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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-20750
STERLING BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
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TEXAS 74-2175590
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) Identification number)
15000 NORTHWEST FREEWAY 77040
Houston, Texas (Zip Code)
(Address of principal executive offices)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 466-8300
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
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TITLE OF EACH CLASS SHARES OUTSTANDING AT DECEMBER 31, 1998
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Common Stock, $1 Par Value 23,876,267
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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 Exchange Act of
1934 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (17 CFR 229.405) is not contained herein, and will
not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the registrant's Common Stock held by non-
affiliates as of February 26, 1999, was $231,019,092 based on the closing
sales price of $12.00 on such date.
As of March 1, 1999, registrant had outstanding 23,912,830 shares of Common
Stock, $1.00 par value.
DOCUMENTS INCORPORATED BY REFERENCE: Proxy Statement for the Annual Meeting
of Shareholders to be held April 26, 1999 (Part III)
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Page 1 of 63 Total Pages
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PART -- I
ITEM 1 -- BUSINESS
GENERAL
Sterling Bancshares, Inc. (the "Company"), headquartered in Houston, Texas, is a
bank holding company that provides commercial and retail banking services
primarily in the Houston metropolitan area through the community banking offices
of Sterling Bank, a banking association chartered under the laws of the State of
Texas ("Sterling Bank"), and Clear Lake National Bank, a national banking
association chartered under the laws of the United States ("Clear Lake
National"). (Sterling Bank and Clear Lake National are collectively referred to
as the "Bank"). Also, the Company provides mortgage banking services through
its 80 percent ownership of Sterling Capital Mortgage Company ("SCMC").
The Company's principal executive offices are located at 15000 Northwest
Freeway, Houston, Texas, 77040 and its telephone number is (713) 466-8300. The
Company was incorporated under the laws of the State of Texas in 1980 and became
the parent bank holding company of Sterling Bank in 1981 and Clear Lake National
in 1998. Sterling Bank was chartered in 1974 and Clear Lake National was
chartered in 1981. The Company completed its initial public offering on
October 22, 1992.
The Company had approximately 618 and 281 full time equivalent employees,
including 151 and 30 officers, in its commercial banking and mortgage banking
segments, respectively, as of December 31, 1998. At December 31, 1998, the
Company had total assets of $1.4 billion, deposits of $1.3 billion, and
shareholders' equity of $111.5 million.
The Company has two operating segments: commercial banking and mortgage banking.
Each segment is managed separately because each business requires different
marketing strategies and each offers different products and services. See
Note T to the Consolidated Financial Statements for summarized financial
information by operating segment.
COMMERCIAL BANKING
The Bank provides a wide range of retail and commercial banking services,
including demand, savings and time deposits; commercial, real estate and
consumer loans; merchant credit card services; letters of credit; and cash and
asset management services. In addition, the Bank facilitates sales of
brokerage, mutual fund, and insurance products. The deposits of the Bank are
insured by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation ("FDIC").
The primary lending focus of the Bank is on commercial loans and owner-occupied
real estate loans to local businesses with annual sales ranging from $300,000 to
$30 million. Typically, the Bank's customers have financing requirements
between $100,000 and $500,000. The Bank does not seek loans of more than $2
million but will consider larger lending relationships which involve exceptional
levels of credit quality. The Bank's credit range, while well below its legal
lending limit of $13.7 million, allows for greater diversity in the loan
portfolio, less competition from large banks, and better pricing opportunities.
SUPERCOMMUNITY BANKING STRATEGY. The Bank's business strategy is generally
known as a supercommunity bank strategy. Under this strategy, the Bank provides
a broad line of financial products and services to small and medium-sized
businesses and consumers through full service community banking offices. Each
banking office has senior management, with significant lending experience, who
exercise substantial authority over credit and pricing decisions, subject to
loan committee approval for larger credits. This decentralized management
approach, coupled with continuity of service by the same staff members, enables
the Bank to develop long-term customer relationships, maintain high quality
service and respond quickly to customer needs. The Company believes that its
emphasis on local relationship banking, together with a conservative approach to
lending and resultant high asset quality, are important factors in the success
and growth of the Bank.
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The Company and the Bank have maintained a strong community orientation by,
among other things, supporting the active participation of staff members in
local charitable, civic, school, religious and community development activities.
Each banking office may also appoint selected customers to a business
development board that assists in introducing prospective customers to the Bank
and in developing or improving products and services to meet customer needs. As
a result of the development of broad banking relationships with customers and
the convenience and service of the Company's twenty banking offices, lending and
investing activities are funded almost entirely by core deposits, over one-third
of which are noninterest bearing demand deposits.
The Bank centralizes operational and support functions that are transparent to
customers in order to achieve consistency and cost efficiencies in the delivery
of products and services by each banking office. The central office provides
services such as data processing, bookkeeping, accounting, loan administration,
loan review, compliance, legal management, and internal auditing to all twenty
community banking offices to enhance their delivery of quality service. The
Company also provides overall direction in the areas of credit policy and
administration, strategic planning, marketing, investment portfolio management,
and other financial and administrative services. The community banking offices
work closely with the Company to develop new products and services needed by
their customers and introduce enhancements to existing products and services.
MORTGAGE BANKING
The Company originates, sells and services single family residential mortgages
through its 80 percent ownership of SCMC. SCMC has production offices in Texas,
Illinois, Colorado, and Arizona, with corporate offices in Houston, Texas. The
typical mortgage originated by SCMC is approximately $110,000. A substantial
portion of SCMC's loan production is generated through joint ventures known as
affiliated business arrangements with established home builders and realtor-
based organizations. SCMC is an approved Government National Mortgage
Association ("GNMA") Issuer of Mortgage-Backed Securities. SCMC is also an
approved Federal National Mortgage Association ("FNMA") and Federal Home Loan
Mortgage Corporation ("FHLMC") seller/servicer and a HUD-Approved Title II
nonsupervised mortgagee. During 1998, SCMC funded approximately $1 billion in
residential mortgage loans.
EXPANSION
The Company's growth strategy has been concentrated on increasing its community
banking presence in the greater Houston area. The Company has grown through a
combination of internal growth, mergers and acquisitions, and the opening of new
community banking offices.
MERGERS AND ACQUISITIONS. On November 20, 1998, the Company acquired Hometown
Bancshares, Inc. ("Hometown"), which was the bank holding company for Clear Lake
National, in a stock-for-stock merger. The acquisition of Hometown added $92
million in total assets and $84 million in total deposits to the Company's
balance sheet. Clear Lake National operates two locations in the Clear Lake
area of southeast Houston. The Company plans to merge Clear Lake National into
Sterling Bank in the second quarter of 1999 to create Sterling Bank's nineteenth
and twentieth banking offices.
On June 30, 1998, Humble National Bank ("Humble") was acquired by the Company in
a stock-for-stock merger. The acquisition of Humble added $54 million in total
assets and $49 million in total deposits to the Company's balance sheet. Humble
operates a full service banking office in the Humble area of northeast Houston.
During August 1998, the Company merged Humble into Sterling Bank to create
Sterling Bank's eighteenth banking office.
On September 30, 1997, the Company completed the acquisition of First Houston
Bancshares, Inc. ("First Houston") and its wholly owned subsidiary bank, Houston
National Bank ("Houston National"), in a stock-for-stock merger. The
acquisition of First Houston added $135 million in total assets and $125 million
in total deposits to the Company's balance sheet. In October 1997, Houston
National was merged into the Bank adding the Bayou Bend Office at 5757 Memorial
Drive to the Bank's expanding office network.
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In September 1996, the Bank acquired a 40% equity interest in SCMC. On July 2,
1998, the Company acquired an additional 40% equity ownership in SCMC resulting
in a total of 80% equity ownership.
DE NOVO OFFICES. 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. 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 and will be convertible into a maximum of 76,875
shares of the Company's common stock. The conversion ratio is dependent upon
the Fort Bend office meeting certain performance goals.
In January 1998, the Company opened a new 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. 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.
During 1996, the Company opened two new community banking offices, the first in
the Upper Kirby district of central Houston, and the second in the Galleria area
of Houston. The Company opened a full service office in the Cypress Station
area, north of the city, in January 1997.
The Company will continue to seek acquisition and new office opportunities when
available and consistent with its community banking philosophy. To accommodate
further growth, the Company will continue to upgrade its central office data
processing and telecommunication systems and facilities to provide the Company
with the technological capacity necessary to meet the needs and expectations of
its customers.
COMPETITION
The Company engages in highly competitive activities. Each activity and market
served involves competition with other banks and mortgage companies, as well as
with non-banking and non-financial enterprises that offer financial products and
services that compete directly with the Company's product and service offerings.
The Company actively competes with other banks and mortgage companies in its
efforts to obtain deposits and make loans, in the scope and types of services
offered, in interest rates paid on time deposits and charged on loans, and in
other aspects of banking.
In addition to competing with other banks and mortgage companies, the Company
competes with other financial institutions engaged in the business of making
loans or accepting deposits, such as savings and loan associations, credit
unions, industrial loan associations, insurance companies, small loan companies,
finance companies, real estate investment trusts, certain governmental agencies,
credit card organizations and other enterprises. In recent years, competition
for funds from securities brokers for money market accounts has also
intensified. Additional competition for deposits comes from government and
private issues of debt obligations and other investment alternatives for
depositors such as money market funds. The Bank also competes with a variety of
other institutions in providing brokerage services.
SUPERVISION AND REGULATION
References herein to applicable statutes and regulations are brief summaries
thereof, do not purport to be complete and are qualified in their entirety by
reference to such statutes and regulations.
THE BANK HOLDING COMPANY
The Company and its second tier holding company, Sterling Bancorporation, Inc.,
are bank holding companies registered under the Bank Holding Company Act of
1956, as amended ("BHCA"), and are subject to supervision and regulation by the
Federal Reserve Board. Federal laws subject bank holding companies to
particular
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restrictions on the types of activities in which they engage, and to a range of
supervisory requirements and activities, including regulatory enforcement
actions for violations of laws and policies. In addition, Texas law authorizes
the Texas Department of Banking to supervise and regulate a holding company
controlling a state bank.
PERMISSIBLE ACTIVITIES
As a bank holding company, the activities of the Company, as well as the
activities of entities which are controlled by the Company or of which the
Company owns 5% or more of the voting securities, are limited by the BHCA to
banking, management and control of banks, furnishing or performing services for
its subsidiaries, or any other activity which the Federal Reserve Board
determines to be incidental or closely related to banking or managing or
controlling banks. In approving acquisitions by the Company of entities engaged
in banking-related activities, the Federal Reserve Board considers a number of
factors, including the expected benefits to the public, such as greater
convenience and increased competition or gains in efficiency, which are weighted
against the risks of possible adverse effects, such as an attempt to monopolize
the business of banking, undue concentration of resources, decreased or unfair
competition, conflicts of interest, or unsound banking practices.
MORTGAGE COMPANY
SCMC is an approved GNMA Issuer of Mortgage-Backed Securities. SCMC is also an
approved FNMA and FHLMC seller/servicer and a HUD-Approved Title II
nonsupervised mortgagee. As such, SCMC must operate under certain guidelines
set forth by GNMA, FNMA, FHLMC and HUD. As a majority owned subsidiary of a
bank holding company, SCMC is also subject to the regulatory authority of the
FDIC, the Texas Department of Banking and the Federal Reserve Board.
NON-BANKING ACTIVITIES
The BHCA sets forth exceptions to its general prohibition against bank holding
company ownership of voting shares in any company engaged in non-banking
activities. The exceptions include certain activities exempt based upon the
type of activity and those determined by the Federal Reserve Board to be closely
related to banking or managing or controlling banks. The Economic Growth and
Regulatory Paperwork Reduction Act of 1996 ("EGRPRA"), signed into law on
September 30, 1996, streamlined the non-banking activities application process
for bank holding companies which qualified as well-capitalized and well-managed.
SAFETY AND SOUNDNESS STANDARDS
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") expanded the Federal Reserve Board's authority to prohibit activities
of bank holding companies and their non-banking subsidiaries which represent
unsafe and unsound banking practices or which constitute violations of laws or
regulations. Notably, FIRREA increased the amount of civil money penalties that
the Federal Reserve Board can assess for certain activities conducted on a
knowing and reckless basis, if those activities cause a substantial loss to a
depository institution. The penalties can be as high as $1 million per day.
FIRREA also expanded the scope of individuals and entities against which such
penalties may be assessed.
On July 10, 1995, the four federal agencies that regulate banks and savings
associations (FDIC, Federal Reserve Board, the Office of the Comptroller of the
Currency and the Office of Thrift Supervision) jointly issued guidelines for
safe and sound banking operations (Interagency Guidelines Establishing Standards
for Safety and Soundness) as required by Section 132 of the Federal Deposit
Insurance Corporation Improvement Act ("FDICIA"). The guidelines identify the
fundamental standards that the four agencies follow when evaluating the
operational and managerial controls at insured institutions. An institution's
performance will be evaluated against these standards during the regulators'
periodic on-site examinations.
DIVIDEND RESTRICTIONS
It is the policy of the Federal Reserve Board that bank holding companies should
pay cash dividends on common stock only out of income available over the past
year and only if prospective earnings retention is
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consistent with the organization's expected future needs and financial
condition. The policy provides that bank holding companies should not maintain a
level of cash dividends that undermines the bank holding company's ability to
serve as a source of strength to its banking subsidiaries.
Under Federal Reserve Board policy, a bank holding company is expected to act as
a source of financial strength to each of its banking subsidiaries and commit
resources to their support. Such support may be required at times when, absent
this Federal Reserve Board policy, a bank holding company may not be inclined to
provide it.
CAPITAL ADEQUACY REQUIREMENTS
The Federal Reserve Board monitors the capital adequacy of bank holding
companies. The Bank is subject to the capital adequacy requirements promulgated
by the FDIC and the Texas Department of Banking.
The Federal Reserve Board has adopted a system using risk-based capital adequacy
guidelines to evaluate the capital adequacy of bank holding companies. Under
the risk-based capital guidelines, different categories of assets are assigned
different risk weights, based generally on the perceived credit risk of the
asset. These risk weights are multiplied by corresponding asset balances to
determine a "risk-related" asset base. Certain off balance sheet items are added
to the risk-weighted asset base by converting them to a balance sheet equivalent
and assigning to them the appropriate risk weight. In addition, the guidelines
define each of the capital components. Total capital is defined as the sum of
"core capital elements" ("Tier 1") and "supplemental capital elements"
("Tier 2"), with "Tier 2" being limited to 100% of "Tier 1." For bank holding
companies, "Tier 1" capital includes, with certain restrictions, common
shareholders' equity, perpetual preferred stock, and minority interest in
consolidated subsidiaries. "Tier 2" capital includes, with certain limitations,
certain forms of perpetual preferred stock, as well as maturing capital
instruments and the reserve for credit losses. The guidelines require
achievement of a minimum ratio of total capital-to-risk-weighted assets of 8.0%
(of which at least 4.0% is required to be comprised of "Tier 1" capital
elements). At December 31, 1998, the Company's ratios of "Tier 1" and "Total"
capital-to-risk-weighted assets were 11.89%, and 12.80%, respectively.
In addition to the risk-based capital guidelines, the Federal Reserve Board and
the FDIC have adopted the use of a minimum Tier 1 leverage ratio as an
additional tool to evaluate the capital adequacy of banks and bank holding
companies. The banking organization's Tier 1 leverage ratio is defined to be a
company's "Tier 1" capital divided by its average total consolidated assets. The
leverage ratio adopted by the federal banking agencies requires a minimum 3.0%
"Tier 1" capital to total assets ratio for institutions with the highest
regulatory rating. All other institutions will be expected to maintain a
leverage ratio of 4.0% to 5.0%. The Company's leverage ratio at December 31,
1998 of 9.67% significantly exceeded the regulatory minimum.
IMPOSITION OF LIABILITY FOR UNDERCAPITALIZED SUBSIDIARIES
A bank holding company that fails to meet the applicable risk-based capital
standards will be at a disadvantage. For example, Federal Reserve Board policy
discourages the payment of dividends by a bank holding company from borrowed
funds as well as payments that would adversely affect capital adequacy. Failure
to meet the capital guidelines may result in institution of appropriate
supervisory or enforcement actions by the Federal Reserve Board. FDICIA
requires bank regulators to take "prompt corrective action" to resolve problems
associated with insured depository institutions whose capital declines below
certain levels.
AUDIT REPORTS
The regulations promulgated by the FDIC to implement FDICIA require depository
institutions with assets of $500 million or more to conform to the new
procedures. The Bank qualifies as an institution with assets of more than $500
million and is subject to the audit and reporting requirements of FDICIA.
FDICIA requires insured institutions to submit annual audit reports prepared by
independent auditors to federal and state regulators. The audit report of the
institution's holding company can be used to satisfy this requirement. Auditors
must apply procedures agreed to by the FDIC to determine compliance by the
institution or holding company with legal requirements designated by FDICIA.
The annual audit report must include financial statements prepared in accordance
with generally accepted accounting principles, statements concerning
management's responsibility for the financial statements and internal controls
designated by the FDIC, and an
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attestation by the auditor regarding the statements of management. For certain
large institutions, independent auditors may be required to review quarterly
financial statements. FDICIA requires that independent audit committees be
formed, consisting solely of outside directors. The Company has an audit
committee comprised of outside directors who are certified public accountants
and, therefore, is in compliance with the requirements for large institutions.
ACQUISITIONS BY BANK HOLDING COMPANIES
The BHCA requires a bank holding company to obtain the prior approval of the
Federal Reserve Board before it may acquire all or substantially all of the
assets of any bank, or ownership or control of any voting shares of any bank, if
after such acquisition it would own or control, directly or indirectly, more
that 5% of the voting shares of such bank. In approving bank acquisitions, the
Federal Reserve Board considers the financial and managerial resources and
future prospects of the bank holding company and the banks concerned, the
convenience and needs of the communities to be served, and various competitive
factors. The Attorney General of the United States may, within 30 days after
approval of an acquisition by the Federal Reserve Board, bring an action
challenging such acquisition under the federal antitrust laws, in which case the
effectiveness of such approval is stayed pending a final ruling by the courts.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act of 1977 ("CRA") and the regulations promulgated
by the FDIC to implement CRA are intended to ensure that banks meet the credit
needs of their service area, including low and moderate income communities and
individuals, consistent with safe and sound banking practices. In 1995, the bank
regulatory agencies adopted final regulations for implementing CRA. These
regulations effect extensive changes to the existing procedures for determining
compliance with CRA. The CRA regulations also require the banking regulatory
authorities to evaluate a bank's record in meeting the needs of its service area
when considering applications to establish new offices or consummate any merger
or acquisition transaction. Under FIRREA, the federal banking agencies are
required to rate each insured institution's performance under CRA and to make
such information publicly available. In the case of an acquisition by a bank
holding company, the CRA performance record of the banks involved in the
transaction are reviewed as part of the processing of the acquisition
application. A CRA rating other than `outstanding' or `satisfactory' can
substantially delay or block the transaction. Based upon its most recent
examination, Sterling Bank has a satisfactory CRA rating.
INTERSTATE BANKING
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Branching Act") has increased the ease and likelihood of interstate
acquisitions throughout much of the United States. The Interstate Branching Act
removes state law barriers to acquisitions in all states and allows multi-state
banking operations to merge into a single bank with interstate branches.
Interstate banking and branching authority will be subject to certain conditions
and restrictions, such as capital adequacy, management and CRA compliance. The
Interstate Bank Act preempts existing barriers that restrict entry into all
states - such as regional compacts and reciprocity agreements - thus creating
opportunities for expansion into markets that were previously closed. Under the
law, bank holding companies are now able to acquire banks in any state, subject
to certain conditions. Banks acquired pursuant to this authority may
subsequently be converted to branches. Interstate branching is permitted by
allowing banks to merge across state lines to form a single institution.
Interstate merger transactions can be used to consolidate existing multi-state
operations or to acquire new branches. A bank may establish a new branch as its
initial entry into a state only if the state has authorized de novo branching.
In addition, out-of-state banks may merge with a single branch of a bank if the
state has authorized such a transaction. The Federal Reserve Board, however,
will only allow the acquisition by a bank holding company of an interest in any
bank located in another state if the statutory laws of the state in which the
target bank is located expressly authorize such acquisitions. The interstate
branching provisions became effective on June 1, 1997, unless a state took
action before that time. Texas elected to "opt out" of the Interstate Branching
Act. Despite Texas' having opted out of the Riegle-Neal Act, the Texas Banking
Act permits, in certain circumstances, out-of-state bank holding companies to
acquire certain existing banks and bank holding companies in Texas.
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STERLING BANK AND CLEAR LAKE NATIONAL BANK
Sterling Bank is a Texas-chartered banking association. Clear Lake National is a
nationally chartered bank. Their deposits are insured by the FDIC; therefore,
both banks are subject to the supervision and regulation by the FDIC. Sterling
Bank is subject to the supervision and regulation of the Texas Department of
Banking and Clear Lake National is subject to the supervision and regulation of
the Office of the Comptroller of the Currency. Pursuant to such regulation, the
banks are subject to special restrictions, supervisory requirements and
potential enforcement actions. Neither bank is a member of the Federal Reserve
System; however, the Federal Reserve Board also has supervisory authority that
directly affects the Bank. Sterling Bank is a member of the Federal Home Loan
Bank and, therefore, is subject to compliance with its requirements.
PERMISSIBLE ACTIVITIES FOR STATE-CHARTERED INSTITUTIONS
The Texas Constitution provides that a Texas-chartered bank has the same rights
and privileges that are or may be granted to national banks domiciled in Texas.
FDICIA provides that no state bank or subsidiary thereof may engage as principal
in any activity not permitted for national banks, unless the institution
complies with applicable capital requirements and the FDIC determines that the
activity poses no significant risk to the Bank Insurance Fund ("BIF").
BRANCHING
Texas law provides that a Texas-chartered bank can establish a branch anywhere
in Texas provided that the branch is approved in advance by the Commissioner of
the Texas Department of Banking (the "Commissioner"). The branch must also be
approved by the FDIC, which considers a number of factors, including financial
history, capital adequacy, earnings prospects, character of management, needs of
the community, and consistency with corporate powers. There are no federal
limitations on the ability of insured non-member state banks to branch across
state lines; however, such branching would be subject to applicable state law
restrictions.
RESTRICTIONS ON SUBSIDIARY BANKS
Dividends paid by the Bank are the primary source of the Company's cash flow.
Although the Bank elected in August 1997 to temporarily suspend the payment of
dividends to the Company and to use the proceeds from the issuance of $28.75
million of trust preferred securities by Sterling Bancshares Capital Trust I to
meet the Company's current cash flow needs, the Bank is expected to provide
substantially all of the Company's cash flow in the foreseeable future. Under
federal law, the Bank may not pay a dividend that results in an
"undercapitalized" situation. At December 31, 1998, there was an aggregate of
approximately $37.5 million available for the payment of dividends by the Bank
to the Company without prior regulatory approval.
Other requirements in Texas law affecting the operation of subsidiary banks
include requirements relating to maintenance of reserves against deposits,
restrictions on the nature and amount of loans that may be made and the interest
that may be charged thereon and limitations relating to investments and other
activities.
EXAMINATIONS
The FDIC periodically examines and evaluates insured banks. FDIC examinations
are conducted every 12 months. The FDIC may, however, accept the result of a
Texas Department of Banking examination in lieu of conducting an independent
examination. FDICIA authorized the FDIC to assess the institution for its costs
of conducting the examinations.
The Commissioner also conducts examinations annually, unless additional
examinations are deemed necessary to safeguard the interests of shareholders,
depositors and creditors. The Commissioner may accept the results of a federal
examination in lieu of conducting an independent examination. However, since
the total assets of the Bank exceeded $1 billion at December 31, 1998, the FDIC
and the Texas Department of Banking will jointly examine the Bank on an annual
basis.
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DEPOSIT INSURANCE ASSESSMENTS
The FDIC assesses deposit insurance premiums on all banks in order to adequately
fund the BIF so as to resolve any insured institution that is declared insolvent
by its primary regulator. The FDIC has established a risk-based deposit
insurance premium system to calculate a depository institution's semi-annual
deposit insurance assessment. The FDIC's semi-annual assessment is based upon
the designated reserve ratio for the deposit insurance fund and the probability
and extent to which the deposit insurance fund will incur a loss with respect to
the institution. In addition, the FDIC can impose special assessments to cover
the cost of borrowings from the U.S. Treasury, the Federal Financing Bank, and
BIF member banks.
The FDIC established a process for raising or lowering all rates for insured
institutions semi-annually if conditions warrant a change. Under this new
system, the FDIC has the flexibility to adjust the assessment rate schedule
twice a year without seeking prior public comment, but only within a range of
five cents per $100 above or below the premium schedule adopted. The FDIC can
make changes in the rate schedule outside the five-cent range above or below the
current schedule only after a full rulemaking with opportunity for public
comment.
On September 30, 1996, President Clinton signed into law an act that contained a
comprehensive approach to recapitalizing the Savings Association Insurance Fund
("SAIF") and to assure the payment of the Financing Corporation's ("FICO") bond
obligations. Under this new act, banks insured under the BIF are required to
pay a portion of the interest due on bonds that were issued by FICO to help
shore up the ailing Federal Savings and Loan Insurance Corporation in 1987. The
BIF rate must equal one-fifth of the SAIF rate through year-end 1999, or until
the insurance funds are merged, whichever occurs first. Thereafter BIF and SAIF
payers will be assessed pro rata for the FICO bond obligations. With regard to
the assessment for the FICO obligation, the current BIF rate is .0126% of
deposits and the SAIF rate is .0630% of deposits.
EXPANDING ENFORCEMENT AUTHORITY
One of the major additional impacts imposed on the banking industry by FDICIA is
the increased ability of banking regulators to monitor the activities of banks
and their holding companies. In addition, the Federal Reserve Board and FDIC
have extensive authority to police unsafe or unsound practices and violations of
applicable laws and regulations by depository institutions and their holding
companies. For example, the FDIC may terminate the deposit insurance of any
institution which it determines has engaged in an unsafe or unsound practice.
The agencies can also assess civil money penalties, issue cease and desist or
removal orders, seek injunctions, and publicly disclose such actions. FDICIA,
FIRREA and other laws have expanded the agencies' authority in recent years, and
the agencies have not yet fully tested the limits of their powers.
EFFECT ON ECONOMIC ENVIRONMENT
The policies of regulatory authorities, including the monetary policy of the
Federal Reserve Board, have a significant effect on the operating results of
bank holding companies and their subsidiaries. Among the means available to the
Federal Reserve Board to affect the money supply are open market operations in
U.S. government securities, changes in the discount rate on member bank
borrowings, and changes in reserve requirements against member bank deposits.
These means are used in varying combinations to influence overall growth and
distribution of bank loans, investments and deposits, and their use may affect
interest rates charged on loans or paid for deposits.
Federal Reserve Board monetary policies have materially affected the operating
results of commercial banks in the past and are expected to continue to do so in
the future. The nature of future monetary policies and the effect of such
policies on the business and earnings of the Company and its subsidiaries cannot
be predicted.
CONSUMER LAWS AND REGULATIONS
In addition to these laws and regulations, banks are also subject to certain
consumer laws and regulations that are designed to protect consumers in
transactions with banks. Among the more prominent of such laws and regulations
are the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds
Transfer Act, the
9
<PAGE>
Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair
Credit Reporting Act, and the Fair Housing Act. These laws and regulations
mandate certain disclosure requirements and regulate the manner in which
financial institutions must deal with customers when taking deposits or making
loans to such customers. The Bank must comply with the applicable provisions of
these consumer protection laws and regulations as part of their ongoing customer
relations.
YEAR 2000 COMPLIANCE
GENERAL. The Year 2000 risk involves computer programs and computer software
that may not able to 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. Such erroneous results could affect interest,
payment or due dates or cause the temporary inability to process transactions,
send invoices or engage in normal business activities. If the Company, its
suppliers and its borrowers do not properly address these issues, there could be
a material adverse impact on the Company's financial condition or results of
operations.
REGULATORY OVERSIGHT. On May 5, 1997, the Federal Financial Institutions
Examination Council ("FFIEC") which is comprised of the four major banking
regulatory agencies promulgated guidelines that federally supervised financial
institutions are expected to follow to ensure that their information processing
systems are Year 2000 compliant. The Year 2000 guidelines delineate specific
actions and conversion efforts which financial institutions should address and
implement as part of the Year 2000 planning process. The guidelines identify
five critical phases that each financial institution must incorporate into its
Year 2000 program. The Year 2000 guidelines also address external and operating
issues that must be evaluated in the planning process. The federal banking
agencies conducted numerous supervisory reviews of all depository institutions
during 1998 and follow-up assessments are expected throughout 1999 and, if
necessary, will schedule comprehensive on-site examinations to evaluate the
adequacy of each bank's Year 2000 plans and conversion programs. In furtherance
of the supervisory responsibilities of the bank regulatory agencies, the FFIEC
issued examination guidelines in December 1997 for evaluating the Year 2000
readiness of all federally supervised financial institutions and data centers.
The examination guidelines direct the federal banking regulatory agencies to
assess (i) each institution's information, accounting and risk control systems,
(ii) the awareness and commitment of both the board of directors and
management to Year 2000 issues, (iii) the allocation of resources and personnel
to Year 2000 planning, (iv) the scope and integrity of the institution's
assessment, planning and corrective efforts, (v) the scope and adequacy of
testing plans, (vi) the reliance on vendors and third party providers and the
testing and validation of their applications and systems, and (vii) the
institution's assessment of the impact of Year 2000 risks on bank customers,
particularly with respect to credit relationships. If the appropriate regulatory
authority determines that the examined institution has not appropriately
addressed potential Year 2000 risks and planning considerations, prompt
corrective action or other enforcement action may be taken. Further information
regarding the Company's Year 2000 plan and related initiatives is discussed
further on page 28 at "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
10
<PAGE>
ITEM 2 -- PROPERTIES
The principal executive offices of the Company and Sterling Bank, as well as the
Company's management information systems, are located at 15000 Northwest
Freeway, Houston, Texas, 77040, in a building owned by Sterling Bank. In
addition to its principal office, the Company operates the following locations:
Owned Leased Total
--------- ---------- ---------
Banking offices in the Houston 8 12 20
metropolitan area
Central department offices 1 4 5
Mortgage production offices
Arizona 4 4
Colorado 1 1
Illinois 1 1
Texas 14 14
--------- ---------- ---------
Total 9 36 45
========= ========== =========
ITEM 3 -- LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries is presently involved in any
material legal proceedings.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART -- II
ITEM 5 -- MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
The Company's stock trades through the NASDAQ Stock Market under the symbol
SBIB. The following table sets forth the high and low closing stock prices of
the Company's common stock, as quoted on the NASDAQ Stock Market and the
dividends paid thereon for each quarter of the last two fiscal years. This
information has been restated to reflect all stock splits occurring prior to the
issuance of this report.
HIGH LOW DIVIDEND
-------- -------- ---------
1998
First quarter $ 17.00 $ 13.69 $ 0.0400
Second quarter 18.25 15.00 0.0400
Third quarter 15.94 11.94 0.0400
Fourth quarter 16.00 12.13 0.0400
1997
First quarter $ 11.00 $ 8.11 $ 0.0367
Second quarter 12.50 9.00 0.0367
Third quarter 13.67 11.58 0.0367
Fourth quarter 15.00 12.17 0.0367
11
<PAGE>
On January 25, 1999, the Company's Board of Directors declared a quarterly cash
dividend of $0.045 payable on February 22, 1999, to shareholders of record on
February 5, 1999. The Company intends to continue to pay a dividend at the rate
of $0.045 per share quarterly throughout 1999.
On January 26, 1998, the Company's Board of Directors declared a three-for-two
stock split (effected as a 50% stock dividend) of the Company's common stock
distributed on February 20, 1998, to shareholders of record on February 6, 1998.
Concurrently with the 1998 stock split, the Company declared a quarterly $0.04
cash dividend (computed on an "after-split" basis) payable on February 20, 1998,
to shareholders of record on February 6, 1998.
On January 27, 1997, the Company's Board of Directors declared a three-for-two
stock split (effected as a 50% stock dividend) to shareholders of record on
February 10, 1997, with shares distributed on February 24, 1997. Concurrently
with the 1997 stock split, the Company declared a quarterly $0.0367 cash
dividend (computed on an "after-split" basis) payable on February 24, 1997, to
shareholders of record on February 10, 1997. The 1997 dividend information
disclosed above is reflective of both the 1998 and 1997 stock split.
As of March 1, 1999, there were 818 shareholders of record of common stock. The
number of beneficial shareholders is unknown to the Company at this time.
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The authorized capital stock of the Company consists of (i) 50,000,000 shares of
Common Stock, $1.00 per share par value, of which 23,876,267 shares were issued
and outstanding as of December 31, 1998 and (ii) 1,000,000 shares of Preferred
Stock, $1.00 per share par value ("Preferred Stock"), issuable in series, of
which 50,233 shares of Series D, 27,000 shares of Series E, 25,500 shares of
Series F and 36,000 shares of Series G Convertible Preferred Stock were issued
and outstanding as of December 31, 1998. All prior series of Preferred stock
have been converted into shares of common stock in accordance with the relative
rights and preferences of each such series. As of December 31, 1998, an
additional 435,000 shares of Common Stock were issuable upon exercise of the
Company's vested outstanding employee stock options and pursuant to outstanding
subscriptions under the Company's Employee Stock Purchase Plan.
The following discussion of the terms and provisions of the Company's capital
stock is qualified in its entirety by reference to the Company's Articles of
Incorporation and Bylaws, filed as exhibits.
COMMON STOCK
All outstanding shares of Common Stock are fully paid and nonassessable. There
are no preemptive, conversion, subscription, redemption or repurchase rights
associated with shares of Common Stock, except as exist under the 1994 Incentive
Stock Option Plan and the 1994 Employee Stock Purchase Plan. Each holder of
shares of Common Stock is entitled to one vote for each share held of record as
to all matters requiring a shareholder vote. Holders of shares of Common Stock
are not entitled to cumulative voting rights in the election of directors. Upon
the dissolution of the Company, the holders of Common Stock would be entitled to
participate ratably in the assets available for distribution after satisfaction
of the claims of creditors of the Company and of holders of any series of
Preferred Stock having a liquidation preference, to the extent of such
preference.
The holders of shares of the Common Stock are entitled to such dividends as the
Board of Directors, in its discretion, may declare out of funds legally
available therefor. Under the Texas Business Corporation Act, as amended (the
"TBCA"), dividends may not be paid if, after the payment, the Company's total
assets would be less than the sum of its total debts and stated capital, or if
the Company would be unable to pay its debts as they become due in the usual
course of its business. There can be no assurances such dividends will continue
to be paid in the future. Payment of future dividends will be dependent upon,
among other things, the Company's and the Bank's earnings and financial
condition, and the general economic and regulatory climate.
12
<PAGE>
Funds for the payment of dividends by the Company are obtained primarily from
dividends received from the Bank. Certain restrictions exist regarding the
ability of the Bank to pay dividends to the Company. Under federal law, the
Bank cannot pay a dividend if it will cause the Bank to be "undercapitalized."
The regulators of the Bank and the Company may administratively impose stricter
limits on the ability of the Bank to pay dividends to the Company.
The Bank is also subject to risk based capital rules that restrict its ability
to pay dividends. The risk based capital rules set an explicit schedule for
achieving minimum capital levels in relation to risk weighted assets. The Bank
has been required to meet a minimum ratio of total capital to risk weighted
assets of 8.0%. As of December 31, 1998, the Bank was in compliance with all
capital requirements.
Harris Trust and Savings Bank presently serves as the transfer agent and
registrar for the Common Stock.
PREFERRED STOCK
The Company's Preferred Stock (or other securities convertible in whole or in
part into Preferred Stock) is available for issuance from time to time for
various purposes as determined by the Company's Board of Directors, including,
without limitation, making future acquisitions, raising additional equity
capital and financing. Subject to certain limits set by its Articles of
Incorporation, the Preferred Stock (or such convertible securities) may be
issued on such terms and conditions, at such times and in such situations as the
Board of Directors, in its discretion, determines to be appropriate, without any
further approval or action by the shareholders (unless otherwise required by
laws, rules, regulations or agreements applicable to the Company).
13
<PAGE>
ITEM 6 -- SELECTED FINANCIAL DATA
The following table sets forth summary historical data for the Company for the
periods indicated. The stock-for-stock bank mergers that have been consummated
by the Company during the reported periods were all accounted for using the
"pooling of interests" method. As such, all data prior to the respective mergers
have been restated to include the merged entities' balance sheet data and
historical results of operations.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- -------- --------
(In thousands except for per share amounts)
<S> <C> <C> <C> <C> <C>
SUMMARY OF INCOME:
Interest income $ 103,031 $ 88,602 $ 70,177 $ 60,752 $ 49,743
Interest expense 29,681 27,481 22,202 19,242 13,963
---------- ---------- ---------- -------- --------
Net interest income 73,350 61,121 47,975 41,510 35,780
Provision for credit losses 5,892 3,176 2,457 1,232 1,336
Noninterest income 20,581 11,640 10,332 9,670 9,317
Noninterest expense 62,344 48,561 38,053 34,796 31,734
---------- ---------- ---------- -------- --------
Income before income taxes 25,695 21,024 17,797 15,152 12,027
Provision for income taxes 8,391 7,009 5,527 4,723 3,690
---------- ---------- ---------- -------- --------
Net Income $ 17,304 $ 14,015 $ 12,270 $ 10,429 $ 8,337
========== ========== ========== ======== ========
PER SHARE DATA:
Basic earnings per share $ 0.74 $ 0.62 $ 0.54 $ 0.47 $ 0.39
Diluted earnings per share $ 0.71 $ 0.59 $ 0.52 $ 0.46 $ 0.39
Book value per share at period-end $ 4.58 $ 3.80 $ 3.29 $ 2.88 $ 2.35
Tangible book value per share at period-end $ 4.34 $ 3.73 $ 3.21 $ 2.78 $ 2.24
Shares used in computing basic earnings per share 23,379 22,787 22,562 22,366 21,173
Shares used in computing diluted earnings per share 24,323 23,827 23,428 22,744 21,475
BALANCE SHEET DATA (at period-end):
Total assets $1,416,312 $1,313,843 $1,038,535 $867,527 $762,212
Loans, net of unearned discount 946,815 813,558 621,987 490,264 408,929
Allowance for credit losses 10,170 7,882 7,472 6,823 6,602
Total securities 241,457 297,279 226,848 242,023 249,755
Deposits 1,251,685 1,141,366 945,658 774,166 690,076
Notes payable, senior debentures and ESOP indebtedness 186 321 4,498 6,461 8,854
Company-obligated mandatorily redeemable trust preferred
securities of subsidiary trust 28,750 28,750 - - -
Shareholders' equity 111,509 89,360 75,280 64,660 50,036
SELECTED PERFORMANCE RATIOS:
Return on average assets 1.28% 1.22% 1.33% 1.32% 1.16%
Return on average shareholders' equity 17.09% 16.86% 17.40% 17.99% 16.78%
Dividend payout ratio 23.72% 22.06% 24.65% 23.64% 23.01%
Net interest margin (tax equivalent) 6.07% 6.00% 5.89% 5.71% 5.62%
ASSET QUALITY RATIOS:
Nonperforming loans to total period-end loans 0.53% 0.61% 0.52% 0.81% 0.74%
Period-end nonperforming assets to total assets 0.49% 0.49% 0.60% 0.72% 0.69%
Period-end allowance for credit losses to nonperforming loans 204.18% 159.91% 231.12% 171.00% 217.82%
Period-end allowance for credit losses to total loans 1.07% 0.97% 1.20% 1.39% 1.61%
Net charge-offs to average loans 0.41% 0.40% 0.33% 0.25% 0.15%
LIQUIDITY AND CAPITAL RATIOS:
Average loans to average deposits 74.33% 68.52% 65.88% 63.88% 58.93%
Period-end shareholders' equity to total assets 7.87% 6.80% 7.25% 7.45% 6.56%
Average shareholders' equity to average assets 7.50% 7.23% 7.65% 7.32% 6.91%
Period-end Tier 1 capital to risk weighted assets 11.89% 12.43% 10.66% 11.51% 11.38%
Period-end total capital to risk weighted assets 12.80% 13.50% 11.74% 12.67% 12.63%
Period-end Tier 1 leverage ratio (Tier 1 capital to
total average assets) 9.67% 10.67% 8.84% 7.51% 6.67%
</TABLE>
14
<PAGE>
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of the Company analyzes the major elements of the Company's
consolidated balance sheets and statements of income. This section should be
read in conjunction with the Company's consolidated financial statements and
accompanying notes and other detailed information incorporated by reference. The
stock-for-stock bank mergers that have been consummated by the Company during
the reported periods were all accounted for using the "pooling of interests"
method. As such, all data prior to the respective mergers have been restated to
include the merged entities' balance sheet data and historical results of
operations.
The statements contained in this Annual Report which are not historical
statements of fact may constitute forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Any such forward-
looking statements involve a number of risks and uncertainties. The actual
results of future events could differ materially from those stated in any
forward-looking statements made in this Annual Report. Among the factors that
could cause actual results to differ materially are the risks and uncertainties
discussed in this Item 7 and the uncertainties set forth from time to time in
the Company's other public reports and filings and public statements. The
Company does not undertake, and specifically disclaims any obligation, to update
any forward-looking statements to reflect occurrences or unanticipated events or
circumstances after the date of such statements.
RESULTS OF OPERATIONS
PERFORMANCE SUMMARY
Net income for 1998 was $17.3 million, an increase of $3.3 million, or 23.5%
over the $14.0 million recorded for 1997. Net income of $14.0 million in 1997
increased $1.7 million, or 14.2% over the $12.3 million recorded for 1996.
These increases were primarily due to increased net interest income.
Diluted earnings per share for 1998 was $0.71 as compared to $0.59 for 1997 and
$0.52 for 1996. All per share amounts have been restated to reflect the stock
splits effected as stock dividends through February 20, 1998.
Two industry measures of the performance by a banking institution are its return
on average assets and return on average equity. Return on average assets
("ROA") measures net earnings in relation to average total assets and indicates
a company's ability to employ its resources profitably. During 1998, the
Company's ROA was 1.28%, as compared to 1.22% and 1.33% for 1997 and 1996,
respectively. Return on average equity ("ROE") is determined by dividing annual
net earnings by average shareholders' equity and indicates how effectively a
company can generate net income on the capital invested by its shareholders.
During 1998, the Company's annualized ROE was 17.09% compared to 16.86% and
17.40% for 1997 and 1996, respectively.
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income represents the amount by which interest income on interest-
earning assets, including securities and loans, exceeds interest paid on
interest-bearing liabilities, including deposits and other borrowed funds. Net
interest income is the principal source of the Company's earnings. Interest
rate fluctuations, as well as changes in the amount and type of earning assets
and liabilities, combine to affect net interest income.
Net interest income for 1998 was $73.4 million, compared to $61.1 million for
1997, an increase of $12.2 million or 20.0%. The improvement in net interest
income for 1998 was mainly due to an increase in total interest earning assets,
specifically in the loan portfolio. During 1998, the yield on interest earning
assets decreased 18 basis points, from 8.62% in 1997 to 8.44% in 1998. Total
yield on interest-bearing liabilities decreased by 13 basis points from 3.78% in
1997 to 3.65% in 1998. These declines are consistent with the national trends
in interest rates. For 1998, the net interest margin (net interest income
divided by average total interest earning assets) increased 6 basis points to
6.01% from 5.95% for 1997. The improvement in net interest margin is due to the
increase in average non-interest bearing deposits and issuance of trust
preferred securities in June 1997 (as discussed herein).
15
<PAGE>
Net interest income for 1997 was $61.1 million, up $13.1 million or 27.4% from
$48.0 million for 1996. During 1997, the yield on interest earning assets
increased 10 basis points from 8.52% in 1996 to 8.62% in 1997. Likewise, in
1997, the yield on interest-bearing liabilities increased by 6 basis points from
3.72% in 1996 to 3.78% in 1997. For 1997, the net interest margin (net interest
income divided by average total interest-earning assets) increased 13 basis
points to 5.95% from 5.82% for 1996. This increase was also due to the increase
in average non-interest bearing deposits and issuance of trust preferred
securities in June 1997 (as discussed herein).
To provide a more in-depth analysis of net interest income, the following
average balance sheets and net interest income analysis detail the contribution
of interest-earning assets to overall net interest income and the impact of the
cost of funds:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------
1998 1997
----------------------------------- ------------------------------------
Average Average Average Average
Balance Interest Yield Balance Interest Yield
---------- -------- ------- ---------- -------- -------
(in thousands)
Interest earning assets:
<S> <C> <C> <C> <C> <C> <C>
Deposits in financial institutions $ 9,026 $ 485 5.37% $ 19,052 $ 1,045 5.48%
Federal funds sold and securities purchased
under agreements to resell 70,275 4,207 5.99% 33,033 1,843 5.58%
Securities (taxable) 222,477 13,785 6.20% 251,940 15,608 6.20%
Securities (non-taxable) 34,728 1,644 4.73% 23,543 1,179 5.01%
Loans, net of unearned discount (taxable)(1) 883,749 82,853 9.38% 699,345 68,860 9.85%
Loans, net of unearned discount (non-taxable) 741 57 7.69% 666 67 10.06%
---------- -------- ------- ---------- -------- -------
Total interest earning assets 1,220,996 103,031 8.44% 1,027,579 88,602 8.62%
Noninterest earning assets:
Cash and due from banks 74,594 76,717
Premises and equipment, net 35,357 33,083
Other assets 27,138 20,110
Allowance for credit losses (9,042) (7,892)
---------- ----------
Total noninterest earning assets 128,047 122,018
---------- ----------
Total assets $1,349,043 $1,149,597
========== ==========
Interest bearing liabilities:
Demand and savings deposits $ 511,579 $ 14,404 2.82% $ 470,668 $14,402 3.06%
Certificates and other time deposits 282,817 14,470 5.12% 235,354 12,016 5.11%
Other borrowed funds 17,903 781 4.36% 18,750 889 4.74%
Notes payable, senior debentures and
ESOP indebtedness 254 26 10.24% 1,962 174 8.87%
---------- -------- ------- ---------- -------- -------
Total interest bearing liabilities 812,553 29,681 3.65% 726,734 27,481 3.78%
Noninterest bearing liabilities:
Demand deposits 395,589 315,667
Other liabilities 10,928 7,279
---------- ----------
Total noninterest bearing liabilities 406,517 322,946
Trust preferred securities 28,750 16,810
Shareholders' equity 101,223 83,107
---------- ----------
Total liabilities and shareholders' equity $1,349,043 $1,149,597
========== ==========
Net interest income and margin (2) $ 73,350 6.01% $61,121 5.95%
======== ======= ======== =======
Net interest income and margin
(tax-equivalent basis)(3) $ 74,113 6.07% $61,679 6.00%
======== ======= ======== =======
Year Ended December 31,
-----------------------------------
1996
-----------------------------------
Average Average
Balance Interest Yield
---------- -------- -------
(in thousands)
Interest earning assets:
Deposits in financial institutions $ 10,657 $ 557 5.23%
Federal funds sold and securities purchased
under agreements to resell 35,868 1,907 5.32%
Securities (taxable) 206,423 12,438 6.03%
Securities (non-taxable) 23,437 1,176 5.02%
Loans, net of unearned discount (taxable)(1) 546,643 54,019 9.88%
Loans, net of unearned discount (non-taxable) 1,036 80 7.72%
---------- -------- -------
Total interest earning assets 824,064 70,177 8.52%
Noninterest earning assets:
Cash and due from banks 66,827
Premises and equipment, net 24,576
Other assets 13,709
Allowance for credit losses (7,260)
----------
Total noninterest earning assets 97,853
----------
Total assets $ 921,916
==========
Interest bearing liabilities:
Demand and savings deposits $ 381,104 $ 11,318 2.97%
Certificates and other time deposits 200,330 10,035 5.01%
Other borrowed funds 9,527 411 4.31%
Notes payable, senior debentures and
ESOP indebtedness 5,482 438 7.99%
---------- -------- -------
Total interest bearing liabilities 596,443 22,202 3.72%
Noninterest bearing liabilities:
Demand deposits 249,928
Other liabilities 5,016
----------
Total noninterest bearing liabilities 254,944
Trust preferred securities -
Shareholders' equity 70,529
----------
Total liabilities and shareholders' equity $ 921,916
==========
Net interest income and margin (2) $ 47,975 5.82%
======== =======
Net interest income and margin
(tax-equivalent basis)(3) $ 48,538 5.89%
======== =======
</TABLE>
- --------------------------------------------------------------------------------
(1) Loan origination fees are considered adjustments to interest income. These
fees aggregated $1,531,000, $1,312,000 and $919,000 for the years ended
December 31, 1998, 1997 and 1996, respectively. Related loan origination
costs are not separately allocated to loans, but are charged to non-
interest expense. For the purpose of calculating loan yields, average loan
balances include nonaccrual loans with no related interest income.
(2) The net interest margin is equal to net interest income divided by average
interest-earning assets.
(3) In order to make pretax income and resultant yields on tax-exempt
investments and loans comparable to those on taxable investments and loans,
a tax-equivalent adjustment is made equally to interest income and income
tax expense with no effect on after tax income. The tax equivalent
adjustment has been computed using a federal income tax rate of 35%.
The following rate/volume analysis shows the portions of the net change in
interest income due to changes in volume or rate. The changes in interest
income due to both rate and volume in the analysis have been allocated
16
<PAGE>
to the volume or rate change in proportion to the absolute amounts of the change
in each (in thousands):
<TABLE>
<CAPTION>
1998 vs. 1997 1997 vs. 1996
Increase (Decrease) Increase (Decrease)
Due to Changes in: Due to Changes in:
---------------------------------- ----------------------------------
Volume Rate Total Volume Rate Total
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Deposits in financial institutions $ (550) $ 278 $ (272) $ 439 $ 49 $ 488
Federal funds sold and securities purchased
under agreements to resell 2,078 286 2,364 (151) 87 (64)
Securities (taxable) (1,825) (286) (2,111) 2,743 427 3,170
Securities (non-taxable) 560 (95) 465 5 (2) 3
Loans, net of unearned discount (taxable) 18,157 (4,164) 13,993 15,090 (249) 14,841
Loans, net of unearned discount (non-taxable) 8 (18) (10) (29) 16 (13)
-------- -------- -------- -------- -------- --------
Total interest income $ 18,428 $ (3,999) $ 14,429 $ 18,097 $ 328 $ 18,425
======== ======== ======== ======== ======== ========
Interest bearing liabilities:
Demand and savings deposits $ 1,252 $ (1,250) $ 2 $ 2,660 $ 424 $ 3,084
Certificates and other time deposits 2,423 31 2,454 1,754 227 1,981
Other borrowings (40) (68) (108) 398 80 478
Notes payable, senior debentures and ESOP
indebtedness (151) 3 (148) (281) 17 (264)
-------- -------- -------- -------- -------- --------
Total interest expense 3,484 (1,284) 2,200 4,531 748 5,279
-------- -------- -------- -------- -------- --------
Net interest income $ 14,944 $ (2,715) $ 12,229 $ 13,566 $ (420) $ 13,146
======== ======== ======== ======== ======== ========
</TABLE>
NONINTEREST INCOME
For 1998, noninterest income totaled $20.6 million, an increase of $8.9 million
or 76.8% over $11.6 million in 1997. On July 2, 1998, Sterling Bank purchased
an additional 40 percent interest in SCMC, resulting in total ownership of 80
percent. The Bank's portion of SCMC's earnings prior to July 2, 1998 is shown
as "equity in earnings from Sterling Capital Mortgage Company" and included in
noninterest income. Earnings from July 2, 1998 forward are consolidated into
the earnings of the Company in their natural classifications. For 1998,
noninterest income from commercial banking totaled $12.9 million, an increase of
$1.6 million or 14.0% over $11.3 million in 1997. The increase is primarily
attributed to volume growth in deposit accounts. Noninterest income of $11.6
million for the year ended December 31, 1997, increased $1.3 million or 13.0%
over 1996, primarily due to an increase in the deposit base.
The following table shows the breakout of noninterest income between commercial
banking and mortgage banking for 1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---------------------------------------- ----------------------------------------
Commercial Mortgage Commercial Mortgage
Banking Banking Combined Banking Banking Combined
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Customer service fees $ 8,045 $ - $ 8,045 $ 7,935 $ - $ 7,935
Equity in earnings of Sterling
Capital Mortgage Company - 495 495 - 320 320
Condemnation award 478 - 478 - - -
Gains on sale of mortgage loans - 5,927 5,927 - - -
Other 4,387 1,249 5,636 3,385 - 3,385
---------- ---------- ---------- ---------- ---------- ----------
$ 12,910 $ 7,671 $ 20,581 $ 11,320 $ 320 $ 11,640
========== ========== ========== ========== ========== ==========
1996
----------------------------------------
Commercial Mortgage
Banking Banking Combined
---------- ---------- ----------
Customer service fees $ 7,059 $ - $ 7,059
Equity in earnings of Sterling
Capital Mortgage Company - 316 316
Condemnation award - - -
Gains on sale of mortgage loans - - -
Other 2,957 - 2,957
---------- ---------- ----------
$ 10,016 $ 316 $ 10,332
========== ========== ==========
</TABLE>
NONINTEREST EXPENSE
For 1998, noninterest expenses totaled $62.3 million, an increase of $13.8
million or 28.4% over $48.6 million in 1997. Of this increase, $5.2 million
represented noninterest expenses from SCMC subsequent to
17
<PAGE>
July 2, 1998. Excluding these expenses noninterest expenses increased $8.6
million or 17.7% over 1997. Noninterest expenses are shown as follows (in
thousands):
<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 $ 29,247 $ 2,653 $ 31,900 $ 24,916 $ - $ 24,916
Occupancy expenses 7,210 1,004 8,214 6,033 - 6,033
Technology 4,320 - 4,320 3,196 - 3,196
Supplies 1,193 224 1,417 972 - 972
Professional fees 1,785 61 1,846 1,779 - 1,779
Minority interest expense 2,668 304 2,972 1,519 - 1,519
Other 10,724 951 11,675 10,146 - 10,146
---------- ---------- ---------- ---------- ---------- ----------
$ 57,147 $ 5,197 $ 62,344 $ 48,561 $ - $ 48,561
========== ========== ========== ========== ========== ==========
1996
----------------------------------------
Commercial Mortgage
Banking Banking Combined
---------- ---------- ----------
Salaries and employee benefits $ 22,012 $ - $ 22,012
Occupancy expenses 5,798 - 5,798
Technology 1,833 - 1,833
Supplies 901 - 901
Professional fees 1,030 - 1,030
Minority interest expense - - -
Other 6,479 - 6,479
---------- ---------- ----------
$ 38,053 $ - $ 38,053
========== ========== ==========
</TABLE>
Salaries and employee benefits in the commercial banking segment totaled $29.2
million, an increase of $4.3 million or 17.4% over $24.9 million for 1997 due
primarily to an increase in the number of full time equivalent employees and
routine salary increases. The Bank increased its number of full-time equivalent
personnel by 71 or 13.0% during the year, from 547 at year-end 1997 to 618 at
year-end 1998. The increase is due primarily to opening two de novo offices
(Spencer Highway and Fort Bend) during 1998, the addition of personnel devoted
to resolving Year 2000 issues, the addition of loan officers and lending
assistants, as well as central personnel required as a result of growth in loans
and deposits, as well as the bank acquisitions. Salaries and employee benefits
totaled $24.9 million in 1997, an increase of $2.9 million or 13.2% over $22.0
million for 1996 due primarily to an increase in the number of full time
equivalent employees and routine salary increases. The Bank increased its
number of full-time equivalent personnel by 65 or 13.5% during 1997, from 482 at
year-end 1996 to 547 at year-end 1997. The increase is due primarily to opening
three de novo offices during late 1996 and early 1997 (Cypress Station, Upper
Kirby and Fountainview), the addition of personnel devoted to resolving year
2000 issues, the addition of loan officers and lending assistants, as well as
central personnel required as a result of growth in loans and deposits, as well
as the bank acquisitions.
Occupancy expense in the commercial banking segment totaled $7.2 million in
1998, an increase of $1.2 million or 19.5% over $6.0 million in 1997. This
increase is due to the opening of the two de novo offices during 1998 as well as
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 location. Occupancy
expense totaled $6.0 million in 1997 as compared to $5.8 million in 1996, an
increase of $235 thousand, or 4%. This increase was due to the addition of the
three de novo offices in late 1996 and early 1997.
Technology expenses in 1998 totaled $4.3 million, an increase of $1.1 million or
35.2% over $3.2 million in 1997. This increase is due to Year 2000 readiness
initiatives, perpetual improvements and upgrades to the core and ancillary data
processing and operational systems, as well as costs associated with the
acquisition of Humble and Hometown. In 1997, technology costs included non-
recurring expenditures associated with the acquisition of First Houston.
Technology expenses in 1997 totaled $3.2 million, an increase of $1.4 million or
74.4% over $1.8 million in 1996. The Bank underwent a major core data
processing system conversion during 1997 to better position itself for serving
its expanding customer base. The acquisition of First Houston required
significant data processing expenditures.
Minority interest expense in 1998 of $3.0 million increased $1.5 million or
95.7% over $1.5 million in 1997. In June 1997, the Company issued, through a
wholly owned subsidiary, $28,750,000 in 9.28% Cumulative Trust Preferred
Securities that mature in 2027. Interest on these securities is classified as
minority interest expense. Also, in 1998, minority interest expense was
recorded to reflect the 20 percent interest in SCMC that the Company did not
own. There was no minority interest in 1996.
Other expenses in the commercial banking segment totaled $10.7 million in 1998,
an increase of $578 thousand or 5.7%, from $10.1 million in 1997. This increase
is due to the overall growth in the Company's loan and deposit portfolio as well
as the opening of two new de novo offices. Other expenses totaled $10.1 million
in
18
<PAGE>
1997, an increase of $3.7 million, or 56.6% over $6.5 million in 1996. The
increases were a result of the opening of three additional banking offices
during late 1996 and early 1997, the acquisition of First Houston, and an
increased marketing effort.
INCOME TAXES
The Company provided $8.4 million for federal income taxes for 1998, $7.0
million for 1997, and $5.5 million for 1996. The effective tax rates for 1998,
1997, and 1996 were 32.7%, 33.3%, and 31.1%, respectively.
FINANCIAL CONDITION
LOANS HELD FOR INVESTMENT
At December 31, 1998, loans held for investment totaled $862.0 million, an
increase of $118.6 million or 16.0% over loans at December 31, 1997 of
$743.4 million.
At December 31, 1998, total loans were 75.7% of deposits and 66.9% of total
assets. At December 31, 1997, total loans were 71.3% of deposits and 61.9% of
total assets.
The following table summarizes the loan portfolio of the Bank by type of loan as
of December 31, excluding loans held for sale (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------------ ------------------ ------------------ ------------------ ------------------
Amount % Amount % Amount % Amount % Amount %
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial
and industrial:
US addressees $315,936 36.7% $285,158 38.3% $212,145 36.5% $170,508 35.4% $146,864 36.5%
Non-US addressees 4,047 0.5% 771 0.1% 1,353 0.2% 3,108 0.6% 957 0.2%
Real estate mortgage:
Commercial 240,871 27.9% 206,465 27.8% 155,822 26.8% 145,426 30.2% 124,030 30.7%
Residential 110,114 12.8% 91,869 12.4% 70,708 12.2% 50,559 10.5% 46,738 11.6%
Real estate construction 88,042 10.2% 65,273 8.8% 50,968 8.8% 39,107 8.1% 24,734 6.1%
Consumer 102,950 11.9% 93,829 12.6% 90,022 15.5% 73,474 15.2% 60,295 14.9%
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
$861,960 100.0% $743,365 100.0% $581,018 100.0% $482,182 100.0% $403,618 100.0%
======== ======= ======== ======= ======== ======= ======== ======= ======== =======
</TABLE>
The primary lending focus of the Bank is on commercial loans and owner-occupied
real estate loans to local businesses with annual sales ranging from $300,000 to
$30 million. Typically, the Bank's customers have financing requirements
between $100,000 and $500,000. The primary lending focus of the Bank has been
on commercial loans and owner-occupied real estate loans to local businesses.
Although the Bank's legal lending limit was $13.7 million at December 31, 1998,
the Bank has not maintained exposure greater than $7.0 million on any
relationship.
The Bank makes commercial loans primarily to small and medium-sized businesses
and to professionals. The Bank offers a variety of commercial loan products
including revolving lines of credit, letters of credit, working capital loans,
and loans to finance accounts receivable, inventory and equipment. Typically,
the Bank's commercial loans have floating rates of interest, are for varying
terms (generally not exceeding three years), are personally guaranteed by the
business owner and are secured by accounts receivable, inventory and/or other
business assets. In addition to the commercial loans secured solely by non-real
estate business assets, the Bank makes commercial loans that are secured by
owner-occupied real estate, as well as other business assets.
The Bank's commercial mortgage loans are secured by first liens on real estate,
typically have floating interest rates, and amortize over a 15-year period with
balloon payments due at the end of three years. In underwriting commercial
mortgage loans, consideration is given to the property's operating history,
future operating projections, current and projected occupancy, location and
physical condition. The underwriting analysis also includes credit checks,
appraisals, and a review of the financial condition of the borrower.
19
<PAGE>
The Bank makes loans to finance the construction of residential and, to a lesser
extent, nonresidential properties, such as churches. Construction loans
generally are secured by first liens on real estate and have floating interest
rates. The Bank conducts periodic inspections, either directly or through an
architect or other agent, prior to approval of periodic draws on these loans.
Underwriting guidelines similar to those described above are also used in the
Bank's construction lending activities.
The Bank makes automobile, boat, home improvement and other loans to consumers.
These loans are primarily made to customers who have other relationships with
the Bank. In addition, the Bank began issuing consumer credit cards through the
Visa and MasterCard systems during 1995. These cards are primarily issued to
customers who have other relationships with the Bank and excellent credit
histories. As of December 31, 1998 and 1997, the Bank had outstanding credit
card balances of $4.9 million and $3.2 million, respectively.
The recent downturn in the oil industry is expected to have a minimal impact on
the Company since loans to oil producers and companies primarily dependent on
the upstream oil industry represent less than 2 percent of the Company's loan
portfolio. Additionally, the Houston economy is much more diversified than it
was 10 years ago and, consequently, our customer base is better able to adapt to
changes in oil prices.
The Bank seeks to compete effectively in its chosen markets by consistent
application of its business strategy. See further discussion of "BUSINESS -
Supercommunity Bank Strategy" and "BUSINESS - Competition".
As of December 31, 1998, there was no concentration of loans to any one type of
industry exceeding 10% of total loans nor were there any loans classified as
highly leveraged transactions.
LOANS HELD FOR SALE
Loans held for sale of $84.9 million at December 31, 1998 increased from $70.2
million at December 31, 1997. Approximately $9.7 million of these loans are
comprised of student loans. The remainder are mortgage loans originated by SCMC
that are held for sale. These loans are typically sold to investors within one
month of origination.
RISK ELEMENTS
Nonperforming, 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. The Bank receives on
an ongoing basis updated appraisals on loans secured by real estate,
particularly those categorized as nonperforming loans and potential problem
loans. In those instances where updated appraisals reflect reduced collateral
values, an evaluation of the borrower's overall financial condition is made to
determine the need, if any, for possible write-downs or appropriate additions to
the allowance for credit losses.
The Bank defines potential problem loans as those loans not classified as
nonperforming, but where information known by management indicates serious doubt
that the borrower will be able to comply with the present payment terms.
Management identifies these loans through its continuous loan review process and
classifies potential problem loans as those loans graded as substandard,
doubtful, or loss, excluding all nonperforming loans.
The Bank had no material foreign loans outstanding or loan concentrations for
the years ended December 31, 1994 through 1998. The Bank, however, continues to
monitor the potential risk of foreign borrowers and concentrations of credit.
20
<PAGE>
The following table presents information regarding non-performing loans and
assets as of December 31, 1994 through 1998 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 4,048 $ 4,226 $ 2,817 $ 3,250 $ 2,392
Restructured loans 312 217 45 121 142
Accruing loans past due 90 days or more 621 486 371 619 497
---------- ---------- ---------- -------- --------
Total nonperforming loans 4,981 4,929 3,233 3,990 3,031
Real estate acquired by foreclosure 1,593 967 2,614 2,260 2,207
Other repossessed assets 356 536 355 29 13
---------- ---------- ---------- -------- --------
Total nonperforming assets $ 6,930 $ 6,432 $ 6,202 $ 6,279 $ 5,251
========== ========== ========== ======== ========
Nonperforming loans to total loans 0.53% 0.61% 0.52% 0.81% 0.74%
Nonperforming assets to total assets 0.49% 0.49% 0.60% 0.72% 0.69%
Potential problem loans $ 19,700 $ 13,524 $ 15,144 $ 13,573 N/A
========== ========== ========== ======== ========
Total loans $ 946,815 $ 813,558 $ 621,987 $490,264 $408,929
========== ========== ========== ======== ========
Total assets $1,416,312 $1,313,843 $1,038,535 $867,527 $762,212
========== ========== ========== ======== ========
</TABLE>
ALLOWANCE FOR CREDIT LOSSES
The Bank has several systems in place to assist in maintaining the overall
quality of its loan portfolios. The Bank has established underwriting
guidelines to be followed by its bank offices. The Bank also monitors its
delinquency levels for any negative or adverse trends and particularly monitors
credits which have total exposure of $50,000 or more. However, there can be no
assurance that the Bank's loan portfolios will not become subject to increasing
pressures from deteriorating borrower creditworthiness due to general economic
conditions.
The allowance for credit losses is a reserve established through charges to
earnings in the form of a provision for credit losses. Based on an evaluation
of the loan portfolios, management presents a quarterly review of the allowance
for credit losses to the Bank's Board of Directors, indicating any changes in
the allowance since the last review and any recommendations as to adjustments in
the allowance. In making its evaluation, management considers the industry
diversification of the Bank's commercial loan portfolio and the effect of
changes in the local real estate market on collateral values. The Bank also
considers the results of recent regulatory examinations. The Bank continues to
monitor the effects of current economic indicators and their probable impact on
borrowers, the amount of charge-offs for the period, the amount of non-
performing loans and related collateral security. The Bank monitors the loan
portfolio through its internal loan review department and obtains an annual loan
review by independent consultants. Charge-offs occur when loans are deemed to
be uncollectible.
The Bank follows a loan review program to evaluate the credit risk in the
commercial loan portfolio for substantially all commercial loans and real estate
loans. Through the loan review process, the Bank maintains an internally
classified loan list, which, along with the delinquency list of loans, helps
management assess the overall quality of the loan portfolios and the adequacy of
the allowance for credit losses. Loans classified as "substandard" are those
loans with clear and defined weaknesses such as highly leveraged positions,
unfavorable financial ratios, uncertain repayment sources or poor financial
condition, which may jeopardize recoverability of the debt.
Loans classified as "doubtful" are those loans which have characteristics
similar to substandard accounts but with an increased risk that a loss may
occur, or at least a portion of the loan may require a charge-off if liquidated
at present. Although loans classified as substandard do not duplicate loans
classified as doubtful,
21
<PAGE>
both substandard and doubtful loans include some loans that are delinquent at
least 30 days or on nonaccrual status. Loans classified as "loss" are those
loans that are in the process of being charged off.
At December 31, 1998, substandard loans totaled $21.6 million, of which
$4.3 million were loans designated as delinquent or nonaccrual; and doubtful
loans totaled $1.1 million of which $612 thousand were designated as delinquent
or nonaccrual.
In addition to the internally classified loan list and delinquency list of
loans, the Bank maintains a separate "watch list" which further aids the Bank in
monitoring loan portfolios. Watch list loans show warning elements where the
present status portrays one or more deficiencies that require attention in the
short run or where pertinent ratios of the loan account have weakened to a point
where more frequent monitoring is warranted. These loans do not have all the
characteristics of a classified loan (substandard or doubtful) but do show
weakened elements as compared with those of a satisfactory credit. The Bank
reviews these loans to assist in assessing the adequacy of the allowance for
credit losses. As of December 31, 1998 and 1997, none of the watch list loans
were designated as delinquent and there were none on nonaccrual. Approximately
99% of the loans on the watch list are current and paying in accordance with
loan terms as of December 31, 1998. As of December 31, 1998, watch list loans
totaled $27.7 million.
In order to determine the adequacy of the allowance for credit losses,
management considers the risk classification or delinquency status of loans and
other factors. Management also establishes specific allowances for credits
which management believes require reserves greater than those allocated
according to their classification or delinquent status. An unallocated
allowance is also established based on the Bank's historical charge-off
experience. The Bank currently charges against its operations a provision for
credit losses equal to an amount necessary to adjust the allowance to a level
determined to be adequate to absorb losses.
22
<PAGE>
The following table presents, for the periods indicated, an analysis of the
allowance for credit losses and other related data (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Average loans outstanding $884,490 $700,011 $547,679 $446,256 $378,026
======== ======== ======== ======== ========
Loans outstanding at period end $946,815 $813,558 $621,987 $490,264 $408,929
======== ======== ======== ======== ========
Allowance for credit losses at January 1 $ 7,882 $ 7,472 $ 6,823 $ 6,602 $ 5,830
Charge-offs:
Commercial, financial, and industrial 2,686 1,834 1,468 1,132 1,063
Real estate, mortgage and construction 479 119 139 16 117
Installment 1,005 1,251 674 250 277
-------- -------- -------- -------- --------
Total charge-offs 4,170 3,204 2,281 1,398 1,457
Recoveries:
Commercial, financial, and industrial 189 232 299 196 545
Real estate, mortgage and construction 118 27 38 16 297
Installment 259 179 136 175 51
-------- -------- -------- -------- --------
Total recoveries 566 438 473 387 893
-------- -------- -------- -------- --------
Net charge-offs 3,604 2,766 1,808 1,011 564
Provision for credit losses 5,892 3,176 2,457 1,232 1,336
-------- -------- -------- -------- --------
Allowance for credit losses at December 31 $ 10,170 $ 7,882 $ 7,472 $ 6,823 $ 6,602
======== ======== ======== ======== ========
Ratios:
Allowance to average loans 1.15% 1.13% 1.36% 1.53% 1.75%
Allowance to period end loans 1.07% 0.97% 1.20% 1.39% 1.61%
Net charge-offs to average loans 0.41% 0.40% 0.33% 0.23% 0.15%
Allowance to period-end nonperforming loans 204.18% 159.91% 231.12% 171.00% 217.82%
</TABLE>
ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES
The following table describes the allocation of the allowance for credit losses
among various categories of loans and certain other information as of the dates
indicated. The allocation is made for analytical purposes and is not
necessarily indicative of the categories in which future loan losses may occur.
The total allowance is available to absorb losses from any segment of loans.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ ------------------ ------------------ ------------------ ------------------
Balance of allowance % of % of % of % of % of
for credit losses at end Allow- Allow- Allow- Allow- Allow-
of period applicable to: Amount ance Amount ance Amount ance Amount ance Amount ance
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial
and industrial $ 3,356 33% $ 1,727 22% $ 2,118 28% $ 1,386 20% $ 1,855 28%
Real estate - mortgage 1,142 11% 242 3% 282 4% 1,091 16% 997 15%
Real estate - construction 335 3% 266 3% 203 3% - 0% 121 2%
Consumer 679 7% 596 8% 480 6% 230 3% 61 1%
Unallocated 4,658 46% 5,051 64% 4,389 59% 4,116 61% 3,568 54%
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
$ 10,170 100.0% $ 7,882 100.0% $ 7,472 100.0% $ 6,823 100.0% $ 6,602 100.0%
======== ======= ======== ======= ======== ======= ======== ======= ======== =======
</TABLE>
23
<PAGE>
SECURITIES
The following table summarizes the book value of securities held by the Bank as
of the dates shown. See Note D to the Company's consolidated financial
statements for information relating to fair values and details of held-to-
maturity and available-for-sale securities portfolios.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1998 % 1997 % 1996 %
-------- ------ -------- ------ -------- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S Treasury securities and
obligations of U.S. government
agencies $107,457 44.5% $179,402 60.3% $133,330 58.8%
Obligations of states and political
subdivisions 52,061 21.6% 23,134 7.8% 23,586 10.4%
Mortgage-backed securities and
collateralized mortgage obligations 62,790 26.0% 88,887 29.9% 65,752 29.0%
Other securities 19,149 7.9% 5,856 2.0% 4,180 1.8%
-------------------------------------------------------------------
$241,457 100.0% $297,279 100.0% $226,848 100.0%
===================================================================
</TABLE>
At December 31, 1998, securities of $241.5 million had decreased $55.8 million
from $297.3 million at December 31, 1997, as the Bank invested proceeds of
maturing investments into short-term investments in other financial
institutions, securities purchased with an agreement to resell and loans held
for sale. At December 31, 1998 and 1997, securities represented 19.3% and 26.0%
of total deposits and 17.0% and 22.6% of total assets, respectively.
The yield on the Bank's securities portfolio at December 31, 1998, was 5.84% and
the weighted-average life of the portfolio was approximately 4.4 years. The
yield on the Bank's securities portfolio at December 31, 1997, was 6.2% and the
weighted-average life of the portfolio was approximately 4.3 years.
The maturity distribution and weighted average yield of the Bank's debt security
portfolio as of December 31, 1998, are summarized in the following table (in
thousands).
<TABLE>
<CAPTION>
Due * 1 Year Due 1-5 Years Due 5-10 Years Due ** 10 Years Total
------------------ ------------------ ------------------ ------------------ --------
Amount Yield Amount Yield Amount Yield Amount Yield
-------- ----- -------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
securities and
obligations of
U.S. government
agencies $ 12,040 6.08% $ 89,891 5.96% $ 4,170 7.02% $ 1,357 7.69% $107,458
Obligations of
state and political
subdivisions 2,412 7.04% 16,519 6.78% 30,920 6.88% 2,209 7.95% 52,060
Mortgage-backed
securities and
collateralized
mortgage obligations 701 5.48% 7,765 6.35% 7,769 5.92% 46,555 6.46% 62,790
-------- ----- -------- ----- -------- ----- -------- ----- --------
$ 15,153 6.21% $114,175 6.11% $ 42,859 6.72% $ 50,121 6.56% $222,308
======== ===== ======== ===== ======== ===== ======== ===== ========
</TABLE>
* Less than
** More than
DEPOSITS
The Bank's lending and investing activities are funded almost entirely by core
deposits, approximately 76.2% of which are demand and savings deposits.
Noninterest-bearing deposits for 1998 were $446.0 million as compared to $383.3
million for 1997, an increase of $62.7 million or 16.4% over 1997. Deposits
grew due to a
24
<PAGE>
combination of same location growth and the opening of four new locations in
1997 and 1998. Approximately 35.6% of deposits at December 31, 1998 were
noninterest bearing as compared to 33.6% at December 31, 1997. The Bank does not
accept brokered deposits.
The Bank's average total deposits for 1998 were $1.2 billion, or $168.3 million
and 16.5% over average total deposits during 1997 that were $1.0 billion. The
Bank's total deposits at December 31, 1998, were $1.3 billion, up $110.3 million
or 9.7% over total deposits of $1.1 billion at year-end 1997. Deposit growth
continues to be concentrated primarily in core deposits, consisting of all
deposits other than retail and public fund certificates of deposit in excess of
$100,000.
The average balances and weighted average rates paid on deposits for each of the
years ended December 31, 1998, 1997, and 1996 are presented below (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- ----------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 395,589 $ 315,667 $ 249,928
Interest-bearing demand and savings deposits 511,579 2.82% 470,668 3.06% 381,104 2.97%
Time deposits 282,817 5.12% 235,354 5.11% 200,330 5.01%
---------- -------- ---------- -------- ---------- --------
$1,189,985 2.43% $1,021,689 2.59% $ 831,362 2.57%
========== ======== ========== ======== ========== ========
</TABLE>
The Bank's time deposits of $100,000 or more have consistently shown a pattern
of renewal similar to that for deposits of less than $100,000. See Note I of
the consolidated financial statements for maturities of certificates of deposits
of $100,000 or more.
BORROWINGS
Deposits are the primary source of funds for the Bank's lending and investment
activities and for its general business purposes. Occasionally, the Bank
obtains additional funds from the Federal Home Loan Bank and correspondent
banks. The Bank has an available line of credit with the Federal Home Loan Bank
of Dallas which allows the Bank to borrow on a collateralized basis at a fixed
rate for a period from one to thirty-five days.
In June 1997, the Company formed Sterling Bancshares Capital Trust I, a trust
formed under the laws of the State of Delaware (the "Trust"). The Trust issued
$28,750,000 of 9.28% Trust Preferred Securities and invested the proceeds
thereof in the 9.28% Junior Subordinated Deferrable Interest Debentures (the
"Junior Subordinated Debentures") issued by the Company. The Junior
Subordinated Debentures will mature on June 6, 2027, which date may be shortened
to a date not earlier than June 6, 2002 if certain conditions are met (including
the Company having received prior approval of the Federal Reserve and any other
required regulatory approvals). The Trust Preferred Securities will be subject
to mandatory redemption in a like amount contemporaneously with the optional
prepayment of the Junior Subordinated Debentures by the Company. The Junior
Subordinated Debentures may be prepaid upon the occurrence and continuation of
certain events including a change in the tax status or regulatory capital
treatment of the Trust Preferred Securities. In each case, redemption will be
made at a price equal to 100% of the face amount of the Trust Preferred
Securities, plus the accrued and unpaid distributions thereon through the
redemption date.
INTEREST RATE SENSITIVITY AND LIQUIDITY
The Company manages its interest rate risk through structuring the balance sheet
portfolios to maximize net interest income while maintaining an acceptable level
of risk to changes in market interest rates. This process requires a balance
between profitability, liquidity, and interest rate risk.
To effectively measure and manage interest rate risk, the Company uses
simulation analysis to determine the impact on net interest income of changes in
interest rates under various interest rate scenarios, balance sheet trends, and
strategies. From these simulations, interest rate risk is quantified and
appropriate strategies are
25
<PAGE>
developed and implemented. The overall interest rate risk position and
strategies are reviewed by Management, the Asset/Liability Management Committee
and the Company's Board of Directors on an ongoing basis.
The following table presents an analysis of the sensitivity inherent in the
Company's net interest income and market value of portfolio equity. The
interest rate scenarios presented in the table include interest rates at
December 31, 1998 and as adjusted by instantaneous rate changes upward and
downward of up to 200 basis points. Each rate scenario reflects unique
prepayment and repricing assumptions. Since there are limitations inherent in
any methodology used to estimate the exposure to changes in market interest
rates, this analysis is not intended to be a forecast of the actual effect of a
change in market interest rates on the Company. The market value sensitivity
analysis presented includes assumptions that (i) the composition of the
Company's interest sensitive assets and liabilities existing at fiscal year end
will remain constant over the measurement period; and (ii) that changes in
market rates are parallel and instantaneous across the yield curve regardless of
duration or repricing characteristics of specific assets or liabilities.
Further, the analysis does not contemplate any actions that the Company might
undertake in response to changes in market interest rates. Accordingly, this
analysis is not intended and does not provide a precise forecast of the effect
actual changes in market rates will have on the Company.
Impact on:
-----------------------------
1999 Net Market Value
Change in Interest of Portfolio
Interest Rates Income Equity
---------------- ---------- --------------
+200 15.07% 0.25%
+100 7.61 0.42
0 0.00 0.00
-100 -7.73 -1.31
-200 -15.42 -3.36
An interest rate sensitive asset or liability is one that, within a defined time
period, either matures or experiences an interest rate change in line with
general market interest rates. The management of interest rate risk is
performed by analyzing the maturity and repricing relationships between
interest-earning assets and interest-bearing liabilities at specific points in
time ("GAP") and by analyzing the effects of interest rate changes on net
interest income over specific periods of time by projecting the performance of
the mix of assets and liabilities in varied interest rate environments.
Interest rate sensitivity reflects the potential effect on net interest income
of a movement in interest rates. A company is considered to be asset sensitive,
or having a positive GAP, when the amount of its interest-earning assets
maturing or repricing within a given period exceeds the amount of its interest-
bearing liabilities also maturing or repricing within that time period.
Conversely, a company is considered to be liability sensitive, or having a
negative GAP, when the amount of its interest-bearing liabilities maturing or
repricing within a given period exceeds the amount of its interest-earning
assets also maturing or repricing within that time period. During a period of
rising interest rates, a negative GAP would tend to affect adversely net
interest income, while a positive GAP would tend to result in an increase in net
interest income. During a period of falling interest rates, a negative GAP
would tend to result in an increase in net interest income, while a positive GAP
would tend to affect net interest income adversely. When analyzing its GAP
position, the Company emphasizes the next twelve-month period.
26
<PAGE>
The following table sets forth the expected maturity and repricing
characteristics of the Company's interest earning assets and interest bearing
liabilities as of December 31, 1998:
<TABLE>
<CAPTION>
0-90 90-365 1-3 3-5 Over
Days Days Years Years 5 Years Total
--------- --------- --------- --------- --------- -----------
(In thousands, except for data expressed in percentages)
Interest earning assets:
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 45,745 $ - $ - $ - $ - $ 45,745
Securities purchased under
agreements to resell 32,992 - - - - 32,992
Deposits in other financial institutions 500 100 - - - 600
Securities 34,833 15,629 66,766 70,355 53,874 241,457
Loans 437,277 105,355 157,316 197,697 49,170 946,815
--------- --------- --------- --------- --------- -----------
Total interest earning assets 551,347 121,084 224,082 268,052 103,044 1,267,609
Interest bearing liabilities:
Demand and savings deposits 507,729 - - - - 507,729
Certificates of deposit and
other time deposits 119,784 136,574 34,000 7,602 - 297,960
Other borrowed funds 13,428 - - - - 13,428
ESOP indebtedness - 147 39 - - 186
--------- --------- --------- --------- --------- -----------
Total interest bearing liabilities 640,941 136,721 34,039 7,602 - 819,303
--------- --------- --------- --------- --------- -----------
Period GAP $ (89,594) $ (15,637) $ 190,043 $ 260,450 $ 103,044 $ 448,306
========= ========= ========= ========= ========= ===========
Cumulative GAP $ (89,594) $(105,231) $ 84,812 $ 345,262 $ 448,306
========= ========= ========= ========= =========
Period GAP to total assets (6.33%) (1.10%) 13.42% 18.39% 7.28%
========= ========= ========= ========= =========
Cumulative GAP to total assets (6.33%) (7.43%) 5.99% 24.38% 31.65%
========= ========= ========= ========= =========
</TABLE>
Shortcomings are inherent in any GAP analysis since certain assets and
liabilities may not re-price proportionally as interest rates change.
Consequently, the Company's management has begun to utilize an interest rate
risk simulation model to increase its ability to monitor and forecast the effect
of various interest rate environments on earnings and its net capital position.
Liquidity involves the Company's ability to raise funds to support asset growth
or reduce assets to meet deposit withdrawals and other payment obligations, to
maintain reserve requirements and otherwise to operate the Company on an ongoing
basis. In recent years, the Company's liquidity needs have primarily been met
by growth in core deposits, as previously discussed. Although access to
purchased funds from correspondent banks is available and has been utilized on
occasion to take advantage of investment opportunities, the Company does not
generally rely on these external funding sources. Generally, the cash and
federal funds sold position, supplemented by amortizing investment and loan
portfolios, have created an adequate liquidity position.
CAPITAL RESOURCES
At December 31, 1998, shareholders' equity totaled $111.5 million or 7.9% of
total assets, as compared to $89.4 million and 6.8% of total assets at
December 31, 1997.
Regulatory authorities in the United States have issued risk-based capital
standards by which all bank holding companies and banks will be evaluated in
terms of capital adequacy. These guidelines relate a banking company's capital
to the risk profile of its assets. Tier 1 capital includes common shareholders'
equity, minority interest in consolidated subsidiaries, and qualifying perpetual
preferred stock together with related surpluses and retained earnings. Tier 2
capital may be comprised of limited life preferred stock, qualifying debt
instruments, and the reserves for credit losses.
27
<PAGE>
Banking regulators have also issued leverage ratio requirements. The leverage
ratio requirement is measured as the ratio of Tier 1 capital to adjusted assets.
See Note S to the Company's consolidated financial statements for further
discussion of the Company's and the Bank's regulatory capital requirements.
The Bank's capital levels at December 31, 1998 and 1997 qualify it as "well-
capitalized," the highest of five tiers under applicable regulatory definitions.
CONTINGENCIES AND UNCERTAINTIES--YEAR 2000
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. In October 1995, a
three-year technology plan was approved jointly by the boards of directors of
the Company and the Bank, prior to formal adoption of the Year 2000 plan. The
technology plan represented a comprehensive program to reengineer and redesign
the Bank's entire information systems, telecommunications and technology
infrastructure. Pursuant to this plan, the Company spent more than $3 million
during 1996 and 1997 to upgrade its 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. The Company estimates 1999 costs related to
Year 2000 readiness at $500 thousand.
Implementation of the Company's Year 2000 Plan has been actively managed by the
Company and regularly supervised by the banking regulatory authorities. A 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, experienced consultants have
been retained to assist in the assessment of Year 2000 risks to the Bank's loan
portfolio and overall asset quality. The boards 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 boards of directors. All employees
have been required to attend training programs regarding the Year 2000 issue and
the Company's plan.
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 mission critical applications, with all untested systems
being tested prior to June 30, 1999. As part of the testing process, the
Company 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 be Year 2000 compliant but will be
retested throughout 1999.
The significant possible Year 2000 risks of the Company 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 an adverse impact on its operations but has nevertheless developed
contingency plans to address these possibilities.
For the computer systems and facilities that it has determined to be most
critical, the Company expects to complete development, test, and adopt business
contingency plans by June 30, 1999. These plans will conform to recently issued
guidance from the FFIEC on business contingency planning for Year 2000
readiness. Contingency plans will include, among other actions, manual
workarounds and identification of resource requirements and alternative
solutions for resuming critical business processes in the event of a Year 2000
related failure.
28
<PAGE>
ITEM 7A - QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
For information regarding the market risk of the Company's financial
instruments, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - INTEREST RATE SENSITIVITY AND LIQUIDITY." The
Company's principal market risk exposure is to interest rates.
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index included on page 33 and the Consolidated Financial Statements
which begin on page 35 of this Form 10-K.
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART - III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the caption "ELECTION OF DIRECTORS" of the
Company's Proxy Statement dated March 24, 1999, relating to the 1999 Annual
Meeting of Shareholders of the Company, is incorporated herein by reference.
ITEM 11 -- EXECUTIVE COMPENSATION
The information set forth under the caption "EXECUTIVE COMPENSATION" of the
Company's Proxy Statement dated March 24, 1999, relating to the 1999 Annual
Meeting of Shareholders of the Company, is incorporated herein by reference.
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to the beneficial ownership of the outstanding shares
of Common Stock of the Company by its directors and executive officers set forth
under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT" of the Company's Proxy Statement dated March 24, 1999, relating to
the 1999 Annual Meeting of Shareholders of the Corporation, is incorporated
herein by reference.
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "CERTAIN TRANSACTIONS" of the
Company's Proxy Statement dated March 24, 1999, relating to the 1999 Annual
Meeting of Shareholders of the Company, is incorporated herein by reference.
29
<PAGE>
PART -- IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) List of documents filed as part of this report
INDEPENDENT AUDITORS' REPORT
CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheets
Statements of Income
Statements of Shareholders' Equity
Statements of Cash Flows
Notes to Consolidated Financial Statements
(a)(2) No financial statement schedules are required to be filed as a part of
this report
(b) Reports on Form 8-K
The following report on Form 8-K was filed during the quarter ended
December 31, 1998:
On November 23, 1998, the Company filed a Form 8-K to report that it
had completed the acquisition of Hometown Bancshares, Inc., a Texas
corporation and a registered bank holding company ("Hometown")
pursuant to the Agreement and Plan of Merger dated as of June 12,
1998, as amended, among the Company, Sterling Bancorporation, Inc.
("Bancorporation"), a wholly owned subsidiary of Sterling, and
Hometown, whereby Hometown merged with and into Bancorporation with
Bancorporation as the surviving entity.
(c) Exhibits
2.1 Merger Agreement dated as of October 21, 1993, between the Company and
Guardian Bancshares, Inc. [Incorporated by reference to Exhibit 2(a)
of the Company's Registration Statement on Form S-4 (File
No. 33-71660)]
2.2 Amendment No. 1 dated as of January 26, 1994, to the Merger Agreement
dated as of October 21, 1993, between the Company and Guardian
Bancshares, Inc. [Incorporated by reference to Exhibit 2(b) of the
Company's Registration Statement on Form S-4 (File No. 33-71660)]
2.3 Stock Purchase Agreement dated as of September 10, 1993, among the
Company, Sterling Bancorporation, Inc., Enterprise Bank--Houston, and
the Shareholder Representatives of Enterprise Bank--Houston, Inc.
[Incorporated by reference to Exhibit 2(c) of the Company's
Registration Statement on Form S-4 (File No. 33-71660)]
2.4 Agreement and Plan of Merger dated as of March 18, 1997, by and among
the Company, Sterling Bancorporation, Inc. and First Houston
Bancshares, Inc. [Incorporated by reference to the Company's
Registration Statement on Form S-4 (File No. 333-28153)]
2.5 Agreement and Plan of Consolidation dated as of February 17, 1998, by
and between the Company and Humble National Bank [Incorporated by
reference to the Company's Current Report on Form 8-K filed on
February 27, 1998 (File No. 000-20750)]
2.6* Agreement and Plan of Merger dated as of June 12, 1998 among the
Company, Sterling Bancorporation, and Hometown Bancshares, Inc., as
amended.
3.1* Restated and Amended Articles of Incorporation of the Company, as
amended.
3.2 Restated By-Laws of the Company [Incorporated by reference to Exhibit
4.2 of the Company's Registration Statement on Form S-8, effective
November 25, 1996 (File No. 333-16719)]
30
<PAGE>
4.1 Form of Indenture to be dated as of June 6, 1997 [Incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement on
Form S-3 (File No. 333-27185)]
4.2 Form of Junior Subordinated Debenture [Included as an exhibit to the
Form of Indenture that is incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement on Form S-3 (File No. 333-27185)]
4.3 Form of Trust Preferred Securities Guarantee Agreement of the Company
[Incorporated by reference to Exhibit 4.7 to the Company's
Registration Statement on Form S-3 (File No. 333-27185)]
10.1** 1994 Incentive Stock Option Plan of the Company [Incorporated by
reference to Exhibit 10.1 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1994]
10.2 1994 Employee Stock Purchase Plan of the Company [Incorporated by
reference to Exhibit 10.2 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1994]
10.3** 1984 Incentive Stock Option Plan of the Company [Incorporated by
reference to Exhibit 10.1 of the Company's Registration Statement on
Form S-1, effective October 22, 1992 (Registration No. 33-51476)]
10.4** Settlement and Release Agreement dated October 2, 1995, between the
Company and C. Frank Kurtin [Incorporated by reference to Exhibit 10.5
of the Company's Annual Report on Form 10-K for the year ended
December 31, 1995]
10.5** Consulting Contract dated October 2, 1995, between Sterling
Bancshares, Inc., and C. Frank Kurtin [Incorporated by reference to
Exhibit 10.6 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1995]
10.6** 1995 Non-Employee Director Stock Compensation Plan [Incorporated by
reference to Exhibit 4.3 of the Company's Registration Statement on
Form S-8 (File No. 333-16719)]
21* Subsidiaries of the Company
23.1* Consent of Deloitte & Touche LLP, Independent Auditors
27.1 to Financial Data Schedules [The required Financial Data Schedules have
27.9* been included as Exhibits 27.1 to 27.9 of the Form 10-K filed
electronically with the Securities and Exchange Commission]
* As filed herewith.
** Management Compensation Agreement
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
STERLING BANCSHARES, INC.
by /s/ George Martinez
--------------------
DATE: March 24, 1999 George Martinez,
Chairman and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacity indicated on this the 24th day of March, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE SIGNATURE TITLE
- --------- ----- --------- -----
<S> <C> <C> <C>
/s/ George Martinez Chairman and Director /s/ James J. Kearney Director
- ------------------------- -------------------------
George Martinez James J. Kearney
/s/ J. Downey Bridgwater President and Director /s/ Russell Orr Director
- ------------------------- -------------------------
J. Downey Bridgwater Russell Orr
/s/ John H. Buck Director /s/ Christian A. Rasch Director
- ------------------------- -------------------------
John H. Buck Christian A. Rasch
/s/ James M. Clepper Director /s/ Steven F. Retzloff Director
- ------------------------- -------------------------
James M. Clepper Steven F. Retzloff
/s/ Walter P. Gibbs, Jr. Director /s/ Raimundo Riojas Director
- ------------------------- -------------------------
Walter P. Gibbs, Jr. Raimundo Riojas
/s/ Bruce J. Harper Director /s/ Cuba Wadlington, Jr. Director
- ------------------------- -------------------------
Bruce J. Harper Cuba Wadlington, Jr.
/s/ Glenn H. Johnson Director
- -------------------------
Glenn H. Johnson
</TABLE>
32
<PAGE>
STERLING BANCSHARES, INC.
TABLE OF CONTENTS
- ----------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT 34
CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheets 35
Statements of Income 36
Statements of Shareholders' Equity 37
Statements of Cash Flows 39
Notes to Consolidated Financial Statements 40
33
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Sterling Bancshares, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheets of Sterling
Bancshares, Inc. and subsidiaries (the "Company") as of December 31, 1998 and
1997, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Sterling Bancshares,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
March 12, 1999
34
<PAGE>
STERLING BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(In thousands, except share amounts)
- --------------------------------------------------------------------------------
ASSETS 1998 1997
---------- ----------
Cash and cash equivalents (Note C) $ 136,089 $ 138,887
Interest-bearing deposits in financial
institutions 600 409
Securities purchased with an agreement to resell 32,992 15,496
Available-for-sale securities, at fair value
(amortized cost of $89,721 and $94,755 at
December 31, 1998 and 1997, respectively) (Note D) 90,336 94,811
Held-to-maturity securities, at amortized cost
(fair value of $154,521 and $204,609 at
December 31, 1998 and 1997, respectively) (Note D) 151,121 202,468
Investment in Sterling Capital Mortgage Company - 2,510
Loans held for sale (Note E) 84,855 70,193
Loans held for investment (Notes E and F) 861,960 743,365
Allowance for credit losses (Note G) (10,170) (7,882)
---------- ----------
Loans, net 851,790 735,483
Accrued interest receivable 8,311 8,316
Real estate acquired by foreclosure 1,593 967
Premises and equipment, net (Note H) 36,539 34,482
Goodwill, net 5,888 1,518
Other assets 16,198 8,303
---------- ----------
TOTAL ASSETS $1,415,312 $1,313,843
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Demand deposits:
Noninterest-bearing $ 445,996 $ 383,314
Interest-bearing 507,729 500,299
Certificates of deposit and other time
deposits (Note I) 297,960 257,753
---------- ----------
Total deposits 1,251,685 1,141,366
Other borrowed funds (Note J) 13,428 45,169
Accrued interest payable and other liabilities 9,806 8,877
ESOP indebtedness (Note K) 186 321
---------- ----------
Total liabilities 1,275,105 1,195,733
COMMITMENTS AND CONTINGENCIES (Notes Q and R)
COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST
PREFERRED SECURITIES OF SUBSIDIARY TRUST (Note L) 28,750 28,750
MINORITY INTEREST IN STERLING CAPITAL MORTGAGE COMPANY 948 -
SHAREHOLDERS' EQUITY (Notes N, O and S):
Convertible Preferred stock, $1 par value;
1,000,000 shares authorized, 137,000 and
177,000 issued and outstanding at December 31,
1998 and 1997, respectively 137 177
Common stock, $1 par value; 50,000,000 and
30,000,000 shares authorized, 23,876,267
and 22,875,000 issued and outstanding at
December 31, 1998 and 1997, respectively 23,876 22,875
Capital surplus 26,688 19,288
Retained earnings 60,597 47,398
ESOP indebtedness (186) (321)
Accumulated other comprehensive income--net
unrealized (gain) loss on available-for-sale
securities, net of tax 397 (57)
---------- ----------
Total shareholders' equity 111,509 89,360
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,416,312 $1,313,843
========== ==========
See notes to consolidated financial statements.
35
<PAGE>
STERLING BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(In thousands except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Interest income:
Loans, including fees $ 82,910 $ 68,927 $ 54,099
Securities:
Taxable 13,497 15,608 12,438
Non-taxable 1,644 1,179 1,176
Federal funds sold and securities purchased under agreements
to resell 4,207 1,843 1,907
Deposits in financial institutions 773 1,045 557
-------- -------- --------
Total interest income 103,031 88,602 70,177
Interest expense:
Demand and savings deposits 14,404 14,402 11,318
Certificates and other time deposits 14,470 12,016 10,035
Other borrowed funds 781 889 411
Notes payable and ESOP indebtedness 26 174 438
-------- -------- --------
Total interest expense 29,681 27,481 22,202
-------- -------- --------
Net interest income 73,350 61,121 47,975
Provision for credit losses (Note G) 5,892 3,176 2,457
-------- -------- --------
Net interest income after provision for credit losses 67,458 57,945 45,518
Noninterest income:
Customer service fees 8,045 7,935 7,059
Equity in earnings of Sterling Capital Mortgage Company 495 320 316
Gain on sale of mortgage loans 5,927 - -
Other 6,114 3,385 2,957
-------- -------- --------
Total noninterest income 20,581 11,640 10,332
Noninterest expense:
Salaries and employee benefits (Note N) 31,900 24,916 22,012
Occupancy expense 8,214 6,033 5,798
Net losses and carrying costs of real estate acquired by
foreclosure 213 128 177
FDIC assessment 340 118 4
Technology 4,320 3,196 1,833
Postage and delivery charges 1,304 1,050 952
Supplies 1,417 972 901
Professional fees 1,846 1,779 1,030
Minority interest expense:
Company-obligated mandatorily redeemable trust preferred
securities of subsidiary trust (Note L) 2,668 1,519 -
Sterling Capital Mortgage Company 304 - -
Other 9,818 8,850 5,346
-------- -------- --------
Total noninterest expense 62,344 48,561 38,053
-------- -------- --------
Income before income taxes 25,695 21,024 17,797
Provision for income taxes (Note M) 8,391 7,009 5,527
-------- -------- --------
Net income $ 17,304 $ 14,015 $ 12,270
======== ======== ========
Earnings per share (Note P):
Basic $ 0.74 $ 0.62 $ 0.54
======== ======== ========
Diluted $ 0.71 $ 0.59 $ 0.52
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
36
<PAGE>
STERLING BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(In thousands except share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock
--------------------- ---------------------
Shares Amount Shares Amount
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 49 $ 49 22,261 $ 22,261
Net income
Net change in unrealized gain (loss) on
available-for-sale securities, net of tax
Total comprehensive income
Issuance of common stock (Note N) 249 249
Sale of preferred stock 39 39
Cash dividends paid
ESOP indebtedness repayments
-------- -------- -------- ----------
BALANCE AT DECEMBER 31, 1996 88 88 22,510 22,510
Net income
Net change in unrealized gain (loss) on
available-for-sale securities, net of tax
Total comprehensive income
Issuance of common stock (Note N) 368 368
Redemption of common stock (3) (3)
Sale of preferred stock 89 89
Cash dividends paid
ESOP indebtedness repayments
-------- -------- -------- ----------
BALANCE AT DECEMBER 31, 1997 177 177 22,875 22,875
Net income
Net change in unrealized gain (loss) on
available-for-sale securities, net of tax
Total comprehensive income
Issuance of common stock (Note N) 360 360
Common stock issued in exchange for an
additional 40 percent interest in SCMC (Note B) 296 296
Redemption of common stock (4) (4)
Sale of preferred stock 87 87
Conversion of preferred stock to common stock (127) (127) 349 349
Cash dividends paid
ESOP indebtedness repayments
-------- -------- -------- ----------
BALANCE AT DECEMBER 31, 1998 137 $ 137 23,876 $ 23,876
======== ======== ======== ==========
</TABLE>
See notes to consolidated financial statements.
37
<PAGE>
- --------------------------------------------------------------------------------
Accumulated Other
Comprehensive Income-
Net Unrealized Gain
(Loss) on Available-for- Total
Capital Retained ESOP Sale Securities, Shareholders'
Surplus Earnings Indebtedness Net of Tax Equity
- --------- --------- ------------ ------------------------ -------------
$ 15,903 $ 27,241 $ (551) $ (243) $ 64,660
12,270 12,270
12 12
-------------
12,282
-------------
442 (11) 680
536 575
(3,025) (3,025)
108 108
- --------- --------- ------------ ------------------------ -------------
16,881 36,475 (443) (231) 75,280
14,015 14,015
174 174
-------------
14,189
-------------
1,288 1,656
(18) (21)
1,137 1,226
(3,092) (3,092)
122 122
- --------- --------- ------------ ------------------------ -------------
19,288 47,398 (321) (57) 89,360
17,304 17,304
454 454
-------------
17,758
-------------
2,031 2,391
4,333 4,629
(18) (22)
1,276 1,363
(222) -
(4,105) (4,105)
135 135
- --------- --------- ------------ ------------------------ -------------
$ 26,688 $ 60,597 $ (186) $ 397 $ 111,509
========= ========= ============ ======================== =============
38
<PAGE>
STERLING BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(In thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997 1996
--------- --------- ---------
Net income $ 17,304 $ 14,015 $ 12,270
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Amortization and accretion of premiums and discounts on securities, net 246 416 676
Provision for credit losses 5,892 3,176 2,457
Deferred income tax expense (893) (264) (616)
Equity in undistributed earnings from Sterling Capital Mortgage Company (470) (194) (316)
Gain on sale of assets (6,056) (263) (113)
Depreciation and amortization 5,691 4,155 3,128
Write-down of real estate acquired by foreclosure 53 145 37
Net loans originated or purchased for sale or resale (8,735) (29,224) (31,437)
(Increase) decrease in accrued interest receivable and other assets (3,346) (4,253) 609
Increase (decrease) in accrued interest payable and other liabilities (1,567) 1,114 2,772
--------- --------- ---------
Net cash provided by (used in) operating activities 8,119 (11,177) (10,533)
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in securities purchased under agreements to resell (17,496) (16,224) (2,481)
Proceeds from maturities and principal paydowns of held-to-maturity securities 81,709 28,117 32,663
Purchases of held-to-maturity securities (30,259) (75,415) (17,259)
Proceeds from sale of available-for-sale securities - - 19,434
Proceeds from maturities and principal paydowns of available-for-sale securities 68,425 54,091 54,027
Purchases of available-for-sale securities (63,599) (77,381) (72,850)
Investment in Sterling Capital Mortgage Company - - (2,000)
Net increase in loans (124,159) (165,110) (102,221)
Proceeds from sale of real estate acquired by foreclosure 1,580 2,193 418
Net (increase) decrease in interest-bearing deposits in financial institutions (191) (387) 1,196
Cash and cash equivalents acquired with Sterling Capital Mortgage Company 1,219 - -
Proceeds from sale of premises and equipment 820 1,151 85
Purchase of premises and equipment (7,171) (9,839) (12,808)
--------- --------- ---------
Net cash used in investing activities (89,122) (258,804) (101,796)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts 110,319 195,707 171,493
Net increase (decrease) in repurchase agreements and federal funds purchased (31,741) 40,740 (8,332)
Repayments of notes payable - (4,055) (1,855)
Proceeds from issuance of common and preferred stock 3,754 2,882 1,255
Redemption of common stock (22) (21) -
Issuance of company-obligated mandatorily redeemable trust preferred securities - 28,750 -
Payments of cash dividends (4,105) (3,092) (3,025)
--------- --------- ---------
Net cash provided by financing activities 78,205 260,911 159,536
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (2,798) (9,070) 47,207
Cash and cash equivalents at beginning of year 138,887 147,957 100,750
--------- --------- ---------
Cash and cash equivalents at end of year $ 136,089 $ 138,887 $ 147,957
========= ========= =========
Supplemental information:
Income taxes paid $ 8,598 $ 7,788 $ 5,581
========= ========= =========
Interest paid $ 29,865 $ 26,999 $ 21,878
========= ========= =========
Noncash investing and financing activities:
Acquisition of real estate through foreclosure of collateral $ 2,130 $ - $ 1,009
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
39
<PAGE>
STERLING BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
ORGANIZATION - Sterling Bancshares, Inc. (hereinafter, collectively with its
subsidiaries (the "Company") headquartered in Houston, Texas, is a bank
holding company that provides commercial and retail banking services in the
Houston metropolitan area through the community banking offices of Sterling
Bank, a banking association chartered under the laws of the State of Texas
("Sterling Bank"), and Clear Lake National Bank, a national banking
association chartered under the laws of the United States ("Clear Lake
National"). (Sterling Bank and Clear Lake National are collectively referred
to as the "Bank"). Also, the Company provides mortgage banking services
through its 80 percent ownership of Sterling Capital Mortgage Company
("SCMC").
SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES - The accounting and
reporting policies of the Company conform to generally accepted accounting
principles and the prevailing practices within the banking industry. A
summary of significant accounting policies follows:
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of Sterling Bancshares, Inc. and its subsidiaries. All material
intercompany transactions have been eliminated in consolidation. The
consolidated financial statements have been restated to present the combined
financial information of acquisitions accounted for using the pooling of
interests method (see Note B).
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts in the financial
statements. Actual results could differ from those estimates.
SECURITIES - Securities classified as held-to-maturity are carried at cost,
adjusted for the amortization of premiums and the accretion of discounts.
Management has the positive intent and the Company has the ability to hold
these assets until their maturities. Under certain circumstances (including
the deterioration of the issuer's creditworthiness or a change in tax law or
statutory or regulatory requirements), these securities may be sold or
transferred to another portfolio.
Securities classified as available-for-sale are carried at fair value.
Unrealized gains and losses are excluded from earnings and reported net of
tax, as accumulated comprehensive income until realized. Securities within
the available-for-sale portfolio may be used as part of the Company's asset
and liability management strategy and may be sold in response to changes in
interest rate risk, prepayment risk or other factors.
Premiums and discounts are amortized and accreted to operations using the
level-yield method of accounting, adjusted for prepayments as applicable.
The specific identification method of accounting is used to compute gains or
losses on the sales of these assets.
INVESTMENT IN STERLING CAPITAL MORTGAGE COMPANY - In September 1996, the
Company acquired a 40 percent equity and 44 percent voting interest in SCMC.
On July 2, 1998, the Company acquired an additional 40 percent interest,
increasing its total ownership to 80 percent. The consolidated income
statements include the Company's 40 percent share of SCMC's equity earnings
from the
40
<PAGE>
initial acquisition through July 1, 1998 using the equity method of
accounting. Beginning July 2, 1998, SCMC's financial statements are fully
consolidated with the Company's and the remaining 20 percent ownership is
shown as minority interest.
LOANS HELD FOR SALE - Loans originated and intended for sale in the secondary
market are carried at the lower of cost or market value in the aggregate.
Premiums, discounts and loan fees (net of certain direct loan origination
costs) on loans held for sale are deferred until the related loans are sold
or repaid. Gains or losses on loan sales are recognized at the time of sale
and determined using the specific identification method.
LOANS HELD FOR INVESTMENT - Loans held for investment are stated at the
principal amount outstanding, net of unearned discount. Unearned discount
relates principally to consumer installment loans. The related interest
income for installment loans is recognized principally by the "sum of the
months' digits" method, which records interest in proportion to the declining
outstanding balances of the loans. This method approximates the interest
method. For other loans, such income is recognized using the simple interest
method.
Impaired loans, with the exception of groups of smaller-balance homogeneous
loans that are collectively evaluated for impairment, are defined as loans
for which, based on current information and events, it is probable that a
creditor will be unable to collect all amounts due, both interest and
principal, according to the contractual terms of the loan agreement. The
allowance for credit losses related to impaired loans is determined based on
the present value of expected cash flows discounted at the loan's effective
interest rate or, as a practical expedient, the loan's observable market
price or the fair value of the collateral if the loan is collateral
dependent.
NONACCRUAL, PAST-DUE AND RESTRUCTURED LOANS - Included in this loan category
are loans which have been categorized by management as nonaccrual because
collection of interest is doubtful and loans which have been restructured to
provide a reduction in the interest rate below the current market rate or a
deferral of interest or principal payments.
When the payment of principal or interest on a loan is delinquent for 90
days, or earlier in some cases, the loan is placed on nonaccrual status and
classified as impaired unless the loan is in the process of collection and
the underlying collateral fully supports the carrying value of the loan. If
the decision is made to continue accruing interest on the loan, periodic
reviews are made to evaluate the appropriateness of the accruing status of
the loan. When a loan is placed on nonaccrual status, interest accrued and
uncollected during the current year prior to the judgment of
noncollectibility is charged to operations. Interest accrued and uncollected
during prior periods is charged to the allowance for credit losses.
Generally, any payments received on nonaccrual loans are applied first to
outstanding loan amounts and next to the recovery of charged-off loan
amounts. Any excess is treated as a recovery of lost interest.
Restructured loans are those loans for which concessions in terms have been
granted because of a borrower's financial difficulty. Interest is generally
accrued on such loans in accordance with the new terms.
ALLOWANCE FOR CREDIT LOSSES - The allowance for credit losses is a valuation
allowance for probable losses incurred on loans. All losses are charged to
the allowance when the loss actually occurs or when a determination is made
that a probable loss has occurred. Recoveries are credited to the allowance
at the time of recovery.
41
<PAGE>
Throughout the year, management estimates the probable level of losses to
determine whether the allowance for credit losses is adequate to absorb
losses in the existing portfolio. Based on these estimates, an amount is
charged to the provision for credit losses and credited to the allowance for
credit losses in order to adjust the allowance to a level determined to be
adequate to absorb losses.
Management's judgment as to the level of probable losses on existing loans
involves the consideration of current and anticipated economic conditions and
their potential effects on specific borrowers; an evaluation of the existing
relationships among loans, potential credit losses and the present level of
the allowance; results of examinations of the loan portfolio by regulatory
agencies; and management's internal review of the loan portfolio. In
determining the collectibility of certain loans, management also considers
the fair value of any underlying collateral. The amounts ultimately realized
may differ from the carrying value of these assets because of economic,
operating or other conditions beyond the Company's control.
It should be understood that estimates of credit losses involve an exercise
of judgment. While it is reasonably possible that in the near term the
Company may sustain losses which are substantial relative to the allowance
for credit losses, it is the judgment of management that the allowance for
credit losses reflected in the consolidated balance sheets is adequate to
absorb estimated losses that exist in the current loan portfolio.
PREMISES AND EQUIPMENT - Land is carried at cost. Premises and equipment are
carried at cost, less accumulated depreciation and amortization.
Depreciation expense is computed principally using the straight-line method
over the estimated useful lives of the assets. Leasehold improvements are
amortized using the straight-line method over the periods of the leases or
the estimated useful lives, whichever is shorter.
GOODWILL - Goodwill is amortized using the straight-line method over a period
of 10 to 25 years. Management periodically performs an evaluation to
determine whether any impairment of goodwill has occurred. If any such
impairment is identified, a write-down of the goodwill is recorded.
REAL ESTATE ACQUIRED BY FORECLOSURE - The Bank records real estate acquired
by foreclosure at fair value less estimated costs to sell. Adjustments are
made to reflect declines in value subsequent to acquisition, if any, below
the recorded amounts. Required developmental costs associated with
foreclosed property under construction are capitalized and considered in
determining the fair value of the property. Operating expenses of such
properties, net of related income, and gains and losses on their disposition
are included in noninterest expense.
INCOME TAXES - Sterling Bancshares Inc. ("Bancshares") files a consolidated
federal income tax return with its subsidiaries. Each computes income taxes
as if it filed a separate return and remits to, or is reimbursed by,
Bancshares based on the portion of taxes currently due or refundable.
Deferred income taxes are accounted for by applying statutory tax rates in
effect at the balance sheet date to differences between the book basis and
the tax basis of assets and liabilities. The resulting deferred tax assets
and liabilities are adjusted to reflect changes in enacted tax laws or rates.
Realization of net deferred tax assets is dependent on generating sufficient
future taxable income. Although realization is not assured, management
believes it is more likely than not that all of the net deferred tax assets
will be realized. The amount of the net deferred tax asset considered
42
<PAGE>
realizable, however, could be reduced in the near term if estimates of future
taxable income are reduced.
STOCK-BASED COMPENSATION - The Company accounts for stock-based employee
compensation plans using the intrinsic value-based method of accounting as
permitted and discloses pro forma information assuming the fair value-based
method as prescribed by SFAS No. 123.
PROFIT SHARING PLAN - The Company has a profit sharing plan that covers
substantially all employees. Contributions are accrued and funded currently.
STATEMENTS OF CASH FLOWS - For purposes of the statements of cash flows, cash
and cash equivalents are defined as cash and due from banks and federal funds
sold. Generally, federal funds are sold for one-day periods.
EARNINGS PER SHARE - The Company adopted SFAS No. 128, "Earnings per Share"
in 1997. All previously reported EPS amounts have been restated and are not
materially different from those amounts previously reported.
Basic earnings per share is computed using the weighted average number of
shares outstanding. Diluted earnings per share is computed using the
weighted average number of shares outstanding adjusted for the incremental
shares issuable upon conversion of preferred stock and issuable upon exercise
of outstanding stock options.
RECLASSIFICATIONS - Certain reclassifications have been made to prior year
amounts to conform to current year presentation. All reclassifications have
been applied consistently for the periods presented.
RECENT ACCOUNTING STANDARDS - Effective 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 income, (2) the statement of
shareholders' equity, or (3) a separate statement of comprehensive income.
Comprehensive income is comprised of net income and all changes to
shareholders' equity, except those due to investments by owners (changes in
capital surplus) and distributions to owners (dividends). The Company has
elected to report comprehensive income in the consolidated statements of
shareholders' equity.
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosure
about Segments of an Enterprise and Related Information" which requires
public companies to report certain information about their operating segments
in their annual financial statements and quarterly reports issued to
shareholders. It also requires public companies to report certain
information about their products and services, the geographic areas in which
they operate, and their major customers. The Company has disclosed
separately results of operations relating to the commercial banking and
mortgage banking operating segments in Note T to the consolidated financial
statements.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
establishes accounting and reporting standards for derivative instruments and
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
Upon implementation of SFAS No. 133, securities classified as held-to-
maturity may be redesignated as available-for-sale or trading. This
statement is effective for periods beginning after June 15, 1999. The
Company has no derivative instruments currently. Management believes the
43
<PAGE>
implementation of this pronouncement will not have a material effect on the
Company's financial statements.
B. ACQUISITIONS
The following table shows transactions that have been accounted for using the
pooling of interests method. The consolidated financial statements have been
restated to present the combined financial information of the Company and the
acquired entities. There were no material adjustments to the net assets of
the acquired entities as a result of adopting the same accounting practices
as the Company.
<TABLE>
<CAPTION>
Shares of
Company Common Total Assets at Total Deposits at
Acquired Entity Acquisition Date Stock Issued Acquisition Date Acquisition Date
--------------- ---------------- -------------- ---------------- -----------------
<S> <C> <C> <C> <C>
First Houston Bancshares, Inc. September 30, 1997 1,686,014 $135 million $125 million
Humble National Bank June 30, 1998 855,000 54 million 49 million
Hometown Bancshares, Inc.(1) November 20, 1998 1,375,000 92 million 84 million
</TABLE>
(1) Hometown Bancshares, Inc. was the bank holding company for Clear Lake
National.
On July 2, 1998, the Company acquired an additional 40 percent of Sterling
Capital Mortgage Company ("SCMC") in exchange for 296,287 shares of the
Company's common stock valued at approximately $4.6 million. Subsequent to
the transaction, the Company owned 80 percent of SCMC. The transaction has
been accounted for as a purchase. This transaction resulted in $4.7 million
in goodwill, which is being amortized over 20 years. The results of
operations from SCMC are included in the consolidated statements of the
Company beginning July 2, 1998. If the results of operations of SCMC had
been included in consolidated income as though the acquisition of the
additional 40 percent had occurred January 1, 1997, there would have been no
material change in reported net income and earnings per share for 1998 and
1997.
The following table reflects the results of operations of the Company as
originally reported and the combined amounts after the 1998 acquisitions
accounted for using the pooling of interests method:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------------------------------------
1997 1996
---------------------------------------- -----------------------------------------
Originally Originally
Reported Humble Hometown Restated Reported Humble Hometown Restated
---------- ------ -------- -------- ---------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $79,268 $3,427 $5,907 $88,602 $62,171 $2,829 $5,177 $70,177
Interest expense 24,785 1,046 1,650 27,481 19,807 849 1,546 22,202
------- ------ ------ ------- ------- ------ ------ -------
Net interest income 54,483 2,381 4,257 61,121 42,364 1,980 3,631 47,975
Provision for credit losses 2,945 96 135 3,176 2,343 18 96 2,457
------- ------ ------ ------- ------- ------ ------ -------
Net interest income after
provision for credit losses 51,538 2,285 4,122 57,945 40,021 1,962 3,535 45,518
Noninterest income 9,739 1,173 728 11,640 8,598 1,002 732 10,332
Noninterest expense 41,618 3,103 3,840 48,561 32,354 2,644 3,055 38,053
------- ------ ------ ------- ------- ------ ------ -------
Net income before income
taxes 19,659 355 1,010 21,024 16,265 320 1,212 17,797
Provision for income taxes 6,576 92 341 7,009 5,112 6 409 5,527
------- ------ ------ ------- ------- ------ ------ -------
Net income $13,083 $ 263 $ 669 $14,015 $11,153 $ 314 $ 803 $12,270
======= ====== ====== ======= ======= ====== ====== =======
</TABLE>
44
<PAGE>
C. CASH AND CASH EQUIVALENTS
The Bank is required by the Board of Governors of the Federal Reserve System
(the "FRB") to maintain average reserve balances. "Cash and cash
equivalents" in the consolidated balance sheets includes amounts so
restricted of approximately $5.1 million at December 31, 1998 and $2.5
million at December 31, 1997.
D. SECURITIES
The amortized cost and fair value of securities are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Treasury securities and obligations
of U.S. government agencies $ 45,303 $ 543 $ 23 $ 45,823
Obligations of states and political
subdivisions 784 34 - 818
Mortgage-backed securities 24,485 111 50 24,546
Federal Home Loan Bank stock and other
equity securities 19,149 - - 19,149
-------- ------ ---- --------
Total $ 89,721 $ 688 $ 73 $ 90,336
======== ====== ==== ========
HELD-TO-MATURITY
U.S. Treasury securities and obligations
of U.S. government securities $ 61,634 $1,887 $ 49 $ 63,472
Obligations of states and political
subdivisions 51,243 1,150 - 52,393
Mortgage-backed securities and
collateralized mortgage obligations 38,244 625 213 38,656
-------- ------ ---- --------
Total $151,121 $3,662 $262 $154,521
======== ====== ==== ========
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Treasury securities and obligations
of U.S. government agencies $ 56,943 $1,071 $1,053 $ 56,961
Obligations of states and political
subdivisions 787 19 1 805
Mortgage-backed securities 31,179 119 99 31,199
Federal Home Loan Bank stock and other
equity securities 5,846 - - 5,846
-------- ------ ------ --------
Total $ 94,755 $1,209 $1,153 $ 94,811
======== ====== ====== ========
HELD-TO-MATURITY
U.S. Treasury securities and obligations
of U.S. government securities $122,441 $1,231 $ 260 $123,412
Obligations of states and political
subdivisions 22,329 496 46 22,779
Mortgage-backed securities and
collateralized mortgage obligations 57,688 857 136 58,409
Other debt securities 10 - 1 9
-------- ------ ------ --------
Total $202,468 $2,584 $ 443 $204,609
======== ====== ====== ========
</TABLE>
The amortized cost and fair value of securities at December 31, 1998, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. All amounts are
shown in thousands.
<TABLE>
<CAPTION>
Held-to-Maturity Available-for-Sale
----------------------- -----------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Due in one year or less $ 7,406 $ 7,444 $ 7,002 $ 7,046
Due after one year through five years 70,032 71,972 35,976 36,378
Due after five years through ten years 33,916 34,831 1,083 1,174
Due after ten years 1,523 1,618 2,026 2,043
Mortgage-backed securities and
collateralized mortgage obligations 38,244 38,656 24,485 24,546
FHLB stock and other equity securities - - 19,149 19,149
-------- -------- ------- -------
$151,121 $154,521 $89,721 $90,336
======== ======== ======= =======
</TABLE>
The Company does not own any securities of any one issuer (other than the
U.S. government and its agencies) of which aggregate adjusted cost exceeds
10% of the consolidated shareholders' equity at December 31, 1998 or 1997.
Securities with carrying values totaling $149.2 million and fair values
totaling $148.7 million at December 31, 1998 were pledged to secure public
deposits and securities sold under repurchase agreements and for other
purposes required or permitted by law.
46
<PAGE>
E. LOANS
The loan portfolio consists of various types of loans made principally to
borrowers located in the Houston metropolitan area, and is classified by
major type as follows (in thousands):
December 31,
-----------------------
1998 1997
-------- --------
Commercial, financial and industial $315,936 $285,158
Real estate-commercial 240,871 206,465
Real estate-mortgage 110,114 91,869
Real estate-construction 88,042 65,273
Consumer 103,506 95,724
Foreign commercial and industrial 4,047 771
Less unearned discount (556) (1,895)
-------- --------
Total loans held for investment 861,960 743,365
Loans held for sale 84,855 70,193
-------- --------
Total loans $946,815 $813,558
======== ========
The recorded investment in impaired loans under SFAS No. 114 is approximately
$23.1 million and $19.2 million, at December 31, 1998 and 1997, respectively.
Under SFAS No. 114, such impaired loans required an allowance for credit
losses of approximately $4.7 million and $3.4 million, respectively.
The average recorded investment in impaired loans for the years ended
December 31, 1998, 1997 and 1996 was $19.9 million, $15.9 million and $13.9
million, respectively. The Company recognized interest income on these
impaired loans of $2.1 million, $1.8 million and $1.1 million in 1998, 1997
and 1996, respectively.
Loan maturities and rate sensitivity of the loan portfolio, excluding real
estate - mortgage, consumer and foreign loans and unearned discount, at
December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Due After
One Year
Due in One Through Five Due After
Year or Less Years Five Years Total
------------ ------------ ---------- -----
<S> <C> <C> <C> <C>
Commercial, financial and industrial $159,325 $148,875 $ 7,736 $315,936
Real estate-commercial 55,181 162,393 23,297 240,871
Real estate-construction 28,086 52,365 7,591 88,042
-------- -------- ------- --------
Total $242,592 $363,633 $38,624 $644,849
======== ======== ======= ========
Loans with a fixed interest rate $ 68,240 $221,918 $23,732 $313,890
Loans with a floating interest rate 174,352 141,715 14,892 330,959
-------- -------- ------- --------
Total $242,592 $363,633 $38,624 $644,849
======== ======== ======= ========
</TABLE>
As of December 31, 1998 and 1997, loans outstanding to directors, officers
and their affiliates were approximately $6,316,000 and $7,340,000,
respectively. In the opinion of management, all transactions entered into
between the Bank and such related parties have been and are, in the ordinary
course of business, made on the same terms and conditions as similar
transactions with unaffiliated persons.
47
<PAGE>
An analysis of activity with respect to these related-party loans is as
follows (in thousands):
Year Ended
December 31,
-------------------
1998 1997
---- ----
Beginning balance $ 7,340 $ 6,688
New loans and reclassified related loans 3,814 5,598
Repayments (4,838) (4,946)
------- -------
Ending balance $ 6,316 $ 7,340
======= =======
F. NONACCRUAL, PAST-DUE AND RESTRUCTURED LOANS
The following table presents information relating to nonaccrual, past-due and
restructured loans (in thousands):
December 31,
-------------------
1998 1997
---- ----
Nonaccrual loans $ 4,048 $ 4,226
Loans 90 days or more past due, not on
nonaccrual status 621 486
Restructured loans, performing 312 217
------- -------
$ 4,981 $ 4,929
======= =======
G. ALLOWANCE FOR CREDIT LOSSES
An analysis of activity in the allowance for credit losses is as follows (in
thousands):
Year Ended December 31,
-----------------------------
1998 1997 1996
---- ---- ----
Balance at beginning of year $ 7,882 $7,472 $6,823
Provisions 5,892 3,176 2,457
Loans charged off 4,170 3,204 2,281
Loan recoveries (566) (438) (473)
------- ------ ------
Net loans charged off 3,604 2,766 1,808
------- ------ ------
Balance at end of year $10,170 $7,882 $7,472
======= ====== ======
48
<PAGE>
H. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows (in thousands):
December 31,
-----------------------------
1998 1997
-------------- -----------
Land $ 7,399 $ 7,392
Buildings and improvements 25,714 24,387
Furniture, fixtures and equipment 24,218 21,225
------- -------
57,331 53,004
Less accumulated depreciation
and amortization 20,792 18,522
------- -------
Total $36,539 $34,482
======= =======
I. DEPOSITS
Included in certificates of deposit and other time deposits are certificates
of deposit in amounts of $100,000 or more. The remaining maturities of these
certificates are summarized as of December 31, 1998 as follows (in
thousands):
Three months or less $ 96,794
Four through six months 30,026
Seven through twelve months 24,979
Thereafter 16,817
--------
$168,616
========
Interest expense for certificates of deposit in excess of $100,000 was
approximately $7.2 million, $4.9 million, and $3.8 million for the years
ended December 31, 1998, 1997 and 1996, respectively.
The Bank has no brokered deposits and there are no major concentrations of
deposits.
J. OTHER BORROWED FUNDS
Securities sold under agreements to repurchase generally mature within one to
four days from the transaction date. Information concerning securities sold
under agreements to repurchase is summarized as follows (dollars in
thousands):
1998 1997
------- -------
Average balance during the year $17,903 $18,750
Average interest rate during the year 4.36% 4.74%
Maximum month-end balance during the year $20,089 $22,796
Average interest rate at the end of the year 4.07% 4.73%
The Bank has an available line of credit with the Federal Home Loan Bank of
Dallas, which allows the Bank to borrow on a collateralized basis at a fixed
term for a period generally not exceeding one week. At December 31, 1997,
the Bank had $25,000,000, bearing an interest rate of 6.30%, borrowed under
this line of credit, with a term of one week. This amount was repaid in
January 1998.
49
<PAGE>
K. NOTES PAYABLE AND ESOP INDEBTEDNESS
Hometown Bancshares Employee Stock Ownership Plan and Trust ("ESOP") has a
note payable to a lender with a balance of $186,000 and $321,000 as of
December 31, 1998 and 1997, respectively. The proceeds of the loan were used
to purchase shares of previously unissued common stock from Hometown
Bancshares, Inc. Because the Bank guarantees repayment, the ESOP debt is
recorded in the consolidated financial statements with an offsetting
reduction to shareholders' equity for the outstanding balance of the debt.
The debt is expected to be paid through discretionary contributions made by
the Bank to the ESOP. The approximate amounts of maturities for the note
payable are as follows: $147,000 in 1999 and $39,000 in 2000.
In connection with bank acquisitions in 1993 and 1994, the Company entered
into a loan agreement with a bank that committed $8,000,000. The Company
repaid the loan in full during 1997. In February 1991, the Company sold
$2,850,000 in senior debentures. All outstanding debentures were repaid
during the year ended December 31, 1997.
L. TRUST PREFERRED SECURITIES
In June 1997, the Company formed Sterling Bancshares Capital Trust I, a trust
formed under the laws of the State of Delaware (the "Trust"). The Trust
issued $28,750,000 of 9.28% Trust Preferred Securities and invested the
proceeds thereof in the 9.28% Junior Subordinated Deferrable Interest
Debentures (the "Junior Subordinated Debentures") issued by the Company. The
Junior Subordinated Debentures will mature on June 6, 2027, which date may be
shortened to a date not earlier than June 6, 2002 if certain conditions are
met (including the Company having received prior approval of the Federal
Reserve and any other required regulatory approvals). The Trust Preferred
Securities will be subject to mandatory redemption if the Junior Subordinated
Debentures are repaid by the Company. The Junior Subordinated Debentures may
be prepaid if certain events occur, including a change in the tax status or
regulatory capital treatment of the Trust Preferred Securities. In each
case, redemption will be made at par, plus the accrued and unpaid
distributions thereon through the redemption date.
M. INCOME TAXES
The components of the provision for income taxes follow (in thousands):
Year Ended December 31,
------------------------------
1998 1997 1996
------ ------ ------
Current expense $9,284 $7,273 $6,143
Deferred benefit (893) (264) (616)
------ ------ ------
Total $8,391 $7,009 $5,527
====== ====== ======
50
<PAGE>
The provision for income taxes differs from the amount computed by applying
the federal income tax statutory rate on operations as follows (in
thousands):
Year Ended December 31,
------------------------------
1998 1997 1996
------ ------ ------
Taxes calculated at statutory
rate $8,993 $7,236 $6,081
Increase (decrease) resulting
from:
Tax-exempt interest income (596) (368) (421)
Goodwill amortization 125 103 114
Adjustments to valuation
allowance (230) - (318)
Other, net 99 38 71
------ ------ ------
Income tax expense $8,391 $7,009 $5,527
====== ====== ======
Significant deferred tax assets and liabilities at December 31, 1998 and
1997, were as follows (in thousands):
December 31,
--------------------
1998 1997
------ ------
Deferred tax assets:
Net unrealized loss on available-
for-sale securities $ - $ 62
Depreciable assets 214 264
Real estate acquired by foreclosure 99 114
Allowance for credit losses 3,446 2,584
Net operating loss carryforward 298 335
Deferred compensation 269 163
Other 52 321
------ ------
Total deferred tax assets 4,378 3,843
Deferred tax liabilities:
Net unrealized gains on available-
for-sale securities 215 -
Earnings from Sterling Capital Mortgage
Company 396 222
Cash to accrual (for former First Houston
Bancshares) 114 228
Federal Home Loan Bank stock dividends 175 175
Other 630 -
------ ------
Total deferred tax liabilities 1,530 625
------ ------
Net deferred tax assets before valuation
allowance 2,848 3,218
Valuation allowance 262 492
------ ------
Net deferred tax assets $2,586 $2,726
====== ======
N. EMPLOYEE BENEFITS
PROFIT SHARING PLAN - The Company's profit sharing plan includes
substantially all employees. Contributions to the plan are made at the
discretion of the Board of Directors but generally equal up to 10% of the
Company's pretax income, subject to IRS limitations. Employee contributions
to 401(k) plan accounts are optional. Beginning in 1997, the Company matched
50 percent of the employee's contribution, up to 6 percent of the employee's
base pay. Profit sharing contributions are accrued and funded currently.
Total profit sharing expense for 1998, 1997 and 1996 was approximately
$2,268,000, $1,702,000 and $1,711,000, respectively.
51
<PAGE>
STOCK-BASED COMPENSATION - During April 1994, the Company adopted the 1994
Stock Incentive Plan (the "Stock Plan"). The Stock Plan provides for a
maximum of 2,000,000 shares of the Company's common stock to be issued. No
options or performance shares may be granted after April 2004. Options are
granted to officers and employees at exercise prices determined by the
Compensation Committee of the Board of Directors. These options generally
have exercise prices equal to the fair market value of the common stock at
the date of grant and vest ratably over a four-year period. Options granted
under the plan must be exercised not later than ten years from the date of
grant. Stock grant awards may also be made under the Stock Plan with
compensation expense recognized for any stock grant awards. A total of
1,400, 950, and 1,950 stock grants were awarded under the Stock Plan during
1998, 1997 and 1996, respectively.
A summary of changes in outstanding options, as restated for stock splits, is
as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1998 1997 1996
-------------------- ------------------ -----------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000s) Price (000s) Price (000s) Price
--------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Shares under option, beginning of year 1,134 $ 4.68 1,136 $ 3.68 1,176 $2.93
Shares granted 225 14.68 170 10.03 221 6.19
Shares canceled/expired (74) 4.56 (35) 4.32 (72) 3.67
Shares exercised (334) 3.42 (137) 3.07 (189) 1.94
----- ------ ----- ------ ----- -----
Shares under option, end of year 951 $ 7.50 1,134 $ 4.68 1,136 $3.68
===== ====== ===== ====== ===== =====
Shares exercisable, end of year 423 513 422
===== ===== =====
Shares reserved for future granting
of options, end of year 1,033 554 723
===== ===== ====
Weighted average fair value of options
granted during the year $ 5.09 $ 3.27 $0.94
====== ====== =====
Range of exercise prices of options
granted during the year $12.63-$17.38 $8.78-$14.42 $5.30-$7.11
</TABLE>
If compensation cost for the Company's stock-based compensation plan had been
determined based on the fair value at the grant dates for awards, there would
have been no material impact on the Company's reported net income or earnings
per share.
The fair value of options at date of grant was estimated using the Black-
Scholes option-pricing model with the following weighted-average assumptions:
1998 1997 1996
---------- ---------- ----------
Expected life (years) 7.57 7.38 6.00
Interest rate 4.64% 5.77% 7.08%
Volatility 26.23% 24.69% 22.69%
Dividend yield 1.19% 1.17% 2.00%
ESOP - Hometown Bancshares Inc. ("Hometown") established the ESOP in January
1992 and the original purchase of common shares by the ESOP was funded with
borrowings funded by
52
<PAGE>
Hometown. Hometown stock held by the ESOP was converted to Company common
stock in the merger. The Bank made contributions to the ESOP totaling
$160,000, $120,000 and $120,000 during 1998, 1997 and 1996.
STOCK PURCHASE PLAN - The Company offers the 1994 Employee Stock Purchase
Plan (the "Purchase Plan"), which is a compensatory benefit plan, to all
employees who are employed for more than 20 hours per week and meet minimum
length-of-service requirements of three months. The Purchase Plan provides
for an aggregate of 675,000 shares of the Company's common stock to be issued
under the Plan with no more than 67,500 shares available during any annual
offering. The purchase price for shares available under the Purchase Plan is
equal to the fair market value on the date of the offering. During 1998 and
1997, 2,430 and 5,441 shares, respectively, were purchased and 12,192 and
26,799 shares, respectively, were subscribed for through payroll deduction
for a maximum of two years. Shares are issued upon full payment.
O. SHAREHOLDERS' EQUITY
STOCK SPLITS - The Board of Directors declared stock splits effected in the
form of stock dividends as follows:
Declaration Date Split ratio Distribution Date
---------------- ----------- -----------------
January 26, 1998 3-for-2 February 20, 1998
January 27, 1997 3-for-2 February 24, 1997
January 22, 1996 3-for-2 February 14, 1996
January 17, 1995 3-for-2 February 10, 1995
PREFERRED STOCK - The Board of Directors has approved the sale of convertible
preferred stock in series pursuant to confidential private placement
memoranda upon the opening of various banking offices. The shares are sold
to investors who may assist in the business development efforts of the
opening office and are convertible to common shares dependent on that banking
office meeting certain performance and deposit growth goals. A total of
517,642 convertible preferred shares have been approved for issue in seven
series.
During 1998, 126,880 shares of preferred stock under three series issued in
1995 and 1996 were converted into 348,600 common shares as adjusted for stock
splits declared subsequent to issuance and prior to conversion of such shares
of preferred stock. At December 31, 1998, there are 137,000 convertible
preferred shares outstanding. These shares are convertible into a maximum of
193,510 shares of common stock if the performance and deposit growth goals of
the banking offices are achieved.
53
<PAGE>
P. EARNINGS PER COMMON SHARE
Earnings per common share was computed based on the following (in thousands,
except per share data):
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------ ------------------
Amount Per Share Amount Per Share Amount Per Share
------ --------- ------ ===== ====== =====
<S> <C> <C> <C> <C> <C> <C>
Net Income $17,304 $14,015 $12,270
======= ======= ======
Basic:
Weighted average shares outstanding 23,379 $0.74 22,787 $0.62 22,562 $0.54
===== ===== =====
Diluted:
Add incremental shares for:
Assumed exercise of outstanding options 547 721 682
Assumed conversion of preferred stock 397 319 184
------- ------- -------
Total 24,323 $0.71 23,827 $0.59 23,428 $0.52
======= ===== ======= ===== ====== =====
</TABLE>
The incremental shares for the assumed exercise of the outstanding options
was determined by application of the treasury stock method. The incremental
shares for the conversion of the preferred stock was determined assuming
applicable performance goals had been met.
Q. COMMITMENTS AND CONTINGENCIES
LEASES - A summary as of December 31, 1998, of noncancelable future operating
lease commitments follows (in thousands):
1999 $2,038
2000 1,558
2001 1,415
2002 994
2003 669
Thereafter 2,675
------
Total $9,349
======
Rent expense under all noncancelable operating lease obligations, net of
income from noncancelable subleases aggregated, was approximately $1.3
million, $700 thousand, and $609 thousand for the years ended December 31,
1998, 1997 and 1996, respectively.
LITIGATION - The Company has been named as a defendant in various legal
actions arising in the normal course of business. In the opinion of
management, after reviewing such claims with outside counsel, resolution of
such matters will not have a materially adverse impact on the consolidated
financial statements.
R. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to various financial instruments with off-balance sheet
risk in the normal course of business to meet the financial needs of its
customers. These financial instruments include commitments to extend credit
and standby letters of credit. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized
in the consolidated balance sheets. The Bank's exposure to credit loss in the
event of nonperformance by
54
<PAGE>
the other party to the financial instrument for commitments to extend credit
is represented by the contractual notional amount of these instruments. The
Bank uses the same credit policies in making these commitments and
conditional obligations as it does for on-balance sheet instruments.
The following is a summary of the various financial instruments entered into
by the Bank (in thousands):
December 31,
--------------------------
1998 1997
------------ ------------
Financial instruments whose contract
amount represents credit risk:
Commitments to extend credit $156,627 $113,411
Standby letters of credit 11,026 10,444
Mortgages sold with recourse 210,442 150,652
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being fully drawn upon, the total commitment
amounts disclosed above do not necessarily represent future cash
requirements.
The Bank evaluates each customer's creditworthiness on a case-by-case basis.
The amount of collateral obtained, if considered necessary by the Bank upon
extension of credit, is based on management's credit evaluation of the
customer.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk to
the Bank in issuing letters of credit is essentially the same as that
involved in extending loan facilities to its customers.
S. REGULATORY MATTERS
CAPITAL REQUIREMENTS - The Company is subject to various regulatory capital
requirements administered by the federal banking agencies. Any institution
that fails to meet its minimum capital requirements is subject to actions by
regulators that could have a direct material effect on its financial
statements. Under the capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines based on the Bank's assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices. The
Company's capital amount and the Bank's classification under the regulatory
framework for prompt corrective action are also subject to qualitative
judgments by the regulators.
To meet the capital adequacy requirements, the Company must maintain minimum
capital amounts and ratios as defined in the regulations. Management
believes, as of December 31, 1998 and 1997, that the Company and the Bank met
all capital adequacy requirements to which they are subject.
As of December 31, 1998, the most recent notification categorized the Bank as
"well capitalized" under the regulatory capital framework for prompt
corrective action and there have been no events since that notification that
management believes have changed the Bank's category. To be categorized as
well capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table.
55
<PAGE>
The following is a summary of the Company's capital ratios for the periods
presented (in thousands):
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
-------- -------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED:
As of December 31, 1998:
Total Capital (to Risk Weighted Assets) $145,297 12.80% $90,811 8.0%
Tier I Capital (to Risk Weighted Assets) 134,964 11.89% 45,404 4.0%
Tier I Capital (to Average Assets) 134,964 9.67% 55,813 4.0%
As of December 31, 1997:
Total Capital (to Risk Weighted Assets) $124,864 13.50% $74,011 8.0%
Tier I Capital (to Risk Weighted Assets) 114,921 12.43% 36,984 4.0%
Tier I Capital (to Average Assets) 114,921 10.67% 43,082 4.0%
STERLING BANK ONLY:
As of December 31, 1998:
Total Capital (to Risk Weighted Assets) $112,775 10.58% $85,274 8.0% $106,593 10.0%
Tier I Capital (to Risk Weighted Assets) 103,241 9.65% 42,794 4.0% 64,191 6.0%
Tier I Capital (to Average Assets) 103,241 7.90% 52,278 4.0% 65,348 5.0%
As of December 31, 1997:
Total Capital (to Risk Weighted Assets) $ 90,196 10.29% $70,139 8.0% $ 87,674 10.0%
Tier I Capital (to Risk Weighted Assets) 82,556 9.42% 35,056 4.0% 52,584 6.0%
Tier I Capital (to Average Assets) 82,556 8.34% 39,604 4.0% 49,505 5.0%
CLEAR LAKE NATIONAL BANK ONLY:
As of December 31, 1998:
Total Capital (to Risk Weighted Assets) $ 6,184 9.48% $ 5,219 8.0% $ 6,523 10.0%
Tier I Capital (to Risk Weighted Assets) 5,522 8.47% 2,608 4.0% 3,912 6.0%
Tier I Capital (to Average Assets) 5,522 6.05% 3,652 4.0% 4,565 5.0%
As of December 31, 1997:
Total Capital (to Risk Weighted Assets) $ 6,124 11.40% $ 4,299 8.0% $ 5,374 10.0%
Tier I Capital (to Risk Weighted Assets) 5,846 10.88% 2,150 4.0% 3,224 6.0%
Tier I Capital (to Average Assets) 5,846 7.81% 2,995 4.0% 3,744 5.0%
</TABLE>
Clear Lake National was the sole subsidiary of Hometown and, pending
regulatory approval, will be merged into Sterling Bank during 1999.
DIVIDEND RESTRICTIONS - Dividends paid by the Bank and the Company are
subject to certain restrictions imposed by regulatory agencies. Under these
restrictions there was an aggregate of approximately $37.5 million and $33.4
million available for payment of dividends at December 31, 1998, by the Bank
and the Company, respectively.
56
<PAGE>
T. SEGMENTS
The Company has two operating segments: commercial banking and mortgage
banking. Each segment is 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 A. 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 for the year ended
December 31, 1998 follows:
<TABLE>
<CAPTION>
Commercial
Banking Mortgage Banking Total
---------- ---------------- -----------
<S> <C> <C> <C>
Net interest income $ 73,350 $ - $ 73,350
Noninterest income 12,910 7,176 20,086
Equity in earnings of SCMC - 495 495
---------- ------------ ----------
Total revenue 86,260 7,671 93,931
Provision for credit losses 5,892 - 5,892
Noninterest expense 57,147 5,197 62,344
---------- ------------ ----------
Income before income taxes 23,221 2,474 25,695
Provision for income taxes 7,629 762 8,391
---------- ------------ ----------
Net income $ 15,592 $ 1,712 $ 17,304
========== ============ ==========
Total assets $1,412,214 $ 4,098 $1,416,312
========== ============ ==========
</TABLE>
Intersegment interest was paid to Sterling Bank by SCMC in the amount of
$2,216,511 for the year ended December 31, 1998. Total loans in the mortgage
warehouse of $62,651,755 were eliminated in consolidation.
U. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values were estimated by management as of December 31, 1998 and 1997,
and required considerable judgment. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair values presented.
The following methods and assumptions were used to estimate the fair value of
cash and of financial instruments for which it is practicable to estimate
that value:
SHORT-TERM INVESTMENTS - For short-term investments, the carrying amount is a
reasonable estimate of fair value.
SECURITIES - For securities held as investment, fair value equals quoted
market prices, if available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
57
<PAGE>
LOANS HELD FOR SALE - For loans held for sale, fair value equals quoted
market prices, if available. If a quoted market price is not available, the
fair value is estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
LOANS HELD FOR INVESTMENT - The fair value of loans is estimated by
discounting the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the same
remaining maturities.
DEPOSIT LIABILITIES - The fair value of demand deposits, savings accounts and
certain money market deposits is the amount payable on demand at the
reporting date. The fair value of certificates of deposit is estimated using
the rates currently offered for deposits of similar remaining maturities.
OTHER BORROWED FUNDS - The carrying amounts approximate fair value because
these borrowings reprice at market rates generally within four days.
ESOP INDEBTEDNESS - Rates currently available to the Company for debt with
similar terms and remaining maturities are used to discount the future cash
flows to estimate fair value of existing debt.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND FINANCIAL
GUARANTEES WRITTEN - The fair value of commitments is estimated using the
fees currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed-rate loan commitments, fair value also considers
the difference between current levels of interest rates and the committed
rates. The fair value of guarantees and letters of credit is based on fees
currently charged for similar agreements or on the estimated cost to
terminate them or otherwise settle the obligations with the counterparties at
the reporting date.
58
<PAGE>
The estimated fair values of the Company's financial instruments are as
follows (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1998 1997
----------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Short-term investments $ 169,681 $ 169,681 $ 154,792 $ 154,792
Available-for-sale securities 90,336 90,336 94,811 94,811
Held-to-maturity securities 151,121 154,521 202,468 204,609
Loans held for sale 84,855 84,855 70,193 70,193
Loans held for investment 861,960 864,552 743,365 736,655
Less allowance for credit losses (10,170) (10,170) (7,882) (7,882)
---------- ---------- ---------- ----------
Total $1,347,783 $1,353,775 $1,257,747 $1,253,178
========== ========== ========== ==========
Financial liabilities:
Deposits $1,251,685 $1,253,354 $1,141,366 $1,142,473
Other borrowed funds 13,428 13,428 45,169 45,169
ESOP indebtedness 186 - 321 321
---------- ---------- ---------- ----------
Total $1,265,299 $1,266,782 $1,186,856 $1,187,963
========== ========== ========== ==========
Off-balance-sheet instruments:
Commitments to extend credit ( - ) ( - )
Standby letters of credit ( - ) ( - )
</TABLE>
V. SUBSEQUENT EVENT
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 to the right to receive a fractional share of the
Company's common stock, for a total of 1,854,600 shares of the Company's
common stock. Houston Commerce had approximately $104.4 million in assets
and $93.6 million in deposits as of December 31, 1998. This Agreement is
subject to approval by the shareholders of Houston Commerce and applicable
banking regulatory authorities.
59
<PAGE>
W. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The table below sets forth unaudited financial information for each quarter
of the last two years (in thousands, except per share amounts).
<TABLE>
<CAPTION>
1998 1997
------------------------------------------- -------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $26,210 $26,224 $26,060 $24,538 $24,159 $23,354 $21,550 $19,539
Interest expense 7,035 7,592 7,659 7,396 7,313 7,344 6,733 6,091
------- ------- ------- ------- ------- ------- ------- -------
Net interest income 19,175 18,632 18,401 17,142 16,846 16,010 14,817 13,448
Provision for credit losses 1,819 1,355 1,791 927 930 757 749 740
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for credit losses 17,356 17,277 16,610 16,215 15,916 15,253 14,068 12,708
Noninterest income 6,590 7,054 3,809 3,153 2,955 3,266 2,825 2,594
Noninterest expense 17,890 16,934 14,175 13,370 13,550 12,865 11,530 10,616
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes 6,056 7,397 6,244 5,998 5,321 5,654 5,363 4,686
Provision for income taxes 2,001 2,506 1,836 2,048 1,820 1,866 1,774 1,550
------- ------- ------- ------- ------- ------- ------- -------
Net income $ 4,055 $ 4,891 $ 4,408 $ 3,950 $ 3,501 $ 3,788 $ 3,589 $ 3,136
======= ======= ======= ======= ======= ======= ======= =======
Earnings per share:
Basic $ 0.17 $ 0.21 $ 0.19 $ 0.17 $ 0.15 $ 0.17 $ 0.16 $ 0.14
======= ======= ======= ======= ======= ======= ======= =======
Diluted $ 0.17 $ 0.20 $ 0.18 $ 0.16 $ 0.15 $ 0.16 $ 0.15 $ 0.13
======= ======= ======= ======= ======= ======= ======= =======
Shares used in computing
earnings per share:
Basic 23,804 23,558 23,155 22,997 22,856 22,832 22,790 22,734
======= ======= ======= ======= ======= ======= ======= =======
Diluted 24,534 24,403 24,404 24,259 23,993 23,981 23,815 23,740
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Earnings per common share are computed independently for each of the quarters
presented and therefore may not sum to the totals for the year.
All quarters have been restated to present the combined financial information
of acquisitions accounted for using the pooling of interests method.
60
<PAGE>
X. PARENT-ONLY FINANCIAL STATEMENTS
STERLING BANCSHARES, INC.
(Parent Company Only)
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(In thousands)
----------------------------------------------------------------------------
December 31,
--------------------
1998 1997
-------- --------
ASSETS
Cash and cash equivalents $ 22,621 $ 28,837
Accrued interest receivable and other assets 3,966 2,644
Goodwill, net 610 638
Investment in bank subsidiaries 113,490 89,222
Investment in Sterling Bancshares Capital Trust 889 889
-------- --------
TOTAL $141,576 $122,230
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accrued interest payable and other liabilities $ 242 $ 2,910
ESOP indebtedness 186 321
Junior subordinated debentures 29,639 29,639
-------- --------
Total liabilities 30,067 32,870
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock 137 177
Common stock 23,876 22,875
Capital surplus 26,688 19,288
Retained earnings 60,597 47,398
ESOP indebtedness (186) (321)
Accumulated other comprehensive income-net
unrealized loss on available-for-sale securities,
net of tax 397 (57)
-------- --------
111,509 89,360
-------- --------
TOTAL $141,576 $122,230
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61
<PAGE>
STERLING BANCSHARES, INC.
(Parent Company Only)
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
REVENUES:
Dividends received from bank subsidiaries $ 450 $ 3,550 $ 4,605
Interest income 7 1 1
------- ------- -------
Total revenues 457 3,551 4,606
EXPENSES:
Interest expense:
Notes payable and ESOP indebtedness 26 183 447
Junior subordinated debentures 2,668 1,519 -
Goodwill amortization 28 28 28
General and administrative 756 557 328
------- ------- -------
Total expenses 3,478 2,287 803
Income (deficit) before equity in undistributed
earnings of subsidiaries and income taxes (3,021) 1,264 3,803
Equity in undistributed earnings of
subsidiaries 19,181 11,979 8,259
------- ------- -------
Income before income tax benefit 16,160 13,243 12,062
Income tax benefit 1,144 772 208
------- ------- -------
Net income $17,304 $14,015 $12,270
======= ======= =======
</TABLE>
62
<PAGE>
STERLING BANCSHARES, INC.
(Parent Company Only)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands)
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
-------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,304 $ 14,015 $12,270
Adjustments to reconcile net income
to net cash provided by operating
activities:
Amortization of goodwill 28 28 28
Equity in undistributed earnings
of subsidiary (19,181) (11,979) (8,259)
Change in operating assets and
liabilities:
Accrued interest receivable and
other assets (1,324) (1,820) (40)
Accrued interest payable and
other liabilities (2,670) 2,359 475
-------- -------- -------
Net cash provided by (used in)
operating activities (5,843) 2,603 4,474
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital contribution to Sterling
Bancshares Capital Trust I - (889) -
-------- -------- -------
Net cash used in investing
activities - (889) -
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable - (4,055) (1,855)
Proceeds from issuance of common stock 2,391 1,656 680
Proceeds from issuance of preferred stock 1,363 1,226 575
Proceeds from issuance of junior
subordinated debentures - 29,639 -
Redemption of common stock (22) (21) -
Payments of cash dividends (4,105) (3,092) (3,025)
-------- -------- -------
Net cash provided by (used in)
financing activities (373) 25,353 (3,625)
-------- -------- -------
NET INCREASE (DECREASE) IN CASH (6,216) 27,067 849
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 28,837 1,770 921
-------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $22,621 $ 28,837 $ 1,770
======== ======== =======
63
<PAGE>
EXHIBIT 2.6
AGREEMENT AND PLAN OF MERGER
AMONG
STERLING BANCSHARES, INC.
STERLING BANCORPORATION, INC.
AND
HOMETOWN BANCSHARES, INC.
DATED AS OF JUNE 12, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
ARTICLE I CERTAIN DEFINITIONS.................................................... 2
Section 1.01 Certain Definitions........................................... 2
ARTICLE II THE MERGER AND RELATED TRANSACTIONS................................... 7
Section 2.01 Merger........................................................ 7
Section 2.02 Time and Place of Closing..................................... 7
Section 2.03 Effective Time................................................ 7
Section 2.04 Reservation of Right to Revise Transaction; Further Actions... 8
ARTICLE III MERGER CONSIDERATION; EXCHANGE PROCEDURES........................... 8
Section 3.01 Merger Consideration.......................................... 8
Section 3.02 Stockholder's Meeting......................................... 9
Section 3.03 Rights Under Stock Plans...................................... 10
ARTICLE IV EXCHANGE OF SHARES.................................................... 10
Section 4.01 Exchange Agent................................................ 10
Section 4.02 Exchange Procedures........................................... 10
Section 4.03 No Further Ownership Rights in Company Common Stock........... 11
Section 4.04 Termination of Exchange Fund.................................. 11
Section 4.05 Escheat of Exchange Fund...................................... 11
Section 4.06 No Fractional Shares.......................................... 11
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......................... 12
Section 5.01 Organization, Standing and Authority.......................... 12
Section 5.02 Company Capital Stock......................................... 13
Section 5.03 Subsidiaries.................................................. 13
Section 5.04 Authorization of Merger and Related Transactions.............. 14
Section 5.05 Financial Statements and Regulatory Reports................... 15
Section 5.06 Absence of Undisclosed Liabilities............................ 15
Section 5.07 Tax Matters................................................... 15
Section 5.08 Allowance for Credit Losses................................... 16
Section 5.09 Other Regulatory Matters...................................... 17
Section 5.10 Properties.................................................... 17
Section 5.11 Compliance with Laws.......................................... 17
Section 5.12 Employee Benefit Plans........................................ 18
</TABLE>
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<TABLE>
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Section 5.13 Commitments and Contracts..................................... 19
Section 5.14 Material Contract Defaults.................................... 20
Section 5.15 Legal Proceedings............................................. 20
Section 5.16 Absence of Certain Changes or Events.......................... 20
Section 5.17 Reports....................................................... 20
Section 5.18 Insurance..................................................... 21
Section 5.19 Labor......................................................... 21
Section 5.20 Material Interests of Certain Persons......................... 21
Section 5.21 Registration Obligations...................................... 21
Section 5.22 Brokers and Finders........................................... 21
Section 5.23 State Takeover Laws........................................... 21
Section 5.24 Environmental Matters......................................... 22
Section 5.25 The Company Action............................................ 22
Section 5.26 Software...................................................... 22
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF STERLING............................ 23
Section 6.01 Organization, Standing and Authority.......................... 23
Section 6.02 Sterling and Bancorporation Capital Stock..................... 24
Section 6.03 Authorization of Merger and Related Transactions.............. 24
Section 6.04 Financial Statements.......................................... 24
Section 6.05 Sterling SEC Reports.......................................... 25
Section 6.06 Regulatory Matters............................................ 25
Section 6.07 Litigation.................................................... 25
Section 6.08 Brokers and Finders........................................... 25
ARTICLE VII CONDUCT OF THE COMPANY'S BUSINESS.................................... 26
Section 7.01 Conduct of Business Prior to the Effective Time............... 26
Section 7.02 Forbearances.................................................. 26
ARTICLE VIII ADDITIONAL AGREEMENTS............................................... 28
Section 8.01 Access and Information........................................ 28
Section 8.02 Registration Statement; Proxy Statement....................... 29
Section 8.03 Press Releases................................................ 30
Section 8.04 Notice of Defaults............................................ 30
Section 8.05 Miscellaneous Agreements and Consents; Affiliates Agreements.. 30
Section 8.06 Indemnification............................................... 31
Section 8.07 Certain Change of Control Matters............................. 32
Section 8.08 Employee Benefits............................................. 32
Section 8.09 Certain Actions............................................... 32
Section 8.10 No Solicitation............................................... 33
Section 8.11 Termination Fee............................................... 34
</TABLE>
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<TABLE>
<S> <C> <C>
Section 8.12 Accruals...................................................... 35
Section 8.13 Certain Agreements............................................ 35
Section 8.14 Notification; Updated Disclosure Schedules.................... 35
Section 8.15 Nasdaq Listing................................................ 36
ARTICLE IX CONDITIONS TO MERGER.................................................. 36
Section 9.01 Conditions to Each Party's Obligation to Effect the Merger.... 36
Section 9.02 Conditions to Obligations of The Company to Effect the Merger. 37
Section 9.03 Conditions to Obligations of Sterling and Bancorporation
to Effect the Merger.......................................... 37
ARTICLE X TERMINATION............................................................ 38
Section 10.01 Termination................................................... 38
Section 10.02 Effect of Termination......................................... 40
Section 10.03 Non-Survival of Representations, Warranties and Covenants
Following the Effective Time.................................. 40
ARTICLE XI GENERAL PROVISIONS.................................................... 40
Section 11.01 Expenses...................................................... 40
Section 11.02 Entire Agreement; Parties in Interest......................... 40
Section 11.03 Amendments.................................................... 40
Section 11.04 Waivers....................................................... 40
Section 11.05 No Assignment................................................. 41
Section 11.06 Notices....................................................... 41
Section 11.07 Specific Performance.......................................... 42
Section 11.08 Governing Law................................................. 42
Section 11.09 Counterparts.................................................. 42
Section 11.10 Captions...................................................... 42
Section 11.11 Severability.................................................. 42
</TABLE>
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<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as of June 12,
1998, is by and among STERLING BANCSHARES, INC. ("Sterling"), a Texas
corporation and a registered bank holding company under the Bank Holding Company
Act of 1956, as amended (the "BHCA"), STERLING BANCORPORATION, INC., a Delaware
corporation which is a registered bank holding company and a wholly owned
subsidiary of Sterling ("Bancorporation") and HOMETOWN BANCSHARES, INC., a Texas
corporation and a registered bank holding company under the BHCA (the
"Company"). Capitalized terms not otherwise defined herein shall have the
meanings set forth in Article I.
WITNESSETH:
WHEREAS, pursuant to the terms and subject to the conditions of this
Agreement, Sterling will acquire the Company through the merger of the Company
with and into Bancorporation, or by such other means as provided for herein (the
"Merger"); and
WHEREAS, pursuant to the Merger, each issued and outstanding share of
Company Common Stock will be converted into shares of Sterling Common Stock upon
the terms and subject to the conditions of this Agreement; and
WHEREAS, (i) the respective Boards of Directors of Sterling, Bancorporation
and the Company have each determined that this Agreement, the Merger and the
transactions contemplated hereby and thereby are in the best interests of their
respective companies and stockholders and have approved this Agreement, the
Merger and the other transactions contemplated hereby and thereby, (ii) the
Board of Directors of the Company has unanimously (a) determined that the
consideration to be paid for the outstanding shares of Company Common Stock is
fair to the stockholders of the Company and (b) resolved to recommend to the
stockholders of the Company that they vote in favor of adoption of this
Agreement and (iii) Sterling, as the sole stockholder of Bancorporation, has
approved and adopted this Agreement, the Merger and the transactions
contemplated hereby and thereby; and
WHEREAS, to induce Sterling to enter into this Agreement, the Company
Specified Stockholders have agreed to execute and deliver to Sterling an
Agreement and Irrevocable Proxy in the form set forth as Annex A to this
Agreement; and
WHEREAS, after the Merger, Sterling intends to effect the merger (the "Bank
Merger") of Clear Lake National Bank, a wholly owned subsidiary of the Company
("Clear Lake Bank"), with and into Sterling Bank, a wholly owned subsidiary of
Bancorporation and an indirect wholly owned subsidiary of Sterling ("Sterling
Bank"), with Sterling Bank as the surviving bank; and
WHEREAS, for federal income tax purposes the Merger is intended to qualify
as a tax-free reorganization pursuant to Section 368 of the Code; and
<PAGE>
WHEREAS, for accounting purposes it is intended that the Merger be
accounted for as a pooling of interests in accordance with APB Opinion 16; and
WHEREAS, Sterling, Bancorporation and the Company desire to provide for
certain undertakings, conditions, representations, warranties and covenants in
connection with the Merger and the related transactions contemplated by this
Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants and agreements contained herein, the
benefits to be derived by each party hereunder and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
Section I.1 Certain Definitions. As used in this Agreement, the
following terms shall have the meanings set forth below:
"Acquisition Proposal" shall have the meaning set forth in
Section 8.10.
"Acquisition Transaction" shall have the meaning set forth in
Section 8.10.
"Affiliate" shall mean, with respect to any Person, any Person that,
directly or indirectly, controls or is controlled by or is under common control
with such Person.
"Agreement" shall have the meaning set forth in the introduction to
this Agreement.
"APB Opinion 16" shall mean Accounting Principles Board Opinion
No. 16.
"Approvals" shall mean any and all filings, permits, consents,
authorizations and approvals of any governmental or regulatory authority or of
any other third person necessary to give effect to the arrangement contemplated
by this Agreement or necessary to consummate the Merger.
"Authorizations" shall have the meaning set forth in Section 5.01.
"Average Closing Price" shall have the meaning set forth in
Section 3.01.
"BHCA" shall have the meaning set forth in the introduction to this
Agreement.
"Bancorporation" shall have the meaning set forth in the recitals to
this Agreement.
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<PAGE>
"Bank Merger" shall have the meaning set forth in the recitals to this
Agreement.
"Certificates" shall have the meaning set forth in Section 4.02.
"Clear Lake Bank" shall have the meaning set forth in the recitals to
this Agreement.
"Closing" shall have the meaning set forth in Section 2.02.
"Closing Date" shall have the meaning set forth in Section 2.02.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and
the rules and regulations promulgated thereunder.
"Commissioner" shall mean the Texas Banking Commissioner.
"Company" shall have the meaning set forth in the introductory
paragraph to this Agreement.
"Company Benefit Plans" shall have the meaning set forth in
Section 5.12(a).
"Company Board" shall mean the Board of Directors of the Company.
"Company Common Stock" shall mean the common stock, par value $1.00
per share, of the Company.
"Company Disclosure Schedule" shall mean that document containing the
written detailed information prepared and delivered by the Company to Sterling
prior to the execution of this Agreement.
"Company ERISA Plan" shall have the meaning set forth in
Section 5.12(a).
"Company ESOP" shall have the meaning set forth in Section 8.15.
"Company Financial Statements" shall have the meaning set forth in
Section 5.05(a).
"Company" shall have the meaning set forth in the recitals to this
Agreement.
"Company Material Adverse Effect" shall have the meaning set forth in
Section 5.01.
"Company Specified Stockholders" shall mean Charles I. Castro, Com/RE
Limited Partnership, Oscar Nipper, William B. Donovan, M.D., Patricia A.
Donovan, Ph.D., Green Partner LTD, Drummond Partners, Ltd., Perry M. Kallison,
Nancy A. Kinder or Glenn Kinder, Howard Keith Spalding, VHP DEVELOPMENT, LTD.,
and Billie Holbert, Jr.
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<PAGE>
"Company Stock Plan" shall have the meaning set forth in
Section 5.12(a).
"Company Stockholders' Meeting" shall have the meaning set forth in
Section 3.02.
"Condition" shall have the meaning set forth in Section 5.01.
"DGCL" shall mean the Delaware General Corporation Law, as amended.
"Dissenting Share" shall have the meaning set forth in
Section 3.01(d).
"Effective Time" shall have the meaning set forth in Section 2.03.
"Employee" shall mean any current or former employee, officer or
director, independent contractor or retiree of the Company, its subsidiaries and
any dependent or spouse thereof.
"Environmental Law" shall have the meaning set forth in Section 5.24.
"ERISA" shall have the meaning set forth in Section 5.12(a).
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Exchange Agent" shall have the meaning set forth in Section 4.01.
"Exchange Fund" shall have the meaning set forth in Section 4.01.
"Expenses" shall have the meaning set forth in Section 8.11.
"FDIC" shall mean the Federal Deposit Insurance Corporation.
"Federal Reserve Board" shall mean the Board of Governors of the
Federal Reserve System and any Federal Reserve Bank.
"GAAP" shall mean generally accepted accounting principles in the
United States, applied on a consistent basis.
"Indemnified Party" shall have the meaning set forth in Section 8.06.
"Law" shall mean any United States (federal, state or local) or
foreign law, statute, ordinance, rule, regulation, order, judgment or decree;
"Liens" shall have the meaning set forth in Section 5.03.
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<PAGE>
"Maximum Amount" shall have the meaning set forth in Section 8.06(b).
"Merger" shall have the meaning set forth in the recitals to this
Agreement.
"Merger Consideration" shall have the meaning set forth in
Section 3.01(b).
"Bancorporation" shall have the meaning set forth in the introduction
this Agreement.
"Order" shall mean any decree, judgment, injunction, ruling, writ or
other order (whether temporary, preliminary or permanent);
"Permitted Liens" are (i) Liens for current taxes not yet due and
payable and incurred in the ordinary course of business, (ii) with respect to a
lease, the interest of the lessor thereunder, including any Liens on the
interest of such lessor, and (iii) such imperfections of title, Liens,
restrictions and easements that do not materially impair the use or value of the
properties or assets or otherwise materially impair the current operations
relating to the business of the Company or its Subsidiaries or the Company's
consolidated financial condition or consolidated results of operations.
"Person" or "person" shall mean any individual, corporation, limited
liability company, association, partnership, group (as defined in Section
13(d)(3) of the Exchange Act), joint venture, trust or unincorporated
organization, or a government or any agency or political subdivision thereof.
"Proxy Statement" shall have the meaning set forth in Section 8.02.
"Regulatory Agreement" shall have the meaning set forth in
Section 5.11(b).
"Regulatory Authorities" shall have the meaning set forth in
Section 5.11(b).
"Regulatory Reporting Document" shall have the meaning set forth in
Section 5.05(a).
"Remedies Exception" shall mean any bankruptcy, reorganization,
insolvency, fraudulent conveyance or transfer, moratorium or similar laws
affecting creditors' rights generally and general principles of equity
(regardless of whether enforcement is considered in a proceeding at law or in
equity).
"Reports" shall have the meaning set forth in Section 5.17.
"SEC" shall mean the Securities and Exchange Commission.
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<PAGE>
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Sterling" shall have the meaning set forth in the introduction to
this Agreement.
"Sterling Bank" shall have the meaning set forth in the recitals to
this Agreement.
"Sterling Common Stock" shall mean the common stock, par value $1.00
per share, of Sterling.
"Sterling Preferred Stock" shall have the meaning set forth in
Section 6.02.
"Sterling Financial Statements" shall have the meaning set forth in
Section 6.04.
"Sterling Material Adverse Effect" shall have the meaning set forth in
Section 6.01(a).
"Sterling SEC Reports" shall have the meaning set forth in
Section 6.05.
"Subsidiary" shall mean, in the case of either Sterling or the
Company, any corporation, association or other entity in which it owns or
controls, directly or indirectly, 25% or more of the outstanding voting
securities or 25% or more of the total equity interest; provided, however, that
the term shall not include any such entity in which such voting securities or
equity interest is owned or controlled in a fiduciary capacity, without sole
voting power, or was acquired in securing or collecting a debt previously
contracted in good faith.
"Superior Proposal" shall have the meaning set forth in
Section 10.01(f).
"Surviving Corporation" shall have the meaning set forth in
Section 2.01.
"Tax" or "Taxes" shall mean all federal, state, local and foreign
taxes, charges, fees, levies, imposts, duties or other assessments, including,
without limitation, income, gross receipts, excise, employment, sales, use,
transfer, license, payroll, franchise, severance, stamp, occupation, windfall
profits, environmental, federal highway use, commercial rent, customs duties,
capital stock, paid up capital, profits, withholding, Social Security, single
business and unemployment, disability, real property, personal property,
registration, ad valorem, value added, alternative or add-on minimum, estimated,
or other tax or governmental fee of any kind whatsoever, imposed or required to
be withheld by the United States or any state, local, foreign government or
subdivision or agency thereof, including, without limitation, any interest,
penalties or additions thereto.
"Taxable Period" shall mean any period prescribed by any governmental
authority, including, but not limited to, the United States or any state, local,
foreign government or subdivision or agency thereof for which a Tax Return is
required to be filed or Tax is required to be paid.
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<PAGE>
"Tax Return" shall mean any report, return, information return or
other information required to be supplied to a taxing authority in connection
with Taxes, including, without limitation, any return of an affiliated or
combined or unitary group that includes the Company or any of its Subsidiaries.
"TBCA" shall mean the Texas Business Corporation Act, as amended.
"Termination Fee" shall have the meaning set forth in Section 8.11.
ARTICLE II
THE MERGER AND RELATED TRANSACTIONS
Section II.1 Merger.
(1) Upon the terms and subject to the conditions set forth in this
Agreement and in accordance with the DGCL and the TBCA, at the Effective Time,
the Company shall be merged with and into Bancorporation. As a result of the
Merger, the separate existence of the Company shall thereupon cease, and
Bancorporation shall continue as the surviving corporation of the Merger (the
"Surviving Corporation").
(2) The certificate of incorporation of the Surviving Corporation shall be
the certificate of incorporation of the Bancorporation as in effect immediately
prior to the Effective Time.
(3) The bylaws of the Surviving Corporation shall be the bylaws of
Bancorporation as in effect immediately prior to the Effective Time.
(4) The directors of Bancorporation immediately prior to the Effective Time
shall become the directors of the Surviving Corporation and the officers of
Bancorporation immediately prior to the Effective Time shall become the officers
of the Surviving Corporation, in each case until their respective successors are
duly elected and qualified.
(5) The Merger shall have the effects set forth in the DGCL and the TBCA.
Section II.2 Time and Place of Closing. The closing of the transactions
contemplated hereby (the "Closing") will take place at the offices of Andrews &
Kurth L.L.P. in Houston, Texas at 10:00 a.m. on the date (the "Closing Date")
that the Effective Time occurs, or at such other time, and at such place, as may
be mutually agreed upon by Sterling and the Company.
Section II.3 Effective Time. On the business day selected by Sterling
occurring within ten (10) business days following the date on which the
expiration of all applicable waiting periods in connection with approvals of
governmental authorities necessary to effectuate the Merger occurs and
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<PAGE>
all conditions to the consummation of this Agreement are satisfied or waived,
unless an earlier or later date has been agreed by the parties, appropriate
articles of merger or certificates of merger shall be executed and filed in
accordance with the DGCL and the TBCA, and the Merger provided for herein shall
become effective upon such filing or at such time as may be specified in such
articles or certificates of merger. The time of such filing or such later
effective time is herein called the "Effective Time."
Section II.4 Reservation of Right to Revise Transaction; Further
Actions.
(6) Notwithstanding anything to the contrary provided elsewhere in this
Agreement, if Sterling notifies the Company in writing prior to the Closing that
Sterling prefers to change the method of effecting the acquisition of the
Company by Sterling (including, without limitation, the provisions as set forth
in Article II) the parties hereto shall forthwith execute an appropriate
amendment or restatement of this Agreement to reflect such changes; provided,
however, that no such change shall (i) alter or change the amount or the kind of
the consideration to be received by the holders of Company Common Stock as
provided for in this Agreement; (ii) take the form of an asset purchase; or
(iii) adversely affect the timing or tax treatment of the transaction described
herein.
(7) In addition, the parties hereto agree that if Sterling so determines,
each of the parties will execute such additional agreements and documents and
take such other actions as Sterling determines necessary or appropriate to
facilitate the Merger and the acquisition of the Company by Sterling, including,
without limitation, entering into agreements to facilitate the Bank Merger.
ARTICLE III
MERGER CONSIDERATION;
EXCHANGE PROCEDURES
Section III.1 Merger Consideration. Subject to the provisions of this
Agreement, at the Effective Time, automatically by virtue of the Merger and
without any action on the part of any party or stockholder:
(8) Each share of Company Common Stock outstanding immediately prior to the
Effective Time shall (except as otherwise provided in Section 3.01(c)) be
converted into the right to receive that number of shares (the "Merger
Consideration") of Sterling Common Stock determined by dividing $21,000,000 by
the average closing price of Sterling Common Stock on the Nasdaq National Market
for the ten trading days ending on and including the fifth trading day prior to
the Effective Time (the "Average Closing Price"); provided that the total number
of shares of Sterling Common Stock into which such Company Common Stock shall be
converted shall not be less than 1,150,000 shares and not more than 1,375,000
shares of Sterling Common Stock.
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<PAGE>
(9) Each share of Company Common Stock held in the treasury of the Company
and each share of Company Common Stock owned by Sterling, Bancorporation or any
direct or indirect wholly owned Subsidiary of Sterling or the Company
immediately prior to the Effective Time shall be canceled without any conversion
and no payment or distribution shall be made with respect thereto.
(10) Notwithstanding anything in this Agreement to the contrary, no share
of Company Common Stock, the holder of which shall have complied with the
provisions of Article 5.12 of the TBCA as to appraisal rights (a "Dissenting
Share"), shall be deemed converted into and to represent the right to receive
the Merger Consideration, and the holders of Dissenting Shares, if any, shall be
entitled to payment, solely from the Surviving Corporation, of the appraised
value of such Dissenting Shares to the extent permitted by and in accordance
with the provisions of Article 5.12 of the TBCA; provided, however, that (i) if
any holder of Dissenting Shares shall, under the circumstances permitted by the
TBCA, subsequently deliver a written withdrawal of his or her demand for
appraisal of such Dissenting Shares, (ii) if any holder fails to establish his
or her entitlement to rights to payment as provided in such Article 5.12, or
(iii) if neither any holder of Dissenting Shares nor the Surviving Corporation
has filed a petition demanding a determination of the value of all Dissenting
Shares within the time provided in such Article 5.12, such holder or holders (as
the case may be) shall forfeit such right to payment for such Dissenting Shares
pursuant to such Article 5.12 and each such Dissenting Share shall thereupon be
converted into and shall represent the right to receive the Merger
Consideration. The Company shall give Sterling (i) prompt notice of any written
objections to the Merger submitted to the Company in accordance with Article
5.12A, attempted withdrawals of such objections, and any other instruments
served pursuant to applicable law received by the Company relating to
stockholders' rights of appraisal and (ii) the opportunity to direct all
negotiations and proceedings with respect to demands for appraisal under the
TBCA. The Company shall not, except with the prior written consent of Sterling,
voluntarily make any payment with respect to any demands for appraisals of
Company Common Stock, offer to settle or settle any such demands or approve any
withdrawal of any such demands.
(11) In the event Sterling changes (or establishes a record date for
changing) the number of shares of Sterling Common Stock issued and outstanding
prior to the Effective Date as a result of a stock split, stock dividend,
recapitalization or similar transaction with respect to the outstanding Sterling
Common Stock and the record date therefor shall be prior to the Effective Date,
the Merger Consideration shall be appropriately adjusted.
Section III.2 Stockholder's Meeting. Subject to applicable law, the
Company, acting through the Company Board, shall, in accordance with applicable
law, duly call, give notice of, convene and hold a special meeting (the "Company
Stockholders' Meetings") of its stockholders as soon as practicable for the
purpose of approving and adopting this Agreement and approving the Merger and,
subject to the fiduciary duties of the Company Board under applicable law as
determined by such directors in good faith after consultation with and based
upon the advice of outside counsel, include in the Proxy Statement (as defined
herein) of the Company for use in connection with the Company Stockholders'
Meeting, the recommendation of the Company Board that the Company stockholders
vote in favor of the approval and adoption of the Merger and this
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<PAGE>
Agreement. The Company agrees to use commercially reasonable efforts to cause
the Company Stockholders' Meeting to occur within 30 days after the Proxy
Statement is mailed to the Company's stockholders.
Section III.3 Rights Under Stock Plans. Prior to the Effective Time,
each unexpired and unexercised option to purchase shares of Company Common
Stock, each of which is set forth in Section 3.03 of the Company Disclosure
Schedule, shall be canceled without the payment of any consideration other than
the Merger Consideration, and each holder of such an option shall so agree.
ARTICLE IV
EXCHANGE OF SHARES
Section IV.1 Exchange Agent. As of the Effective Time, Sterling shall
deposit with a bank or trust company designated by Sterling and reasonably
acceptable to the Company (the "Exchange Agent"), for the benefit of the holders
of shares of Company Common Stock, for exchange in accordance with this Article
IV, the aggregate Merger Consideration (the "Exchange Fund") issuable pursuant
to Section 3.01(a) in exchange for outstanding shares of Company Common Stock.
The Exchange Agent shall, pursuant to irrevocable instructions, deliver the
Merger Consideration contemplated to be issued pursuant hereto out of the
Exchange Fund. The Exchange Fund shall not be used for any other purpose.
Section IV.2 Exchange Procedures. Promptly after the Effective Time,
the Exchange Agent shall mail to each holder of record of a certificate or
certificates which, immediately prior to the Effective Time, represented
outstanding shares of Company Common Stock (the "Certificates"), other than
shares canceled in accordance with Section 3.01(b): (i) a letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and title
to the certificates theretofore representing shares of Company Common Stock
shall pass, only upon proper delivery of such certificates to the Exchange
Agent, and shall be in such form and have such other provisions as Sterling
shall specify) and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for the Merger Consideration. Upon surrender of a
Certificate for cancellation to the Exchange Agent (or to such other agent or
agents as may be appointed by Sterling), together with such letter of
transmittal, duly executed, and any other required documents, the holder of such
Certificate(s) shall be entitled to receive in exchange therefor the Merger
Consideration which such holder has the right to receive pursuant to Section
3.01(a), and the Certificate(s) so surrendered shall forthwith be canceled. In
the event of a transfer of ownership of Company Common Stock which is not
registered in the transfer records of the Company, the Merger Consideration with
respect to such Company Common Stock may be issued to a transferee if the
Certificate(s) representing such Company Common Stock is presented to the
Exchange Agent accompanied by all documents required to evidence and effect such
transfer and by evidence that any applicable stock transfer taxes have been
paid. Until surrendered as contemplated by this Section 4.02, each Certificate
shall be deemed at any time after the Effective Time to represent only the right
to receive upon such
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surrender the Merger Consideration with respect to such Company Common Stock.
The Certificate(s) for Company Common Stock so surrendered shall be duly
endorsed as the Exchange Agent may require. Sterling shall not be obligated to
deliver the Merger Consideration to which any former holder of Company Common
Stock is entitled as a result of the Merger until such holder surrenders his
Certificate(s) formerly representing shares of Company Common Stock for exchange
as provided in this Article IV.
Section IV.3 No Further Ownership Rights in Company Common Stock. The
Merger Consideration shall be deemed to have been issued in full satisfaction of
all rights pertaining to shares of Company Common Stock, subject, however, to
the Surviving Corporation's obligation to pay any dividends or make any other
distributions with a record date prior to the Effective Time that may have been
declared or made by the Company on such shares of Company Common Stock in
accordance with the terms of this Agreement or prior to the date hereof and
which remain unpaid at the Effective Time, and after the Effective Time there
shall be no further registration of transfers on the stock transfer books of the
Surviving Corporation or its transfer agent of the shares of Company Common
Stock that were outstanding immediately prior to the Effective Time. If, after
the Effective Time, Certificates are presented to the Surviving Corporation or
its transfer agent for any reason, they shall be canceled and exchanged as
provided in this Article IV.
Section IV.4 Termination of Exchange Fund. Any portion of the Exchange
Fund that remains undistributed to the former stockholders of the Company for
six months after the Effective Time shall be delivered to Sterling, upon demand,
and any stockholders of the Company who have not theretofore complied with this
Article IV shall thereafter look only to Sterling for payment of their claim for
the Merger Consideration.
Section IV.5 Escheat of Exchange Fund. None of Bancorporation,
Sterling, the Company, or the Exchange Agent shall be liable to any person in
respect of any shares of Sterling Common Stock from the Exchange Fund delivered
to a public office pursuant to any applicable abandoned property, escheat or
similar law. If any Certificates representing shares of Company Common Stock
shall not have been surrendered immediately prior to the date on which any
Merger Consideration in respect of such Certificate would otherwise escheat to
or become the property of any government authority, any such Merger
Consideration in respect of such Certificate shall, as such time and to the
extent permitted by applicable law, become the property of the Surviving
Corporation, free and clear of all claims or interest of any person previously
entitled thereto.
Section IV.6 No Fractional Shares. No certificates or scrip
representing fractional shares of Sterling Common Stock shall be issued upon the
surrender for exchange of Certificates, and no dividend or other distribution,
stock split or interest shall relate to any such fractional security, and such
fractional interests shall not entitle the owner thereof to any voting or other
rights of a security holder of Sterling. In lieu of any fractional security,
each holder of shares of Company Common Stock who would otherwise have been
entitled to a fraction of a share of Sterling Common Stock upon surrender of the
Certificate(s) for such Company Common Stock for exchange will be paid an amount
in cash (without interest) equal to such holder's proportionate interest in the
amount of the
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net proceeds from the sale or sales by the Exchange Agent in accordance with the
provisions of this Section 3.04, on behalf of all such holders, of the aggregate
fractional shares of Sterling Common Stock issued pursuant to Article III. As
soon as practicable following the Effective Time, the Exchange Agent shall
determine the excess of (A) the number of whole shares of Sterling Common Stock
delivered to the Exchange Agent by Sterling pursuant to Section 4.01 over (B)
the aggregate number of whole shares of Sterling Common Stock to be distributed
to holders of Company Common Stock pursuant to Article III (such excess being
herein called the "Excess Securities") and the Exchange Agent, as agent for the
former holders of Company Common Stock, shall sell the Excess Securities at the
prevailing prices on the Nasdaq National Market. The sale of the Excess
Securities by the Exchange Agent shall be executed on the Nasdaq National Market
through one or more member firms of the Nasdaq National Market and shall be
executed in round lots to the extent practicable. Sterling shall pay all
commissions, transfer taxes and other out-of-pocket transaction costs, including
the expenses and compensation of the Exchange Agent, incurred in connection with
such sale of Excess Securities. Until the net proceeds of such sale of Excess
Securities have been distributed to the former stockholders of the Company, the
Exchange Agent will hold such proceeds and dividends in trust for such former
stockholders. As soon as practicable after the determination of the amount of
cash to be paid to former stockholders of the Company in lieu of any fractional
interests, the Exchange Agent shall make available in accordance with this
Agreement such amounts to such former stockholders.
ARTICLE V
REPRESENTATIONS AND
WARRANTIES OF THE COMPANY
The Company represents and warrants to Sterling and Bancorporation as
follows:
Section V.1 Organization, Standing and Authority. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Texas. The Company is duly qualified to do business and in good
standing in all jurisdictions (whether federal, state, local or foreign) where
its ownership or leasing of property or the conduct of its business requires it
to be so qualified and in which the failure to be duly qualified would have a
material adverse effect on the financial condition, results of operations,
business, properties (the "Condition") of the Company and any of its
Subsidiaries or on the ability of the Company or its Subsidiaries to consummate
the transactions contemplated hereby (a "Company Material Adverse Effect"). The
Company has all requisite corporate power and authority (i) to carry on its
business as now conducted, (ii) own, lease and operate its assets, properties
and business and (iii) execute and deliver this Agreement and perform the terms
of this Agreement. The Company is duly registered as a bank holding company
under the BHCA. The Company has in effect all federal, state, local and foreign
governmental, regulatory and other authorizations, franchises, permits and
licenses (collectively, "Authorizations") necessary for it to own or lease its
properties and assets and to carry on its business as now conducted.
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Section V.2 Company Capital Stock.
(12) The authorized capital stock of the Company consists of 4,000,000
shares of Company Common Stock and 1,000,000 shares of preferred stock, par
value $1.00 per share. At March 31, 1998, 3,262,168 shares of Company Common
Stock and no shares of the Company's preferred stock were issued and
outstanding. Since March 31, 1998, the Company has issued no additional capital
stock and has no commitments, options or agreements to issue any additional
shares. As of the date hereof, all of the issued and outstanding shares of
Company Common Stock are duly and validly issued and outstanding and are fully
paid and nonassessable. None of the outstanding shares of Company Common Stock
has been issued in violation of any preemptive rights or any provision of the
Company's Articles of Incorporation or bylaws. As of the date of this
Agreement, no shares of Company Common Stock have been reserved for any purpose
except as set forth in Section 5.02 of the Company Disclosure Schedule.
(13) Except as set forth in Section 5.02 of the Company Disclosure
Schedule, there are no equity securities of the Company (other than the shares
of Company Common Stock described in Section 5.02(a)) outstanding and no
outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, shares of the capital stock of the Company
or contracts, commitments, understandings or arrangements by which the Company
is or may be bound to issue additional shares of its capital stock or options,
warrants or rights to purchase or acquire any additional shares of its capital
stock. There are no contracts, commitments, understandings or arrangements by
which the Company or any of its Subsidiaries is or may be bound to transfer any
shares of the capital stock of any Subsidiary of the Company, and there are no
agreements, understandings or commitments relating to the right of the Company
or any of its Subsidiaries to vote or to dispose of any such shares.
(14) Except as set forth in Section 5.02 of the Company Disclosure
Schedule, there are no securities required to be issued by the Company under any
Company Stock Plan, dividend reinvestment or similar plan.
Section V.3 Subsidiaries. Section 5.03 of the Company Disclosure
Schedule contains a complete list of the Company's Subsidiaries. All of the
outstanding shares of each Subsidiary are owned by the Company and no equity
securities are or may become required to be issued by reason of any options,
warrants, scrip, rights to subscribe to, calls or commitments of any character
whatsoever relating to, or securities or rights convertible into or exchangeable
for, shares of any Subsidiary, and there are no contracts, commitments,
understandings or arrangements by which any Subsidiary is bound to issue
additional shares of its capital stock or options, warrants or rights to
purchase or acquire any additional shares of its capital stock. All of the
shares of capital stock of each Subsidiary are fully paid and nonassessable and
are owned free and clear of any claim, lien, pledge or encumbrance of whatsoever
kind ("Liens"). Each Subsidiary (i) is duly organized, validly existing and in
good standing under the laws of the jurisdiction in which it is incorporated or
organized, (ii) is duly qualified to do business and in good standing in all
jurisdictions (whether
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federal, state, local or foreign) where its ownership or leasing of property or
the conduct of its business requires it to be so qualified and in which the
failure to be so qualified would have a Company Material Adverse Effect, (iii)
has all requisite corporate power and authority to own or lease its properties
and assets and to carry on its business as now conducted, and (iv) has in effect
all Authorizations necessary for it to own or lease its properties and assets
and to carry on its business as now conducted.
Section V.4 Authorization of Merger and Related Transactions.
(15) The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby (including, without limitation, the
consummation of the Merger) have been duly and validly authorized by all
necessary corporate action in respect thereof on the part of the Company,
including unanimous approval of the Merger by the Company Board, (conditioned
upon the receipt of the fairness opinion described in Section 9.02(f)), subject
to the approval of the Merger by the stockholders of the Company to the extent
required by applicable law. The only stockholder approval required for the
approval of the Merger is the approval of two-thirds of the outstanding shares
of Company Common Stock voting as a single class. This Agreement, subject to
any requisite stockholder approval hereof with respect to the Merger, represents
a valid and legally binding obligation of the Company, enforceable against the
Company in accordance with its terms, except as such enforcement may be limited
by the Remedies Exception.
(16) Neither the execution and delivery of this Agreement by the Company,
the consummation by the Company of the transactions contemplated hereby or
thereby nor compliance by the Company with any of the provisions hereof or
thereof will (i) conflict with or result in a breach of any provision of the
Company's Articles of Incorporation or bylaws, (ii) constitute or result in a
breach or violation of any term, condition or provision of, or constitute a
default (or an event which with notice or lapse of time or both would become a
default) under, or give rise to any right of termination, cancellation or
acceleration with respect to, or result in the creation of any Lien upon, any
property or assets of the Company or any of its Subsidiaries pursuant to any
note, bond, mortgage, indenture, license, agreement, lease or other instrument
or obligation to which any of them is a party or by which any of them or any of
their properties or assets may be subject and that would have, individually or
in the aggregate, a Company Material Adverse Effect or (iii) subject to receipt
of the requisite approvals referred to in Section 9.01 of this Agreement,
violate any order, writ, injunction, decree, statute, rule or regulation
applicable to the Company or its Subsidiaries or any of their properties or
assets.
(17) Other than consents, authorizations, approvals or exemptions required
from the Commissioner, the OCC, the FDIC, or the Federal Reserve Board and the
filing of certificates or articles of merger in accordance with the DGCL and the
TBCA, no notice to, filing with, authorization of, exemption by, or consent or
approval of any governmental body or authority is necessary for the consummation
by the Company of the Merger and the other transactions contemplated by this
Agreement.
Section V.5 Financial Statements and Regulatory Reports.
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(18) The Company (i) has delivered to Sterling copies of the audited
consolidated balance sheets and the related audited consolidated statements of
income, stockholders' equity and cash flows (including related notes and
schedules) of the Company and its consolidated Subsidiaries as of and for the
periods ended December 31, 1996 and December 31, 1997, together with the report
thereof of KPMG Peat Marwick LLP, and of the unaudited balance sheet and the
related unaudited statement of income, as of and for the three months ended
March 31, 1998 (the "Company Financial Statements"), and (ii has furnished
Sterling with a true and complete copy of each material report filed by the
Company with the Federal Reserve Board or by any of its Subsidiaries with any
Regulatory Authorities from and after January 1, 1993 (each a "Regulatory
Reporting Document"), which are all the material documents that the Company was
required to file with the Regulatory Authorities since such date and all of
which complied when filed in all material respects with all applicable laws and
regulations.
(19) The Company Financial Statements (as of the dates thereof and for the
periods covered thereby) (i) are in accordance with the books and records of the
Company and its Subsidiaries, which are complete and accurate in all material
respects and which have been maintained in accordance with good business
practices, and (ii) present fairly the consolidated financial position and the
consolidated results of operations, changes in stockholders' equity and cash
flows of the Company and its Subsidiaries as of the dates and for the periods
indicated, in accordance with GAAP, subject in the case of unaudited interim
financial statements to normal recurring year-end adjustments and except for the
absence of certain footnote information in the unaudited interim financial
statements. The Company has delivered to Sterling copies of all management
letters prepared by KPMG Peat Marwick LLP and delivered to the Company since
January 1, 1993.
Section V.6 Absence of Undisclosed Liabilities. Neither the Company
nor any of its Subsidiaries has any obligations or liabilities (contingent or
otherwise) in the amount of $50,000 in the aggregate, except obligations and
liabilities (i) which are fully accrued or reserved against in the consolidated
balance sheet of the Company and its Subsidiaries as of March 31, 1998, included
in the Company Financial Statements or reflected in the notes thereto, or (ii)
which were incurred after March 31, 1998, in the ordinary course of business
consistent with past practice. Since March 31, 1998, neither the Company nor
any of its Subsidiaries has incurred or paid any obligation or liability which
would have a Company Material Adverse Effect.
Section V.7 Tax Matters. Except as set forth in Section 5.07 of the
Company Disclosure Schedule:
(20) All Tax Returns required to be filed by or on behalf of the Company or
any of its Subsidiaries have been timely filed, or requests for extensions have
been timely filed, granted and have not expired, all such returns filed are
complete and accurate in all material respects and all Taxes shown as due on
those Tax Returns have been paid.
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(21) The Company is not involved in any audit examination, deficiency or
refund litigation or matter in controversy with respect to any Taxes. All Taxes
due with respect to completed and settled examinations or concluded litigation
have been paid or adequately reserved for.
(22) Neither the Company nor any of its Subsidiaries has executed an
extension or waiver of any statute of limitations on the assessment or
collection of any Tax due that is currently in effect.
(23) Adequate provision for any Taxes due or to become due for the Company
and any of its Subsidiaries for any period or periods through and including
March 31, 1998, has been made and is reflected on the March 31, 1998 financial
statements included in the Company Financial Statements. Deferred Taxes of the
Company and its Subsidiaries have been provided for in the Company Financial
Statements in accordance with GAAP.
(24) The Company and its Subsidiaries have collected and withheld all Taxes
which they have been required to collect or withhold and have timely submitted
all such collected and withheld amounts to the appropriate authorities. The
Company and its Subsidiaries are in compliance with the back-up withholding and
information reporting requirements under (i) the Code, and (ii) any state, local
or foreign laws, and the rules and regulations, thereunder.
(25) Neither the Company nor any of its Subsidiaries has made any payments,
is obligated to make any payments, or is a party to any contract, agreement or
other arrangement that could obligate it to make any payments that would not be
deductible under Section 280G of the Code.
(26) No consent has been filed under Section 341(f) of the Code with
respect to the Company or any of its Subsidiaries; none of the Subsidiaries was
acquired in a "qualified stock purchase" under Section 338(d)(3) of the Code,
and no elections under Section 338(g) of the Code, protective carryover basis
elections or offset prohibition elections are applicable to the Company or any
of its Subsidiaries; neither the Company nor any of the Subsidiaries has
participated in, or cooperated with, an international boycott within the meaning
of Section 999 of the Code, nor has any such corporation had operations which
are or may hereafter become reportable under Section 999 of the Code; neither
the Company nor any of the Subsidiaries owns any interest in an entity or
arrangement characterized as a partnership for United States federal income tax
purposes; no election under Section 1504(d) of the Code has been made with
respect to the Company or any of its Subsidiaries; none of the assets of the
Company or any of its Subsidiaries is required to be treated as being owned by
some other person pursuant to Section 168(f)(8) of the Code, neither the Company
nor any of the Subsidiaries is a United States real property holding company
under Section 897 of the Code; and no debt of the Company or any of its
Subsidiaries is "corporate acquisition indebtedness" within the meaning of
Section 279(b) of the Code.
Section V.8 Allowance for Credit Losses. Each allowance for credit
losses shown in the consolidated balance sheets of the Company and its
Subsidiaries as of December 31, 1997 and as of March 31, 1998, and included in
the Company Financial Statements, complies in all material respects with GAAP
and OCC Bank Circular 201.
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Section V.9 Other Regulatory Matters. Neither the Company nor any of
its Subsidiaries has taken or agreed to take any action or has any knowledge of
any fact or circumstance that would materially impede or delay receipt of any
approval referred to in Section 9.01(b).
Section V.10 Properties. Except as set forth in Section 5.10 of the
Company's Disclosure Schedule the Company and its Subsidiaries have good and
indefeasible title, free and clear of all Liens except Permitted Liens, to all
their properties and assets whether tangible or intangible, real, personal or
mixed. All buildings, and all fixtures, equipment and other property and assets
which are material to its business on a consolidated basis, held under leases or
subleases by any of the Company or its Subsidiaries are held under valid
instruments enforceable in accordance with their respective terms, subject to
the Remedies Exception. All of the Company's and the Company's Subsidiaries'
equipment in regular use has been well maintained and is in good serviceable
condition, reasonable wear and tear excepted, except where a failure to so
maintain or to be in such condition would not have a Company Material Adverse
Effect.
Section V.11 Compliance with Laws.
(27) Each of the Company and its Subsidiaries is in compliance with all
laws, rules, regulations, policies, guidelines, reporting and licensing
requirements and orders applicable to its business or to its employees
conducting its business, and with its internal policies and procedures, except
for failures to comply which will not result in a Company Material Adverse
Effect.
(28) Neither the Company nor any of its Subsidiaries has received any
notification or communication from any agency or department of any federal,
state or local government, including the Federal Reserve Board, the OCC, the
FDIC, the SEC and the staffs thereof (collectively, the "Regulatory
Authorities") (i) asserting that since January 1, 1993, any of the Company or
its Subsidiaries is not in substantial compliance with any of the statutes,
regulations, or ordinances which such agency, department or Regulatory Authority
enforces, or the internal policies and procedures of the Company or its
Subsidiaries, (ii) threatening to revoke any license, franchise, permit or
governmental authorization which is material to the Condition of the Company or
any of its Subsidiaries, (iii) requiring or threatening to require the Company
or any of its Subsidiaries, or indicating that the Company or any of its
Subsidiaries may be required, to enter into a cease and desist order, agreement
or memorandum of understanding or any other agreement restricting or limiting or
purporting to restrict or limit in any manner the operations of the Company or
any of its Subsidiaries, including, without limitation, any restriction on the
payment of dividends, or (iv) directing, restricting or limiting, or purporting
to direct, restrict or limit in any manner the operations of the Company or any
of its Subsidiaries, including, without limitation, any restriction on the
payment of dividends (any such notice, communication, memorandum, agreement or
order described in this sentence herein referred to as a "Regulatory
Agreement").
(29) Since January 1, 1993, neither the Company nor any of its Subsidiaries
has been a party to any effective Regulatory Agreement or memorandum of
understanding.
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(30) Neither the Company nor any of its Subsidiaries is required by
Section 32 of the Federal Deposit Insurance Act to give prior notice to a
federal banking agency of the proposed addition of an individual to the Company
Board or the employment of an individual as a senior executive officer.
Section V.12 Employee Benefit Plans.
(31) The Company has delivered to Sterling prior to the execution of this
Agreement true and complete copies (and, in the case of each material plan,
financial data with respect thereto) of all pension, retirement, profit-sharing,
deferred compensation, stock option, employee stock ownership, severance pay,
vacation, bonus or other incentive plans, all other employee programs,
arrangements or agreements, all material medical, vision, dental or other health
plans, all life insurance plans and all other material employee benefit plans or
fringe benefit plans, including, without limitation, all "employee benefit
plans" as that term is defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), whether or not terminated, and trust
agreements and insurance contracts under or with respect to which the Company or
any of its Subsidiaries has or could have any liability, contingent, secondary
or otherwise (collectively, the "Company Benefit Plans"). Any of the Company
Benefit Plans which is an "employee pension benefit plan," as that term is
defined in Section 3(2) of ERISA, is referred to herein as a "Company ERISA
Plan". Any of the Company Benefit Plans pursuant to which the Company is or may
become obligated to, or obligated to cause any of its Subsidiaries or any other
Person to, issue, deliver or sell shares of capital stock of the Company or any
of its Subsidiaries, or grant, extend or enter into any option, warrant, call,
right, commitment or agreement to issue, deliver or sell shares, or any other
interest in respect of capital stock of the Company or any of its Subsidiaries,
is referred to herein as a "Company Stock Plan". No Company Benefit Plan is or
has been a multi-employer plan within the meaning of Section 3(37) of ERISA. The
Company has set forth in Section 5.12 of the Company Disclosure Schedule (i) a
list of all of the Company Benefit Plans, (ii) a list of the Company Benefit
Plans that are Company ERISA Plans, (iii) a list of the Company Benefit Plans
that are Company Stock Plans and (iv) a list of the number of shares covered by,
exercise prices for, and holders of, all stock options granted and available for
grant under Company Stock Plans.
(32) From their inception, all the Company Benefit Plans have been and are
in substantial compliance with the applicable terms of ERISA and the Code and
any other applicable laws, rules and regulations, including the terms of such
plans, the breach or violation of which, individually or in the aggregate, could
reasonably be expected to result in a Company Material Adverse Effect.
(33) All liabilities (contingent or otherwise) under any Company Benefit
Plan are fully accrued or reserved against in the Company Financial Statements
in accordance with GAAP. No Company ERISA Plan is or has ever been subject to
Title IV of ERISA or Section 412 of the Code.
(34) Neither the Company nor any of its Subsidiaries has any obligations
for retiree health or other welfare benefits under any Company Benefit Plan or
otherwise. There are no restrictions
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on the rights of the Company or its Subsidiaries to unilaterally amend or
terminate any such Company Benefit Plan at any time without incurring any
material liability thereunder.
(35) Except as set forth in Section 5.12 of the Company Disclosure
Schedule, neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby or thereby will (i) result
in any payment (including, without limitation, severance, golden parachute or
otherwise) becoming due to any person under any Company Benefit Plan or
otherwise, (ii) increase any benefits otherwise payable under any Company
Benefit Plan or (iii) result in any acceleration of the time of payment or
vesting of any such benefits. No amounts payable under any Company Benefit Plan
will be nondeductible pursuant to either Section 280G or 162(m) of the Code.
Section V.13 Commitments and Contracts. Except as set forth in
Section 5.13 of the Company Disclosure Schedule, neither the Company nor any of
its Subsidiaries is a party or subject to, or has amended or waived any rights
under, any of the following (whether written or oral, express or implied):
(36) any employment contract or understanding (including any understandings
or obligations with respect to severance or termination pay liabilities or
fringe benefits) with any Employee, including in any such person's capacity as a
consultant (other than those which either (i) are terminable at will by the
Company or such Subsidiary or (ii) do not involve payments with a present value
of more than $10,000 individually or $50,000 in the aggregate by the Company or
such Subsidiary during the remaining term thereof without giving effect to
extensions or renewals of the existing term thereof that may be made at the
election or with the consent or concurrence of the Company);
(37) any labor contract or agreement with any labor union;
(38) any contract not made in the usual, regular and ordinary course of
business containing non-competition covenants which limit the ability of the
Company or any of its Subsidiaries to compete in any line of business or which
involve any restriction of the geographical area in which the Company or its
Subsidiaries may carry on its business (other than as may be required by law or
applicable Regulatory Authorities);
(39) any other contract or agreement for which the Company or any
Subsidiary was or is required to obtain the approval of any Regulatory Authority
prior to becoming bound or to consummating the transactions contemplated
thereby;
(40) any real property lease with annual rental payments aggregating $5,000
or more;
(41) any contract requiring the payment of any penalty, termination or
other additional amounts as "change of control" payments or otherwise as a
result of the transactions contemplated by this Agreement, or providing for the
vesting or accrual of benefits or rights upon a "change of control" or otherwise
as a result of the transactions contemplated by this Agreement;
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(42) any agreement with respect to (i) the acquisition of any bank branches
or other assets or stock of another financial institution or any other Person or
(ii) the sale of one or more bank branches; or
(43) any outstanding interest rate exchange or other derivative contracts.
Section V.14 Material Contract Defaults. Except as set forth in
Section 5.14 of the Company Disclosure Schedule, neither the Company nor any of
its Subsidiaries is, or has received any notice or has any knowledge that any
party is, in breach, violation or default in any respect under any contract,
agreement, commitment, arrangement, lease, insurance policy or other instrument
to which the Company or any of its Subsidiaries is a party or by which the
Company or any of its Subsidiaries or the assets, business or operations thereof
may be bound or affected or under which it or its respective assets, business or
operations receives benefits, except for those breaches, violations or defaults
which would not have, individually or in the aggregate, a Company Material
Adverse Effect; and there has not occurred any event that with the lapse of time
or the giving of notice of both would constitute such a default.
Section V.15 Legal Proceedings. Except as set forth in Section 5.15 of
the Company Disclosure Schedule, there are no claims or charges filed with, or
proceedings or investigations by, Regulatory Authorities or actions or suits
instituted or pending or, to the best knowledge of the Company's management,
threatened against the Company or any of its Subsidiaries, or against any
property, asset, interest or right of any of them, that might reasonably be
expected to result in a judgment in excess of $10,000 or that might reasonably
be expected to threaten or impede the consummation of the transactions
contemplated by this Agreement. Neither the Company nor any of its Subsidiaries
is a party to any agreement or instrument or is subject to any charter or other
corporate restriction or any judgment, order, writ, injunction, decree, statute,
rule, regulation, code or ordinance that, individually or in the aggregate,
might reasonably be expected to have a Company Material Adverse Effect or might
reasonably be expected to threaten or impede the consummation of the
transactions contemplated by this Agreement.
Section V.16 Absence of Certain Changes or Events. Since January 1,
1993, except (i) as disclosed in any Regulatory Reporting Document filed since
January 1, 1993 and prior to the date hereof or (ii as set forth in Section 5.16
of the Company Disclosure Schedule, neither the Company nor any of its
Subsidiaries has (A) incurred any liability which has had a Company Material
Adverse Effect, (B) suffered any change in its Condition which would have a
Company Material Adverse Effect, other than changes after the date hereof which
affect the banking industry as a whole, (C) failed to operate its business
consistent in all material respects in the ordinary course in accordance with
past practice or (D) changed any accounting practices.
Section V.17 Reports. Since January 1, 1993, the Company and each of
its Subsidiaries have filed on a timely basis all reports and statements,
together with all amendments required to be made with respect thereto
(collectively "Reports"), that they were required to file with (i) the Federal
Reserve Board, (ii the OCC, (ii the FDIC, and (iv any other applicable federal,
state, municipal,
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local or foreign government, securities, banking, savings and loan or other
governmental or regulatory authority. No Regulatory Reporting Document with
respect to periods beginning on or after January 1, 1993, contained any
information that was false or misleading with respect to any material fact or
omitted to state any material fact necessary in order to make the statements
therein not misleading.
Section V.18 Insurance. The Company and each of its Subsidiaries are
presently insured, and during each of the past five calendar years have been
insured, for reasonable amounts against such risks as companies engaged in a
similar business would, in accordance with good business practice, customarily
be insured. The policies of fire, theft, liability (including directors and
officers liability insurance) and other insurance set forth in Section 5.18 of
the Company Disclosure Schedule and maintained with respect to the assets or
businesses of the Company and its Subsidiaries provide adequate coverage against
all pending or threatened claims, and the fidelity bonds in effect as to which
any of the Company or any of its Subsidiaries is a named insured are sufficient
for their purpose.
Section V.19 Labor. No material work stoppage involving the Company or
its Subsidiaries is pending or, to the best knowledge of the Company's
management, threatened. Neither the Company nor any of its Subsidiaries is
involved in, or, to the best knowledge of the Company's management, threatened
with or affected by, any labor or other employment-related dispute, arbitration,
lawsuit or administrative proceeding. Employees of the Company and its
Subsidiaries are not represented by any labor union, and, to the best knowledge
of the Company's management, no labor union is attempting to organize employees
of the Company or any of its Subsidiaries.
Section V.2O Material Interests of Certain Persons. Except as set forth
in Section 5.20 of the Company Disclosure Schedule, no executive officer or
director of the Company, or any "associate" (as such term is defined in Rule
14a-1 under the Exchange Act) of any such executive officer or director, has any
interest in any contract or property (real or personal), tangible or intangible,
used in or pertaining to the business of the Company or any of its Subsidiaries.
Section V.21 Registration Obligations. Neither the Company nor any of
its Subsidiaries is under any obligation, contingent or otherwise, presently in
effect or which will survive the Merger by reason of any agreement to register
any of its securities under the Securities Act.
Section V.22 Brokers and Finders. Neither the Company nor any of its
Subsidiaries nor any of their respective officers, directors or employees has
employed any broker or finder or incurred any liability for any financial
advisory fees, brokerage fees, commissions or finder's fees, and no broker or
finder has acted directly or indirectly for the Company or any of its
Subsidiaries in connection with this Agreement or the transactions contemplated
hereby.
Section V.23 State Takeover Laws. The transactions contemplated by this
Agreement are exempt from any applicable charter or contractual provision
containing change of control or anti-takeover provisions and, to the knowledge
of the Company, from any applicable state takeover law.
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Section V.24 Environmental Matters. To the knowledge of the Company,
neither the Company, any of its Subsidiaries, nor any properties owned or
operated by the Company or any of its Subsidiaries or held as collateral by any
of its Subsidiaries has been or is in violation of or liable under any
Environmental Law (as hereinafter defined), except for such violations or
liabilities that, individually or in the aggregate, are not reasonably likely to
have a Material Adverse Effect. Except as set forth in Section 5.24 of the
Company Disclosure Schedule, none of which could be reasonably expected to have,
individually or in the aggregate, a Company Material Adverse Effect, there are
no actions, suits or proceedings, or demands, claims, notices or investigations
(including without limitation notices, demand letters or requests for
information from any environmental agency) instituted or pending, or to the best
knowledge of the Company's management, threatened relating to the liability of
any properties owned or operated by the Company or any of its Subsidiaries under
any Environmental Law.
"Environmental Law" means any federal, state, local or foreign law,
statute, ordinance, rule, regulation, code, license, permit, authorization,
approval, consent, order, judgment, decree, injunction or agreement with any
Regulatory Authority relating to (i) the protection, preservation or restoration
of the environment (including, without limitation, air, water vapor, surface
water, groundwater, drinking water supply, surface soil, subsurface soil, plant
and animal life or any other natural resource), and/or (ii) the use, storage,
recycling, treatment, generation, transportation, processing, handling,
labeling, production, release or disposal of any substance presently listed,
defined, designated or classified as hazardous, toxic radioactive or dangerous,
or otherwise regulated, whether by type or by quantity, including any material
containing any such substance as a component.
Section V.25 The Company Action. The Company Board, (at a meeting duly
called and held on June 10, 1998), conditioned upon the receipt of the fairness
opinion described in Section 9.02(f), unanimously (a) determined that the Merger
is fair to and in the best interests of the Company and its stockholders, (b)
approved this Agreement and the Merger in accordance with the TBCA, (c) resolved
to recommend approval and adoption of this Agreement and the Merger and the
other transactions contemplated hereby by the Company's stockholders and (d)
directed that this Agreement and the Merger be submitted to the Company's
stockholders for approval.
Section V.26 Software.
(44) The Company owns all right, title and interest in and to, or holds
valid licenses or sub-licenses to use, all of the computer software used by the
Company in its operations, free and clear of any liens, claims or encumbrances
of any kind or nature (excluding the rights of the owner or licensor in the case
of software licensed or sub-licensed by the Company from others). Except as
specified on Schedule 5.26, all computer software owned by the Company was
developed by the Company entirely through its own efforts and for its own
account. The use by the Company of computer software licensed to the Company
from third parties (including the sublicensing of such
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licensed software to customers) does not violate the terms of the respective
license agreements with respect to such licensed software.
(45) No director, officer or employee of the Company owns, directly or
indirectly, in whole or in part, any computer software or other intellectual
property right which the Company is using or which is necessary for the business
of the Company as now conducted.
(46) The Company and its Subsidiaries have followed the procedures set
forth in, and have taken and will continue to take all actions required by, the
FFIEC Safety and Soundness Guidelines Concerning the Year 2000 Business Risk
(the "Year 2000 Guidelines") to ensure that all computer software owned by or
licensed to the Company is fully compliant with the Year 2000 Guidelines.
(47) Neither the Company nor any of its Subsidiaries has received a
regulatory rating of less than satisfactory from any Regulatory Authority with
respect to any review of its compliance with the Year 2000 Guidelines or the
adequacy of its Year 2000 planning efforts.
ARTICLE VI
REPRESENTATIONS AND
WARRANTIES OF STERLING
Each of Sterling and Bancorporation represent and warrant to the Company as
follows:
Section VI.1 Organization, Standing and Authority.
(48) Sterling is a corporation duly organized, validly existing and in good
standing under the laws of the State of Texas. Bancorporation is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware. Each of Sterling and Bancorporation is duly qualified to do
business and in good standing in all jurisdictions where its ownership or
leasing of property or the conduct of its business requires it to be so
qualified and in which the failure to be duly qualified would have a material
adverse effect on the Condition of Sterling and its Subsidiaries taken as a
whole or on the ability of Sterling or Bancorporation to consummate the
transactions contemplated hereby (a "Sterling Material Adverse Effect"). Each
of Sterling and Bancorporation has all requisite corporate power and authority
to carry on its business as now conducted and to own, lease and operate its
assets, properties and business, and to execute and deliver this Agreement and
perform the terms of this Agreement. Each of Sterling and Bancorporation is
duly registered as a bank holding company under the BHCA. Each of Sterling and
Bancorporation has in effect all Authorizations necessary for it to own or lease
its properties and assets and to carry on its business as now conducted, except
for those Authorizations the absence of which, either individually or in the
aggregate, would not have a Material Adverse Effect on the Condition of Sterling
and its Subsidiaries on a consolidated basis.
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Section VI.2 Sterling and Bancorporation Capital Stock.
(49) The authorized capital stock of Sterling consists of 50,000,000 shares
of Sterling Common Stock and 1,000,000 shares of preferred stock, par value
$1.00 per share (the "Sterling Preferred Stock"). As of March 31, 1998, there
were outstanding 20,859,748 shares of Sterling Common Stock and 177,113 shares
of Sterling Preferred Stock and no other shares of capital stock of any class.
The authorized capital stock of Bancorporation consists of 1,000 shares of
common stock, par value $0.01 per share, of which 1,000 shares are issued and
outstanding and owned by Sterling. All of the issued and outstanding shares of
Sterling Common Stock and Bancorporation capital stock are duly and validly
issued and outstanding and are fully paid and nonassessable.
(50) The shares of Sterling Common Stock to be issued in exchange for
shares of Company Common Stock in the Merger, when issued in accordance with the
terms of this Agreement, will be duly authorized, validly issued, fully paid and
nonassessable.
Section VI.3 Authorization of Merger and Related Transactions.
(51) The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly and validly authorized by
all necessary corporate action in respect thereof on the part of each of
Sterling and Bancorporation, to the extent required by applicable law. This
Agreement represents a valid and legally binding obligation of each of Sterling
and Bancorporation, enforceable against Sterling and Bancorporation in
accordance with its terms except as such enforcement may be limited by the
Remedies Exception.
(52) Neither the execution and delivery of this Agreement by Sterling or
Bancorporation, nor the consummation by Sterling or Bancorporation of the
transactions contemplated hereby or thereby nor compliance by Sterling or
Bancorporation with any of the provisions hereof or thereof will (i) conflict
with or result in a breach of any provision of Sterling's Articles of
Incorporation or bylaws or the Certificate of Incorporation or bylaws of
Bancorporation, (ii) constitute or result in a breach or violation of any term,
condition or provision of, or constitute a default (or an event which with
notice or lapse of time or both would become a default) under, or give rise to
any right of termination, cancellation or acceleration with respect to, or
result in the creation of any Lien upon any property or assets of any of
Sterling or its Subsidiaries pursuant to any note, bond, mortgage, indenture,
license, agreement, lease or other instrument or obligation to which any of them
is a party or by which any of them or any of their properties or assets may be
subject, and that would, individually or in the aggregate, have a Sterling
Material Adverse Effect or (iii) subject to receipt of the requisite approvals
referred to in Section 9.01 of this Agreement, violate any order, writ,
injunction, decree, statute, rule or regulation applicable to Sterling or
Bancorporation or any of its properties or assets.
Section VI.4 Financial Statements. Sterling has delivered to the
Company copies of the audited consolidated balance sheets and the related
audited consolidated statements of income, consolidated statements of
stockholders' equity and consolidated statements of cash flows (including
related notes and schedules) of Sterling and its consolidated Subsidiaries as of
and for the periods
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ended December 31, 1996 and December 31, 1997, and its unaudited consolidated
balance sheet at March 31, 1998, and the related unaudited consolidated
statements of income, stockholders' equity and cash flows for the three months
then ended and included in its annual report filed on Form 10-K for the year
ended December 31, 1996 and its quarterly report filed on Form 10-Q for the
quarter ended March 31, 1998, respectively, filed by Sterling pursuant to the
Exchange Act and the rules and regulations of the SEC promulgated thereunder
(collectively, the "Sterling Financial Statements"). The Sterling Financial
Statements (as of the dates thereof and for the periods covered thereby) (A) are
in accordance with the books and records of Sterling and its consolidated
Subsidiaries, which are complete and accurate in all material respects and which
have been maintained in accordance with good business practices, and (B) present
fairly the consolidated financial position and the consolidated statements of
income, changes in shareholders' equity and cash flows of Sterling and its
Subsidiaries as of the dates and for the periods indicated, in accordance with
GAAP, subject in the case of unaudited interim financial statements to normal
recurring year-end adjustments and except for the absence of certain footnote
information in the unaudited interim financial statements.
Section VI.5 Sterling SEC Reports. Since January 1, 1993, Sterling has
filed on a timely basis all reports and statements, together with all amendments
required to be made with respect thereto and, that as an issuer it is required
to file with the SEC pursuant to the Exchange Act (the "Sterling SEC Reports").
No Sterling SEC Report with respect to periods beginning on or after January 1,
1993 and until the Closing contained or will contain any information that was
false or misleading with respect to any material fact or omitted or will omit to
state any material fact necessary in order to make the statements therein not
misleading.
Section VI.6 Regulatory Matters. Neither Sterling nor any of its
Subsidiaries has taken or agreed to take any action or has any knowledge of any
fact or circumstance that would materially impede or delay receipt of any
approval referred to in Section 9.0l(b).
Section VI.7 Litigation. There are no judicial proceedings of any kind
or nature pending or, to the knowledge of Sterling, threatened against Sterling
before any court or administrative tribunal or before or by any governmental
department, agency or instrumentality involving the validity of the transactions
contemplated by this Agreement.
Section VI.8 Brokers and Finders. Neither Sterling nor any of its
Subsidiaries nor any of their respective officers, directors or employees has
employed any broker or finder or incurred any liability for any financial
advisory fees, brokerage fees, commissions or finder's fees, and no broker or
finder has acted directly or indirectly for Sterling or any of its Subsidiaries
in connection with this Agreement or the transactions contemplated hereby.
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ARTICLE VII
CONDUCT OF THE COMPANY'S
BUSINESS
Section VII.1 Conduct of Business Prior to the Effective Time. During
the period from the date of this Agreement to the Effective Time, the Company
shall, and shall cause each of its Subsidiaries to, (i) conduct its business in
the usual, regular and ordinary course consistent with past practice and (ii)
use its best efforts to maintain current customer relationships and preserve
intact its business organization, employees, advantageous business relationships
and retain the services of its officers and key Employees.
Section VII.2 Forbearances. During the period from the date of this
Agreement to the Effective Time, the Company shall not, and shall not permit any
of its Subsidiaries to, without the prior written consent of Sterling (and the
Company shall provide Sterling with prompt notice of any events referred to in
this Section 7.02 occurring after the date hereof):
(53) other than in the ordinary course of business consistent with past
practice, incur any indebtedness for borrowed money (other than short-term
indebtedness incurred to refinance short-term indebtedness and indebtedness of
the Company or any of its Subsidiaries to the Company or any of its
Subsidiaries; it being understood and agreed that incurrence of indebtedness in
the ordinary course of business shall include, without limitation, the creation
of deposit liabilities, purchases of federal funds, and sales of certificates of
deposit), assume, guarantee, endorse or otherwise as an accommodation become
responsible for the obligations of any other Person, or make any loan or advance
other than in the ordinary course of business consistent with past practice;
(54) adjust, split, combine or reclassify any capital stock; make, declare
or pay any dividend or make any other distribution on, or directly or indirectly
redeem, purchase or otherwise acquire, any shares of its capital stock or any
securities or obligations convertible into or exchangeable for any shares of its
capital stock, grant any stock options or stock awards, or grant any Person any
right to acquire any shares of its capital stock; or issue any additional shares
of capital stock, or any securities or obligations convertible into or
exchangeable for any shares of its capital stock;
(55) sell, transfer, mortgage, encumber or otherwise dispose of any of its
properties or assets to any Person, or cancel, release or assign any
indebtedness to such Person or any claims held by any such Person, except in the
ordinary course of business consistent with past practice or pursuant to
contracts or agreements in force at the date of this Agreement;
(56) make any material investment (other than trades in investment
securities in the ordinary course) either by purchase of stock or securities,
contributions to capital, property transfers, or purchase of any property or
assets of any other Person;
(57) enter into, terminate or fail to exercise any material right under,
any contract or agreement involving annual payments in excess of $10,000 and
which cannot be terminated without penalty upon 30 days' notice, or make any
change in, or extension of (other than automatic
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extensions) any of its leases or contracts involving annual payments in excess
of $10,000 and which cannot be terminated without penalty upon 30 days' notice;
(58) modify the terms of any Company Benefit Plan (including any severance
pay plan) or increase or modify in any manner the compensation or fringe
benefits of any of its Employees or pay any pension or retirement allowance not
required by any existing plan or agreement to any such Employees, or become a
party to, amend or commit itself to any pension, retirement, profit-sharing or
welfare benefit plan or agreement or employment agreement with or for the
benefit of any Employee other than routine adjustments in compensation and
fringe benefits in the ordinary course of business consistent with past practice
or accelerate the vesting of any stock options or other stock-based
compensation;
(59) settle any claim, action or proceeding involving the payment of money
damages in excess of $10,000;
(60) amend its Articles of Incorporation or its bylaws;
(61) fail to maintain its Regulatory Agreements, material Authorizations or
to file in a timely fashion all federal, state, local and foreign Tax Returns;
(62) make any capital expenditures of more than $10,000 individually or
$50,000 in the aggregate, other than the automated teller machine which will be
installed at or in the same general area as the main banking office of Clear
Lake Bank;
(63) fail to maintain or administer each Company Benefit Plan in accordance
with all applicable law or timely make all contributions or accruals required
thereunder in accordance with GAAP;
(64) issue any additional shares of the Company's capital stock;
(65) take any action that is intended or may reasonably be expected to
result in any of its representations and warranties set forth in this Agreement
being or becoming untrue at any time prior to the Effective Time, or in any of
the conditions to the Merger set forth in Article IX not being satisfied or in a
violation of any provision of this Agreement, except, in every case, as may be
required by applicable law;
(66) change any methods of accounting from those used in the Company
Financial Statements;
(67) take any action which would prevent the Merger from being accounted
for as a pooling of interests in accordance with APB Opinion 16; or
(68) agree, or make any commitment, to take, in writing or otherwise, any
of the actions described in clauses (a) through (n) of this Section 7.02.
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ARTICLE VIII
ADDITIONAL AGREEMENTS
Section VIII.1 Access and Information.
(69) During the period from the date of this Agreement through the
Effective Time, (i) the Company shall, and shall cause its Subsidiaries to,
afford Sterling, and its accountants, counsel and other representatives, full
access during normal business hours to the properties, books, contracts, Tax
Returns, Reports, commitments and records of the Company and its Subsidiaries at
any time, and from time to time, for the purpose of conducting any review or
investigation reasonably related to this Agreement or the Merger, and the
Company and its Subsidiaries will cooperate fully with all such reviews and
investigations provided that Sterling provides the Company with reasonable
notice of Sterling's on-site visits and that Sterling does not unreasonably
interfere with the business operations of the Company during the course of such
visits, and (ii) Sterling shall upon reasonable notice make personnel and copies
of its SEC reports and other information reasonably related to Sterling's
operations or financial performance available to the Company and its advisors
for purposes of any review or report to the Company Board in evaluating the
Merger.
(70) During the period from the date of this Agreement through the
Effective Time, the Company also shall furnish to Sterling (i) all Reports which
are filed after the date hereof promptly upon the filing thereof, (ii) a copy of
each Tax Return filed by it after the date hereof, and (iii) monthly and other
interim financial statements in the form prepared by the Company for its
internal use. During this period, the Company also shall notify Sterling
promptly of any material change in the Condition of the Company or any of its
Subsidiaries.
(71) Notwithstanding the foregoing provisions of this Section 8.01, no
investigation by the parties hereto made heretofore or hereafter shall affect
the representations and warranties of the parties which are contained herein and
each such representation and warranty shall survive such investigation.
(72) Sterling agrees that it will keep confidential any information
furnished to it in connection with the transactions contemplated by this
Agreement which is reasonably designated as confidential at the time of
delivery, except to the extent that such information (i) was already known to
Sterling and was received from a source other than the Company or any of its
Subsidiaries, directors, officers, employees or agents, (ii) thereafter was
lawfully obtained from another source or was publicly disclosed by the Company
or its agent or representative, or (iii) is required to be disclosed to the OCC,
the FDIC, the Federal Reserve Board, or any other Regulatory Authority, or is
otherwise required to be disclosed by law. Sterling agrees not to use such
confidential information, and to implement safeguards and procedures that are
reasonably designed to prevent such confidential information from being used,
for any purpose other than in connection with the transactions contemplated by
this Agreement. Upon any termination of this Agreement, Sterling will
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return to the Company or will destroy all documents furnished Sterling for its
review and all copies of such documents made by Sterling.
(73) The Company shall cooperate, and shall cause its Subsidiaries,
accountants, counsel and other representatives to cooperate, with Sterling and
its accountants, counsel and other representatives, in connection with the
preparation by Sterling of any applications and documents required to obtain the
Approvals which cooperation shall include providing all information, documents
and appropriate representations as may be necessary in connection therewith and,
when requested by Sterling, preparing and filing of regulatory applications.
(74) From and after the date of this Agreement, each of Sterling and the
Company shall use its reasonable commercial efforts to satisfy or cause to be
satisfied all conditions to their respective obligations under this Agreement.
While this Agreement is in effect, neither Sterling nor the Company shall take
any actions, or omit to take any actions, which would cause this Agreement to
become unenforceable in accordance with its terms.
Section VIII.2 Registration Statement; Proxy Statement.
(75) As promptly as practicable after the execution of this Agreement, the
Company shall (i) prepare and mail to its stockholders and (ii) if required by
applicable law file with the appropriate Regulatory Authorities a proxy or
information statement (the "Proxy Statement") relating to the Company
Stockholders' Meeting. Sterling shall furnish all information concerning
Sterling and its Affiliates as the Company may reasonably request in connection
with and the preparation of the Proxy Statement. The Company shall give
Sterling and its counsel the opportunity to review the Proxy Statement and each
document to be incorporated by reference therein.
(76) Unless otherwise required pursuant to the applicable fiduciary duties
of the Company Board (as determined in good faith by the Company Board based
upon the advice of its outside counsel), no amendment or supplement to the Proxy
Statement will be made by the Company without the approval of Sterling, which
approval shall not be unreasonably withheld.
(77) The information supplied by the Company for inclusion in the Proxy
Statement shall not, at (i) the time the Proxy Statement (or any amendment
thereof or supplement thereto) is first mailed to the stockholders of the
Company and (ii) the time of the Company Stockholders' Meeting, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein not
misleading.
(78) The information supplied or to be supplied by Sterling for inclusion
in the Proxy Statement will not, at the time it is supplied to the Company,
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements made therein not misleading.
Section VIII.3 Press Releases. Prior to the public dissemination of any
press release or other public disclosure of information about this Agreement,
the Merger or any other transaction
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contemplated hereby, the parties to this Agreement shall mutually agree as to
the form and substance of such release or disclosure, except as otherwise
provided by applicable law or by rules of the Nasdaq National Market.
Section VIII.4 Notice of Defaults. The Company shall promptly notify
Sterling of (i) any material change in its business, operations or prospects,
(ii) any complaints, investigations or hearings (or communications indicating
that the same may be contemplated) of any Regulatory Authority, (iii) the
institution or the threat of any material litigation against the Company, or
(iv) any event or condition that might be reasonably expected to cause any of
its representations, warranties or covenants set forth herein not to be true and
correct as of the Effective Time. For purposes of this Section 8.04, the term
material litigation shall mean any claim involving $10,000 or more.
Section VIII.5 Miscellaneous Agreements and Consents; Affiliates
Agreements. Subject to the terms and conditions of this Agreement, each of the
parties hereto agrees to use its respective commercially reasonable efforts to
take, or cause to be taken, all action, and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement as
expeditiously as reasonably practicable, including, without limitation, using
their respective commercially reasonable efforts to lift or rescind any
injunction or restraining order or other order adversely affecting the ability
of the parties to consummate the transactions contemplated hereby. Sterling and
the Company shall, and shall cause each of their respective Subsidiaries to, use
their commercially reasonable efforts to obtain consents of all third parties
and Regulatory Authorities necessary or, in the reasonable opinion of Sterling
or the Company, desirable for the consummation of the transactions contemplated
by this Agreement including the Merger and the Bank Merger. In case at any time
after the Effective Time any further action is necessary or desirable to carry
out the purposes of this Agreement, the proper officers and directors of
Sterling shall be deemed to have been granted authority in the name of the
Company to take all such necessary or desirable action. Without limiting the
foregoing, the Company will take such actions as may be reasonably necessary to
identity each of its "affiliates" for purposes of Rule 145 under the Securities
Act and to cause each person so identified to deliver to Sterling prior to the
Effective Time a written agreement in form and substance satisfactory to
Sterling providing that such person shall not sell, pledge, transfer or
otherwise dispose of any Sterling Common Stock to be received by such person as
part of the Merger Consideration except in compliance with the applicable
provisions of the Securities Act and applicable SEC rules and regulations
regarding treatment of the Consolidation as a "pooling of interest" for
accounting purposes. For a period of not less than two years after the date
hereof (or such shorter period of time as may be applicable for such
"affiliates" to sell shares of Sterling Common Stock in accordance with Rule 144
under the Securities Act), Sterling will continue to file in a timely manner all
reports required to be filed by it pursuant to Section 13 and Section 15(d) of
the Exchange Act.
Section VIII.6 Indemnification.
(79) Sterling shall indemnify, defend and hold harmless the directors,
officers, employees, and agents of the Company and its Subsidiaries (each, an
"Indemnified Party") against all losses,
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expenses (including reasonable attorneys' fees), claims, damages or liabilities
and amounts paid in settlement arising out of actions or omissions or alleged
acts or omissions occurring at or prior to the Effective Time (including the
transactions contemplated by this Agreement) to the full extent permitted under
the TBCA and by the Company's Articles of Incorporation and bylaws as in effect
on the date hereof, including provisions relating to advances of expenses
incurred in the defense of any proceeding to the full extent permitted by the
TBCA upon receipt of any undertaking required by the TBCA, except that the right
to indemnification shall not arise in those instances in which the party seeking
indemnification has participated in the breach of any covenant or agreement
contained herein or knowingly caused any representation or warranty of the
Company contained herein to be false or inaccurate in any respect and the claim
arises principally from such breach or the falsity or inaccuracy of such
representation or warranty. Without limiting the foregoing, in any case in which
a determination by Sterling is required to effectuate any indemnification,
Sterling shall direct, at the election of the Indemnified Party, that the
determination shall be made by independent counsel mutually agreed upon between
Sterling and the Indemnified Party.
(80) Sterling shall use its commercially reasonable efforts (and the
Company shall cooperate prior to the Effective Time in these efforts) to
maintain in effect for a period of four years after the Effective Time the
Company's existing directors' and officers' liability insurance policy (provided
that Sterling may substitute therefor (i) policies of at least the same coverage
and amounts containing terms and conditions which are substantially no less
advantageous in the aggregate or (ii) with the consent of the Company given
prior to the Effective Time, any other policy) with respect to claims arising
from facts or events which occurred prior to the Effective Time and covering
persons who are currently covered by such insurance; provided, however, that
Sterling shall not be obligated to make premium payments for such four-year
period in respect of such policy (or coverage replacing such policy) which
exceed, for the portion related to the Company's directors and officers, 100% of
the annual premium payments on the Company's current policy in effect as of the
date of this Agreement (the "Maximum Amount"). If the amount of the premiums
necessary to maintain or procure such insurance coverage exceeds the Maximum
Amount, Sterling shall use its commercially reasonable efforts to maintain the
most advantageous policies of directors' and officers' liability insurance
obtainable for a premium equal to the Maximum Amount.
(81) If Sterling shall consolidate with or merge into any other person and
shall not be the continuing or surviving person of such consolidation or merger
or shall transfer all or substantially all of its assets to any person, then and
in each case, proper provision shall be made so that the successors and assigns
of Sterling shall assume the obligations set forth in this Section 8.06.
(82) The provisions of this Section 8.06 are intended to be for the benefit
of, and shall be enforceable by, each Indemnified Party, and his or her heirs
and representatives.
(83) Sterling shall pay all expenses, including reasonable attorneys' fees,
that may be incurred by any Indemnified Party in successfully enforcing the
indemnity and other obligations provided for in this Section 8.06 if Sterling
has been finally determined to have acted in bad faith in refusing such
indemnity. The Indemnified Party shall pay all expenses, including reasonable
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attorneys' fees, incurred by Sterling if the indemnification or other
obligations provided in this Section 8.06 are denied by a court of competent
jurisdiction by final and nonappealable order.
Section VIII.7 Certain Change of Control Matters. From and after the date
hereof, the Company shall take all action necessary so that none of the
execution and delivery of this Agreement, the consummation of the Merger or the
consummation of the other transactions contemplated hereby or thereby will
increase any benefits otherwise payable under any Company Benefit Plan except as
set forth in Sections 5.12 and 5.13 of the Company Disclosure Schedule.
Section VIII.8 Employee Benefits. As soon as practicable following the
Effective Time, Sterling shall provide generally to officers and employees of
the Company and its Subsidiaries employee benefits, including without limitation
health and welfare benefits, life insurance and vacation arrangements, on terms
and conditions which when taken as a whole, including, without limitation, any
benefits provided after the Effective Time under the Company's Employee Stock
Ownership Plan, are substantially similar, in the good faith opinion of
Sterling, to those provided from time to time by Sterling and its Subsidiaries
to their similarly situated officers and employees. In that regard, such
officers and employees of the Company shall be credited under the employee
benefit plans of Sterling for their years of "eligibility service" and "vesting
service" earned under the Company Benefit Plans as if such service had been
earned with Sterling. Such officers and employees of the Company shall be
credited with "benefit service" under the employee benefit plans of Sterling
only with respect to their period of employment with Sterling and its
Subsidiaries after the Effective Time in accordance with the terms and
conditions of such employee benefit plans. As of the Effective Time, the
employees and their dependents, if any, previously covered as of the Effective
Time under the Company's health insurance plan shall be covered under Sterling's
health insurance plan and, to the extent possible under the terms of Sterling's
then current health insurance plan, will not be subject to any pre-existing
condition limitations or exclusions, except those excluded under Sterling's
health insurance plan. The Company's employees shall not be required to satisfy
the deductible and employee payments required by Sterling's comprehensive
medical and/or dental plans for the calendar year of the Effective Time to the
extent of amounts previously credited during such calendar year under comparable
plans maintained by the Company. Nothing in this Agreement shall operate or be
construed as requiring Sterling or any of its Subsidiaries to continue to
maintain or to terminate any Company Benefit Plan or any employee benefit plan
of Sterling or to limit in any way Sterling's ability to amend any such plan.
Section VIII.9 Certain Actions. No party shall take any action which
would adversely affect or delay the ability of either Sterling or the Company to
obtain any necessary approvals of any Regulatory Authority or other governmental
authority required for the transactions contemplated hereby or to perform its
covenants and agreements under this Agreement.
Section VIII.10 No Solicitation. (a) Neither the Company nor any of its
Subsidiaries shall, nor shall it authorize or permit any of its officers,
directors or employees or any investment banker, financial advisor, attorney,
accountant or other representative retained by it or any of its Subsidiaries to
initiate, solicit, encourage (including by way of furnishing information), or
take any other action
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to facilitate, any inquiries or the making of any proposal which constitutes, or
may reasonably be expected to lead to, any Acquisition Proposal (as defined
herein), or enter into or maintain or continue discussions or negotiate with any
person in furtherance of such inquiries or to obtain an Acquisition Proposal, or
agree to or endorse any Acquisition Proposal, and the Company shall notify
Sterling orally (within one business day) and in writing (as promptly as
practicable), in reasonable detail, as to any inquiries and proposals which it
or any of its Subsidiaries or any of their respective representatives or agents
may receive; provided, however, that (i) the Company may furnish or cause to be
furnished confidential and non-public information concerning the Company and its
businesses, properties or assets to a third party (subject to execution by such
third party of a confidentiality agreement containing confidentiality provisions
substantially similar to those of the letter agreement entered into between the
Company and Sterling dated April 17, 1998), (ii) following the execution of such
a confidentiality agreement, the Company may engage in discussions or
negotiations with a third party executing such an agreement, (iii) following
receipt of an Acquisition Proposal, the Company may take and disclose to its
stockholders a position with respect to such Acquisition Proposal, including, if
such Acquisition Proposal is a tender offer, the Company's Board may take and
disclose to the Company's stockholders a position contemplated by Rule 14e-2
under the Exchange Act, and/or (iv) following receipt of an Acquisition
Proposal, the Company's Board may withdraw or modify its recommendation referred
to in Section 5.25, but in each case referred to in the foregoing clauses (i)
through (iv) only to the extent that the Company's Board shall conclude in good
faith (on the basis of advice from outside counsel) that such action is required
in order for the Company's Board to satisfy its fiduciary obligations under
applicable law; provided, further, that the Company's Board shall not take any
of the foregoing actions referred to in clauses (i) through (iv) until after
reasonable notice to and consultation with Sterling with respect to such action
and that the Company's Board shall continue to consult with Sterling after
taking such action and, in addition, if the Company Board receives an
Acquisition Proposal or any request for confidential and non-public information
or for access to the properties, books or records of the Company or any
Subsidiary for the purpose of making, or in connection with, an Acquisition
Proposal, then the Company shall promptly inform Sterling as provided above of
the terms and conditions of such proposal or request and the identity of the
person making it. As used herein, the term "Acquisition Proposal" means: (x) any
acquisition or purchase of a significant amount of the assets of the Company and
its Subsidiaries on a consolidated basis, or any equity interest in the Company
or any of its Subsidiaries or any take-over bid or tender offer (including an
issuer bid or self-tender offer) or exchange offer, merger, plan of arrangement,
reorganization, consolidation, business combination, sale of substantially all
of the assets, sale of securities, recapitalization, liquidation, dissolution or
similar transaction involving the Company or any of its Subsidiaries (other than
the transactions contemplated by this Agreement) or any other transaction the
consummation of which would or could reasonably be expected to impede, interfere
with, prevent or materially delay the consummation of the Merger or which would
or could reasonably be expected to materially dilute the benefits to Sterling
and Bancorporation of the transactions contemplated hereby or (y) any proposal,
plan or intention to do any of the foregoing either publicly announced or
communicated to the Company or any agreement to engage in any of the foregoing.
The Company will immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties conducted heretofore
with respect to any of the foregoing. "Acquisition
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Transaction" means the transaction(s) by which an Acquisition Proposal is
consummated. Nothing in this Section 8.10 shall (A) permit the Company to
terminate this Agreement or (B) permit the Company or any of its Subsidiaries to
enter into any written agreement with respect to an Acquisition Proposal during
the term of this Agreement (it being agreed that during the term of this
Agreement neither the Company nor any of its Subsidiaries shall enter into any
written agreement with any person that provides for, or in any way facilitates,
an Acquisition Proposal, other than a confidentiality agreement in the form
referred to above), it being understood that Section 10.01 sets forth the rights
of the Company to terminate this Agreement.
(84) Without limiting the foregoing, it is understood that any violation of
the restrictions set forth in the first sentence of Section 8.10(a) by any
employee, officer or director or authorized employee, agent or representative of
the Company or any of its Subsidiaries (including, without limitation, any
investment banker, financial advisor, attorney or accountant or other
representative retained by the Company or any of its Subsidiaries) or otherwise
shall be deemed to be a breach of Section 8.10(a) by the Company.
Section VIII.11 Termination Fee. To compensate Sterling for entering into
this Agreement, taking actions to consummate the transactions contemplated
hereunder and incurring the costs and expenses related thereto and other losses
and expenses, including foregoing the pursuit of other opportunities by
Sterling, the Company and Sterling agree as follows:
(85) Provided that neither Sterling nor Bancorporation shall be in material
breach of its obligations under this Agreement (which breach has not been cured
promptly following receipt of written notice thereof by the Company specifying
in reasonable detail the basis of such alleged breach), the Company shall pay to
Sterling the sum of $500,000 (the "Termination Fee"), plus reasonable out-of-
pocket expenses, not in excess of $100,000 (including, without limitation,
amounts paid or payable to banks and investment bankers, fees and expenses of
counsel and printing expenses) (such expenses are hereinafter referred to as the
"Expenses") incurred by Sterling or any of its Affiliates in connection with or
arising out of the transactions contemplated by this Agreement, regardless of
when those expenses are incurred, if this Agreement is terminated (i) by the
Company under the provisions of Section 10.01(e), (ii) by either Sterling or the
Company under the provisions of Section 10.01(f) due to the failure of the
Company's stockholders to approve and adopt this Agreement and the Merger, if at
the time of such failure to so approve and adopt this Agreement and the Merger
there shall exist an Acquisition Proposal with respect to the Company and,
within nine months of the termination of this Agreement, the Company enters into
a definitive agreement with any third party with respect to any Acquisition
Proposal with respect to the Company or (iii) by Sterling under the provisions
of Section 10.01(g). Sterling shall provide the Company with an itemization of
Expenses.
(86) Any payment required by paragraph (a) of this Section 8.11 shall
become payable within two business days after termination of this Agreement or,
in the case of reimbursement to Sterling of the Expenses, promptly after (but in
no event later than three business days following) delivery to the Company of
the itemization of Expenses.
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(87) The Company acknowledges that the agreements contained in this Section
8.11 are an integral part of the transactions contemplated in this Agreement,
and that, without these agreements, Sterling would not enter into this
Agreement; accordingly, if the Company fails to promptly pay the Termination Fee
or Expenses when due, the Company shall in addition thereto pay to Sterling all
costs and expenses (including fees and disbursements of counsel) incurred in
collecting such Termination Fee or Expenses, as the case may be, together with
interest on the amount of the Termination Fee or Expenses (or any unpaid portion
thereof) from the date such payment was required to be made until the date such
payment is received by Sterling at the prime rate as reported in The Wall Street
Journal as in effect from time to time during such period.
Section VIII.12 Accruals. Prior to the Effective Time and after
consultation with Sterling, the Company shall, consistent with GAAP, make such
changes and modifications to its loan, accrual and reserve policies and
practices (including loan classification and allowance for credit losses levels)
to bring such policies and practices into line with those presently followed by
Sterling, including appropriate increases in its allowance for credit losses.
Section VIII.13 Certain Agreements. Neither the Company nor any Subsidiary
(nor any of their agents or representatives) will waive any provision of any
confidentiality or standstill or similar agreement to which it is a party
without the prior written consent of Sterling, unless the Company's Board or the
board of directors of such Subsidiary concludes in good faith (based upon advice
from outside counsel) that waiving such provision is necessary or appropriate in
order for such board of directors to act in a manner which is consistent with
its fiduciary obligations under applicable law. The Company will immediately
advise Sterling of the termination or waiver of any confidentiality or
standstill or similar agreement to which it is a party by the other party or
parties to such agreement.
Section VIII.14 Notification; Updated Disclosure Schedules. The Company
shall give prompt notice to Sterling, and Sterling or Bancorporation shall give
prompt notice to the Company, of (i) any representation or warranty made by it
in this Agreement becoming untrue or inaccurate in any respect, including,
without limitation, as a result of any change in the Company Disclosure
Schedule or the Sterling Disclosure Schedule, as applicable, or (ii) the failure
by it to comply with or satisfy in any material respect any covenant, condition
or agreement to be complied with or satisfied by it under this Agreement;
provided, however, that no such notification shall affect the representations,
warranties, covenants or agreements of the parties or the conditions to the
obligations of the parties under this Agreement.
Section VIII.15 Nasdaq Listing. Sterling shall use its best efforts to
have the shares of Sterling Common Stock to be issued to holders of Company
Common Stock in the Merger included for quotation on the Nasdaq National Market
prior to the Effective Time.
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ARTICLE IX
CONDITIONS TO MERGER
Section IX.1 Conditions to Each Party's Obligation to Effect the Merger.
The respective obligations of each of Sterling, Bancorporation and the Company
to effect the Merger and the other transactions contemplated hereby shall be
subject to the fulfillment or waiver at or prior to the Effective Time of the
following conditions:
(88) The Company stockholders shall have approved and adopted all matters
relating to this Agreement, the Merger and the transactions contemplated hereby
and thereby as required under the TBCA and the Company's Articles of
Incorporation at the Company Stockholders' Meeting.
(89) This Agreement, the Merger, the Bank Merger and the other transactions
contemplated hereby and thereby shall have been approved by the Federal Reserve
Board, the Commissioner, the FDIC, the OCC and any other Regulatory Authorities
whose approval is required for consummation of the transactions contemplated
hereby and all applicable waiting periods shall have expired. No such approval
or consent shall be conditioned or restricted in any manner (including
requirements relating to the disposition of assets) which in the good faith
judgment of Sterling would so adversely impact the economic or business benefits
of the transactions contemplated by this Agreement that, had such condition or
restriction been known, it would not have entered into this Agreement.
(90) Neither Sterling, Bancorporation nor the Company shall be subject to
any active litigation which seeks any order, decree or injunction of a court or
agency of competent jurisdiction to enjoin or prohibit the consummation of the
Merger or the other transactions contemplated by this Agreement.
(d) The shares of Sterling Common Stock issuable pursuant to the Merger
shall have been approved for quotation on the Nasdaq National Market.
(e) Deloitte & Touche LLP, independent public accountants for Sterling,
shall have delivered a letter, dated the Closing Date, addressed to Sterling, in
form and substance reasonably satisfactory to Sterling, to the effect that the
Merger will qualify for pooling-of-interests accounting treatment if consummated
in accordance with this Agreement.
(f) KPMG Peat Marwick LLP, independent public accountants for the Company,
shall have delivered a letter, dated the Closing Date, addressed to the Company,
in form and substance reasonably satisfactory to the Company, stating that the
Merger will qualify for pooling-of-interests accounting treatment if consummated
in accordance with this Agreement.
Section IX.2 Conditions to Obligations of The Company to Effect the
Merger. The obligations of the Company to effect the Merger shall be subject to
the fulfillment or waiver at or prior to the Effective Time of the following
additional conditions:
(91) Representations and Warranties. The representations and warranties of
Sterling set forth in Article VI hereof shall be true and correct in all
respects as of the date of this Agreement and
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as of the Effective Time (as though made on and as of the Effective Time except
to the extent such representations and warranties are by their express
provisions made as of a specified date) and the Company shall have received a
certificate signed by the chairman, president or other duly authorized officer
of Sterling to that effect.
(92) Performance of Obligations. Sterling shall have performed in all
material respects all obligations required to be performed by it under this
Agreement prior to the Effective Time, and the Company shall have received a
certificate signed by the chairman, president or other duly authorized officer
of Sterling to that effect and as to the absence of litigation as described in
Section 9.01(c).
(93) Material Adverse Change. Prior to the Closing, there shall not have
occurred any material adverse change in the Condition of Sterling and its
Subsidiaries taken as a whole, nor shall any event have occurred which, with the
lapse of time, may cause or create any material adverse change in the Condition
of Sterling and its Subsidiaries taken as a whole in the reasonable and good
faith judgment of the Company Board. Humble shall have received a certificate
signed by the chairman and chief executive officer, president or other duly
authorized officer of Sterling to that effect.
(94) Tax Opinion. The Company shall have received an opinion of Cox &
Smith, Incorporated, counsel to the Company, to the effect that the Merger will
constitute a reorganization within the meaning of Section 368 of the Code and no
gain or loss will be recognized by the stockholders of the Company to the extent
that they receive Sterling Common Stock in exchange for their Company Common
Stock in the Merger.
(95) Fairness Opinion. The Company Board shall have received an opinion
from its financial advisor to the effect that the Merger Consideration is fair
to the Company's stockholders from a financial point of view.
Section IX.3 Conditions to Obligations of Sterling and Bancorporation to
Effect the Merger. The obligations of Sterling and Bancorporation to effect the
Merger shall be subject to the fulfillment at or prior to the Effective Time of
the following additional conditions:
(96) Representations and Warranties. The representations and warranties of
the Company set forth in Article V hereof shall be true and correct in all
material respects as of the date of this Agreement and as of the Effective Time
(as though made on and as of the Effective Time except to the extent such
representations and warranties are by their express provisions made as of a
specified date) and Sterling and Bancorporation shall have received a
certificate signed by the chief executive officer, president or other duly
authorized officer of the Company to that effect.
(97) Performance of Obligations. The Company shall have performed in all
material respects all obligations required to be performed by it under this
Agreement prior to the Effective Time, and Sterling and Bancorporation shall
have received a certificate signed by the chairman or
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the chief executive officer, president or other duly authorized officer of the
Company to that effect and as to the absence of litigation as described in
Section 9.01(c).
(98) Material Adverse Change. Prior to the Closing, there shall not have
occurred any material adverse change in the Condition of the Company and any of
its Subsidiaries, taken as a whole, nor shall any event have occurred which,
with the lapse of time, may cause or create any material adverse change in the
Condition of the Company and any of its Subsidiaries, taken as a whole, in the
reasonable and good faith judgment of the Board of Directors of Sterling, and
Sterling and Bancorporation shall have received a certificate signed by the
chairman or the chief executive officer, president or other duly authorized
officer of the Company to that effect.
(99) Opinion of Counsel. Sterling shall have received an opinion of Cox &
Smith, Incorporated, counsel for the Company, addressed to Sterling and in form
reasonably satisfactory to it as to the validity of the approvals of the Merger
by the Company Board and the stockholders of the Company.
(100) Dissenting Shares. The number of Dissenting Shares shall not exceed
ten percent (10%) of the total issued and outstanding shares (as of the
Effective Time) of Company Common Stock.
ARTICLE X
TERMINATION
Section X.1 Termination. Notwithstanding any other provision of this
Agreement, and notwithstanding the approval of this Agreement, the Merger and
the transactions contemplated hereby and thereby by the stockholders of the
Company, this Agreement may be terminated and the Merger may be abandoned at any
time prior to the Effective Time:
(101) by mutual consent of the Board of Directors of Sterling and the
Company; or
(102) by the Company Board or the Board of Directors of Sterling if (i) the
Federal Reserve, the FDIC, the OCC or the Commissioner has denied approval of
the Merger or the Bank Merger and such denial has become final and nonappealable
or has approved the Merger subject to conditions that in the judgment of
Sterling would restrict it or its Subsidiaries or affiliates in their respective
spheres of operations and business activities after the Effective Time or (ii)
the Effective Time does not occur by November 30, 1998, provided, however, that
the right to terminate this Agreement under clause (ii) of this Section 10.01(b)
shall not be available to any party whose failure to fulfill any obligation
under this Agreement has been the cause of or resulted in the failure of the
Effective Time to occur prior to such date; or
(103) by Sterling (if it is not in breach of any of its obligations
hereunder) pursuant to notice in the event of a breach or failure by the Company
that would cause a failure of the conditions
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in Section 9.03, which breach or failure has not been, or cannot be, cured
within 30 days after written notice of such breach is given to the Company; or
(104) by the Company (if it is not in breach of any of its obligations
hereunder) pursuant to notice in the event of a breach or failure by Sterling
that would cause a failure of the conditions in Section 9.02, which breach or
failure has not been, or cannot be, cured within 30 days after written notice of
such breach is given to Sterling; or
(105) by the Company if (i) there shall not have been a breach of any
covenant or agreement on the part of the Company under this Agreement and (ii)
prior to the Effective Time, the Company shall have received a bona fide
Acquisition Proposal and the Company Board determines in its good faith judgment
and in the exercise of its fiduciary duties, based as to legal matters on the
written opinion of independent legal counsel and as to financial matters on the
written opinion of an investment banking firm of national reputation, that such
Alternative Proposal (if consummated pursuant to its terms) would result in an
Alternative Transaction that is more favorable to the Company stockholders than
the Merger ("Superior Proposal") and that the failure to terminate this
Agreement and accept such alternative Acquisition Proposal would be inconsistent
with the proper exercise of such fiduciary duties; provided, however, that
termination under this clause (ii) shall not be deemed effective until payment
of the Termination Fee and Expenses required by Section 8.11; or
(106) by either Sterling or the Company, if the Merger and this Agreement
shall fail to receive the requisite vote for approval and adoption at the
Company Stockholders' Meeting;
(107) by Sterling if the Company Board shall have (A) resolved to accept a
Superior Proposal, or (B) recommended to the stockholders of the Company that
they tender their shares in a tender or exchange offer commenced by a third
party or (C) withdrawn or modified, in any manner that is adverse to Sterling or
Bancorporation, its recommendation or approval of this Agreement or the Merger
or recommended to the Company stockholders acceptance or approval of any
Alternative Proposal, or shall have resolved to do the foregoing.
(108) by the Company if the product of the Average Closing Price times the
number of shares constituting the Merger Consideration is less than $21,000,000.
Section X.2 Effect of Termination. In the event of the termination and
abandonment of this Agreement pursuant to Section 10.01, this Agreement shall
become void and have no effect, except that (i) the provisions of this
Section 10.02 and Sections 8.01(d), 8.11 and 11.01 shall survive any such
termination and abandonment; and (ii) no party shall be relieved or released
from any liability arising out of an intentional breach of any provision of this
Agreement.
Section X.3 Non-Survival of Representations, Warranties and Covenants
Following the Effective Time. Except for Articles III and IV and Sections 8.06
and 11.01, none of the respective representations, warranties, obligations,
covenants and agreements of the parties shall survive the Effective Time.
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ARTICLE XI
GENERAL PROVISIONS
Section XI.1 Expenses. Except as provided in Section 8.11, each party
hereto shall bear its own expenses incident to preparing, entering into and
carrying out this Agreement and consummating the Merger, including without
limitation in the Company's case all expenses related to the preparation,
printing and mailing of all the Proxy Statement.
Section XI.2 Entire Agreement; Parties in Interest. Except as otherwise
expressly provided herein, this Agreement contains the entire agreement between
the parties hereto with respect to the transactions contemplated hereunder and
such supersedes all prior arrangements or understandings with respect thereto,
written or oral. The terms and conditions of this Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective
successors. Other than Section 8.06, nothing in this Agreement, expressed or
implied, is intended to confer upon any individual, corporation or other entity
(including, without limitation, any stockholder of the Company), other than
Sterling, Bancorporation and the Company or their respective successors, any
rights, remedies, obligations or liabilities under or by reason of this
Agreement.
Section XI.3 Amendments. To the extent permitted by law, this Agreement
may be amended by a subsequent writing signed by each of Sterling,
Bancorporation, and the Company; provided however, that the provisions hereof
relating to the amount of the Merger Consideration shall not be amended after
the Company Stockholders' Meeting without any requisite approval of the holders
of the issued and outstanding shares of Company Common Stock entitled to vote
thereon.
Section XI.4 Waivers. Prior to or at the Effective Time, each of
Sterling, Bancorporation, and the Company shall have the right to waive any
default in the performance of any term of this Agreement by the other, to waive
or extend the time for the compliance or fulfillment by any other party of any
and all of such other party's obligations under this Agreement and to waive any
or all of the conditions precedent to its obligations under this Agreement,
except any condition which, if not satisfied, would result in the violation of
any law or applicable governmental regulation.
Section XI.5 No Assignment. Except as provided in Section 2.04, none of
the parties hereto may assign any of its rights or delegate any of its
obligations under this Agreement to any other person or entity without the prior
written consent of the other parties to this Agreement.
Section XI.6 Notices. All notices or other communications which are
required or permitted hereunder shall be in writing and sufficient if delivered
by courier, by facsimile transmission, or by registered or certified mail,
postage prepaid to the persons at the addressees set forth below (or at such
other address as may be provided hereunder), and shall be deemed to have been
delivered as of the date so delivered:
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Company: Hometown Bancshares, Inc.
c/o Charles Castro
Charles Castro Mfg. Co., Inc.
1107 W. Laurel
San Antonio, Texas 78901
Telecopy: (210) 733-1745
With a copy to: Cox & Smith, Incorporated
112 East Pecan, Suite 1800
San Antonio, Texas 78205
Attention: Cary Plotkin Kavy
Telecopy: (210) 226-8395
Sterling and
Bancorporation: Sterling Bancshares, Inc.
15000 Northwest Freeway
Houston, Texas 77040
Attention: George Martinez, Chairman
Michael A. Roy, Senior Vice President
Telecopy: (713) 849-5498
With a copy to: Andrews & Kurth L.L.P.
Texas Commerce Tower
600 Travis, Suite 4200
Houston, Texas 77002
Attention: Dan A. Fleckman
Telecopy: (713) 220-4285
Section XI.7 Specific Performance. The parties hereby acknowledge and
agree that the failure of either party to fulfill any of its covenants and
agreements hereunder, including the failure to take all such actions as are
necessary on its part to cause the consummation of the Merger, will cause
irreparable injury for which damages, even if available, will not be an adequate
remedy. Accordingly, each party hereby consents to the issuance of injunctive
relief by any court of competent jurisdiction to compel performance of the other
party's obligations and to the granting by any such court of the remedy of the
specific performance hereunder.
Section XI.8 Governing Law. This Agreement shall in all respects be
governed by and construed in accordance with the laws of the state of Texas
applicable to contracts executed and to be performed in that state. All actions
and proceedings arising out of or relating to this Agreement shall be heard and
determined in any state or federal court sitting in Houston, Harris County,
Texas.
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Section XI.9 Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to constitute an original but
all of which together shall constitute one and the same instrument.
Section XI.10 Captions. The captions contained in this Agreement are for
reference purposes only and are not part of this Agreement.
Section XI.11 Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of Law,
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the Merger is not affected in any manner materially adverse to any
party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in a mutually acceptable manner in order that the
Merger be consummated as originally contemplated to the fullest extent possible.
IN WITNESS WHEREOF, Sterling and the Company have caused this Agreement to
be signed by their respective officers thereunto duly authorized, all as of the
date first written above.
STERLING BANCSHARES, INC.
By:/s/ Michael A. Roy
--------------------------------------
Name: Michael A. Roy
Title: Senior Vice President
STERLING BANCORPORATION, INC.
By:/s/ Michael A. Roy
--------------------------------------
Name: Michael A. Roy
Title: Vice President
HOMETOWN BANCSHARES, INC.
By:/s/ Charles I. Castro, Jr.
--------------------------------------
Name: Charles I. Castro, Jr.
Title: Chairman
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EXHIBIT 3.1
-----------
RESTATED AND AMENDED
ARTICLES OF INCORPORATION
OF
STERLING BANCSHARES, INC.
Sterling Bancshares, Inc. (the "Corporation"), pursuant to the provisions
of Article 4.07 of the Texas Business Corporation Act, hereby adopts these
Restated and Amended Articles of Incorporation which accurately copy the
Articles of Incorporation of the Corporation that are in effect to date, as
previously amended and as further amended by such Restated and Amended Articles
of Incorporation as hereinafter set forth. The original Articles of
Incorporation of the Corporation were originally filed with the Secretary of
State of the State of Texas on September 23, 1980.
These Restated and Amended Articles of Incorporation and the amendment made
hereby have been duly adopted in accordance with the applicable provisions of
Article 4.07 of the Texas Business Corporation Act, and the Restated and Amended
Articles of Incorporation, and such amendment were adopted by the shareholders
of the outstanding Shares of Common Stock of the Corporation at a shareholders
meeting held on April 23, 1998.
ARTICLE ONE
The name of the Corporation is Sterling Bancshares, Inc.
ARTICLE TWO
Paragraph 1 of Article 4 of the Articles of Incorporation is hereby amended
to read in its entirety as follows:
The total number of shares of all classes of stock which the Corporation
shall be authorized to issue is 51,000,000 shares, divided into the following:
(i) 1,000,000 shares of Cumulative Preferred Stock, of the par value of $1.00
per share (Preferred Stock); and (ii) 50,000,000 shares of Common Stock, of the
par value of $1.00 per share (Common Stock).
<PAGE>
ARTICLE THREE
The amendment made by the restated articles of incorporation has been
effected in conformity with the provisions of the Texas Business Corporation Act
and such restated articles of incorporation and the amendment made by the
restated articles of incorporation was duly adopted by the shareholders of the
corporation on the 23rd day of April, 1998.
ARTICLE FOUR
The number of shares outstanding was 20,799,863 shares of Common Stock and
177,113 shares of Preferred Stock; the number of shares entitled to vote on the
restated articles of incorporation as so amended was 20,799,863 shares of Common
Stock; the number of shares voted for such restated articles as so amended was
16,827,666 of Common Stock; the number of shares voted against such restated
articles as so amended was 237,926 of Common Stock; and the number of shares
abstaining from voting on such restated articles as so amended was 158,280 of
Common Stock.
ARTICLE FIVE
The articles of incorporation and all amendments and supplements thereto
are hereby superseded by the following restated articles of incorporation which
accurately copy the entire text thereof and the amendment set forth above:
ARTICLE 1.
The name of the corporation is Sterling Bancshares, Inc.
ARTICLE 2.
The period of duration of the corporation is perpetual.
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ARTICLE 3.
The purpose for which the Corporation is organized is to engage in any or
all lawful acts, activities or businesses for which a corporation may be
organized under the Texas Business Corporation Act.
ARTICLE 4.
The total number of shares of all classes of stock which the Corporation
shall be authorized to issue is 51,000,000 shares, divided into the following:
(i) 1,000,000 shares of Cumulative Preferred Stock, of the par value of $1.00
per share (Preferred Stock); and (ii) 50,000,000 shares of Common Stock, of the
par value of $1.00 per share (Common Stock).
A description of the respective classes of stock and a statement of the
designations, preferences, limitations and relative rights of said respective
classes of stock are as follows:
4.1. Preferred Stock.
---- ---------------
Section 4.1.1. Issuance in Series. The Preferred Stock may be
divided into and issued in one or more series. The Board of Directors is hereby
vested with authority from time to time to establish and designate such series,
and within the limitations prescribed by law or set forth herein, to fix and
determine the relative rights and preferences of the shares of any series so
established, but all shares of the Preferred Stock shall be identical except as
to the following relative rights and preferences, as to which there may be
variations between different series: (a) the rate of dividend; (b) the price at
and the terms and conditions on which shares may be redeemed, including, to the
extent permitted by law, the manner in which shares are to be chosen for
redemption if less than all the shares of a series are to be redeemed; (c) the
amount payable upon shares in event of involuntary liquidation; (d) the amount
payable upon shares in the event of
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voluntary liquidation; (e) sinking fund provisions for the redemption or
purchase of shares; (f) the terms and conditions on which shares may be
converted, if the shares of any series are issued with the privilege of
conversion; and (g) voting rights. The Board of Directors shall exercise such
authority by the adoption of a resolution or resolutions as prescribed by law.
The term "fixed for such series" and similar terms as used in this Article 4
shall mean stated and expressed in this Article 4 or in a resolution or
resolutions adopted by the Board of Directors establishing and designating the
series of Preferred Stock referred to herein.
Section 4.1.2. Dividends. The holders of the Preferred Stock of each such
series shall be entitled to receive, when and as declared by the Board of
Directors, out of any funds legally available therefor, cumulative preferential
dividends in cash, at the rate per annum fixed for such series, and no more.
Dividends on shares of the Preferred Stock of each series shall accrue from the
date of the initial issue of shares of such series, or from such other date as
may be fixed by the Board of Directors, shall be cumulative, and shall be
payable quarterly on the last days of March, June, September and December in
each year to shareholders of record on the fifteenth day of the calendar month
in which such dividends are payable with the first dividend on the Preferred
Stock of any series being payable on the respective dividend date which follows
the first full calendar quarter after the initial issue of shares of such
series. Each share of Preferred Stock shall rank on a parity with each other
share of Preferred Stock, irrespective of series, with respect to preferential
dividends at the respective rates fixed for such series, and no dividend shall
be declared or paid or set apart for payment for the Preferred Stock of any
series unless at the same time a dividend in like proportion to the accrued and
unpaid dividends upon the Preferred Stock of each other series shall be declared
or paid or set apart for payment, as the case may be, on Preferred Stock of each
other
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<PAGE>
series then outstanding. Accrued and unpaid dividends on the Preferred Stock
shall not bear interest.
Section 4.1.3. Dividend Restrictions on Junior Stock. So long as any
shares of Preferred Stock are outstanding, the Corporation shall not pay or
declare any cash dividends whatsoever on the Common Stock or any other class of
stock ranking junior to the Preferred Stock unless (a) all dividends on the
Preferred Stock of all series for all past quarterly dividend periods shall have
been paid, or declared and a sum sufficient for the payment thereof set apart,
and (b) there shall exist no default in respect of any sinking fund or purchase
fund for the redemption or purchase of shares of Preferred Stock of any series
or such default shall have been waived by the holders of at least a majority of
the then issued and outstanding shares of Preferred Stock of such series by a
vote at a meeting called for such purpose or by written waiver with or without a
meeting.
Section 4.1.4. Redemption. The Corporation at the option of the Board of
Directors may redeem the Preferred Stock of any series which by its terms is
redeemable, at the time or times and on the terms and conditions fixed for such
series, upon notice duly given as hereinafter provided, by paying therefor in
cash the sum fixed for such series, together, in each case, with an amount equal
to accrued and unpaid dividends thereon. The term "accrued and unpaid dividends"
as used herein with respect to Preferred Stock of any series shall mean
dividends on all outstanding shares of Preferred Stock of such series at the
rate fixed for such series, from the date or dates from which such dividends
accrued to the date as of which accrued and unpaid dividends are being
determined, less the aggregate amount of all dividends theretofore declared and
paid or set apart for payment upon such outstanding Preferred Stock.
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<PAGE>
At least 20 and not more than 50 days' previous notice of any such
redemption of Preferred Stock shall be mailed, addressed to the holders of
record of the shares to be redeemed at their respective addresses as the same
shall appear on the books of the Corporation.
In case of the redemption of only part of the Preferred Stock of any series
at the time outstanding, at the option of the Board of Directors such redemption
shall be made pro rata or the shares of such series to be redeemed shall be
chosen by lot in such manner as may be prescribed by resolution of the Board of
Directors or the shares of such series to be redeemed shall be chosen in such
other manner as may have been fixed for such series.
The Corporation may, on or prior to the date fixed for redemption of any
shares of Preferred Stock, deposit with any bank or trust company in the State
of Texas, or any bank or trust company in the United States duly appointed and
acting as transfer agent for the Corporation, as a trust fund, a sum sufficient
to redeem such shares called for redemption, with irrevocable instructions and
authority to such bank or trust company to give or complete the notice of
redemption thereof and to pay, on or after the date fixed for such redemption,
to the respective holders of such shares, as evidenced by a list of holders of
such shares certified by the Corporation by its president or vice president or
by its secretary or an assistant secretary, the redemptive price upon the
surrender of their respective share certificates. Thereafter, from and after
the date fixed for redemption, such shares shall be deemed to be redeemed and
dividends thereon shall cease to accrue after such date fixed for redemption.
Such deposit shall be deemed to constitute full payment of such shares to their
holders. Thereafter, such shares shall no longer be deemed to be outstanding,
and the holders thereof shall cease to be shareholders with respect to such
shares, and shall have no rights with respect thereto except the right to
receive from the bank or trust company payment of the
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<PAGE>
redemptive price of such shares without interest, upon the surrender of their
respective certificates therefor, and any right to convert such shares which may
exist. In case the holders of such shares shall not, within six (6) years after
such deposit, claim the amount deposited for redemption thereof, such bank or
trust company shall upon demand pay over to the Corporation the balance of such
amount so deposited to be held in trust and such bank or trust company shall
thereupon be relieved of all responsibility to the holders thereof.
If as of the date fixed for redemption of the Preferred Stock called for
redemption, the amount deposited for the redemption thereof exceeds the
aggregate redemption price of all such shares being redeemed, any such excess
shall be paid back to the Corporation.
If and so long as there shall exist any default in the payment of dividends on
any series of Preferred Stock or any default in respect of any sinking fund or
purchase fund for the redemption or purchase of shares of Preferred Stock of any
series, the Corporation shall not (other than by the use of unapplied funds, if
any, paid into or set aside for a sinking fund or purchase fund prior to such
default) (a) redeem any shares of the Preferred Stock unless all the then
outstanding shares of Preferred Stock are redeemed, or (b) purchase, retire or
otherwise acquire for a consideration any shares of the Preferred Stock except
pro rata pursuant to offers of sale made by holders of the Preferred Stock in
response to an invitation for tenders given simultaneously by the Corporation by
mail to the holders of record of all shares of the Preferred Stock then
outstanding.
Section 4.1.5. Liquidation or Dissolution. In the event of any liquidation,
dissolution or winding up of the affairs of the Corporation, then, before any
distribution or payment shall be made to the holders of the Common Stock or any
other class of stock of the Corporation ranking junior to the Preferred Stock in
respect of dividends or distribution of assets upon
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<PAGE>
liquidation, the holders of the Preferred Stock of the respective series shall
be entitled to be paid in full, in the event of a voluntary or involuntary
liquidation, dissolution or winding up, the respective amounts fixed for such
series, plus in each case a sum equal to accrued and unpaid dividends thereon to
the date of payment thereof. After such payment shall have been made in full to
the holders of the Preferred Stock, the remaining assets and funds of the
Corporation shall be distributed among the holders of the stock of the
Corporation ranking junior to the Preferred Stock in respect of dividends or
distribution of assets upon liquidation according to their respective rights. In
the event that the assets of the Corporation available for distribution to
holders of Preferred Stock shall not be sufficient to make the payment herein
required to be made in full, such assets shall be distributed to the holders of
the respective shares of Preferred Stock pro rata in proportion to the amounts
payable upon such share thereof. Neither the merger or consolidation of the
Corporation into or with another corporation nor the merger or consolidation of
any other corporation into or with the Corporation, shall be deemed to be a
liquidation, dissolution or winding up of the Corporation within the meaning of
this Section 4.1.5., but the sale, lease or conveyance of all or substantially
all of its assets shall be deemed to be a liquidation, dissolution or winding up
of the Corporation within the meaning of this Section 4.1.5.
Section 4.1.6. Status of Shares Redeemed or Retired. Preferred Stock
redeemed or otherwise retired by the Corporation shall, upon the filing of such
statement as may be required by law, assume the status of authorized but
unissued Preferred Stock and may thereafter be reissued in the same manner as
other authorized but unissued Preferred Stock.
Section 4.1.7. Amendments. Subject to such requirements as may be
prescribed by law or as may be expressly set forth in the foregoing provisions
of this Section 4.1. or in any
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<PAGE>
resolution establishing and designating a series of shares of Preferred Stock,
any of the foregoing terms and provisions of this Section 4.1. may be altered,
amended or repealed or the application thereof suspended or waived in any
particular case and changes in any of the designations, preferences, limitations
and relative rights of the Preferred Stock may be made with the affirmative
vote, at a meeting called for the purpose, or the written consent with or
without a meeting, of the holders of at least two-thirds of the then issued and
outstanding shares of Preferred Stock; provided that neither the rate of
dividend nor the amount payable upon the redemption or in the event of voluntary
or involuntary liquidation on any share of Preferred Stock be reduced without
the consent of the holders thereof.
Section 4.2. Common Stock.
Section 4.2.1. Dividends. Subject to the prior and superior rights of the
Preferred Stock, and on the conditions set forth in Section 4.1. of this Article
4 or in any resolution of the Board of Directors providing for the issuance of
any series of Preferred Stock, and not otherwise, such dividends (payable in
cash, stock or otherwise) as may be determined by the Board of Directors may be
declared and paid on the Common Stock from time to time out of any funds legally
available therefor.
Section 4.2.2. Liquidation or Dissolution. After payment shall have been
made in full to the holders of the Preferred Stock in the event of any
liquidation, dissolution or winding up of the affairs of the Corporation, the
remaining assets and funds of the Corporation shall be distributed pro rata
among the holders of the Common Stock according to their respective shares.
Section 4.3. Provisions Applicable to All Classes of Stock.
Section 4.3.1. Pre-emptive Rights. No holder of shares of any class of the
capital stock of the Corporation or any other person shall be entitled to any
pre-emptive rights whatsoever.
Section 4.3.2. Voting Rights. Subject to the voting rights expressly
conferred herein, by law and by the Board of Directors in establishing and
fixing the relative rights and preferences of the shares of any series of
Preferred Stock, the holders of the Common Stock shall exclusively possess full
voting power for the election of directors and for all other purposes. Except
as otherwise provided herein, by law, or by the Board of Directors in
establishing and fixing the relative rights and preferences of the shares of any
series of Preferred Stock, in any case where the holders of Preferred Stock
possess voting rights, the Common Stock and Preferred Stock together shall vote
as one class.
Section 4.3.3. Noncumulative Voting. Cumulative voting shall not be
permitted.
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<PAGE>
ARTICLE 5.
The Corporation will not commence business until it has received for the
issuance of its shares consideration of the value of at least $1,000.00,
consisting of money, labor done or property actually received.
ARTICLE 6.
Without necessity for action by its shareholders, the Corporation may
purchase, directly or indirectly, its own shares to the extent of the aggregate
of unrestricted capital surplus available therefor and unrestricted reduction
surplus available therefor.
ARTICLE 7.
No contract or other transaction between the Corporation and one or more of
its directors, officers or securityholders or between the Corporation and
another corporation, partnership, joint
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venture, trust or other enterprise of which one or more of the Corporation's
directors, officers or securityholders are members, officers, securityholders,
directors or employees or in which they are otherwise interested, directly or
indirectly, shall be invalid solely because of such relationship, or solely
because such director, officer or securityholder is present at or participates
in the meeting of the Board of Directors or committee thereof which authorizes
the contract or other transaction, or solely because his or their votes are
counted for such purpose, if: (a) the material facts as to his relationship or
interest and as to the contract or other transaction are known or disclosed to
the Board of Directors or committee thereof, and such board or committee in good
faith authorizes the contract or other transaction by the affirmative votes of a
majority of the disinterested directors even though the disinterested directors
be less than a quorum; or (b) the material facts as to his relationship or
interest and as to the contract or other transaction are known or disclosed to
the shareholders entitled to vote thereon, and the contract or other transaction
is specifically approved in good faith by vote of the shareholders; or (c) the
contract or other transaction is fair as to the Corporation as of the time it is
authorized, approved or ratified by the Board of Directors, a committee thereof,
or the shareholders.
ARTICLE 8.
Section 8.1. The Corporation, by action of its Board of Directors, may
indemnify any director or officer of the Corporation, and any person who may
have served at the request of the Corporation as a director or officer of
another corporation in which it owns shares or of which it is a creditor,
against any costs and expenses, including counsel fees, actually and necessarily
incurred (or reasonably expected to be incurred) in connection with the defense
of any civil, criminal, administrative or other claim, action, suit or
proceeding (whether by or in the right of the
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<PAGE>
Corporation or otherwise) in which he may become involved or with which he may
be threatened, by reason of his being or having been such a director or officer,
and against any payments in settlement of any such claim, action, suit or
proceeding or in satisfaction of any related judgment, fine or penalty, provided
that the Board of Directors shall, in the exercise of its business judgment,
determine that such indemnification is in the best interests of the Corporation.
Section 8.2. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction, or upon a plea of nolo contenders or its
equivalent, shall not, of itself, create any presumptions that the person to be
indemnified did not act in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Corporation, and in respect of
any criminal action or proceeding, did not reasonably believe that his conduct
was lawful.
Section 8.3. Expenses incurred in defending a civil or criminal action, suit
or proceeding may be paid by the Corporation in advance of the final
disposition of such action, suit or proceeding as authorized by the Board of
Directors in the specific case on receipt of an undertaking by or on behalf of
the director or officer to repay such amount unless it shall ultimately be
determined that he is entitled to be indemnified by the Corporation.
Section 8.4. The foregoing right of indemnification shall not be deemed
exclusive of any other rights to which any director, officer or other person may
be entitled under any other bylaw, agreement, vote of shareholders or
disinterested directors, as a matter of law or otherwise both as to action in
his official capacity and as to action in another capacity while holding such
office and shall continue as to a person who has ceased to be a director or
officer and shall inure to the benefit of the heirs, executors and
administrators of such a person. No person shall be entitled to
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<PAGE>
indemnification pursuant to this Article 8 in relation to any matter as to which
indemnification shall not be permitted by law.
ARTICLE 9.
In performing his duties, a director of the Corporation shall be entitled to
rely on information, opinions, reports or statements, including financial
statements and other financial data, in each case prepared or presented by: (a)
one or more officers or employees of the Corporation whom the director
reasonably believes to be reliable and competent in the matters presented, (b)
counsel, public accountants or other persons as to matters which the director
reasonably believes to be within such person's professional or expert
competence, or (c) a committee of the Board of Directors upon which he does not
serve, duly designated in accordance with a provision of the by-laws, as to
matters within its designated authority, which committee the director deems to
merit confidence, but he shall not be considered to be acting in good faith if
he has knowledge concerning the matter in question that would cause such
reliance to be unwarranted. A person who so performs his duties shall have no
liability to the Corporation (whether asserted directly or derivatively) by
reason of being or having been a director of the Corporation.
ARTICLE 10.
The address of the registered office of the Corporation is 15000 Northwest
Freeway, Houston, Texas 77040, the name of the registered agent of the
Corporation at such address is George Martinez.
ARTICLE 11.
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The Board of Directors consists of fifteen (15) members who shall serve as
directors until their respective successors shall have been elected and
qualified, and whose names and addresses are as follows:
Name Address
---- -------
J. Downey Bridgwater 15000 Northwest Freeway
Houston, Texas 77040
John H. Buck 15000 Northwest Freeway
Houston, Texas 77040
John B. Carter, Jr. 15000 Northwest Freeway
Houston, Texas 77040
James M. Clepper 15000 Northwest Freeway
Houston, Texas 77040
Walter P. Gibbs, Jr. 15000 Northwest Freeway
Houston, Texas 77040
Bruce J. Harper 15000 Northwest Freeway
Houston, Texas 77040
Glenn H. Johnson 15000 Northwest Freeway
Houston, Texas 77040
James J. Kearney 15000 Northwest Freeway
Houston, Texas 77040
George Martinez 15000 Northwest Freeway
Houston, Texas 77040
Russell I. Orr 15000 Northwest Freeway
Houston, Texas 77040
Christian A. Rasch 15000 Northwest Freeway
Houston, Texas 77040
Steven F. Retzloff 15000 Northwest Freeway
Houston, Texas 77040
Raimundo Riojas 15000 Northwest Freeway
Houston, Texas 77040
Cuba Wadlington, Jr. 15000 Northwest Freeway
Houston, Texas 77040
IN WITNESS WHEREOF, the undersigned has executed these Restated and Amended
Articles of Incorporation this 27th day of May, 1998.
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Sterling Bancshares, Inc.
By: /s/ George Martinez
--------------------------------------
George Martinez, Chairman
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<PAGE>
EXHIBIT 21
SUBSIDIARIES OF STERLING BANCSHARES, INC.
The following is a list of the subsidiaries of Sterling Bancshares, Inc.:
Sterling Bancorporation, Inc.
A Delaware corporation
PO Box 631
Wilmington, Delaware 19899
Sterling Bancshares Capital Trust I
A Delaware statutory business trust
15000 Northwest Freeway
Houston, Texas 77040
Sterling Bank
A Texas state banking association
15000 Northwest Freeway
Houston, Texas 77040
Clear Lake National Bank
A national banking association
15000 Northwest Freeway
Houston, Texas 77040
Sterling Capital Mortgage Corporation
A Texas corporation
13100 Northwest Freeway Suite 200
Houston, Texas 77040
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
No. 333-46346 of Sterling Bancshares, Inc. on Form S-4 and in Registration
Statements Nos. 33-75444, 33-75442, 333-16719 and 333-57171 of Sterling
Bancshares, Inc. on Forms S-8 of our report dated March 12, 1999, appearing in
this Annual Report on Form 10-K of Sterling Bancshares, Inc. for the year ended
December 31, 1998.
DELOITTE & TOUCHE LLP
Houston, Texas
March 24, 1999
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) (TO
COME)
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) (TO COME)
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<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 92,736
<INT-BEARING-DEPOSITS> 6,380
<FED-FUNDS-SOLD> 38,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 80,060
<INVESTMENTS-CARRYING> 167,832
<INVESTMENTS-MARKET> 170,040
<LOANS> 905,166
<ALLOWANCE> (8,911)
<TOTAL-ASSETS> 1,376,606
<DEPOSITS> 1,228,772
<SHORT-TERM> 16,578
<LIABILITIES-OTHER> 4,520
<LONG-TERM> 0
28,750
177
<COMMON> 23,185
<OTHER-SE> 153,060
<TOTAL-LIABILITIES-AND-EQUITY> 1,376,606
<INTEREST-LOAN> 40,672
<INTEREST-INVEST> 8,352
<INTEREST-OTHER> 1,574
<INTEREST-TOTAL> 50,598
<INTEREST-DEPOSIT> 14,593
<INTEREST-EXPENSE> 15,055
<INTEREST-INCOME-NET> 35,543
<LOAN-LOSSES> 2,718
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 27,545
<INCOME-PRETAX> 12,242
<INCOME-PRE-EXTRAORDINARY> 12,242
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,358
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.34
<YIELD-ACTUAL> 6.02
<LOANS-NON> 3,579
<LOANS-PAST> 458
<LOANS-TROUBLED> 357
<LOANS-PROBLEM> 20,902
<ALLOWANCE-OPEN> 7,882
<CHARGE-OFFS> 1,954
<RECOVERIES> 240
<ALLOWANCE-CLOSE> 8,911
<ALLOWANCE-DOMESTIC> 4,955
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,956
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) (TO
COME)
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) (TO COME)
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 84,302
<INT-BEARING-DEPOSITS> 918
<FED-FUNDS-SOLD> 58,504
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 70,247
<INVESTMENTS-CARRYING> 176,982
<INVESTMENTS-MARKET> 179,156
<LOANS> 872,605
<ALLOWANCE> (8,478)
<TOTAL-ASSETS> 1,309,976
<DEPOSITS> 1,161,813
<SHORT-TERM> 20,089
<LIABILITIES-OTHER> 5,757
<LONG-TERM> 0
28,750
177
<COMMON> 23,653
<OTHER-SE> 142,285
<TOTAL-LIABILITIES-AND-EQUITY> 1,309,976
<INTEREST-LOAN> 19,547
<INTEREST-INVEST> 4,315
<INTEREST-OTHER> 676
<INTEREST-TOTAL> 24,538
<INTEREST-DEPOSIT> 7,163
<INTEREST-EXPENSE> 7,396
<INTEREST-INCOME-NET> 17,142
<LOAN-LOSSES> 927
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 13,370
<INCOME-PRETAX> 5,998
<INCOME-PRE-EXTRAORDINARY> 5,998
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,950
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.16
<YIELD-ACTUAL> 6.04
<LOANS-NON> 4,087
<LOANS-PAST> 337
<LOANS-TROUBLED> 269
<LOANS-PROBLEM> 13,318
<ALLOWANCE-OPEN> 7,882
<CHARGE-OFFS> 470
<RECOVERIES> 114
<ALLOWANCE-CLOSE> 8,478
<ALLOWANCE-DOMESTIC> 4,031
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,447
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) (TO
COME)
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) (TO COME)
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 121,937
<INT-BEARING-DEPOSITS> 409
<FED-FUNDS-SOLD> 16,950
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 94,811
<INVESTMENTS-CARRYING> 202,468
<INVESTMENTS-MARKET> 204,609
<LOANS> 813,558
<ALLOWANCE> (7,882)
<TOTAL-ASSETS> 1,313,843
<DEPOSITS> 1,141,366
<SHORT-TERM> 45,169
<LIABILITIES-OTHER> 8,877
<LONG-TERM> 321
28,750
177
<COMMON> 22,875
<OTHER-SE> 66,308
<TOTAL-LIABILITIES-AND-EQUITY> 1,313,843
<INTEREST-LOAN> 68,927
<INTEREST-INVEST> 16,787
<INTEREST-OTHER> 2,888
<INTEREST-TOTAL> 88,602
<INTEREST-DEPOSIT> 26,418
<INTEREST-EXPENSE> 27,481
<INTEREST-INCOME-NET> 61,121
<LOAN-LOSSES> 3,176
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 48,561
<INCOME-PRETAX> 21,024
<INCOME-PRE-EXTRAORDINARY> 21,024
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,015
<EPS-PRIMARY> 0.62
<EPS-DILUTED> 0.59
<YIELD-ACTUAL> 5.95
<LOANS-NON> 4,226
<LOANS-PAST> 486
<LOANS-TROUBLED> 217
<LOANS-PROBLEM> 13,524
<ALLOWANCE-OPEN> 7,472
<CHARGE-OFFS> 3,204
<RECOVERIES> 438
<ALLOWANCE-CLOSE> 7,882
<ALLOWANCE-DOMESTIC> 2,831
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,051
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) (TO
COME)
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) (TO COME)
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 79,988
<INT-BEARING-DEPOSITS> 988
<FED-FUNDS-SOLD> 25,134
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 92,820
<INVESTMENTS-CARRYING> 210,375
<INVESTMENTS-MARKET> 211,726
<LOANS> 746,346
<ALLOWANCE> (7,859)
<TOTAL-ASSETS> 1,204,131
<DEPOSITS> 1,066,244
<SHORT-TERM> 15,506
<LIABILITIES-OTHER> 7,256
<LONG-TERM> 0
28,750
177
<COMMON> 16,518
<OTHER-SE> 137,906
<TOTAL-LIABILITIES-AND-EQUITY> 1,204,131
<INTEREST-LOAN> 50,136
<INTEREST-INVEST> 12,422
<INTEREST-OTHER> 1,885
<INTEREST-TOTAL> 64,443
<INTEREST-DEPOSIT> 19,371
<INTEREST-EXPENSE> 20,168
<INTEREST-INCOME-NET> 44,275
<LOAN-LOSSES> 2,246
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 35,011
<INCOME-PRETAX> 15,703
<INCOME-PRE-EXTRAORDINARY> 15,703
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,513
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.44
<YIELD-ACTUAL> 5.94
<LOANS-NON> 3,396
<LOANS-PAST> 450
<LOANS-TROUBLED> 316
<LOANS-PROBLEM> 16,096
<ALLOWANCE-OPEN> 7,472
<CHARGE-OFFS> 56
<RECOVERIES> 10
<ALLOWANCE-CLOSE> 7,859
<ALLOWANCE-DOMESTIC> 3,504
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,355
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) (TO
COME)
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) (TO COME)
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 102,393
<INT-BEARING-DEPOSITS> 542
<FED-FUNDS-SOLD> 16,044
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 66,832
<INVESTMENTS-CARRYING> 222,525
<INVESTMENTS-MARKET> 222,354
<LOANS> 723,562
<ALLOWANCE> (7,959)
<TOTAL-ASSETS> 1,179,557
<DEPOSITS> 1,026,805
<SHORT-TERM> 35,045
<LIABILITIES-OTHER> 5,863
<LONG-TERM> 0
28,750
177
<COMMON> 23,406
<OTHER-SE> 127,238
<TOTAL-LIABILITIES-AND-EQUITY> 1,179,557
<INTEREST-LOAN> 32,092
<INTEREST-INVEST> 7,634
<INTEREST-OTHER> 1,363
<INTEREST-TOTAL> 41,089
<INTEREST-DEPOSIT> 12,213
<INTEREST-EXPENSE> 12,824
<INTEREST-INCOME-NET> 28,265
<LOAN-LOSSES> 1,489
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 22,146
<INCOME-PRETAX> 10,049
<INCOME-PRE-EXTRAORDINARY> 10,049
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,725
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.28
<YIELD-ACTUAL> 5.98
<LOANS-NON> 3,399
<LOANS-PAST> 495
<LOANS-TROUBLED> 118
<LOANS-PROBLEM> 16,252
<ALLOWANCE-OPEN> 7,472
<CHARGE-OFFS> 893
<RECOVERIES> 76
<ALLOWANCE-CLOSE> 7,959
<ALLOWANCE-DOMESTIC> 3,639
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,320
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) (TO
COME)
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) (TO COME)
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 67,581
<INT-BEARING-DEPOSITS> 25,927
<FED-FUNDS-SOLD> 46,132
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 69,162
<INVESTMENTS-CARRYING> 178,758
<INVESTMENTS-MARKET> 177,086
<LOANS> 642,861
<ALLOWANCE> (8,040)
<TOTAL-ASSETS> 1,074,115
<DEPOSITS> 976,439
<SHORT-TERM> 8,825
<LIABILITIES-OTHER> 7,356
<LONG-TERM> 3,600
0
88
<COMMON> 23,410
<OTHER-SE> 122,356
<TOTAL-LIABILITIES-AND-EQUITY> 1,074,115
<INTEREST-LOAN> 15,286
<INTEREST-INVEST> 3,765
<INTEREST-OTHER> 488
<INTEREST-TOTAL> 19,539
<INTEREST-DEPOSIT> 5,923
<INTEREST-EXPENSE> 6,091
<INTEREST-INCOME-NET> 13,448
<LOAN-LOSSES> 740
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10,616
<INCOME-PRETAX> 4,686
<INCOME-PRE-EXTRAORDINARY> 4,686
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,136
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.13
<YIELD-ACTUAL> 5.93
<LOANS-NON> 2,320
<LOANS-PAST> 640
<LOANS-TROUBLED> 95
<LOANS-PROBLEM> 14,049
<ALLOWANCE-OPEN> 7,472
<CHARGE-OFFS> 256
<RECOVERIES> 85
<ALLOWANCE-CLOSE> 8,040
<ALLOWANCE-DOMESTIC> 3,363
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,677
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10K AND
AUDITED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) (TO COME)
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 96,129
<INT-BEARING-DEPOSITS> 522
<FED-FUNDS-SOLD> 51,328
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 69,532
<INVESTMENTS-CARRYING> 157,315
<INVESTMENTS-MARKET> 156,888
<LOANS> 621,987
<ALLOWANCE> (7,472)
<TOTAL-ASSETS> 1,038,535
<DEPOSITS> 945,658
<SHORT-TERM> 5,157
<LIABILITIES-OTHER> 8,440
<LONG-TERM> 4,498
0
0
<COMMON> 22,510
<OTHER-SE> 88,999
<TOTAL-LIABILITIES-AND-EQUITY> 1,038,535
<INTEREST-LOAN> 54,099
<INTEREST-INVEST> 13,614
<INTEREST-OTHER> 2,464
<INTEREST-TOTAL> 70,177
<INTEREST-DEPOSIT> 21,353
<INTEREST-EXPENSE> 22,202
<INTEREST-INCOME-NET> 47,975
<LOAN-LOSSES> 2,457
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 38,053
<INCOME-PRETAX> 17,797
<INCOME-PRE-EXTRAORDINARY> 17,797
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,270
<EPS-PRIMARY> 0.54
<EPS-DILUTED> 0.52
<YIELD-ACTUAL> 5.82
<LOANS-NON> 2,817
<LOANS-PAST> 371
<LOANS-TROUBLED> 45
<LOANS-PROBLEM> 15,144
<ALLOWANCE-OPEN> 6,823
<CHARGE-OFFS> 2,281
<RECOVERIES> 473
<ALLOWANCE-CLOSE> 7,472
<ALLOWANCE-DOMESTIC> 3,083
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,389
</TABLE>
