<PAGE>
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, 1999
[ ] 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, 1999:
Class of Stock Shares Outstanding
- ----------------------------- -------------------------
Common Stock, Par Value $1.00 23,943,526
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. INTERIM FINANCIAL STATEMENTS
STERLING BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31,
1999 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 101,900 $ 136,089
Interest-bearing deposits in financial institutions 600 600
Securities purchased with an agreement to resell 40,791 32,992
Available-for-sale securities, at fair value 97,697 90,336
Held-to-maturity securities, at amortized cost 150,751 151,121
Loans held for sale 72,710 84,855
Loans held for investment 887,271 864,523
Allowance for credit losses (11,146) (10,170)
----------- -----------
Loans, net 876,125 854,353
Accrued interest receivable 7,551 8,311
Real estate acquired by foreclosure 877 1,593
Premises and equipment, net 38,436 36,539
Goodwill, net 5,782 5,888
Other assets 12,835 13,635
----------- -----------
TOTAL ASSETS $ 1,406,055 $ 1,416,312
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits:
Noninterest-bearing $ 441,673 $ 445,996
Interest-bearing 507,025 507,729
Certificates of deposit and other time deposits 292,647 297,960
----------- -----------
Total deposits 1,241,345 1,251,685
Securities sold under agreements to repurchase and other borrowed funds 10,322 13,428
Accrued interest payable and other liabilities 9,492 9,806
ESOP indebtedeness 186 186
----------- -----------
Total liabilities 1,261,345 1,275,105
COMPANY-OBLIGATED MANDITORILY REDEEMABLE
TRUST PREFERRED SECURITIES OF SUBSIDIARY TRUST 28,750 28,750
MINORITY INTEREST IN STERLING CAPITAL MORTGAGE COMPANY 946 948
Shareholders' equity:
Convertible preferred stock, $1 par value, 1 million shares authorized 139 137
Common stock, $1 par value, 50 million shares authorized 23,943 23,876
Capital surplus 26,843 26,688
Retained earnings 64,069 60,597
ESOP indebtedness (186) (186)
Accumulated other comprehensive income--net unrealized loss on
available-for-sale securities, net of tax 206 397
----------- -----------
Total shareholders' equity 115,014 111,509
=========== ===========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,406,055 $ 1,416,312
=========== ===========
</TABLE>
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE>
STERLING BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1999 1998
--------------------------
(Unaudited)
<S> <C> <C>
Interest income:
Loans, including fees $ 20,790 $ 19,541
Securities:
Taxable 2,803 3,962
Tax-exempt 658 234
Federal funds sold and securities purchased under agreements
to resell 1,152 648
Deposits in financial institutions 56 160
-------- --------
Total interest income 25,459 24,545
Interest expense:
Demand and savings deposits 2,832 3,793
Certificates and other time deposits 3,486 3,353
Other borrowed funds 111 242
ESOP indebtedness - 8
-------- --------
Total interest expense 6,429 7,396
-------- --------
NET INTEREST INCOME 19,030 17,149
Provision for credit losses 1,623 927
-------- --------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 17,407 16,222
Noninterest income:
Customer service fees 2,065 1,957
Equity in earnings of Sterling Capital Mortage Company - 193
Gain on sale of mortgage loans 1,897 -
Other 2,044 996
-------- --------
Total noninterest income 6,006 3,146
Noninterest expense:
Salaries and employee benefits 9,111 6,990
Occupancy expense 2,484 1,715
Net gain and carrying costs of real estate acquired by
foreclosure (71) (14)
FDIC assessment 125 64
Technology 714 900
Postage and delivery charges 372 290
Supplies 391 289
Professional fees 324 405
Minority interest expense:
Company-obligated mandatorily redeemable trust preferred
securitites of subsidiary trust 667 667
Sterling Capital Mortgage Company 26 -
Other 2,539 2,064
-------- --------
Total noninterest expense 16,682 13,370
NET INCOME BEFORE INCOME TAXES 6,731 5,998
Provision for income taxes 2,176 2,048
-------- --------
NET INCOME $ 4,555 $ 3,950
======== ========
EARNINGS PER SHARE:
Basic $ 0.19 $ 0.17
======== ========
Diluted $ 0.19 $ 0.16
======== ========
</TABLE>
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
STERLING BANCSHARES, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
--------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,555 $ 3,950
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Amortization and accretion of premiums and discounts
on securities, net 118 89
Equity in undistributed earnings of Sterling Capital Mortgage
Company - (169)
Provision for credit losses 1,623 927
Write-downs, less gains on sale, of real estate acquired by
foreclosure and repossessed assets (137) -
Depreciation and amortization 1,488 1,267
Net change in loans held for sale 12,145 (23,819)
Gain on the sale of University of Houston office location (450) -
Increase in accrued interest receivable and other assets 1,273 1,938
Decrease in accrued interest payable and other liabilities (216) (3,190)
--------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 20,399 (19,007)
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in securities purchased under agreements to resell (7,799) (11,608)
Proceeds from maturity and paydowns of held-to-maturity securities 5,698 25,632
Purchases of held-to-maturity securities (12,151) -
Proceeds from maturity and paydowns of available-for-sale securities 12,469 25,453
Purchases of available-for-sale securities (13,403) (1,081)
Net increase in loans held for investment (34,312) (36,713)
Proceeds from sale of real estate acquired by foreclosure 853 609
Net decrease in interest-bearing deposits in financial institutions - (9)
Proceeds from sale of University of Houston office location 5,545 -
Proceeds from sale of premises and equipment 140 80
Purchase of premises and equipment (3,522) (1,370)
--------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (46,482) 993
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposit accounts (4,141) 20,437
Net decrease in repurchase agreements/funds purchased (3,106) (25,080)
Proceeds from issuance of common stock and preferred stock 224 1,236
Redemption of preferred stock - (19)
Dividends paid (1,083) (1,160)
--------- --------
NET CASH USED IN FINANCING ACTIVITIES (8,106) (4,586)
NET DECREASE IN CASH AND CASH EQUIVALENTS (34,189) (22,600)
CASH AND CASH EQUIVALENTS:
Beginning of period 136,089 122,052
--------- --------
End of period $ 101,900 $ 99,452
========= ========
SUPPLEMENTAL INFORMATION:
Income taxes paid $ 1,250 $ 713
========= ========
Interest paid $ 6,441 $ 7,287
========= ========
Noncash investing and financing activities:
Acquisitions of real estate through foreclosure of collateral $ - $ 1,153
========= ========
</TABLE>
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
STERLING BANCSHARES, INC., AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
1. Basis of Presentation:
The accompanying unaudited interim 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, 1999, 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, 1998.
2. Earnings Per Common Share
Earnings per common share ("EPS") were computed based on the following (in
thousands, except per share amounts):
Three Months Ended March 31,
1999 1998
----------------- --------------
Per Per
Amount Share Amount Share
------- ------- ------- ------
Net income $ 4,555 $ 3,950
======= =======
Basic:
Weighted average shares
outstanding 23,915 $ 0.19 22,997 $ 0.17
====== ======
Diluted:
Add incremental shares for:
Assumed exercise of
outstanding options 333 803
Assumed conversion of
preferred stock 205 459
------- -------
Total $24,453 $ 0.19 24,259 $ 0.16
======= ====== ======= ======
All previously reported amounts have been restated to reflect the
acquisition of Hometown Bancshares, Inc. on November 20, 1998 and the
acquisition of Humble National Bank on June 30, 1998, both of which were
accounted for using the pooling of interests method.
5
<PAGE>
3. Shareholders' Equity
The following table displays the changes in shareholders' equity for the three-
month periods ended March 31, 1999 and 1998 (in thousands):
Three Months Ended March 31,
1999 1998
----------------------------------------
Equity, beginning of period $111,509 $ 89,360
Comprehensive income:
Net income $ 4,555 $ 3,950
Net change in net unrealized
losses on AFS securities (191) 37
-------- --------
Total comprehensive income 4,364 3,987
Issuance of common stock 193 1,236
Redemption of common stock - (19)
Issuance of preferred stock 31 -
Cash dividends paid (1,083) (1,160)
ESOP indebtedness repayments - 33
-------- --------
Equity, end of period $115,014 $ 93,437
======== ========
4. Segments
On July 2, 1998, Sterling Bank (the "Bank") acquired an additional 40 percent
interest in Sterling Capital Mortgage Company ("SCMC"). The Bank has a total of
80 percent ownership in SCMC and reports its financial position and results of
operations on a consolidated basis. Whereas previously earnings from 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. The commercial banking and mortgage banking
segments are managed separately because each business requires different
marketing strategies and each offers different products and services.
The accounting policies of the segments are the same as those described in Note
1. The Company evaluates each segment's performance based on the profit or loss
from its operations before income taxes, excluding non-recurring items.
Intersegment financing arrangements are accounted for at current market rates as
if they were with third parties.
Summarized financial information by operating segment as of and for the three-
month periods ended March 31, (in thousands) follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------------- ---------------------------------------
COMMERCIAL MORTGAGE COMMERCIAL MORTGAGE
BANKING BANKING TOTAL BANKING BANKING TOTAL
---------- ------ ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 19,030 $ - $ 19,030 $ 17,149 $ - $ 17,149
Noninterest income 3,476 2,530 6,006 2,953 - 2,953
Equity in earnings of SCMC - - - - 193 193
---------- ------ ---------- ---------- ------- ----------
Total revenue 22,506 2,530 25,036 20,102 193 20,295
Provision for credit losses 1,623 - 1,623 927 - 927
Noninterest expense 14,347 2,335 16,682 13,370 - 13,370
---------- ------ ---------- ---------- ------- ----------
Income before income taxes 6,536 195 6,731 5,805 193 5,998
Provision for income taxes 2,107 69 2,176 2,048 - 2,048
---------- ------ ---------- ---------- ------- ----------
Net income $ 4,429 $ 126 $ 4,555 $ 3,757 $ 193 $ 3,950
========== ====== ========== ========== ======= ==========
Total assets $1,401,897 $4,158 $1,406,055 $1,310,061 $ - $1,310,061
========== ====== ========== ========== ======= ==========
</TABLE>
6
<PAGE>
Intersegment interest was paid to Sterling by SCMC in the amount of $736
thousand for the three-month period ended March 31, 1999. Total loans in the
mortgage warehouse of $50 million were eliminated in consolidation as of March
31, 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SIGNIFICANT DEVELOPMENTS
Expansion - On February 24, 1999, the Company entered into an Agreement and Plan
of Consolidation (the "Agreement") with B.O.A. Bancshares Inc., the parent bank
holding company of Houston Commerce Bank, ("Houston Commerce"). The terms of
the Agreement provide that each share of Houston Commerce's common stock will be
canceled and converted into the right to receive a fractional share of the
Company's common stock, for a total of 1,856,600 shares of the Company's common
stock. Houston Commerce had approximately $115.4 million in assets and $105.6
million in deposits as of March 31, 1999. This Agreement is subject to approval
by the shareholders of Houston Commerce and applicable banking regulatory
authorities.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO SAME PERIOD IN 1998
Net Income - Net income for the three-month period ended March 31, 1999, was
$4.6 million as compared to $4.0 million for the same period in 1998, an
increase of approximately $605 thousand or 15.3%. This increase is attributable
to continued solid loan and deposit growth and maintenance of a strong net
interest margin of 6.15% on a tax-equivalent basis for the period.
Net Interest Income - Net interest income for the three-month period ended March
31, 1999, was $19.0 million, as compared to $17.1 million for the same period in
1998, an increase of $1.9 million or 11.0%. The growth in net interest income
is attributable primarily to an increase in average earning assets, enhanced by
the maintenance of a strong net interest margin. Average earning assets for the
three months ended March 31, 1999, were $1.3 billion, up $123 million, or 10.6%
from $1.2 billion for the same period in 1998. The yield on average earning
assets for the three-month period ended March 31, 1999, was 8.09%, as compared
to 8.63% for the same period in 1998. This decrease is due primarily to an
overall decline in interest rates. For the first three months of 1999, average
total loans represented 73.6% of average total interest earning assets, compared
to 71.9% for the same period in 1998. The cost of interest bearing liabilities
declined 63 basis points from 3.81% in 1998 to 3.18% in 1999. The Company's
6.15% tax equivalent net interest margin for the first three months of 1999
increased from the 6.07% net interest margin recorded during the same period in
1998. This is the result of growth in average non-interest bearing demand
deposits of $68.0 million, or 18.8% and the reinvestment of earnings and
issuance of stock resulting in an increase of average equity of $22.0 million,
or 23.9%.
7
<PAGE>
The following schedule gives a comparative analysis of the Company's daily
average interest-earning assets and interest-bearing liabilities for the three-
month periods ended March 31, 1999 and 1998, respectively:
CONSOLIDATED YIELD ANALYSIS
Three months ended March 31,
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998
-------------------------------- -------------------------------
YIELD ANALYSIS Average Average
Balance Interest Yield Balance Interest Yield
---------- ------- ------ ---------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Interest bearing deposits in financial institutions $ 4,842 $ 56 4.69% $ 11,557 $ 160 5.61%
Federal funds sold 54,207 635 4.75% 21,134 297 5.70%
Securites purchased under agreements to resell 34,272 517 6.12% 20,067 351 7.09%
Investment securities (taxable) 184,425 2,803 6.16% 248,613 3,962 6.46%
Investment securities (tax-exempt) 59,047 658 4.52% 22,780 234 4.17%
Loans (taxable) 938,493 20,779 8.98% 828,495 19,526 9.56%
Loans (tax-exempt) 647 11 6.90% 778 15 7.82%
---------- ------- ------ ---------- ------- ------
Total Interest Earning Assets 1,275,933 25,459 8.09% 1,153,424 24,545 8.63%
Noninterest Earning Assets:
Cash and due from banks 70,545 80,924
Premises and equipment, net 37,151 34,645
Other assets 29,541 24,432
Allowance for credit losses (10,712) (8,058)
---------- ----------
Total Noninterest Earning Assets 126,525 131,943
---------- ----------
Total Assets $1,402,458 $1,285,367
========== ==========
Interest Bearing Liabilities:
Demand and savings deposits $ 510,518 $ 2,832 2.25% $ 504,129 $ 3,793 3.05%
Certificates and other time deposits 296,443 3,486 4.77% 262,595 3,353 5.18%
Other borrowings 11,931 111 3.77% 21,247 250 4.77%
---------- ------- ------ ---------- ------- ------
Total Interest Bearing Liabilities 818,892 6,429 3.18% 787,971 7,396 3.81%
Noninterest Bearing Liabilities:
Demand deposits 430,268 362,295
Other liabilities 10,574 14,366
Trust preferred securities 28,750 28,750
Shareholders' equity 113,974 91,985
---------- ----------
583,566 497,396
---------- ----------
Total Liabilities and Shareholders' Equity $1,402,458 $1,285,367
========== ==========
Net Interest Income & Margin $19,030 6.05% $17,149 6.03%
======= ====== ======= ======
Net Interest Income & Margin (tax equivalent) $19,336 6.15% $17,257 6.07%
======= ====== ======= ======
</TABLE>
Provision for Credit Losses - The provision for credit losses for the first
three months of 1999 was $1.6 million, as compared to $927 thousand for the same
period in 1998, an increase of $696 thousand or 75.1%. This increase in the
provision for credit losses is to provide for loan growth. After net charge-
offs of $647 thousand and provisions for the first three months of 1999, the
Company's allowance for credit losses increased by $1.0 million from $10.2
million on December 31, 1998, to $11.1 million on March 31, 1999. Please refer
to the subsequent discussion of Allowance for Credit Losses for additional
insight to management's approach and methodology in estimating the allowance for
credit losses.
8
<PAGE>
Non-interest Income - Total non-interest income for the three-month period ended
March 31, 1999 was $6.0 million, as compared to $3.1 million for the same period
in 1998, an increase of $2.9 million or 90.9%. As a result of the change in
reporting presentation described in Note 4 to the unaudited interim consolidated
financial statements included in Part I of this document, income from SCMC of
$2.5 million is now consolidated into the Bank's income. For the first three
months of 1998, the Company recorded equity earnings of $193 thousand from SCMC.
Also, during the first quarter of 1999, the Company sold its banking office at
the University of Houston for a gain of $450 thousand.
Non-interest income for the three months ended March 31, is summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------ ------------------------------
Commercial Mortgage Commercial Mortgage
Banking Banking Combined Banking Banking Combined
------- -------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Customer service fees $ 2,065 $ - $ 2,065 $ 1,957 $ - $ 1,957
Equity in earnings of Sterling
Capital Mortgage Company - - - - 193 193
Gain on sale of
University of Houston office 450 - 450 - - -
Gain on sale of mortgage loans - 1,897 1,897 - - -
Other 961 633 1,594 996 - 996
------- ------- ------- ------- ------ -------
$ 3,476 $ 2,530 $ 6,006 $ 2,953 $ 193 $ 3,146
======= ======== ======= ======= ====== =======
</TABLE>
The income from SCMC typically consists of fees and gains on sale of mortgage
loans. These gains are from recurring loan production, as the average length of
time a mortgage loan is held in portfolio at SCMC is approximately twenty-five
to thirty days. During the first quarter, SCMC had $220 million in loan
fundings.
Non-interest Expense - Non-interest expense increased $3.3 million, or 24.8%, to
$16.7 million for the first three months of 1999 as compared to $13.4 million
for the same period in 1998. 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 non-interest
expense, as shown in the table below.
Non-interest expense for the three months ended March 31, is summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------ ------------------------------
Commercial Mortgage Commercial Mortgage
Banking Banking Combined Banking Banking Combined
------- -------- -------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 7,797 $ 1,314 $ 9,111 $ 6,990 $ - $ 6,990
Occupancy expense 1,936 548 2,484 1,715 - 1,715
Net gain and carrying costs of
real estate acquired by
foreclosure (71) - (71) (14) - (14)
FDIC assessment 125 - 125 64 - 64
Technology 714 - 714 900 - 900
Postage and delivery charges 322 50 372 290 - 290
Supplies 291 100 391 289 - 289
Professional fees 293 31 324 405 - 405
Minority interest expense 667 26 693 667 - 667
Other 2,273 266 2,539 2,064 - 2,064
------- ------- ------- ------- ------ -------
$14,347 $ 2,335 $16,682 $13,370 $ - $13,370
======= ======= ======= ======= ======= =======
</TABLE>
Salaries and employee benefits from commercial banking for the three-month
period ended March 31, 1999 were $7.8 million, as compared to $7.0 million for
the same period in 1998, an increase of $807 thousand or 11.5%. The increase is
due to an increase in headcount as a result of supporting a larger customer base
and a concentrated effort to increase loan growth. During 1998, the Bank opened
a new office location in Fort Bend County. Also, the Bank hired fifteen new
lenders during 1998 and
9
<PAGE>
seven more during the first quarter of 1999. 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 three-month period
ended March 31, 1999 was $1.9 million, as compared to $1.7 million for the same
period in 1998, an increase of 12.9%. This increase is the result of opening
the new office in Fort Bend County in May 1998, and leasing additional space for
the new cash management, brokerage services, trust administration and call
center areas, as well as for portions of the central departments which have now
outgrown the original central operations office.
The provision for income taxes as a percent of net income before taxes decreased
from 34.1% for the first three months of 1998 to 32.3% for the first three
months of 1999. This decrease is related to the $424 thousand increase in
interest income from tax-exempt securities.
FINANCIAL CONDITION
Total Assets - The total consolidated assets of the Company remained constant at
$1.4 billion.
Cash and Cash Equivalents - The Company had cash and cash equivalents of $101.9
million at March 31, 1999. Comparatively, the Company had $136.1 million in
cash and cash equivalents on December 31, 1998, a decrease of $34.2 million or
25.1%. The decrease was due to the reinvestment of the funds in loans and
repurchase agreements, together with a decrease in deposits.
Securities purchased under agreements to resell - As of March 31, 1999,
securities purchased under agreements to resell totaled $40.8 million as
compared to $33.0 million as of December 31, 1998. 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
improve the overall yield of its liquid investments without substantially
increasing risk. These repurchase agreements generally have a term of nine
months or less.
Securities - The Company's securities portfolio as of March 31, 1999, totaled
$248.4 million, as compared to $241.5 million on December 31, 1998, an increase
of $7.0 million or 2.9%.
Loans Held for Sale - Total loans held for sale decreased from $84.9 million at
December 31, 1998 to $72.7 million at March 31, 1999, a decrease of $12.1
million, or 14.3%. The decrease is primarily due to the sale of the University
of Houston office on March 25, 1999 that held student loans of $9.7 million as
of December 31, 1998.
Loans Held for Investment - As of March 31, 1999, loans held for investment were
$887.3 million. When compared to loans held for investment of $864.5 million on
December 31, 1998, the March 31, 1999 loan balance represents a year-to-date
$22.7 million increase in internal loan production, net of loan reductions, or
an increase of 2.6%. At March 31, 1999, loans held for investment as a
percentage of assets and deposits were 63.1% and 71.5%, respectively.
10
<PAGE>
The following table summarizes the Company's held for investment loan portfolio
by type of loan as of March 31, 1999 (in thousands):
Percent of
Total
-----------
Commercial, financial and industrial $ 326,557 36.80 %
Real estate - commercial 252,971 28.51 %
Real estate - residential mortgage 109,468 12.34 %
Real estate - construction 92,967 10.48 %
Foreign commercial and industrial 5,658 0.64 %
Consumer and other 100,276 11.30 %
Less unearned discount (626) (0.07)%
--------- --------
Total loans held for investment $ 887,271 100.00 %
========= ========
Allowance for Credit Losses - Following is a summary of the changes in the
allowance for credit losses for the three months ended March 31, 1999, and the
relationship of the allowance to total loans at March 31, 1999, and December 31,
1998 (in thousands):
Allowance for credit losses, December 31, 1998 $ 10,170
Charge-offs (731)
Recoveries 84
Provision for credit losses 1,623
----------
Allowance for credit losses, March 31, 1999 $ 11,146
==========
March 31, December 31,
1999 1998
---------- ---------
Loans held for investment at period-end $ 887,271 $ 864,523
Allowance for credit losses $ 11,146 $ 10,170
Allowance as a percent of period-end loans 1.26% 1.18%
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. 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.
Eight properties make up the $877 thousand of other real estate owned ("ORE") at
March 31, 1999. 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 March 31,
1999, the Company has no material foreign loans outstanding or loan
concentrations.
11
<PAGE>
The following table summarizes total non-performing assets and potential problem
loans at December 31, 1998 and at March 31, 1999:
March 31, December 31,
1999 1998
--------- ------------
(In thousands)
Nonaccrual loans $ 4,951 $ 4,048
Restructured loans 303 312
Accruing loans past due 90 days or more 473 621
------- -------
Total nonperforming loans 5,727 4,981
ORE and other foreclosed assets 1,242 1,949
------- -------
Total nonperforming assets $ 6,969 $ 6,930
======= =======
Total nonperforming loans as a % of gross loans held 0.65% 0.58%
for investment
Total nonperforming assets as a % of total assets 0.50% 0.49%
Potential problem loans, other than those shown
above as nonperforming $20,658 $19,700
Premises and Equipment - The Company's premises and equipment, net of
depreciation, as of March 31, 1999, were $38.4 million, as compared to $36.5
million as of December 31, 1998, an increase of $1.9 million or 5.2%.
Deposits - Total deposits as of March 31, 1999, were $1.24 billion, as compared
to $1.25 billion on December 31, 1998, a decrease of $10.3 million, or 0.83%.
Non-interest bearing demand deposits at March 31, 1999, were $441.7 million, as
compared to $446.0 million at December 31, 1998, a decrease of $4.3 million or
0.97%. The percentage of non-interest bearing deposits to total deposits as of
March 31, 1999 continued to be strong at 35.6%. It should be noted that while,
on a period-end basis, deposits remained flat, average total deposits of the
first quarter of 1999 increased by 9.6% compared to the first quarter of 1998
and non-interest bearing deposits increased by 18.8%.
CAPITAL RESOURCES AND LIQUIDITY
Shareholders' Equity - The Company's risk-based capital ratios remain above the
levels designated by regulatory agencies for the Company to be considered as
"well capitalized" on March 31, 1999, with Tier-I capital, total risk-based
capital, and leverage capital ratios of 12.35%, 13.34%, and 9.97%, respectively.
Liquidity - Effective management of balance sheet liquidity is necessary to fund
growth in earning assets and to pay liability maturities, depository withdrawals
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 short-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").
12
<PAGE>
CONTINGENCIES AND UNCERTAINTIES--YEAR 2000
We include this discussion of the Year 2000 problem to update the discussion
contained in our Annual Report on Form 10-K for the year ended December 31,
1998.
GENERAL - This section contains forward-looking statements prepared based on our
best judgments and currently available information. These forward-looking
statements are subject to significant business, third-party, and regulatory
uncertainties and other contingencies, many of which are beyond our control.
These forward-looking statements are also based on our current internal
assessments and remediation plans, incorporating some representations of third-
party servicers, and are subject to change. We cannot assure you that our
results of operations will not be adversely affected by difficulties or delays
in our third parties' Year 2000 readiness efforts. See "Risks" below for a
discussion of factors that may cause such forward-looking statements to differ
from actual results.
The Year 2000 problem involves the risk that computer programs and computer
systems may not perform without interruption into the Year 2000. If computer
systems do not correctly recognize the date change from December 31, 1999 to
January 1, 2000, computer applications that rely on the date field could fail or
create erroneous results. These erroneous results could affect interest
payments or due dates and could cause the temporary inability to process
transactions and to engage in ordinary business activities. Our failure or that
of our suppliers and borrowers to address the Year 2000 problem could have a
material adverse effect on our financial condition, results of operations, or
liquidity.
OUR STATE OF READINESS - We developed and commenced implementation of a
comprehensive plan in April 1997 to ensure that the Company's operational and
financial systems will not be adversely affected by Year 2000 software
programming errors. In October 1995, the boards of directors of the Company and
the Bank approved a three-year technology plan, prior to formal adoption of the
Year 2000 plan. The technology plan represented a comprehensive program to
reengineer and redesign our entire information systems, telecommunications and
technology infrastructure.
Implementation of our Year 2000 Plan has been actively managed by us and
regularly supervised by the banking regulatory authorities. Our Year 2000
project management team has been working to ensure Year 2000 readiness, 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. In addition, we have retained experienced
consultants to assist in the assessment of Year 2000 risks to the Bank's loan
portfolio and overall asset quality. The board of directors of the Company and
the Bank are cognizant of the Year 2000 business risk, have formally reviewed
and approved the Year 2000 plan, and have committed the necessary resources for
successful completion of the project. Senior management is thoroughly involved
in the Year 2000 compliance effort and has closely monitored the effort.
Regular status reports have been furnished to the Company's board of directors.
All employees have been required to attend training programs regarding the Year
2000 issue and our plan.
Our 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 our 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, we have
tested all mission critical applications, with all untested systems being tested
prior to June 30, 1999. As part of the testing process, we constructed a stand
alone network to safely test all networked systems and applications. All mission
critical applications or systems were deemed through the testing and validation
phases to
13
<PAGE>
be Year 2000 compliant but will be retested throughout 1999. Concerning non-
information technology systems (embedded microcontrollers, etc.) we have tested
such things as vault doors, alarm systems and we are not aware of any problems
with such systems.
We have material relationships with several third party vendors whose failure to
address Year 2000 issues could have an adverse effect upon the operations or
financial condition of the Company. We have contacted each of these third party
vendors and requested Year 2000 plan and testing information. Rather than
relying upon the information furnished by our third party suppliers, we have
included the testing of all third party mission critical applications and
systems in our testing plans. In addition, we have contacted our major
borrowers and assessed their exposure to potential Year 2000 difficulties that
might adversely affect their ability to repay their indebtedness to the Bank.
Based upon our evaluation of the Bank's significant borrowers, we do not believe
that Year 2000 problems pose a material risk to the Company's overall asset
quality.
COSTS TO ADDRESS YEAR 2000 ISSUES - We cannot predict the total financial costs
associated with the Year 2000 issue at this time with absolute certainty. We
spent a combined total of $3 million during fiscal years 1996 to 1997 and
approximately $300 thousand during fiscal year 1998 to upgrade our core data
processing, network communications, and teller systems. As part of the
selection process for new systems and software applications, each system and
application upgrade was evaluated for Year 2000 compliance. We estimate 1999
costs related to Year 2000 readiness at $750 thousand. As of March 31, 1999, we
had spent a total of $1.5 million on Year 2000 readiness.
THE RISKS OF OUR YEAR 2000 ISSUES - Our significant possible Year 2000 risks
include:
. the inability to process checks through the normal payment system,
. the inability to post customer accounts or calculate interest accruals
properly,
. liquidity risks arising from customers' possible fears about Year 2000
problems,
. loan losses arising from the business impact of bank or mortgage customers
not being adequately prepared, and
. business interruption from vendors who are not adequately prepared.
We do not expect any of these risks to be probable of having an adverse impact
on our operations. Nevertheless, we have developed contingency plans to address
these possibilities.
OUR CONTINGENCY PLANS - For the computer systems and facilities that we have
determined to be most critical, we expect to complete development, test, and
adopt business contingency plans by June 30, 1999. These plans will conform to
recently issued guidance from the Federal Financial Institutions Examinations
Council on business contingency planning for Year 2000 readiness. Contingency
plans will include manual workarounds and identification of resource
requirements and alternative solutions for resuming critical business processes
in the event of a Year 2000 related failure.
14
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes since December 31, 1998. See Form 10K, Item
7 "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Interest Rate Sensitivity and Liquidity".
PART II. OTHER INFORMATION
ITEM 1. Not applicable.
ITEM 2. CHANGES IN SECURITIES
There were no changes in securities during the three months ended March 31,
1999.
ITEM 3. Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Shareholder Proposals for 2000 Annual Meeting of Shareholders
Any proposal of shareholders to be included in the Company's proxy statement
relating to the Company's 2000 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 24, 1999; 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:
Exhibit 11. Computation of Earnings Per Share
Included as Note (2) to Interim Consolidated Financial Statements on page 5 of
this Form 10-Q.
Exhibit 27. Financial Data Schedule
The required Financial Data Schedules have been included as Exhibit 27 of the
Form 10-Q filed electronically with the Securities and Exchange Commission.
15
<PAGE>
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
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 76,504
<INT-BEARING-DEPOSITS> 600
<FED-FUNDS-SOLD> 66,187
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 97,697
<INVESTMENTS-CARRYING> 150,751
<INVESTMENTS-MARKET> 152,480
<LOANS> 959,981
<ALLOWANCE> (11,146)
<TOTAL-ASSETS> 1,406,055
<DEPOSITS> 1,241,345
<SHORT-TERM> 10,322
<LIABILITIES-OTHER> 10,438
<LONG-TERM> 186
28,750
139
<COMMON> 23,943
<OTHER-SE> 90,932
<TOTAL-LIABILITIES-AND-EQUITY> 1,406,055
<INTEREST-LOAN> 20,790
<INTEREST-INVEST> 3,461
<INTEREST-OTHER> 1,208
<INTEREST-TOTAL> 25,459
<INTEREST-DEPOSIT> 6,318
<INTEREST-EXPENSE> 6,429
<INTEREST-INCOME-NET> 19,030
<LOAN-LOSSES> 1,623
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 16,682
<INCOME-PRETAX> 6,731
<INCOME-PRE-EXTRAORDINARY> 6,731
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,555
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.19
<YIELD-ACTUAL> 6.05
<LOANS-NON> 4,951
<LOANS-PAST> 473
<LOANS-TROUBLED> 303
<LOANS-PROBLEM> 20,658
<ALLOWANCE-OPEN> 10,170
<CHARGE-OFFS> 731
<RECOVERIES> 84
<ALLOWANCE-CLOSE> 11,146
<ALLOWANCE-DOMESTIC> 5,989
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,157
</TABLE>
