<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-----------
FORM 10-Q
------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 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 March 31, 2000:
CLASS OF STOCK SHARES OUTSTANDING
- ----------------------------- ------------------
Common Stock, Par Value $1.00 26,084,853
================================================================================
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM I. INTERIM FINANCIAL STATEMENTS
STERLING BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 85,514 $ 91,139
Interest-bearing deposits in financial institutions 441 135
Securities purchased with an agreement to resell 42,644 40,834
Available-for-sale securities, at fair value 347,710 359,127
Held-to-maturity securities, at amortized cost 159,915 166,112
Loans held for sale 59,333 70,404
Loans held for investment 1,129,231 1,124,577
Allowance for credit losses (13,910) (13,187)
------------- -------------
Loans, net 1,115,321 1,111,390
Accrued interest receivable 11,240 11,330
Real estate acquired by foreclosure 1,355 1,323
Premises and equipment, net 42,777 41,003
Goodwill, net 5,920 6,030
Other assets 78,820 60,653
------------- -------------
TOTAL ASSETS $ 1,950,990 $ 1,959,480
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits:
Noninterest-bearing $ 501,045 $ 481,757
Interest-bearing 624,536 581,687
Certificates of deposit and other time deposits 367,091 352,107
------------- -------------
Total deposits 1,492,672 1,415,551
Securities sold under agreements to repurchase and other borrowed funds 280,783 362,332
Accrued interest payable and other liabilities 8,978 17,003
------------- -------------
Total liabilities 1,782,433 1,794,886
COMPANY-OBLIGATED MANDITORILY REDEEMABLE
TRUST PREFERRED SECURITIES OF SUBSIDIARY TRUST 28,750 28,750
MINORITY INTEREST IN STERLING CAPITAL MORTGAGE COMPANY 1,325 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 26,085 26,030
Capital surplus 28,705 28,658
Retained earnings 85,624 80,927
Accumulated other comprehensive income--net unrealized loss on
available-for-sale securities, net of tax (1,993) (1,161)
------------- -------------
Total shareholders' equity 138,482 134,543
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,950,990 $ 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
ENDED MARCH 31,
2000 1999
------------- -------------
(Unaudited)
<S> <C> <C>
Interest income:
Loans, including fees $ 28,182 $ 22,834
Securities:
Taxable 7,343 2,920
Tax-exempt 829 673
Federal funds sold and securities purchased under agreements
to resell 813 1,202
Deposits in financial institutions 7 56
------------- -------------
Total interest income 37,174 27,685
Interest expense:
Demand and savings deposits 4,293 2,947
Certificates and other time deposits 4,568 4,140
Other borrowed funds 4,536 116
Note payable and ESOP indebtedness -- 33
------------- -------------
Total interest expense 13,397 7,236
------------- -------------
NET INTEREST INCOME 23,777 20,449
Provision for credit losses 2,024 1,698
------------- -------------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 21,753 18,751
Noninterest income:
Customer service fees 2,533 2,265
Gain on sale of mortgage loans 2,555 1,897
Other 2,876 2,127
------------- -------------
Total noninterest income 7,964 6,289
Noninterest expense:
Salaries and employee benefits 12,405 9,721
Occupancy expense 2,940 2,721
Net gain and carrying costs of real estate acquired by
foreclosure 7 (43)
FDIC assessment 59 128
Technology 888 772
Postage and delivery charges 384 402
Supplies 363 434
Professional fees 395 346
Minority interest expense:
Company-obligated mandatorily redeemable trust preferred
securities of subsidiary trust 667 667
Sterling Capital Mortgage Company 24 26
Other 2,963 2,660
------------- -------------
Total noninterest expense 21,095 17,834
NET INCOME BEFORE INCOME TAXES 8,622 7,206
Provision for income taxes 2,619 2,330
------------- -------------
NET INCOME $ 6,003 $ 4,876
============= =============
EARNINGS PER SHARE:
Basic $ 0.23 $ 0.19
============= =============
Diluted $ 0.23 $ 0.19
============= =============
</TABLE>
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 4
STERLING BANCSHARES, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,003 $ 4,876
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Amortization and accretion of premiums and discounts
on securities, net 35 123
Provision for credit losses 2,024 1,698
Write-downs, less gains on sale, of real estate acquired by
foreclosure and repossessed assets (9) (137)
Depreciation and amortization 1,713 1,607
Net decrease in loans held for sale 11,071 12,145
Gain on the sale of University of Houston office location -- (450)
Net (increase) decrease in accrued interest receivable and other assets (17,630) 1,320
Net decrease in accrued interest payable and other liabilities (8,001) (5)
------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (4,794) 21,177
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in securities purchased under agreements to resell (1,810) (7,799)
Proceeds from maturity and paydowns of held-to-maturity securities 6,111 5,698
Purchases of held-to-maturity securities -- (12,151)
Proceeds from maturity and paydowns of available-for-sale securities 10,188 12,469
Purchases of available-for-sale securities -- (13,673)
Net increase in loans held for investment (6,150) (37,218)
Proceeds from sale of real estate acquired by foreclosure 172 853
Net increase in interest-bearing deposits in financial institutions (306) --
Proceeds from sale of University of Houston office location -- 5,545
Proceeds from sale of premises and equipment 15 140
Purchase of premises and equipment (3,391) (3,554)
------------- -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 4,829 (49,690)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts 77,121 7,869
Net decrease in repurchase agreements/funds purchased (81,549) (4,702)
Proceeds from issuance of common stock and preferred stock 74 224
Dividends paid (1,306) (1,083)
------------- -------------
NET CASH USED IN FINANCING ACTIVITIES (5,660) 2,308
NET DECREASE IN CASH AND CASH EQUIVALENTS (5,625) (26,205)
CASH AND CASH EQUIVALENTS:
Beginning of period 91,139 139,690
------------- -------------
End of period $ 85,514 $ 113,485
============= =============
SUPPLEMENTAL INFORMATION:
Income taxes paid $ 4,500 $ 1,350
============= =============
Interest paid $ 14,189 $ 7,115
============= =============
Noncash investing and financing activities:
Acquisitions of real estate through foreclosure of collateral $ 195 $ 15
============= =============
</TABLE>
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 5
STERLING BANCSHARES, INC., AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
1. Basis of Presentation:
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring items) considered necessary
for a fair presentation have been included. Operating results for the
three-month period ended March 31, 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 MARCH 31,
2000 1999
----------------------- -----------------------
AMOUNT PER SHARE AMOUNT PER SHARE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $ 6,003 $ 4,876
========== ==========
Basic:
Weighted average shares
outstanding 26,057 $ 0.23 25,770 $ 0.19
========== ==========
Diluted:
Add incremental shares for:
Assumed exercise of
outstanding options 234 328
Assumed conversion of 77 205
preferred stock
---------- ----------
Total 26,368 $ 0.23 26,303 $ 0.19
========== ========== ========== ==========
</TABLE>
All previously reported amounts have been restated to reflect the
acquisition of B.O.A. Bancshares Inc. on June 1, 1999, which was accounted
for using the pooling of interests method.
5
<PAGE> 6
3. Shareholders' Equity
The following table displays the changes in shareholders' equity for the
three-month periods ended March 31, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
--------------------------- -----------------------------
<S> <C> <C> <C> <C>
Equity, beginning of period $ 134,543 $ 116,933
Comprehensive income:
Net income $ 6,003 $ 4,876
Net change in net unrealized losses
on AFS securities (832) (192)
---------- ----------
Total comprehensive income 5,171 4,684
Issuance of common stock 74 193
Issuance of preferred stock -- 31
Cash dividends paid (1,306) (1,083)
---------- ----------
Equity, end of period $ 138,482 $ 120,758
========== ==========
</TABLE>
4. 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
three-month periods ended March 31, (in thousands) follows:
<TABLE>
<CAPTION>
2000 1999
------------------------------------ ------------------------------------
COMMERCIAL MORTGAGE COMMERCIAL MORTGAGE
BANKING BANKING TOTAL BANKING BANKING TOTAL
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 23,777 $ -- $ 23,777 $ 20,449 $ -- $ 20,449
Noninterest income 4,429 3,535 7,964 3,759 2,530 6,289
---------- ---------- ---------- ---------- ---------- ----------
Total revenue 28,206 3,535 31,741 24,208 2,530 26,738
Provision for credit losses 2,024 -- 2,024 1,698 -- 1,698
Noninterest expense 17,723 3,372 21,095 15,499 2,335 17,834
---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes 8,459 163 8,622 7,011 195 7,206
Provision for income taxes 2,552 67 2,619 2,261 69 2,330
---------- ---------- ---------- ---------- ---------- ----------
Net income $ 5,907 $ 96 $ 6,003 $ 4,750 $ 126 $ 4,876
========== ========== ========== ========== ========== ==========
Total assets, March 31 $1,947,769 $ 3,221 $1,950,990 $1,517,109 $ 4,158 $1,521,267
========== ========== ========== ========== ========== ==========
</TABLE>
Intersegment interest was paid to Sterling by SCMC in the amount of $1.1 million
for the three-month period ended March 31, 2000. Total loans in the mortgage
warehouse of $59 million were eliminated in consolidation as of March 31, 2000.
6
<PAGE> 7
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 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 Untied 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
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO SAME PERIOD IN 1999
NET INCOME - Net income for the three-month period ended March 31, 2000, was
$6.0 million as compared to $4.9 million for the same period in 1999, an
increase of approximately $1,127 million or 23.1%. This increase is attributable
to continued solid loan and deposit growth and maintenance of a strong net
interest margin of 5.55% on a tax-equivalent basis for the period.
NET INTEREST INCOME - Net interest income for the three-month period ended March
31, 2000, was $23.8 million, as compared to $20.4 million for the same period in
1999, an increase of $3.3 million or 16.3%. The growth 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 March 31, 2000, were $1.7 billion, up $387 million, or
28.4% 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 March 31, 2000, was 8.55%, as compared to 8.25%
for the same period in 1999. Throughout the second half of 1999 and the first
quarter of 2000, the Board of Governors of the Federal Reserve System ("Federal
Reserve")
7
<PAGE> 8
increased the discount rates four times, each time by 25 basis points. The cost
of interest bearing liabilities increased 102 basis points from 3.27% in 1999 to
4.29% in 2000. This increase in rates was due to a combination of the Federal
Reserve rate increase as well new FHLB advances resulting from the leverage
program. The Company's 5.55% tax equivalent net interest margin for the first
three months of 2000 decreased from the 6.18% 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 142 basis points. Excluding the leverage program, the net interest margin
would have been 6.16% for the first quarter of 2000. Please refer to the
subsequent discussion of Financial Condition - - Securities for discussion of
the leverage program.
The following schedule gives a comparative analysis of the Company's daily
average interest-earning assets and interest-bearing liabilities for the
three-month periods ended March 31, 2000 and 1999, respectively:
CONSOLIDATED YIELD ANALYSIS
Three months ended March 31,
(Dollars in thousands)
<TABLE>
<CAPTION>
2000 1999
---------------------------------- --------------------------------------
YIELD ANALYSIS Average Average
Balance Interest Yield Balance Interest Yield
----------- ----------- ------ ----------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Interest bearing deposits in financial institutions $ 463 $ 7 6.08% $ 4,842 $ 56 4.69%
Federal funds sold 10,401 148 5.72% 58,510 685 4.75%
Securities purchased under agreements to resell 36,671 665 7.29% 34,272 517 6.12%
Investment securities (taxable) 441,130 7,343 6.69% 192,082 2,920 6.17%
Investment securities (tax-exempt) 76,035 829 4.39% 60,420 673 4.52%
Loans (taxable) 1,183,106 28,172 9.58% 1,010,767 22,823 9.16%
Loans (tax-exempt) 498 10 8.08% 647 11 6.90%
----------- ----------- ------ ----------- ----------- ------
Total Interest Earning Assets 1,748,304 37,174 8.55% 1,361,540 27,685 8.25%
Noninterest Earning Assets:
Cash and due from banks 66,776 74,184
Premises and equipment, net 41,942 40,110
Other assets 84,148 47,059
Allowance for credit losses (13,743) (11,246)
----------- -----------
Total Noninterest Earning Assets 179,123 150,107
----------- -----------
Total Assets $ 1,927,427 $ 1,511,647
=========== ===========
Interest Bearing Liabilities:
Demand and savings deposits $ 591,762 $ 4,293 2.92% $ 538,233 $ 2,947 2.22%
Certificates and other time deposits 363,963 4,568 5.05% 346,034 4,140 4.85%
Other borrowed funds 310,658 4,536 5.87% 12,185 116 3.86%
Note payable and ESOP indebtedness -- -- -- 2,069 33 6.47%
----------- ----------- ------ ----------- ----------- ------
Total Interest Bearing Liabilities 1,266,383 13,397 4.25% 898,521 7,236 3.27%
Noninterest Bearing Liabilities:
Demand deposits 480,223 452,572
Other liabilities 14,874 12,047
Trust preferred securities 28,750 28,750
Shareholders' equity 137,197 119,757
----------- -----------
661,044 613,126
----------- -----------
Total Liabilities and Shareholders' Equity $ 1,927,427 $ 1,511,647
=========== ===========
Net Interest Income & Margin $ 23,777 5.47% $ 20,449 6.09%
=========== ====== =========== ======
Net Interest Income & Margin (tax equivalent) $ 24,123 5.55% $ 20,759 6.18%
=========== ====== =========== ======
</TABLE>
8
<PAGE> 9
PROVISION FOR CREDIT LOSSES - The provision for credit losses for the first
three months of 2000 was $2.0 million, as compared to $1.7 million for the same
period in 1999, an increase of $326 thousand or 19.2%. This increase in the
provision for credit losses is to provide for loan growth. After net charge-offs
of $1.3 million and provisions for the first quarter of 2000, the Company's
allowance for credit losses increased by $723 thousand from $13.2 million on
December 31, 1999, to $13.9 million on March 31, 2000. Please refer to the
subsequent discussion of Allowance for Credit Losses for additional insight to
management's approach and methodology in estimating the allowance for credit
losses.
NONINTEREST INCOME - Total non-interest income for the quarter ended March 31,
2000 was $7.9 million, as compared to $6.3 million for the same period in 1999,
an increase of $1.7 million or 26.6%.
Noninterest income for the three months ended March 31, 2000 and 1999,
respectively, is summarized as follows:
<TABLE>
<CAPTION>
2000 1999
------------------------------------ ------------------------------------
Commercial Mortgage Commercial Mortgage
Banking Banking Combined Banking Banking Combined
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Customer service fees $ 2,533 $ -- $ 2,533 $ 2,265 $ -- $ 2,265
Bank-owned life insurance income 417 -- 417 -- -- --
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 -- 2,555 2,555 -- 1,897 1,897
Brokerage commissions 174 -- 174 73 -- 73
Other 1,068 980 2,048 971 633 1,604
---------- ---------- ---------- ---------- ---------- ----------
$ 4,429 $ 3,535 $ 7,964 $ 3,759 $ 2,530 $ 6,289
========== ========== ========== ========== ========== ==========
</TABLE>
Noninterest income from the commercial segment increased from $3.8 million in
the first quarter of 1999 to $4.4 million in the first quarter of 2000, an
increase of 17.8%. During the first quarter of 2000, the bank sold its credit
card portfolio to a correspondent bank for a net gain of $237 thousand. Also
during the latter half of 1999, the bank entered into Bank-owned life insurance
("BOLI") policies. Interest credits for these BOLI policies totaled $417
thousand for the first quarter of 2000, with no corresponding amounts in 1999.
Brokerage commissions increased 138%, accounting for a total increase of $101
thousand. Finally, during the first quarter of 1999, the Company sold its
banking office at the University of Houston for a gain of $450 thousand.
Excluding, these items, customer service fees and other non-interest income
increased $11.8% and 10.0%, respectively, as a result of growth in deposits
transaction accounts.
The income from the mortgage banking segment typically consists of fees and
gains on sale of mortgage loans. These gains are from recurring loan production,
as the average length of time a mortgage loan is held in portfolio at SCMC is
approximately twenty-five to thirty days. During the first quarter, SCMC had
$256 million in loan fundings.
9
<PAGE> 10
NONINTEREST EXPENSE - Noninterest expense increased $3.3 million, or 18.4%, to
$21.1 million for the first three months of 2000 as compared to $17.8 million
for the same period in 1999.
Noninterest expense for the three months ended March 31, 2000 and 1999,
respectively, is summarized as follows:
<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 $ 10,367 $ 2,038 $ 12,405 $ 8,407 $ 1,314 $ 9,721
Occupancy expense 2,283 657 2,940 2,173 548 2,721
Net gain and carrying costs of
real estate acquired by foreclosure 7 -- 7 (43) -- (43)
FDIC assessment 59 -- 59 128 -- 128
Technology 857 31 888 772 -- 772
Postage and delivery charges 332 52 384 352 50 402
Supplies 272 91 363 334 100 434
Professional fees 359 36 395 315 31 346
Minority interest expense 667 24 691 667 26 693
Other 2,520 443 2,963 2,394 266 2,660
---------- ---------- ---------- ---------- ---------- ----------
$ 17,723 $ 3,372 $ 21,095 $ 15,499 $ 2,335 $ 17,834
========== ========== ========== ========== ========== ==========
</TABLE>
Salaries and employee benefits from commercial banking for the three-month
period ended March 31, 2000 were $10.4 million, as compared to $8.4 million for
the same period in 1999, an increase of $2.0 million or 23.3%. The largest part
of the increase is attributable to the hiring of new employees to expand the
Bank's lending force and the credit analyst pool, personnel for the new Bellaire
office, and two new senior credit officers. Additionally, profit sharing and
incentive compensation expense increased as a result of the increased earnings.
Salaries and employee benefits from mortgage banking for the three-month period
ended March 31, 2000 were $2.0 million, as compared to $1.3 million for the same
period in 1999, an increase of $724 thousand or 55.1%. The increase is primarily
due to SCMC's acquisition of Select Mortgage Company in November 1999.
Technology expense relating to commercial banking for the three-month period
ended March 31, 2000 was $857 thousand, as compared to $772 thousand for the
same period in 1999, an increase of 11.0%. This increase is the result of the
purchase of a third sorter to improve productivity. Additionally, a second
mainframe computer system was added to enhance the Bank's transactional
processing capabilities.
Other expenses from mortgage banking for the three-month period ended March 31,
2000 were $443 thousand, as compared to $266 thousand for the same period in
1999, an increase of $177 thousand or 66.5%. The increase in other expenses is
primarily due to SCMC's purchase of Select Mortgage in November 1999.
Provision for Income Taxes - The provision for income taxes as a percent of net
income before taxes decreased from 32.3% for the first three months of 1999 to
30.4% for the first three months of 2000. This decrease is related to the $157
thousand increase in interest income from tax-exempt securities. Additionally,
the Bank invested in bank-owned life insurance policies during 1999 and 2000.
The $417 thousand of other income from these policies is tax-exempt.
FINANCIAL CONDITION
TOTAL ASSETS - The total consolidated assets of the Company remained flat at
$2.0 billion compared to December 31, 1999.
10
<PAGE> 11
CASH AND CASH EQUIVALENTS - The Company had cash and cash equivalents of $85.5
million at March 31, 2000. Comparatively, the Company had $91.1 million in cash
and cash equivalents on December 31, 1999, a decrease of $5.6 million or 6.2%.
At December 31, 1999, the Bank had increased its cash on hand for potential Year
2000 customer demand.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL - As of March 31, 2000,
securities purchased under agreements to resell totaled $42.6 million as
compared to $40.8 million as of December 31, 1999. The securities purchased are
SBA or USDA guaranteed loan certificates. These repurchase agreements generally
have a term of nine months or less.
SECURITIES - The Company's securities portfolio as of March 31, 2000, totaled
$507.6 million, as compared to $525.2 million on December 31, 1999, a decrease
of $17.6 million or 3.4%. This reduction is the result of paydowns and
maturities of securities.
LOANS HELD FOR SALE - Total loans held for sale decreased from $70.4 million at
December 31, 1999 to $59.3 million at March 31, 2000, a decrease of $11.1
million, or 15.7%. These loans represent loans funded by the Bank through a
mortgage warehouse line to SCMC.
LOANS HELD FOR INVESTMENT - As of March 31, 2000, loans held for investment were
$1.13 billion. When compared to loans held for investment of $1.12 billion on
December 31, 1999, the March 31, 2000 loan balance represents a year-to-date
$4.7 million increase in internal loan production, net of loan reductions, or an
overall increase of 0.41%. Period-end loans at December 31, 1999 compared to
March 31, 2000 were relatively flat. This represents a fairly typical seasonal
trend. However, average loans increased on a linked quarter basis by 17.2%
annualized. At March 31, 2000, loans held for investment as a percentage of
assets and deposits were 57.9% and 75.7%, respectively.
The following table summarizes the Company's held for investment loan portfolio
by type of loan as of March 31, 2000 (in thousands):
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
-----------
<S> <C> <C>
Commercial and Industrial $ 416,648 36.90%
Real Estate:
Commercial 352,720 31.24%
One-to-four single family 102,642 9.09%
Multi-family 28,752 2.55%
Construction & development 113,954 10.09%
Credit cards 2,650 0.23%
Consumer 111,110 9.84%
Other 1,269 0.11%
---------- ----------
Total loans held for investment (gross) 1,129,745 100.05%
Unearned discounts 514 0.05%
---------- ----------
Total loans held for investment (net) $1,129,231 100.00%
========== ==========
</TABLE>
11
<PAGE> 12
ALLOWANCE FOR CREDIT LOSSES - Following is a summary of the changes in the
allowance for credit losses for the three months ended March 31, 2000, and the
relationship of the allowance to total loans at March 31, 2000, and December 31,
1999 (in thousands):
<TABLE>
<S> <C>
Allowance for credit losses, December 31, 1999 $ 13,187
Charge-offs (1,509)
Recoveries 208
Provision for credit losses 2,024
--------
Allowance for credit losses, March 31, 2000 $ 13,910
========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------- -----------
<S> <C> <C>
Loans held for investment at period-end $1,129,231 $1,124,577
Allowance for credit losses $ 13,910 $ 13,187
Allowance as a percent of period-end loans 1.23% 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. 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.
Seventeen properties make up the $1.4 million of other real estate owned ("ORE")
at March 31, 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 indicates serious doubt that the borrower will be able to
comply with the present payment terms. Management identifies these loans through
its continuous loan review process and defines potential problem loans as those
loans classified as "substandard", "doubtful", or "loss". As of March 31, 2000,
the Company has no material foreign loans outstanding or loan concentrations.
12
<PAGE> 13
The following table summarizes total nonperforming assets and potential problem
loans at December 31, 1999 and at March 31, 2000:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Nonaccrual loans $ 6,188 $ 5,501
Restructured loans -- 218
Accruing loans past due 90 days or more 269 351
---------- ----------
Total nonperforming loans 6,457 6,070
ORE and other foreclosed assets 1,623 1,566
---------- ----------
Total nonperforming assets $ 8,080 $ 7,636
========== ==========
Total nonperforming loans as a % of gross loans held
for investment 0.57% 0.54%
Total nonperforming assets as a % of total assets 0.41% 0.39%
Potential problem loans, other than those shown
above as nonperforming $ 28,570 $ 24,483
</TABLE>
PREMISES AND EQUIPMENT - The Company's premises and equipment, net of
depreciation, as of March 31, 2000, were $42.8 million, as compared to $41.0
million as of December 31, 1999, an increase of $1.8 million or 4.3%. This
increase was due primarily to the purchase of another sorter and mainframe
computer system as well as build-out for the new Bellaire location which opened
in April 2000.
DEPOSITS - Total deposits as of March 31, 2000, were $1.49 billion, as compared
to $1.42 billion on December 31, 1999, an increase of $77.1 million, or 5.4%.
Non-interest bearing demand deposits at March 31, 2000, were $501.0 million, as
compared to $481.8 million at December 31, 1999, an increase of $19.3 million or
4.0%. The percentage of noninterest bearing deposits to total deposits as of
March 31, 2000 continued to be strong at 33.6%.
CAPITAL RESOURCES AND LIQUIDITY
SHAREHOLDERS' EQUITY - The Company's risk-based capital ratios remain above the
levels designated by regulatory agencies for the Company to be considered as
"well capitalized" on March 31, 2000, with Tier-I capital, total risk-based
capital, and leverage capital ratios of 11.04%, 11.97%, and 8.59%, respectively.
LIQUIDITY - Effective management of balance sheet liquidity is necessary to fund
growth in earning assets and to pay liability maturities, depository withdrawals
and shareholders' dividends. The Company has instituted asset/liability
management policies, including but not limited to a computer simulation model,
to improve liquidity controls and to enhance its management of interest rate
risk and financial condition. The Company has numerous sources of liquidity
including a significant portfolio of short-term assets, marketable investment
securities (excluding those presently classified as "held-to-maturity"), loans
available-for-sale, and access to borrowing arrangements. Available borrowing
arrangements maintained by the Company include federal funds lines with other
13
<PAGE> 14
commercial banks, available Federal Home Loan Bank ("FHLB") advances, as well as
a line of credit with a large commercial bank.
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. Not applicable.
ITEM 2. CHANGES IN SECURITIES
There were no changes in securities during the three months ended March 31,
2000.
ITEM 3. Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
SHAREHOLDER PROPOSALS FOR 2001 ANNUAL MEETING OF SHAREHOLDERS
Any proposal of shareholders to be included in the Company's proxy statement
relating to the Company's 2001 Annual Meeting of Shareholders pursuant to Rule
14a-8 under the Exchange Act must be received by the Company at its principal
executive offices no later than December 24, 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 shareholder proposal to be brought before the
meeting outside the process of Rule 14a-8 at the Company's principal executive
offices not less than 45 days nor more than 180 days prior to the meeting;
provided, if the Company gives notice or prior public disclosure of the date of
the annual meeting less than 50 days before the meeting, such shareholders
notice must be received not later than the close of business on the seventh day
following the date on which the Company's notice of the date of the annual
meeting was mailed or public disclosure made. The form of such shareholder
notice must also comply with the Company's Bylaws.
ITEM 5. Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
EXHIBIT 11. COMPUTATION OF EARNINGS PER SHARE
Included as Note (2) to Interim Consolidated Financial Statements on page 5 of
this Form 10-Q.
EXHIBIT 27. FINANCIAL DATA SCHEDULE
The required Financial Data Schedules have been included as Exhibit 27 of the
Form 10-Q filed electronically with the Securities and Exchange Commission.
14
<PAGE> 15
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
15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 FINANCIAL DATA SCHEDULE
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 74,315
<INT-BEARING-DEPOSITS> 441
<FED-FUNDS-SOLD> 11,199
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 347,710
<INVESTMENTS-CARRYING> 159,915
<INVESTMENTS-MARKET> 157,694
<LOANS> 1,188,564
<ALLOWANCE> (13,910)
<TOTAL-ASSETS> 1,959,480
<DEPOSITS> 1,492,672
<SHORT-TERM> 280,783
<LIABILITIES-OTHER> 10,303
<LONG-TERM> 0
26,085
28,750
<COMMON> 61
<OTHER-SE> 112,336
<TOTAL-LIABILITIES-AND-EQUITY> 1,950,990
<INTEREST-LOAN> 28,182
<INTEREST-INVEST> 8,172
<INTEREST-OTHER> 820
<INTEREST-TOTAL> 37,174
<INTEREST-DEPOSIT> 8,861
<INTEREST-EXPENSE> 13,397
<INTEREST-INCOME-NET> 23,777
<LOAN-LOSSES> 2,024
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 21,095
<INCOME-PRETAX> 8,622
<INCOME-PRE-EXTRAORDINARY> 8,622
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,003
<EPS-BASIC> 0.23
<EPS-DILUTED> 0.23
<YIELD-ACTUAL> 5.55
<LOANS-NON> 6,188
<LOANS-PAST> 269
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 28,570
<ALLOWANCE-OPEN> 13,187
<CHARGE-OFFS> 1,509
<RECOVERIES> 208
<ALLOWANCE-CLOSE> 13,910
<ALLOWANCE-DOMESTIC> 9,154
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,756
</TABLE>
