<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
----------
FORM 10 - Q
----------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30,
2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-20750
STERLING BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-2175590
(State of Incorporation) (IRS Employer ID Number)
15000 NORTHWEST FREEWAY, SUITE 200
HOUSTON, TEXAS 77040
(Address of principal executive office)
713-466-8300
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
("Act") during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days
Yes X No
------- -------
The number of shares outstanding of each class of the registrant's capital stock
as of June 30, 2000:
<TABLE>
<S> <C>
CLASS OF STOCK SHARES OUTSTANDING
------------------------------------ ------------------
Common Stock, Par Value $1.00 26,162,023
</TABLE>
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<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM I. CONDENSED FINANCIAL STATEMENTS
STERLING BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 121,289 $ 91,139
Interest-bearing deposits in financial institutions 228 135
Securities purchased with an agreement to resell 57,820 40,834
Available-for-sale securities, at fair value 342,555 359,127
Held-to-maturity securities, at amortized cost 154,051 166,112
Loans held for sale 125,802 70,404
Loans held for investment 1,133,685 1,124,577
Allowance for credit losses (14,233) (13,187)
------------ ------------
Loans held for investment, net 1,119,452 1,111,390
Accrued interest receivable 11,573 11,330
Real estate acquired by foreclosure 1,005 1,323
Premises and equipment, net 43,591 41,003
Goodwill, net 5,768 6,030
Other assets 58,756 60,653
------------ ------------
TOTAL ASSETS $ 2,041,890 $ 1,959,480
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits:
Noninterest-bearing $ 551,331 $ 481,757
Interest-bearing 580,755 581,687
Certificates of deposit and other time deposits 374,176 352,107
------------ ------------
Total deposits 1,506,262 1,415,551
Securities sold under agreements to repurchase and other borrowed funds 352,373 362,332
Accrued interest payable and other liabilities 8,329 17,003
------------ ------------
Total liabilities 1,866,964 1,794,886
COMPANY-OBLIGATED MANDITORILY REDEEMABLE
TRUST PREFERRED SECURITIES OF SUBSIDIARY TRUST 28,750 28,750
MINORITY INTEREST IN STERLING CAPITAL MORTGAGE COMPANY 1,520 1,301
Shareholders' equity:
Convertible preferred stock, $1 par value, 1 million shares authorized 61 89
Common stock, $1 par value, 50 million shares authorized 26,162 26,030
Capital surplus 29,361 28,658
Retained earnings 91,007 80,927
Accumulated other comprehensive income--net unrealized loss on
available-for-sale securities, net of tax (1,935) (1,161)
------------ ------------
Total shareholders' equity 144,656 134,543
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,041,890 $ 1,959,480
============ ============
</TABLE>
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE> 3
STERLING BANCSHARES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1999 2000 2000 1999
---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 29,602 $ 24,000 $ 57,784 $ 46,834
Securities:
Taxable 7,438 2,852 14,781 5,772
Tax-exempt 824 741 1,653 1,414
Federal funds sold and securities purchased under agreements to resell 876 937 1,689 2,139
Deposits in financial institutions Total interest income 10 16 17 72
---------- ---------- ---------- ----------
38,750 28,546 75,924 56,231
Interest expense:
Demand and savings deposits 4,486 3,006 8,779 5,953
Certificates and other time deposits 4,875 3,916 9,443 8,056
Other borrowed funds 4,892 163 9,428 312
---------- ---------- ---------- ----------
Total interest expense 14,253 7,085 27,650 14,321
---------- ---------- ---------- ----------
NET INTEREST INCOME 24,497 21,461 48,274 41,910
---------- ---------- ---------- ----------
Provision for credit losses 2,149 2,088 4,173 3,786
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 22,348 19,373 44,101 38,124
Noninterest income:
Customer service fees 2,524 2,258 5,057 4,523
Gain on sale of mortgage loans 2,972 3,266 4,761 5,163
Other 4,376 2,073 7,218 4,200
---------- ---------- ---------- ----------
Total noninterest income 9,872 7,597 17,036 13,886
Noninterest expense:
Salaries and employee benefits 12,642 10,575 24,238 20,296
Occupancy expense 3,262 2,987 6,202 5,708
Net losses (gains) and carrying costs of real estate acquired by foreclosure 199 (30) 206 (73)
FDIC assessment 70 136 129 264
Technology 892 1,109 1,780 1,881
Postage and delivery charges 432 430 816 832
Supplies 398 388 761 822
Professional fees 509 752 904 1,098
Minority interest expense:
Company-obligated mandatorily redeemable trust preferred securitites of
subsidiary trust 667 667 1,334 1,334
Sterling Capital Mortgage Company 195 140 219 166
Other 3,165 3,305 6,137 5,965
---------- ---------- ---------- ----------
Total noninterest expense 22,431 20,459 42,726 38,293
NET INCOME BEFORE INCOME TAXES 9,789 6,511 18,411 13,717
Provision for income taxes 3,097 1,889 5,716 4,219
---------- ---------- ---------- ----------
NET INCOME $ 6,692 $ 4,622 $ 12,695 $ 9,498
========== ========== ========== ==========
EARNINGS PER SHARE:
Basic $ 0.26 $ 0.18 $ 0.49 $ 0.37
========== ========== ========== ==========
Diluted $ 0.25 $ 0.18 $ 0.48 $ 0.36
========== ========== ========== ==========
</TABLE>
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 4
STERLING BANCSHARES, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
2000 1999
---------- ----------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,695 $ 9,498
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Amortization and accretion of premiums and discounts
on securities, net 57 253
Provision for credit losses 4,173 3,786
Write-downs, less gains on sale, of real estate acquired by
foreclosure and repossessed assets 162 (148)
Depreciation and amortization 3,544 2,933
Net change in loans held for sale, excluding loans sold with University
of Houston office location (55,398) 28,896
Gain on the sale of University of Houston office location -- (450)
Gain on the sale of credit card portfolio (237) --
Net (increase) decrease in accrued interest receivable and other assets 2,109 (1,358)
Increase (decrease) in accrued interest payable and other liabilities (8,455) 97
---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (41,350) 43,507
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in securities purchased under agreements to resell (16,986) (11,387)
Proceeds from maturity and paydowns of held-to-maturity securities 11,899 17,330
Purchases of held-to-maturity securities -- (29,606)
Proceeds from maturity and paydowns of available-for-sale securities 21,336 22,850
Proceeds from sale of available-for-sale securities 6,136 --
Purchases of available-for-sale securities (11,986) (28,998)
Net increase in loans held for investment (12,474) (105,286)
Proceeds from sale of real estate acquired by foreclosure 395 894
Net (increase) decrease in interest-bearing deposits in financial institutions (93) 500
Proceeds from sale of University of Houston office location -- 5,269
Proceeds from sale of premises and equipment 368 2,675
Purchase of premises and equipment (6,039) (5,329)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (7,444) (131,088)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts 90,711 15,523
Net increase (decrease) in repurchase agreements/funds purchased (9,959) 12,931
Proceeds from issuance of common stock and preferred stock 807 1,592
Repayment of notes payable -- (1,883)
Dividends paid (2,615) (2,167)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 78,944 25,996
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 30,150 (61,585)
CASH AND CASH EQUIVALENTS:
Beginning of period 91,139 139,690
---------- ----------
End of period $ 121,289 $ 78,105
========== ==========
SUPPLEMENTAL INFORMATION:
Income taxes paid $ 11,500 $ 5,700
========== ==========
Interest paid $ 27,166 $ 14,449
========== ==========
Noncash investing and financing activities:
Acquisitions of real estate through foreclosure of collateral $ 239 $ 230
========== ==========
</TABLE>
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 5
STERLING BANCSHARES, INC., AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
1. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring items) considered necessary for a fair presentation have
been included. Operating results for the six-month period ended June 30, 2000,
are not necessarily indicative of the results that may be expected for the
entire year or any interim period. For further information, refer to the
consolidated financial statements and notes thereto included in the annual
report on Form 10-K of Sterling Bancshares, Inc. (the "Company") for the year
ended December 31, 1999.
2. EARNINGS PER COMMON SHARE
Earnings per common share ("EPS") were computed based on the following (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2000 1999 2000 1999
-------------------- -------------------- -------------------- --------------------
AMOUNT PER SHARE AMOUNT PER SHARE AMOUNT PER SHARE AMOUNT PER SHARE
-------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income $ 6,692 $ 4,622 $ 12,695 $ 9,498
======== ======== ======== ========
Basic:
Weighted average shares
outstanding 26,135 $ 0.26 25,720 $ 0.18 26,096 $ 0.49 25,643 $ 0.37
======== ======== ======== ========
Diluted:
Add incremental shares for:
Assumed exercise of
outstanding options 262 346 248 337
Assumed conversion of
preferred stock 62 205 70 205
-------- -------- -------- --------
Total 26,459 $ 0.25 26,271 $ 0.18 26,414 $ 0.48 26,185 $ 0.36
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
4. SHAREHOLDERS' EQUITY
The following table displays the changes in shareholders' equity for the three
and six-month periods ended June 30, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2000 1999 2000 1999
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Equity, beginning of period $138,482 $120,758 $134,543 $116,933
Comprehensive income:
Net income $6,692 $4,622 $12,695 $ 9,498
Net change in net unrealized
losses on AFS securities 58 (842) (774) (1,034)
------ ------ ------- -------
Total comprehensive income 6,750 3,780 11,921 8,464
Issuance of common stock, 732 1,368 807 1,561
Issuance of preferred stock -- -- -- 31
Cash dividends paid (1,308) (1,084) (2,615) (2,167)
ESOP indebtedness repayments -- 186 -- 186
-------- -------- -------- --------
Equity, end of period $144,656 $125,008 $144,656 $125,008
======== ======== ======== ========
</TABLE>
5
<PAGE> 6
5. OPERATING SEGMENTS
Sterling Bank (the "Bank") has an 80 percent ownership interest in Sterling
Capital Mortgage Company ("SCMC") and reports its financial position and results
of operations on a consolidated basis. The commercial banking and mortgage
banking segments are managed separately because each business requires different
marketing strategies and each offers different products and services.
The Company evaluates each segment's performance based on the profit or loss
from its operations before income taxes, excluding non-recurring items.
Intersegment financing arrangements are accounted for at current market rates as
if they were with third parties.
Summarized financial information by operating segment as of and for the
six-month periods ended June 30, follows (in thousands):
<TABLE>
<CAPTION>
2000 1999
------------------------------------ ------------------------------------
COMMERCIAL MORTGAGE COMMERCIAL MORTGAGE
BANKING BANKING TOTAL BANKING BANKING TOTAL
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 48,274 $ -- $ 48,274 $ 41,910 $ -- $ 41,910
Noninterest income 8,832 8,204 17,036 7,445 6,441 13,886
---------- ---------- ---------- ---------- ---------- ----------
Total revenue 57,106 8,204 65,310 49,355 6,441 55,796
Provision for credit losses 4,173 -- 4,173 3,786 -- 3,786
Noninterest expense 36,018 6,708 42,726 33,107 5,186 38,293
---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes 16,915 1,496 18,411 12,462 1,255 13,717
Provision for income taxes 5,097 619 5,716 3,653 566 4,219
---------- ---------- ---------- ---------- ---------- ----------
Net income $ 11,818 $ 877 $ 12,695 $ 8,809 $ 689 $ 9,498
========== ========== ========== ========== ========== ==========
Total assets $2,035,966 $ 5,924 $2,041,890 $1,544,454 $ 4,384 $1,548,838
========== ========== ========== ========== ========== ==========
</TABLE>
Intersegment interest was paid to the Company by SCMC in the amount of $3.0
million for the six-month period ended June 30, 2000. Total loans of $126
million in the mortgage warehouse provided to SCMC by the Bank were eliminated
in consolidation as of June 30, 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q and other documents filed by the Company with the
Securities and Exchange Commission contain certain forward-looking statements.
By their nature, forward-looking statements are subject to risks and
uncertainties. Forward-looking statements include information about possible or
assumed future financial results of the Company and are not guarantees of future
performance. Forward-looking statements can be identified by the fact that they
do not relate strictly to historical or current facts. They often include words
such as "believe," "expect," "anticipate," "intend," "plan," "estimate," or
words of similar meaning, or future or conditional verbs such as "will,"
"would," "should," "could," or "may." Forward looking-statements speak only as
of the date they are made. The Company does not undertake to update
forward-looking statements to reflect circumstances or events that occur after
the date the forward-looking statements are made.
Many possible events, circumstances or other factors could affect the future
financial performance of the Company. Accordingly, actual results may differ
materially from what is expressed or forecasted in, or implied by, any
forward-looking statement. There are a broad range of factors, events, and
developments that could affect the Company's future financial results. The
Company's earnings and overall financial performance are sensitive to business
and economic conditions. For example, deteriorating national or local economic
conditions could decrease the demand for loan, deposit and
6
<PAGE> 7
other financial services and/or increase loan delinquencies and defaults.
Changes in market rates and prices may adversely impact the value of securities,
loans, deposits and other financial instruments. Liquidity requirements could
also be negatively influenced by fluctuations in assets and liabilities or
off-balance sheet exposures. Fiscal and governmental policies of the United
States federal government also affect the Company's business and earnings
prospects. Changes in these policies are beyond the Company's control and are
difficult to predict. Competitive factors may also have a significant impact on
the Company's business and financial results. Legislative and regulatory
developments may also have a significant impact on the Company's future
operations. The foregoing discussion is merely a brief overview of the key
factors that may affect the Company's future business prospects and financial
results and is not a complete list or discussion of the full range of events,
developments, facts and circumstances that may influence the Company's
operations, earnings or financial condition.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SAME PERIOD IN 1999
NET INCOME - Net income for the six-month period ended June 30, 2000, was $12.7
million as compared to $10.4 million operating net income for the same period in
1999, an increase of approximately $2.3 million or 22.1%. Results for the
year-ago period are before a $900 thousand after-tax charge related to the
acquisition of B.O.A. Bancshares. This increase is attributable to: (1) solid
average loan and deposit growth of 16.3% and 7.8%, respectively; (2)
implementation of a leverage program whereby the Bank borrowed $250 million and
invested the proceeds in securities; and (3) maintenance of a strong tax
equivalent net interest margin of 5.61% for the period.
NET INTEREST INCOME - Net interest income for the six-month period ended June
30, 2000, was $48.3 million, as compared to $41.9 million for the same period in
1999, an increase of $6.4 million or 15.2%. The increase in net interest income
is attributable primarily to growth in loans as well as the implementation of a
leverage program during the third quarter of 1999. Average earning assets for
the six months ended June 30, 2000, were $1.8 billion, up $385 million, or 28.1%
from $1.4 billion for the same period in 1999. The leverage program accounted
for $250 million of the increase in average earning assets. The yield on average
earning assets for the six-month period ended June 30, 2000, was 8.70%, as
compared to 8.28% for the same period in 1999. Throughout the second half of
1999 and the first half of 2000, the Board of Governors of the Federal Reserve
System ("Federal Reserve") increased the discount rate six times. The cost of
interest bearing liabilities increased 117 basis points from 3.22% in 1999 to
4.39% in 2000. This increase in rates was due to a combination of the Federal
Reserve rate increases as well as new FHLB advances resulting from the leverage
program. The Company's 5.61% tax equivalent net interest margin for the first
six months of 2000 decreased from the 6.26% net interest margin recorded during
the same period in 1999. The decrease is a result of a leverage program
initiated by the Bank in August 1999. The average margin on the leverage program
was 134 basis points for the first half of 2000. Excluding the leverage program,
the net interest margin would have been 6.33% for the first half of 2000.
7
<PAGE> 8
The following schedule gives a comparative analysis of the Company's daily
average interest earning assets and interest bearing liabilities for the
six-month periods ended June 30, 2000 and 1999, respectively:
CONSOLIDATED YIELD ANALYSIS
SIX MONTHS ENDED JUNE 30,
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
2000
------------------------------------------
AVERAGE
BALANCE INTEREST YIELD
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST EARNING ASSETS:
Interest bearing deposits in financial institutions $ 516 $ 17 6.63%
Federal funds sold 10,152 299 5.92%
Securites purchased under agreements to resell 36,871 1,390 7.58%
Securities (taxable) 432,882 14,781 6.87%
Securities (tax-exempt) 75,048 1,653 4.43%
Loans (taxable) 1,198,998 57,765 9.69%
Loans (tax-exempt) 458 19 8.34%
----------- ----------- -----------
Total Interest Earning Assets 1,754,925 75,924 8.70%
NONINTEREST EARNING ASSETS:
Cash and due from banks 65,501
Premises and equipment, net 42,784
Other assets 89,950
Allowance for credit losses (14,018)
-----------
Total Noninterest Earning Assets 184,217
-----------
TOTAL ASSETS $ 1,939,142
===========
INTEREST BEARING LIABILITIES:
Demand and savings deposits $ 588,550 $ 8,779 3.00%
Certificates and other time deposits 366,070 9,443 5.19%
Other borrowings 310,972 9,428 6.10%
----------- ----------- -----------
Total Interest Bearing Liabilities 1,265,592 27,650 4.39%
NONINTEREST BEARING LIABILITIES:
Demand deposits 491,952
Other liabilities 12,507
Trust preferred securities 28,750
Shareholders' equity 140,341
-----------
673,550
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,939,142
===========
NET INTEREST INCOME & MARGIN $ 48,274 5.53%
=========== ===========
NET INTEREST INCOME & MARGIN (TAX EQUIVALENT) $ 48,960 5.61%
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
1999
----------------------------------------
AVERAGE
BALANCE INTEREST YIELD
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST EARNING ASSETS:
Interest bearing deposits in financial institutions $ 2,950 $ 72 4.92%
Federal funds sold 42,020 1,094 5.25%
Securites purchased under agreements to resell 33,889 1,045 6.22%
Securities (taxable) 196,806 5,772 5.91%
Securities (tax-exempt) 62,751 1,414 4.54%
Loans (taxable) 1,031,061 46,812 9.16%
Loans (tax-exempt) 621 22 7.14%
----------- ----------- -----------
Total Interest Earning Assets 1,370,098 56,231 8.28%
NONINTEREST EARNING ASSETS:
Cash and due from banks 72,469
Premises and equipment, net 39,954
Other assets 48,744
Allowance for credit losses (11,582)
-----------
Total Noninterest Earning Assets 149,585
-----------
TOTAL ASSETS $ 1,519,683
===========
INTEREST BEARING LIABILITIES:
Demand and savings deposits $ 540,042 $ 5,953 2.22%
Certificates and other time deposits 342,686 8,056 4.74%
Other borrowings 14,370 312 4.38%
----------- ----------- -----------
Total Interest Bearing Liabilities 897,098 14,321 3.22%
NONINTEREST BEARING LIABILITIES:
Demand deposits 460,756
Other liabilities 11,112
Trust preferred securities 28,750
Shareholders' equity 121,967
-----------
622,585
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,519,683
===========
NET INTEREST INCOME & MARGIN $ 41,910 6.17%
=========== ===========
NET INTEREST INCOME & MARGIN (TAX EQUIVALENT) $ 42,565 6.26%
=========== ===========
</TABLE>
PROVISION FOR CREDIT LOSSES - The provision for credit losses for the first six
months of 2000 was $4.2 million, as compared to $3.8 million for the same period
in 1999, an increase of $387 thousand or 10.2%. The increase in the provision
for credit losses is to provide for loan growth. After net charge-offs of $3.1
million and provisions for the first six months of 2000, the Company's allowance
for credit losses increased by $1.0 million from $13.2 million on December 31,
1999, to $14.2 million on June 30, 2000. Also, $335 thousand of additional
provision in 1999 was recorded in order for B.O.A. Bancshares to align its
allowance methodology with that of the Company. Please refer to FINANCIAL
CONDITION -- ALLOWANCES FOR CREDIT LOSSES for an additional discussion of
management's approach and methodology for estimating the allowance for credit
losses.
NONINTEREST INCOME - Total noninterest income for the six-month period ended
June 30, 2000 was $17.0 million, as compared to $13.9 million for the same
period in 1999, an increase of $3.2 million or 22.7%.
8
<PAGE> 9
Noninterest income for the six months ended June 30, 2000 and 1999,
respectively, is summarized as follows (in thousands):
<TABLE>
<CAPTION>
2000 1999
------------------------------------ ------------------------------------
COMMERCIAL MORTGAGE COMMERCIAL MORTGAGE
BANKING BANKING COMBINED BANKING BANKING COMBINED
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Customer service fees $ 5,057 $ -- $ 5,057 $ 4,523 $ -- $ 4,523
Bank-owned life insurance income 898 -- 898 -- -- --
Gain on sale of
University of Houston office -- -- -- 450 -- 450
Gain on the sale of
credit card loan portfolio 237 -- 237 -- -- --
Gain on sale of mortgage loans -- 4,761 4,761 -- 5,163 5,163
Brokerage commissions 426 -- 426 177 -- 177
Other 2,214 3,443 5,657 2,295 1,278 3,573
---------- ---------- ---------- ---------- ---------- ----------
$ 8,832 $ 8,204 $ 17,036 $ 7,445 $ 6,441 $ 13,886
========== ========== ========== ========== ========== ==========
</TABLE>
COMMERCIAL BANKING SEGMENT - Noninterest income from commercial banking for the
six-month period ended June 30, 2000 was $8.8 million, as compared to $7.4
million for the same period in 1999, an increase of $1.4 million or 18.6%.
During the latter half of 1999, the Bank purchased bank-owned life insurance
("BOLI") policies. Interest credits for these BOLI policies totaled $898
thousand for the first half of 2000, with no corresponding amounts in 1999.
Customer service fees increased $534 thousand or 11.8% primarily as a result of
an overall increase in average demand and savings accounts of 8.0%. Also, during
the last half of 1999, the Bank increased its focus on monitoring and collecting
overdraft and insufficient fund charges. Brokerage commissions increased 141%,
accounting for a total increase of $249 thousand. Finally, during the first
quarter of 2000, the Bank sold its credit card portfolio to a correspondent bank
for a net gain of $237 thousand. During the first quarter of 1999, the Company
sold its banking office at the University of Houston for a gain of $450
thousand.
MORTGAGE BANKING SEGMENT - Noninterest income from the mortgage banking segment
increased 27.4% from $6.4 million for the first half of 1999 to $8.2 million for
the same period in 2000. The income from the mortgage banking segment primarily
consists of fees and gains on sale of mortgage loans. These gains are from
recurring loan production, as the average length of time a mortgage loan is held
in portfolio at SCMC is approximately twenty-five to thirty days. The increase
in noninterest income is primarily due to an increase in loan funding volume as
well as SCMC's acquisition of Alliance Capital Mortgage, Portland, Orgeon in
April 2000 and Select Mortgage Company, Seattle, Washington in November 1999.
NONINTEREST EXPENSE - Noninterest expense increased $4.4 million, or 11.6%, to
$42.7 million for the first six months of 2000 as compared to $38.3 million for
the same period in 1999.
9
<PAGE> 10
Noninterest expense for the six months ended June 30, 2000 and 1999,
respectively, is summarized as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000 SIX MONTHS ENDED JUNE 30, 1999
------------------------------------ -------------------------------------
COMMERCIAL MORTGAGE COMMERCIAL MORTGAGE
BANKING BANKING COMBINED BANKING BANKING COMBINED
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 20,861 $ 3,377 $ 24,238 $ 17,151 $ 3,145 $ 20,296
Occupancy expense 4,654 1,548 6,202 4,641 1,067 5,708
Net losses (gains) and carrying costs
of real estate acquired by foreclosure 206 -- 206 (73) -- (73)
FDIC assessment 129 -- 129 264 -- 264
Technology 1,716 64 1,780 1,872 9 1,881
Postage and delivery charges 676 140 816 723 109 832
Supplies 553 208 761 651 171 822
Professional fees 837 67 904 1,029 69 1,098
Minority interest expense 1,334 219 1,553 1,334 166 1,500
Other 5,052 1,085 6,137 5,515 450 5,965
---------- ---------- ---------- ---------- ---------- ----------
$ 36,018 $ 6,708 $ 42,726 $ 33,107 $ 5,186 $ 38,293
========== ========== ========== ========== ========== ==========
</TABLE>
COMMERCIAL BANKING SEGMENT - Noninterest expenses related to commercial banking
for the six-month period ended June 30, 2000 were $36.0 million, as compared to
$33.1 million for the same period in 1999, an increase of $2.9 million or 8.8%.
During the second quarter of 1999, the Company recorded noninterest expenses of
$1 million related to the acquisition of B.O.A. Bancshares. Excluding the
special charges related to the acquisition, noninterest expenses increased $3.9
million or 12.2%.
Salaries and employee benefits from commercial banking for the six-month period
ended June 30, 2000, were $20.9 million, as compared to $17.2 million for the
same period in 1999, an increase of $3.7 million or 21.6%. The largest part of
the increase is attributable to the hiring of new employees to expand the Bank's
lending force and its credit analyst pool, personnel for the new Bellaire bank
office, and two new senior credit officers. Additionally, profit sharing and
incentive compensation expense increased as a result of the Company's increased
earnings.
Technology expenses from commercial banking for the six-month period ended June
30, 2000 were $1.7 million, as compared to $1.9 million for the same period in
1999, a decrease of $156 thousand or 8.3%. The decrease in technology expenses
is primarily due to the conversion expenses recorded in June 1999 for the
acquisition of B.O.A. Bancshares, which was partially offset by depreciation
expense for an item processing sorter and a mainframe computer system that were
purchased in the first quarter of 2000. The new equipment was added to improve
productivity and to enhance the Bank's transactional processing capabilities.
Other noninterest expense from commercial banking for the six-month period ended
June 30, 2000, was $5.1 million, as compared to $5.5 million for the same period
in 1999, a decrease of $463 thousand or 8.4%. The decrease is primarily due to a
reduction in marketing expenses of $362 thousand.
MORTGAGE BANKING SEGMENT - Noninterest expenses related to mortgage banking for
the six-month period ended June 30, 2000 were $6.7 million, as compared to $5.2
million for the same period in 1999, an increase of $1.5 million or 29.3%. The
increase in noninterest expense is primarily due the increase in loan funding
volume as well as SCMC's acquisition of Alliance Capital Mortgage and Select
Mortgage Company.
PROVISION FOR INCOME TAXES -The provision for income taxes as a percent of net
income before taxes increased from 30.8% for the first six months of 1999 to
31.0% for the same period in 2000.
10
<PAGE> 11
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO SAME PERIOD IN 1999
NET INCOME - Net income for the three-month period ended June 30, 2000, was $6.7
million as compared to $5.5 million operating net income for the same period in
1999, an increase of approximately of $1.2 million or 20.9%. Results for the
second quarter of 1999 exclude a $900 thousand after-tax charge related to the
B.O.A. Bancshares acquisition. This increase is attributable to: (1) solid
average loan and deposit growth of 15.6% and 7.9%, respectively; (2)
implementation of a leverage program whereby the Bank borrowed $250 million and
invested the proceeds in securities; and (3) maintenance of a strong tax
equivalent net interest margin of 5.70% for the period.
NET INTEREST INCOME - Net interest income for the three-month period ended June
30, 2000, was $24.5 million, as compared to $21.5 million for the same period in
1999, an increase of $3.0 million or 14.1%. The increase in net interest income
is attributable primarily to growth in loans as well as the implementation of a
leverage program during the third quarter of 1999. Average earning assets for
the three months ended June 30, 2000, were $1.8 billion, up $383 million, or
27.8% from $1.4 billion for the same period in 1999. The leverage program
accounted for $250 million of this increase. The yield on average earning assets
for the three-month period ended June 30, 2000, was 8.85%, as compared to 8.31%
for the same period in 1999. Throughout the second half of 1999 and the first
half of 2000, the Federal Reserve increased the discount rate six times. The
cost of interest bearing liabilities increased 136 basis points from 3.17% in
1999 to 4.53% in 2000. This increase in rates was due to a combination of the
Federal Reserve rate increases as well new FHLB advances resulting from the
leverage program. The Company's 5.70% tax equivalent net interest margin for the
three month period ended June 30, 2000 decreased from the 6.34% net interest
margin recorded during the same period in 1999. The decrease is a result of a
leverage program initiated by the Bank in August 1999. The average margin on the
leverage program was 125 basis points for the quarter. Excluding the leverage
program, the net interest margin would have been 6.42% for the first half of
2000.
11
<PAGE> 12
The following schedule gives a comparative analysis of the Company's daily
average interest earning assets and interest bearing liabilities for the
three-month periods ended June 30, 2000 and 1999, respectively:
CONSOLIDATED YIELD ANALYSIS
THREE MONTHS ENDED JUNE 30,
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
2000
------------------------------------------
AVERAGE
BALANCE INTEREST YIELD
----------- ----------- -----------
<S> <C> <C> <C>
Interest Earning Assets:
Interest bearing deposits in financial institutions $ 569 $ 9 6.36%
Federal funds sold 9,903 152 6.17%
Securites purchased under agreements to resell 37,071 725 7.87%
Securities (taxable) 424,634 7,438 7.05%
Securities (tax-exempt) 74,061 824 4.47%
Loans (taxable) 1,214,890 29,593 9.80%
Loans (tax-exempt) 418 9 8.66%
----------- ----------- -----------
Total Interest Earning Assets 1,761,546 38,750 8.85%
NONINTEREST EARNING ASSETS:
Cash and due from banks 64,226
Premises and equipment, net 43,626
Other assets 95,752
Allowance for credit losses (14,293)
-----------
Total Noninterest Earning Assets 189,311
-----------
TOTAL ASSETS $ 1,950,857
===========
INTEREST BEARING LIABILITIES:
Demand and savings deposits $ 585,338 $ 4,486 3.08%
Certificates and other time deposits 368,178 4,875 5.33%
Other borrowings 311,286 4,892 6.32%
----------- ----------- -----------
Total Interest Bearing Liabilities 1,264,802 14,253 4.53%
NONINTEREST BEARING LIABILITIES:
Demand deposits 503,682
Other liabilities 10,137
Trust preferred securities 28,750
Shareholders' equity 143,486
-----------
686,055
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,950,857
===========
NET INTEREST INCOME & MARGIN $ 24,497 5.59%
=========== ===========
NET INTEREST INCOME & MARGIN (TAX EQUIVALENT) $ 24,946 5.70%
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
1999
----------------------------------------
AVERAGE
BALANCE INTEREST YIELD
----------- ----------- -----------
<S> <C> <C> <C>
Interest Earning Assets:
Interest bearing deposits in financial institutions $ 1,079 $ 16 5.95%
Federal funds sold 25,711 409 6.38%
Securites purchased under agreements to resell 33,510 528 6.32%
Securities (taxable) 201,478 2,852 5.68%
Securities (tax-exempt) 65,056 741 4.57%
Loans (taxable) 1,051,132 23,989 9.15%
Loans (tax-exempt) 595 11 7.42%
----------- ----------- -----------
Total Interest Earning Assets 1,378,561 28,546 8.31%
NONINTEREST EARNING ASSETS:
Cash and due from banks 70,773
Premises and equipment, net 39,800
Other assets 50,411
Allowance for credit losses (11,914)
-----------
Total Noninterest Earning Assets 149,070
-----------
TOTAL ASSETS $ 1,527,631
===========
INTEREST BEARING LIABILITIES:
Demand and savings deposits 541,831 $ 3,006 2.23%
Certificates and other time deposits 339,375 3,916 4.63%
Other borrowings 14,485 163 4.51%
----------- ----------- -----------
Total Interest Bearing Liabilities 895,691 7,085 3.17%
NONINTEREST BEARING LIABILITIES:
Demand deposits 468,850
Other liabilities 10,187
Trust preferred securities 28,750
Shareholders' equity 124,153
-----------
631,940
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,527,631
===========
NET INTEREST INCOME & MARGIN $ 21,461 6.24%
=========== ===========
NET INTEREST INCOME & MARGIN (TAX EQUIVALENT) $ 21,806 6.34%
=========== ===========
</TABLE>
PROVISION FOR CREDIT LOSSES - The provision for credit losses for the second
quarter of 2000 was $2.1 million, as compared to $2.1 million for the same
period in 1999, an increase of $61 thousand or 2.9%. In June 1999, $335 thousand
of additional provision was recorded in order for B.O.A. Bancshares to align
their allowance methodology with that of the Company. Excluding the special
adjustment from 1999, the provision for credit losses increased 24.0%.
NONINTEREST INCOME - Total noninterest income for the three-month period ended
June 30, 2000, was $9.9 million, as compared to $7.6 million for the same period
in 1999, an increase of $2.3 million or 29.9%.
12
<PAGE> 13
Noninterest income for the three months ended June 30, 2000 and 1999,
respectively, is summarized as follows (in thousands):
<TABLE>
<CAPTION>
2000 1999
------------------------------------ ------------------------------------
COMMERCIAL MORTGAGE COMMERCIAL MORTGAGE
BANKING BANKING COMBINED BANKING BANKING COMBINED
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Customer service fees $ 2,524 $ -- $ 2,524 $ 2,258 $ -- $ 2,258
Bank-owned life insurance income 481 -- 481 -- -- --
Gain on sale of mortgage loans -- 2,972 2,972 -- 3,266 3,266
Brokerage commissions 252 -- 252 104 -- 104
Other 1,146 2,497 3,643 1,324 645 1,969
---------- ---------- ---------- ---------- ---------- ----------
$ 4,403 $ 5,469 $ 9,872 $ 3,686 $ 3,911 $ 7,597
========== ========== ========== ========== ========== ==========
</TABLE>
COMMERCIAL BANKING SEGMENT - Noninterest income from commercial banking
increased $717 thousand or 19.5% in the second quarter of 2000 compared to 1999.
During the latter half of 1999, the Bank purchased BOLI policies. Interest
credits for these BOLI policies totaled $481 thousand for the second quarter of
2000, with no corresponding amounts in 1999. Also, customer service fees
increased $266 thousand or 11.8% primarily as a result of an overall increase in
average demand and savings accounts of 7.8%. Also, during the last half of 1999,
the Bank increased its focus on monitoring and collecting overdraft and
insufficient fund charges. Brokerage commissions increased 142%, accounting for
a total increase of $148 thousand.
MORTGAGE BANKING SEGMENT - Noninterest income from mortgage banking increased
$1.6 million, or 39.8%, in the second quarter of 2000 compared to the same
period in 1999. The increase in noninterest income is primarily due the increase
in loan funding volume as well as SCMC's acquisition of Alliance Capital
Mortgage and Select Mortgage Company.
NONINTEREST EXPENSE - Noninterest expense increased $2.0 million, or 9.6%, to
$22.4 million for the second quarter of 2000 as compared to $20.5 million for
the same period in 1999.
Noninterest expense for the three months ended June 30, 2000 and 1999, is
summarized as follow (in thousands):
<TABLE>
<CAPTION>
2000 1999
------------------------------------ -------------------------------------
COMMERCIAL MORTGAGE COMMERCIAL MORTGAGE
BANKING BANKING COMBINED BANKING BANKING COMBINED
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 10,494 $ 2,148 $ 12,642 $ 8,744 $ 1,831 $ 10,575
Occupancy expense 2,371 891 3,262 2,468 519 2,987
Net losses (gains) and carrying costs
of real estate acquired by foreclosure 199 -- 199 (30) -- (30)
FDIC assessment 70 -- 70 136 -- 136
Technology 859 33 892 1,100 9 1,109
Postage and delivery charges 344 88 432 371 59 430
Supplies 281 117 398 317 71 388
Professional fees 478 31 509 714 38 752
Minority interest expense 667 195 862 667 140 807
Other 2,532 633 3,165 3,121 184 3,305
---------- ---------- ---------- ---------- ---------- ----------
$ 18,295 $ 4,136 $ 22,431 $ 17,608 $ 2,851 $ 20,459
========== ========== ========== ========== ========== ==========
</TABLE>
COMMERCIAL BANKING SEGMENT - Noninterest expenses related to commercial banking
for the three-month period ended June 30, 2000 were $18.3 million, as compared
to $17.6 million for the same period in 1999, an increase of $687 million or
3.9%. During the second quarter of 1999, the Company recorded noninterest
expenses of $1 million related to the acquisition of B.O.A. Bancshares.
Excluding the special charges related to the acquisition, noninterest expenses
increased $1.7 million or 10.2%.
13
<PAGE> 14
Salaries and employee benefits from commercial banking for the three-month
period ended June 30, 2000 were $10.5 million, as compared to $8.7 million for
the same period in 1999, an increase of $1.8 million or 20.0%. The largest part
of the increase is attributable to the hiring of new employees to expand the
Bank's lending force and its credit analyst pool, personnel for the new Bellaire
bank office, and two new senior credit officers. Additionally, profit sharing
and incentive compensation expense increased as a result of the Company's
increased earnings.
Technology expenses from commercial banking for the three-month period ended
June 30, 2000 were $859 thousand, as compared to $1.1 million for the same
period in 1999, a decrease of $241 thousand or 21.9%. The decrease in technology
expenses is primarily due to the conversion expenses recorded in June 1999 for
the acquisition of B.O.A. Bancshares.
Professional expenses from commercial banking for the three-month period ended
June 30, 2000 were $478 thousand, as compared to $714 million for the same
period in 1999, a decrease of $236 thousand or 33.1%. During the second quarter
of 1999, consultant expenses related to the Year 2000 project and accounting
fees related to the B.O.A. Bancshares acquisition were incurred.
Other noninterest expense from commercial banking for the six-month period ended
June 30, 2000, was $2.5 million, as compared to $3.1 million for the same period
in 1999, a decrease of $589 thousand or 18.9%. The decrease is primarily due to
the $300 thousand reduction in marketing expenses.
MORTGAGE BANKING SEGMENT - Noninterest expenses related to mortgage banking for
the three-month period ended June 30, 2000 were $4.1 million, as compared to
$2.9 million for the same period in 1999, an increase of $1.3 million or 45.1%.
The increase in noninterest expense is primarily due the increase in loan
funding volume as well as SCMC's acquisition of Alliance Capital Mortgage and
Select Mortgage Company.
PROVISION FOR INCOME TAXES - The provision for income taxes as a percent of net
income before taxes increased from 29.0% for the second quarter of 1999 to 31.6%
for the same period in 2000.
FINANCIAL CONDITION
TOTAL ASSETS - The total consolidated assets of the Company increased $82
million compared to December 31, 1999 to $2.0 billion.
CASH AND CASH EQUIVALENTS - The Company had cash and cash equivalents of $121.3
million at June 30, 2000. Comparatively, the Company had $91.1 million in cash
and cash equivalents on December 31, 1999, an increase of $30.2 million or
33.1%.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL - As of June 30, 2000,
securities purchased under agreements to resell totaled $57.8 million as
compared to $40.1 million as of December 31, 1999. The securities purchased are
SBA or USDA guaranteed loan certificates that are purchased by the Bank pursuant
to a third party warehouse facility. These repurchase agreements generally have
a term of nine months or less. The Company increased the approved warehouse
facility under which these securities were purchased from $45 million to $60
million.
SECURITIES - The Company's securities portfolio as of June 30, 2000, totaled
$496.6 million, as compared to $525.2 million on December 31, 1999, a decrease
of $28.6 million or 5.5%. The reduction is the result of paydowns and maturities
of securities.
LOANS HELD FOR SALE - Total loans held for sale increased from $70.4 million at
December 31, 1999, to $125.8 million at June 30, 2000, an increase of $55.4
million, or 78.7%. The increase is primarily
14
<PAGE> 15
due to the increase in loans funded by the Bank through an intercompany mortgage
warehouse with SCMC.
LOANS HELD FOR INVESTMENT - As of June 30, 2000, loans held for investment were
$1.13 billion. When compared to loans held for investment of $1.12 million on
December 31, 1999, the loan balance at June 30, 2000 represents a year-to-date
increase of $9.1 million in internal loan production, net of loan reductions.
The Company has focused on asset quality during the first half of 2000 and has
been actively managing its loan portfolio to eliminate less desirable credits.
However, the loan pipeline has actually increased over the last six months and
future prospects for loan growth are solid. At June 30, 2000, loans held for
investment as a percentage of assets and deposits were 55.5% and 75.3%, as
compared to 57.4% and 79.4% at December 31, 1999, respectively.
The following table summarizes the Company's held for investment loan portfolio
by type of loan as of June 30, 2000 (in thousands):
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
-----------
<S> <C> <C>
Commercial, financial and industrial $ 408,687 32.45%
Real estate - commercial 355,925 28.26%
Real estate - residential mortgage 133,130 10.57%
Real estate - construction 114,932 9.13%
Foreign commercial and industrial 4,768 0.38%
Consumer and other 116,579 9.26%
Less unearned discount (336) (0.03)%
----------- -----------
Total loans held for investment 1,133,685 90.01%
Loans held for sale 125,802 9.99%
----------- -----------
Total loans $ 1,259,487 100.00%
=========== ===========
</TABLE>
ALLOWANCE FOR CREDIT LOSSES - The following is a summary of the changes in the
allowance for credit losses for the six months ended June 30, 2000 and June
30,1999, respectively, (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
2000 1999
---------- ----------
<S> <C> <C>
Allowance for credit losses, December 31, $ 13,187 $ 10,829
Charge-offs (3,589) (2,182)
Recoveries 462 360
Provision for credit losses 4,173 3,786
---------- ----------
Allowance for credit losses, June 30, $ 14,233 $ 12,793
========== ==========
Net charge-offs as a percentage of average
loans (annualized) 0.52% 0.36%
========== ==========
Provision for credit losses as a percentage of
average loans (annualized) 0.70% 0.74%
========== ==========
</TABLE>
15
<PAGE> 16
The following is a summary of the relationship of the allowance to loans held
for investment at June 30, 2000, and December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
Loans held for investment at period-end $ 1,133,685 $ 1,124,577
Allowance for credit losses $ 14,233 $ 13,187
Allowance as a percent of period-end loans held
for investment 1.26% 1.17%
</TABLE>
In order to determine the adequacy of the allowance for credit losses,
management considers the risk classification and delinquency status of loans and
other factors. Management also establishes specific allowances for credits which
management believes require allowances greater than those allocated according to
their risk classification. An unallocated allowance is also established based on
the Company's historical charge-off experience over the last ten years. The
Company will continue to monitor the adequacy of the allowance for credit losses
to determine the appropriate accrual for the Company's provision for credit
losses.
RISK ELEMENTS - 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.
Fifteen properties make up the $1.0 million of other real estate owned ("ORE")
at June 30, 2000. All properties are carried at the current fair market value,
less estimated selling and holding costs.
The Company defines potential problem loans as those loans for which information
known by management creates serious doubt regarding a borrower's ability to
comply with the present payment terms. Management identifies these loans through
monitoring efforts by loan officers as well as its continuous loan review
process and defines potential problem loans as those loans classified as
"substandard", "doubtful", or "loss". As of June 30, 2000, the Company has no
material foreign loans outstanding or loan concentrations.
16
<PAGE> 17
The following table summarizes total nonperforming assets and potential problem
loans at December 31, 1999 and at June 30, 2000:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Nonaccrual loans $ 7,312 $ 5,501
Restructured loans -- 218
Accruing loans past due 90 days or more 218 351
------------ ------------
Total nonperforming loans 7,530 6,070
Other real estate ("ORE") and other foreclosed assets 1,217 1,566
------------ ------------
Total nonperforming assets $ 8,747 $ 7,636
============ ============
Total nonperforming assets as a percent of loans,
ORE and other foreclosed assets 0.69% 0.64%
Allowance for loan losses as a percentage of
nonperforming assets 162.72% 172.70%
Potential problem loans, other than those shown
above as nonperforming $ 32,563 $ 24,483
</TABLE>
PREMISES AND EQUIPMENT - The Company's premises and equipment, net of
depreciation, as of June 30, 2000, were $43.6 million as compared to $41.0
million as of December 31, 1999, an increase of $2.6 million or 6.3%. The
increase is primarily due to the purchase of another item processing sorter and
mainframe computer system, the build-out for the new Bellaire bank office which
opened in April 2000, and the purchase of land in Houston for a proposed new
location.
DEPOSITS - Total deposits as of June 30, 2000, were $1.5 billion, as compared to
$1.4 billion on December 31, 1999, an increase of $90.7 million, or 6.4%.
Noninterest bearing demand deposits at June 30, 2000, were $551.3 million, as
compared to $481.8 million at December 31, 1999, an increase of $69.6 million or
14.4%. The percentage of noninterest bearing deposits to total deposits as of
June 30, 2000 continued to be strong at 36.6%.
CAPITAL RESOURCES AND LIQUIDITY
SHAREHOLDERS' EQUITY - The Company's risk-based capital ratios remain above the
levels designated by regulatory agencies as "well capitalized" on June 30, 2000,
with Tier-1 Capital, Total Risk-Based Capital, and Leverage Capital Ratios of
11.34%, 12.29%, and 8.92%, respectively.
LIQUIDITY - Effective management of balance sheet liquidity is necessary to fund
growth in earning assets and to pay liability maturities, depository withdrawals
and shareholders' dividends. The Company has instituted asset/liability
management policies, including a computer simulation model, to improve liquidity
controls and to enhance its management of interest rate risk and financial
condition. The Company has numerous sources of liquidity including a significant
portfolio of short-term assets, marketable investment securities (excluding
those presently classified as "held-to-maturity"), increases in customers'
deposits, and access to borrowing arrangements. Available borrowing arrangements
maintained by the Company include federal funds lines with other commercial
banks and an advancement arrangement with the Federal Home Loan Bank ("FHLB").
17
<PAGE> 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes since December 31, 1999. See Form 10K, Item
7 "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- INTEREST RATE SENSITIVITY AND LIQUIDITY".
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries is presently involved in any
material legal proceedings.
ITEM 2. CHANGES IN SECURITIES
There were no changes in securities during the six months ended June 30, 2000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
STOCKHOLDER PROPOSALS FOR 2001 ANNUAL MEETING OF STOCKHOLDERS
Any proposal of stockholders to be included in the Company's proxy statement
relating to the Company's 2001 Annual Meeting of Stockholders pursuant to Rule
14a-8 under the Exchange Act must be received by the Company at its principal
executive offices no later than December 24, 2000; such proposal must also
comply with the Company's Bylaws and Rule 14a-8 if the proposal is to be
considered for inclusion in the Company's proxy statement for such meeting. The
Company must receive notice of any stockholder proposal to be brought before the
meeting outside the process of Rule 14a-8 at the Company's principal executive
offices not less than 45 days nor more than 180 days prior to the meeting;
provided, if the Company gives notice or prior public disclosure of the date of
the annual meeting less than 50 days before the meeting, such stockholders
notice must be received not later than the close of business on the seventh day
following the date on which the Company's notice of the date of the annual
meeting was mailed or public disclosure made. The form of such stockholder
notice must also comply with the Company's Bylaws.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
EXHIBIT 11. COMPUTATION OF EARNINGS PER SHARE
Included as Note 2 to the Interim Consolidated Financial Statements on page 5 of
this Form 10-Q.
EXHIBIT 27. FINANCIAL DATA SCHEDULE
The required Financial Data Schedule has been included as Exhibit 27 of the Form
10-Q filed electronically with the Securities and Exchange Commission.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
STERLING BANCSHARES, INC.
-------------------------
(Registrant)
BY: /s/ George Martinez
--------------------------------
GEORGE MARTINEZ
CHAIRMAN AND CHIEF FINANCIAL OFFICER
19
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
11 COMPUTATION OF EARNINGS PER SHARE
Included as Note 2 to the Interim Consolidated
Financial Statements on page 5 of this Form 10-Q.
27 FINANCIAL DATA SCHEDULE
The required Financial Data Schedule has been
included as Exhibit 27 of the Form 10-Q filed
electronically with the Securities and Exchange
Commission.
</TABLE>
