293 96 389 279 -- 279
Professional fees............. 362 40 402 740 -- 740
Minority interest expense..... 667 190 857 674 -- 674
Other......................... 2,820 302 3,122 2,150 -- 2,150
------- ------ ------- ------- ---- -------
$13,393 $2,304 $15,697 $11,857 $ -- $11,857
======= ====== ======= ======= ==== =======
</TABLE>
Salaries and employee benefits for commercial banking for the three-month
period ended September 30, 1998 were $6.9 million, as compared to $5.9 million
for the same period in 1997, an increase of $996 thousand or 16.9%. The increase
is due to an increase in headcount as a result of supporting a larger customer
base.
Occupancy expense relating to commercial banking for the three-month period
ended September 30, 1998 was $1.6 million, as compared to $1.4 million for the
same period in 1997, increase of 8.0%. This increase is the result of opening
two de novo offices during 1997 as well as additional leased office space for
back office departments.
Technology expense for the three-month period ended September 30, 1998, was
$800 million as compared to $674 thousand for the same period in 1997, an
increase of $126 million or 18.7%. The increase is
13
<PAGE> 15
principally due to depreciation expense relating to the new mainframe computer
system installed in April 1997 and an enhanced teller platform installed during
September 1997. These new systems provide the infrastructure for future
expansion. These costs were partially offset by costs relating to the
acquisition of First Houston Bancshares, Inc. in the third quarter of 1997.
Minority interest expense of $667 thousand represents interest expense of
the subsidiary trust on the Trust Preferred Securities. These securities were
issued during the second quarter of 1997. Also, $190 thousand represents the 20
percent minority interest in earnings from SCMC.
Other non-interest expense from commercial banking was $2.8 million for the
three-month period ended September 30, 1998, as compared to $2.2 million for the
same period in 1997, an increase of $670 thousand or 31.2%. This increase is due
to the opening of two de novo offices and other expenses relating to the growth
of the Company.
The provision for income taxes as a percent of net income before taxes
decreased from 33.7% for the third quarter of 1997 to 32.9% for the third
quarter of 1998. This decrease is related to an increase in the tax-exempt
municipal securities portfolio.
FINANCIAL CONDITION
Total Assets -- The total consolidated assets of the Company as of
September 30, 1998 were $1.3 billion, as compared to $1.2 billion as of December
31, 1997, an increase of $74.1 million or 6.0%. The growth in total assets was
due to a combination of internal growth and the opening of two de novo offices.
Federal Funds Sold -- The Company had federal funds sold of $51.4 million
at September 30, 1998. Comparatively, the Company had $7.5 million in federal
funds sold on December 31, 1997, an increase of $43.9 million or 585%. The
increase was due to maturities and paydowns of investment securities that had
not yet been reinvested.
Securities purchased under agreements to resell -- As of September 30,
1998, securities purchased under agreements to resell totaled $36.2 million as
compared to $15.5 million as of December 31, 1997. The securities purchased are
SBA or USDA guaranteed loan certificates. The Company has increased its position
in these securities to improve its liquidity position as well as to earn a
better rate of return compared to other liquid securities with relatively low
credit risk. These repurchase agreements generally have a term of nine months or
less.
Investment Securities -- The Company's investment portfolio as of September
30, 1998, totaled $240.6 million, as compared to $291.6 million on December 31,
1997, a decrease of $51.0 million or 17.5%. The decrease is due to a
redeployment of investment securities in reverse repurchase agreements as
described in the previous paragraph and federal funds sold.
Investments in Subsidiaries -- Sterling Bank is a wholly owned banking
subsidiary. Humble National Bank was acquired in June 1998 and merged into
Sterling Bank, effective August 24, 1998. In September 1996, the Company
purchased a 40% equity interest in Sterling Capital Mortgage Company ("SCMC"),
an originator and servicer of single family residential mortgage loans
headquartered in Houston, Texas. On July 2, 1998, the Company acquired an
additional 40% equity interest, for a total ownership of 80 percent.
Accordingly, the assets and liabilities of the SCMC are consolidated with the
Company's other assets and liabilities and the amount shown on the balance sheet
as "Investment in Sterling Capital Mortgage Company" has been eliminated. The
Company also owns a 100% beneficial interest in Sterling Bancshares Capital
Trust I.
Loans Held for Sale -- Total loans held for sale increased from $70.2
million at December 31, 1997 to $82.3 million at September 30, 1998, an increase
of $12.1 million, or 17.3%. Loans held for sale included loans purchased from
SCMC of $71.0 million and $61.1 million and student loans of $11.3 million and
$9.1 million at September 30, 1998 and December 31, 1997, respectively. Loans
purchased from SCMC increased by $9.9 million or 16.2% from December 31, 1997 as
origination volume increased at SCMC.
14
<PAGE> 16
Loans Held for Investment -- As of September 30, 1998, loans held for
investment were $772.2 million. When compared to loans held for investment of
$691.4 million on December 31, 1997, the September 30, 1998 loan balance
represents a year-to-date $80.8 million increase due to internal loan
production, net of loan reductions, or an increase of 11.7%. At September 30,
1998, loans held for investment as a percentage of assets and deposits were
58.9% and 66.9%, respectively.
The following table summarizes the Company's held for investment loan
portfolio by type of loan as of September 30, 1998 (in thousands):
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
----------
<S> <C> <C>
Commercial, financial and industrial........................ $296,155 38.35%
Real estate -- commercial................................... 208,973 27.06%
Real estate -- residential mortgage......................... 101,652 13.16%
Real estate -- construction................................. 70,173 9.09%
Foreign commercial and industrial........................... 3,126 0.40%
Consumer and other.......................................... 92,887 12.03%
Less unearned discount.................................... (803) (0.10)%
-------- -------
Total loans held for investment................... $772,163 100.00%
======== =======
</TABLE>
Allowance for Credit Losses -- Following is a summary of the changes in the
allowance for credit losses for the nine months ended September 30, 1998, and
the relationship of the allowance to total loans at September 30, 1998, and
December 31, 1997 (in thousands):
<TABLE>
<S> <C> <C>
Allowance for credit losses, December 31, 1997.............. $ 7,629
Chargeoffs.................................................. (2,483)
Recoveries.................................................. 383
Provision for credit losses................................. 3,986
--------
Allowance for credit losses, September 30, 1998............. $ 9,515
========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Loans held for investment at period-end..................... $772,163 $691,394
Allowance for credit losses................................. $ 9,515 $ 7,629
Allowance as a percent of period-end loans.................. 1.23% 1.10%
</TABLE>
In order to determine the adequacy of the allowance for credit losses,
management considers the risk classification and delinquency status of loans and
other factors. Management also establishes specific allowances for credits which
management believes require allowances greater than those allocated according to
their risk classification. An unallocated allowance is also established based on
the Company's historical charge-off experience over the last ten years. The
Company will continue to monitor the adequacy of the allowance for credit losses
to determine the appropriate accrual for the Company's provision for credit
losses.
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 $1.2 million of other real estate owned ("ORE") at
September 30, 1998. All properties are carried at the current fair market value,
less estimated selling and holding costs.
The Company defines potential problem loans as those loans for which
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. As of
September 30, 1998, the Company has no material foreign loans outstanding or
loan concentrations.
15
<PAGE> 17
The following table summarizes total non-performing assets and potential
problem loans at December 31, 1997 and at September 30, 1998:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Nonaccrual loans............................................ $ 4,878 $ 4,226
Restructured loans.......................................... -- 217
Accruing loans past due 90 days or more..................... 680 368
------- -------
Total nonperforming loans......................... 5,558 4,811
ORE and other foreclosed assets............................. 1,608 869
------- -------
Total nonperforming assets........................ $ 7,166 $ 5,680
======= =======
Total nonperforming loans as a % of gross loans held for
investment................................................ 0.72% 0.70%
Total nonperforming assets as a % of total assets........... 0.55% 0.46%
Potential problem loans, other than those shown above as
nonperforming............................................. $18,197 $12,769
</TABLE>
Premises and Equipment -- The Company's premises and equipment, net of
depreciation, as of September 30, 1998, were $32.0 million, as compared to $31.0
million as of December 31, 1997, an increase of $963 thousand or 3.1%. This is
due primarily to leasehold improvements due to the opening of two de novo
offices and new leased space for several back-office operations departments.
Deposits -- Total deposits as of September 30, 1998, were $1.15 billion, as
compared to $1.07 billion on December 31, 1997, an increase of $83.0 million, or
7.7%, resulting from growth in same location deposits, combined with the
additional deposits of the new banking offices in Pasadena and Fort Bend County.
Non-interest bearing demand deposits at September 30, 1998, were $402.2 million,
as compared to $359.1 million at December 31, 1997, an increase of $43.1 million
or 12.0%. The percentage of non-interest bearing deposits to total deposits as
of September 30, 1998 continued to be strong at 34.8%.
CAPITAL RESOURCES AND LIQUIDITY
Shareholders' Equity -- The Company's risk-based capital ratios remain
above the levels designated by regulatory agencies under the prompt corrective
action framework as "well capitalized" on September 30, 1998, with Tier-1
Capital, Total Risk-Based Capital, and Leverage Capital Ratios of 11.81%,
12.72%, and 10.39%, 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
Company include federal funds lines with other commercial banks and an
advancement arrangement with the Federal Home Loan Bank ("FHLB").
Year 2000 -- The Federal Financial Institutions Examination Council
("FFIEC") promulgated guidelines that federally supervised financial
institutions are expected to follow to ensure that their information processing
systems are Year 2000 compliant. These guidelines are discussed in more detail
in the 1997 Form 10-K.
The Company developed and commenced implementation of a comprehensive plan
in April 1997 to ensure that its operational and financial systems will not be
adversely affected by Year 2000 software programming errors. Prior to formal
adoption of the Year 2000 plan, in October 1995 a three-year technology plan was
approved jointly by the boards of directors of the Company and the Bank. The
technology plan
16
<PAGE> 18
represented a comprehensive program to reengineer and redesign the Bank's entire
information systems, telecommunications and technology infrastructure. As part
of the selection process for new systems and software applications, each system
and application upgrade was evaluated for Year 2000 compliance. Pursuant to this
plan, the Company spent more than $3.5 million to date and expects to spend no
more than $500 thousand before December 31, 1999 to upgrade its core data
processing, network communications, and teller systems.
Implementation of the Company's Year 2000 Plan is well underway. A Year
2000 project management team has been actively working towards completion of the
Plan, with representation from all functional and operational areas of the Bank.
Four full-time employees have been dedicated to the project team with the
requisite level of experience and knowledge to ensure that all mission critical
applications are Year 2000 compliant. Senior management is actively involved in
the Year 2000 compliance effort and has closely monitored the effort and has
provided regular status reports to the boards of directors.
The Year 2000 project team has conducted a complete inventory of all
systems, applications and lines of business to assess and prioritize the
potential risks of any Year 2000 errors to the integrity of the Bank's systems
and applications, the accuracy of data and critical information, and the
operational stability of all management information systems and bank office
environments. Based upon the risk priorities identified through the inventory
and assessment phase, the Company has tested all critical applications. As part
of the testing process, the Company constructed a stand-alone network to safely
test all networked systems and applications. All critical applications or
systems were deemed through the testing and validation phases to be Year 2000
compliant but will be retested throughout 1999.
The significant possible worst-case risks of the Company's Year 2000 issues
include (1) the inability to process checks through the normal payment system,
(2), the inability to post customer accounts or calculate interest accruals
properly, (3) liquidity risks arising from customers' possible fears about Year
2000 problems, (4) loan losses arising from the business impact of bank
customers not being adequately prepared, and (5) business interruption from
vendors who are not adequately prepared. The Company does not expect any of
these risks to be probable of having a material impact on its operations but has
nevertheless developed contingency plans to address these possibilities.
ITEM 3. QUALITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes since December 31, 1997. See Form 10K,
Item 7 "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Interest Rate Sensitivity and Liquidity".
17
<PAGE> 19
PART II
OTHER INFORMATION
ITEM 1. Not applicable.
ITEM 2. CHANGES IN SECURITIES
There were no changes in securities during the nine months ended September
30, 1998.
ITEM 3. Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
SHAREHOLDER PROPOSALS FOR 1999 ANNUAL MEETING OF SHAREHOLDERS
Any proposal of shareholders to be included in the Company's proxy
statement relating to the Company's 1999 Annual Meeting of Shareholders pursuant
to Rule 14a-8 under the Exchange Act must be received by the Company at its
principal executive offices no later than December 23, 1998; such proposal must
also comply with the Company's Bylaws and Rule 14a-8 if the proposal is to be
considered for inclusion in the Company's proxy statement for such meeting. The
Company must receive notice of any shareholder proposal to be brought before the
meeting outside the process of Rule 14a-8 at the Company's principal executive
offices not less than 45 days nor more than 180 days prior to the meeting;
provided, if the Company gives notice or prior public disclosure of the date of
the annual meeting less than 50 days before the meeting, such shareholders
notice must be received not later than the close of business on the seventh day
following the date on which the Company's notice of the date of the annual
meeting was mailed or public disclosure made. The form of such shareholder
notice must also comply with the Company's Bylaws.
ITEM 5. Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
11 -- Computation of Earnings Per Share. Included as Note (3)
to Interim Consolidated Financial Statements on page 5 of
this Form 10-Q.
27 -- Financial Data Schedule. The required Financial Data
Schedules have been included as Exhibit 27 of the Form
10-Q filed electronically with the Securities and
Exchange Commission.
</TABLE>
18
<PAGE> 20
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
Chairman and Chief Financial
Officer
19
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
27 -- Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 66,311
<INT-BEARING-DEPOSITS> 10,856
<FED-FUNDS-SOLD> 51,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 70,372
<INVESTMENTS-CARRYING> 170,234
<INVESTMENTS-MARKET> 174,121
<LOANS> 854,465
<ALLOWANCE> (9,515)
<TOTAL-ASSETS> 1,311,124
<DEPOSITS> 1,154,816
<SHORT-TERM> 15,562
<LIABILITIES-OTHER> 10,299
<LONG-TERM> 0
22,255
0
<COMMON> 28,913
<OTHER-SE> 79,279
<TOTAL-LIABILITIES-AND-EQUITY> 1,311,124
<INTEREST-LOAN> 57,735
<INTEREST-INVEST> 11,572
<INTEREST-OTHER> 2,767
<INTEREST-TOTAL> 72,074
<INTEREST-DEPOSIT> 20,682
<INTEREST-EXPENSE> 21,323
<INTEREST-INCOME-NET> 50,751
<LOAN-LOSSES> 3,986
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 40,948
<INCOME-PRETAX> 19,043
<INCOME-PRE-EXTRAORDINARY> 19,043
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,895
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.56
<YIELD-ACTUAL> 5.96
<LOANS-NON> 4,878
<LOANS-PAST> 1,219
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 18,197
<ALLOWANCE-OPEN> 7,629
<CHARGE-OFFS> (2,483)
<RECOVERIES> 383
<ALLOWANCE-CLOSE> 9,515
<ALLOWANCE-DOMESTIC> 5,473
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,042
</TABLE>
