Back to GetFilings.com
================================================================================
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, 2002
[ ] 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 or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
2550 North Loop West, Suite 600
Houston, Texas 77092
(Address of principal executive office and zip code)
713-466-8300
(Registrant's telephone number, including area code)
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 ___
As of June 30, 2002, there were outstanding 43,884,855 shares of common stock,
par value $1.00 per share, of the registrant.
================================================================================
PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS (UNAUDITED)
STERLING BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------
(UNAUDITED)
ASSETS
Cash and cash equivalents $ 123,241 $ 148,295
Interest-bearing deposits in financial institutions 1,955 2,114
Securities purchased with an agreement to resell 2,799 12,313
Trading assets 102,299 118,511
Available-for-sale securities, at fair value 251,006 264,491
Held-to-maturity securities, at amortized cost 68,101 78,408
Loans held for sale 434,634 261,505
Loans held for investment 1,759,626 1,666,788
Allowance for credit losses (24,217) (22,927)
------------ ------------
Loans, net 1,735,409 1,643,861
Accrued interest receivable 12,773 11,593
Real estate acquired by foreclosure 2,368 1,837
Premises and equipment, net 55,389 54,175
Goodwill, net 55,650 54,812
Core deposit intangible 1,845 2,036
Mortgage servicing rights 21,109 19,592
Other assets 89,858 104,547
------------ ------------
TOTAL ASSETS $ 2,958,436 $ 2,778,090
= ========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits:
Noninterest-bearing $ 877,131 $ 797,850
Interest-bearing 876,096 879,542
Certificates of deposit and other time deposits 569,309 591,588
------------ ------------
Total deposits 2,322,536 2,268,980
Securities sold under agreements to repurchase and other borrowed funds 286,969 180,298
Notes payable 20,879 20,879
Accrued interest payable and other liabilities 31,967 28,832
------------ ------------
Total liabilities 2,662,351 2,498,989
COMPANY-OBLIGATED MANDITORILY REDEEMABLE
TRUST PREFERRED SECURITIES OF SUBSIDIARY TRUST 57,500 57,500
MINORITY INTEREST IN STERLING CAPITAL MORTGAGE COMPANY 4,813 4,232
Shareholders' equity:
Convertible preferred stock, $1 par value, 1 million shares authorized 59 39
Common stock, $1 par value, 100 million shares authorized 43,885 43,770
Capital surplus 43,906 42,526
Retained earnings 141,315 127,144
Accumulated other comprehensive income--net unrealized gain on
available-for-sale securities, net of tax 4,607 3,890
------------ ------------
Total shareholders' equity 233,772 217,369
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,958,436 $ 2,778,090
============ ============
See Notes to Interim Consolidated Financial Statements which are an integral
part of these Interim Consolidated Financial Statements.
2
STERLING BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2002 2001 2002 2001
------------------- -------------------
(UNAUDITED) (UNAUDITED)
Interest income:
Loans, including fees $ 37,137 $ 38,132 $ 71,951 $ 73,711
Securities:
Taxable 3,835 5,045 7,811 8,802
Tax-exempt 739 837 1,520 1,690
Federal funds sold and securities purchased under agreements
to resell 124 782 339 1,770
Trading assets 943 797 1,993 797
Deposits in financial institutions 30 25 59 35
-------- -------- -------- --------
Total interest income 42,808 45,618 83,673 86,805
Interest expense:
Demand and savings deposits 2,332 4,812 4,712 9,595
Certificates and other time deposits 4,032 7,309 8,544 14,482
Other borrowed funds 995 2,047 1,721 4,036
Note payable 197 33 400 66
-------- -------- -------- --------
Total interest expense 7,556 14,201 15,377 28,179
-------- -------- -------- --------
NET INTEREST INCOME 35,252 31,417 68,296 58,626
Provision for credit losses 3,088 3,112 5,711 5,472
-------- -------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 32,164 28,305 62,585 53,154
Noninterest income:
Customer service fees 4,150 3,889 8,252 6,686
Gain on sale of mortgage loans 7,541 7,191 11,670 11,475
Mortgage origination income 5,613 3,771 9,006 6,098
Other 5,690 4,541 10,256 7,954
-------- -------- -------- --------
Total noninterest income 22,994 19,392 39,184 32,213
Noninterest expense:
Salaries and employee benefits 23,244 20,640 42,313 36,446
Occupancy expense 5,790 4,709 10,972 8,442
Net loss and carrying costs of real estate acquired by
foreclosure 5 82 71 97
FDIC assessment 137 114 189 210
Technology 1,339 1,491 2,553 2,672
Postage and delivery charges 796 663 1,526 1,171
Supplies 688 495 1,227 902
Professional fees 1,337 658 2,046 1,325
Minority interest expense:
Company-obligated mandatorily redeemable trust preferred
securitites of subsidiary trusts 1,325 1,313 2,655 2,061
Sterling Capital Mortgage Company 366 527 581 858
Conversion costs related to acquistions - - - 1,030
Other 6,043 4,669 11,294 8,199
-------- -------- -------- --------
Total noninterest expense 41,070 35,361 75,427 63,413
NET INCOME BEFORE INCOME TAXES 14,088 12,336 26,342 21,954
Provision for income taxes 4,705 4,448 8,661 7,425
-------- -------- -------- --------
NET INCOME $ 9,383 $ 7,888 $ 17,681 $ 14,529
======== ======== ======== ========
EARNINGS PER SHARE:
Basic $ 0.21 $ 0.19 $ 0.40 $ 0.35
======== ======== ======== ========
Diluted $ 0.21 $ 0.18 $ 0.40 $ 0.34
======== ======== ======== ========
See Notes to Interim Consolidated Financial Statements which are an integral
part of these Interim Consolidated Financial Statements.
3
STERLING BANCSHARES, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(In thousands)
SIX MONTHS ENDED JUNE 30,
2002 2001
------------ -----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,681 $ 14,529
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Amortization and accretion of premiums and discounts
on securities, net 56 147
Net gain on the sale of assets (100) (112)
Net gain on the sale of trading assets (309) (95)
Provision for credit losses 5,711 5,472
Write-downs, less gains on sale, of real estate acquired by
foreclosure and repossessed assets 34 (1)
Depreciation and amortization 5,029 4,394
Net increase in loans held for sale (173,129) (67,175)
Capitalized mortgage servicing rights (3,359) (7,395)
Amortization of mortgage servicing rights 1,842 187
Net (increase) decrease in accrued interest receivable and other assets 12,187 (16,266)
Net increase (decrease) in accrued interest payable and other liabilities 3,716 (3,969)
------------ -----------
Net cash used in operating activities (130,641) (70,284)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in securities purchased under agreements to resell 9,514 (7,326)
Proceeds from maturity and paydowns of held-to-maturity securities 10,196 5,989
Proceeds from the sale of available-for-sale securities 6,810 84,182
Proceeds from maturity and paydowns of available-for-sale securities 57,294 44,516
Purchases of available-for-sale securities (49,263) (97,370)
Proceeds from the sale of trading assets 253,491 30,739
Purchases of trading assets (242,737) (93,627)
Proceeds from principal paydowns of trading securities 5,767 -
Net increase in loans held for investment (98,714) (63,899)
Proceeds from sale of real estate acquired by foreclosure 890 875
Net decrease (increase) in interest-bearing deposits in financial institutions 159 (890)
Purchase of CaminoReal Bancshares, Inc. - (51,813)
Cash and cash equivalents acquired with CaminoReal Bancshares, Inc. - 35,583
Proceeds from sale of premises and equipment 1,307 5,537
Purchase of premises and equipment (7,359) (11,974)
------------ -----------
Net cash used in investing activities (52,645) (119,478)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts 53,556 140,190
Net (increase) decrease in repurchase agreements/funds purchased 106,671 19,582
Proceeds from issuance of common stock and preferred stock 1,515 2,337
Issuance of company-obligated manditorily redeemable trust preferred securities - 28,750
Dividends paid (3,510) (2,899)
------------ -----------
Net cash provided by financing activities 158,232 187,960
NET DECREASE IN CASH AND CASH EQUIVALENTS (25,054) (1,802)
CASH AND CASH EQUIVALENTS:
Beginning of period 148,295 122,112
------------ -----------
End of period $ 123,241 $ 120,310
============ ===========
SUPPLEMENTAL INFORMATION:
Income taxes paid $ 5,800 $ 3,390
============ ===========
Interest paid $ 16,546 $ 28,266
============ ===========
Noncash investing and financing activities:
Acquisitions of real estate through foreclosure of collateral $ 1,455 $ 878
============ ===========
See Notes to Interim Consolidated Financial Statements which are an integral
part of these Interim Consolidated Financial Statements.
4
STERLING BANCSHARES, INC., AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
1. BASIS OF PRESENTATION:
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with accounting principles generally accepted
in the United States of America 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,
2002, 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, 2001.
2. EARNINGS PER COMMON SHARE
Earnings per common share ("EPS") were computed based on the following (in
thousands, except per share amounts):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 2002 2001
---------------------- ----------------------- --------------------- ----------------------
AMOUNT PER SHARE AMOUNT PER SHARE AMOUNT PER SHARE AMOUNT PER SHARE
--------- ----------- --------- ----------- -------- ----------- -------- -----------
Net income $ 9,383 $ 7,888 $ 17,681 $ 14,529
========= ========= ======== ========
Basic:
Weighted average shares
outstanding 43,849 $ 0.21 42,080 $ 0.19 43,814 $ 0.40 41,945 $ 0.35
=========== =========== =========== ===========
Diluted:
Add incremental shares for:
Assumed exercise of
outstanding options 850 747 828 791
Assumed conversion of
preferred stock 98 59 89 63
--------- --------- -------- --------
Total 44,797 $ 0.21 42,886 $ 0.18 44,731 $ 0.40 42,799 $ 0.34
========= =========== ========= =========== ======== =========== ======== ===========
5
3. SHAREHOLDERS' EQUITY
The following table displays the changes in shareholders' equity for the
three-month and six-month periods ended June 30, 2002 and 2001 (in
thousands):
THREE MONTHS ENDED JUNE 30,
2002 2001
--------------------------- -----------------------
Equity, beginning of period $ 224,002 $ 174,956
Comprehensive income:
Net income $ 9,383 $ 7,888
Net change in net unrealized gains
on AFS securities 1,166 (315)
----------- -----------
Total comprehensive income 10,549 7,573
Issuance of common stock 978 1,195
Issuance of preferred stock - -
Cash dividends paid (1,757) (1,452)
----------- ---------
Equity, end of period $ 233,772 $ 182,272
=========== =========
SIX MONTHS ENDED JUNE 30,
2002 2001
-----------------------------------------------------
Equity, beginning of period $ 217,369 $ 166,825
Comprehensive income:
Net income $ 17,681 $ 14,529
Net change in net unrealized gains
on AFS securities 717 1,480
----------- -----------
Total comprehensive income 18,398 16,009
Issuance of common stock 1,273 2,337
Issuance of preferred stock 242 -
Cash dividends paid (3,510) (2,899)
----------- -----------
Equity, end of period $ 233,772 $ 182,272
=========== ===========
On March 7, 2002, the Company completed a private placement of 20,000
shares of the Company's Series I Convertible Preferred Stock (the "Series I
Preferred Stock"). Shares of the Series I Preferred Stock will convert into
shares of the Company's common stock based upon performance goals for the
Dallas banking office for which such shares were issued. The conversion
ratio ranges from 1.25 shares of common stock if the performance goals are
met prior to November 7, 2003, to 1.1 shares of common stock if the
performance goals are met prior to November 7, 2004. After November 7,
2004, each share of Series I Convertible Preferred Stock will automatically
convert into one share of common stock.
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
six-month periods ended June 30, (in thousands) are as follows:
2002 2001
-------------------------------------- ---------------------------------------
COMMERCIAL MORTGAGE COMMERCIAL MORTGAGE
BANKING BANKING TOTAL BANKING BANKING TOTAL
----------- ---------- ----------- ------------ ---------- ------------
Net interest income $ 68,296 $ - $ 68,296 $ 58,626 $ - $ 58,626
Noninterest income 14,124 25,060 39,184 10,936 21,277 32,213
----------- ---------- ----------- ------------ ---------- ------------
Total revenue 82,420 25,060 107,480 69,562 21,277 90,839
Provision for credit losses 5,711 - 5,711 5,472 - 5,472
Noninterest expense 54,288 21,139 75,427 46,917 15,466 62,383
Conversion cost related to acquisition - - - 1,030 - 1,030
----------- ---------- ----------- ------------ ---------- ------------
Income before income taxes 22,421 3,921 26,342 16,143 5,811 21,954
Provision for income taxes 7,064 1,597 8,661 5,044 2,381 7,425
----------- ---------- ----------- ------------ ---------- ------------
Net income $ 15,357 $ 2,324 $ 17,681 $ 11,099 $ 3,430 $ 14,529
=========== ========== =========== ============ ========== ============
Total assets, June 30, $ 2,936,680 $ 21,756 $ 2,958,436 $ 2,525,858 $ 7,076 $ 2,532,934
=========== ========== =========== ============ ========== ============
6
Intersegment interest was paid to Bank by SCMC in the amount of $9.4
million for the six-month period ended June 30, 2002. Total loans of $383.9
million in the mortgage warehouse were eliminated in consolidation as of
June 30, 2002.
5. ACQUISITIONS AND SIGNIFICANT DEVELOPMENTS
On July 16, 2002, the Company announced the signing of an agreement to
divest three offices in South Texas to an investor group headed by the
current executive officers of the three locations. The three offices,
Sterling's Carrizo Springs, Crystal City and Pearsall, have combined loans
of $18 million and combined deposits of $37 million as of June 30, 2002.
The proposed sale is subject to customary closing conditions, including
receipt of all requisite regulatory approvals. Subject to receipt of all
requisite regulatory approvals, the Company anticipates closing the
transaction during the first quarter of 2003.
On May 22, 2002, the Company announced that it had entered into a
definitive agreement to acquire ENB Bankshares, Inc. of Dallas, Texas in a
cash merger. ENB Bankshares, Inc. is the privately held bank holding
company of Eagle National Bank, which operates one banking office in North
Dallas. As of June 30, 2002, Eagle National had assets of $68 million,
loans of $59 million and $59 million in deposits. The merger is subject to
the satisfaction or waiver of customary closing conditions including the
receipt of all requisite regulatory approvals and the approval of the
shareholders of ENB Bankshares, Inc. Subject to the satisfaction or waiver
of the closing conditions, the Company anticipates closing the transaction
during the third quarter of 2002.
On December 17, 2001, the Company acquired Community Bancshares, Inc.
("Community") and its subsidiary bank, Community Bank in a stock and cash
merger. The shareholders of Community Bancshares, Inc. received $14.6
million in cash and 1,443,753 shares of the Company's common stock for all
of the outstanding shares of common stock of Community Bancshares, Inc. The
stock issuance occurred after the three-for-two stock split effected by the
Company in September 2001. Community Bank operated two banking offices in
west Houston. During May 2002, the Company completed the operational
integration of Community Bank and Sterling Bank. This acquisition was
accounted for using the purchase method of accounting. Goodwill of $28.7
million was recorded in connection with this acquisition. In June 2002, the
Company sold Community Bank's charter to Sabine State Bank & Trust Company.
On August 23, 2001, the Company acquired Lone Star Bancorporation, Inc. and
its subsidiary bank, Lone Star Bank in a stock-for-stock merger. The
shareholders of Lone Star Bancorporation, Inc. received an aggregate of
1,760,000 shares of the Company's common stock for all of the outstanding
shares of common stock of Lone Star Bancorporation, Inc. The stock issuance
occurred prior to the three-for-two stock split effected by the Company in
September 2001. All previously reported amounts have been restated to
reflect this transaction which was accounted for using the "pooling of
interests" method. Lone Star Bank operated four banking offices in the
Houston metropolitan area. The Company merged Lone Star Bank into Sterling
Bank in February 2002.
On July 24, 2001, the Company's Board of Directors declared a three-for-two
stock split to be effected in the form of a stock dividend on its common
stock to shareholders of record on September 4, 2001. Cash paid in lieu of
fractional shares was based on the average of the high and low bids on the
record date, as adjusted for the split. The payment date for the stock
dividend was September 18, 2001.
On March 22, 2001, the Company acquired CaminoReal Bancshares of Texas,
Inc. ("CaminoReal") and its subsidiary bank, CaminoReal Bank, National
Association, for an aggregate cash purchase price of $51.8 million.
CaminoReal Bank had four banking offices in San Antonio, Texas and four
7
banking offices in the south Texas cities of Eagle Pass, Carrizo Springs,
Crystal City and Pearsall. During June 2001, the Company completed the
operational integration of CaminoReal Bank and Sterling Bank. This
acquisition was accounted for using the purchase method of accounting.
Goodwill of $21.2 million was recorded in connection with this acquisition.
In February 2001, the Company formed Sterling Bancshares Capital Trust II
("Trust II") and Sterling Bancshares Capital Trust III, each is a trust
formed under the laws of the State of Delaware. On March 21, 2001, Trust II
issued $28,750,000 of 9.20% Trust Preferred Securities and invested the
proceeds thereof in the 9.20% Junior Subordinated Deferrable Interest
Debentures (the "9.20% Junior Subordinated Debentures") issued by the
Company. The 9.20% Junior Subordinated Debentures will mature on March 21,
2031, which date may be shortened to a date not earlier than March 21, 2006
if certain conditions are met (including the Company having received prior
approval of the Federal Reserve and any other required regulatory
approvals). The 9.20% Trust Preferred Securities will be subject to
mandatory redemption in a like amount contemporaneously with the optional
prepayment of the 9.20% Junior Subordinated Debentures by the Company. The
9.20% Junior Subordinated Debentures may be prepaid upon the occurrence and
continuation of certain events including a change in the tax statutes or
regulatory capital treatment of the 9.20% Trust Preferred Securities. In
each case, redemption will be made at a price equal to 100% of the face
amount of the 9.20% Trust Preferred Securities, plus the accrued and unpaid
distributions thereon through the redemption date.
6. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, FASB issued Statement No. 141, "Business Combinations" ("SFAS
141") and Statement No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142"). These statements establish new standards for accounting and
reporting for business combinations and for goodwill and intangible assets
resulting from business combinations. SFAS 141 applies to all business
combinations initiated after June 30, 2001, and requires the application of
the purchase method of accounting to all business combinations. The Company
implemented SFAS 141 on July 1, 2001. SFAS 142 terminates the amortization
of the goodwill presently on the Company's books. Such amortization,
after-tax, was $320 thousand for six months ended June 30, 2001 and $246
thousand for the three months ended June 30, 2001. Under SFAS 142, the
Company is required to periodically assess its goodwill and other
intangible assets for potential impairment, based on the fair value of the
reporting unit at which the goodwill is recorded. The Company implemented
SFAS 142 on January 1, 2002. Goodwill currently carried on the balance
sheet was subject to an initial assessment for impairment. The Company has
completed its initial assessment review and determined that there is no
impairment of goodwill as of January 1, 2002. The adoption of this
statement did not have a material impact on the Company's financial
position of results of operations with the exception of no longer
amortizing goodwill.
In August 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations ("SFAS 143"), and Statement No. 144, Accounting for
Impairment or Disposal of Long Lived Assets ("SFAS 144"). SFAS 143 requires
the recording of the fair value of a liability for an asset retirement
obligation in the period in which it is incurred, and is effective January
1, 2003. SFAS 144 is effective January 1, 2002, and supersedes existing
accounting literature dealing with impairment and disposal of long lived
assets, including discontinued operations. It addresses financial
accounting and reporting for the impairment of long lived assets and for
long lived assets to be disposed of, and expands current reporting for
discontinued operations to include disposals of a "component" of an entity
that has been disposed of or is classified as held for sale. The Company's
management does not believe that the implementation of these two standards
will have a material impact on the Company's consolidated financial
statements.
8
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145 ("SFAS 145"), "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections ". The
provisions of this Statement related to the rescission of Statement 4 shall
be applied in fiscal years beginning after May 15, 2002. The provisions in
paragraphs 8 and 9(c) of this Statement related to Statement 13 shall be
effective for transactions occurring after May 15, 2002. All other
provisions of this Statement shall be effective for financial statements
issued on or after May 15, 2002. SFAS 145 amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The
Company does not believe that the adoption of SFAS 145 will have a
significant impact on its financial statements.
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 146 ("SFAS 146"),
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS
146 addresses accounting and reporting costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue
94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity". This statement requires that a liability
for a cost associated with an exit or disposal activity shall be recognized
and measured initially at its fair value in the period which the liability
in incurred. This statement is effective for exit or disposal activities
that are initiated after December 31, 2002. The Company does not believe
that the adoption of SFAS 146 will have a significant impact on its
financial statements.
7. INTANGIBLE ASSETS
Under the provisions of SFAS No. 142, goodwill was subjected to an initial
assessment for impairment. The Company completed its initial assessment and
determined that there was no impairment of goodwill as of January 1, 2002.
The Company will review goodwill on an annual basis for impairment or as
events occur or circumstances change that would more likely than not reduce
fair value of a reporting unit below its carrying amount. The changes in
the carrying amount of goodwill by reportable segment for the year ended
December 31, 2001 and the six months ended June 30, 2002 are as follows (in
thousands):
(Unaudited) COMMERCIAL BANKING
------------------------------------ MORTGAGE
HOUSTON SAN ANTONIO SOUTH TEXAS BANKING TOTAL
---------- ----------- ----------- ---------- ----------
Balance, January 1, 2001 $ 1,110 $ - $ - $ 4,842 $ 5,952
Amortization (185) (583) (205) (279) (1,252)
Purchase price adjustment - - - 217 217
CaminoReal acquisition - 15,662 5,517 - 21,179
Community acquisition 28,716 - - - 28,716
-------------------------------------------------------------
Balance, December 31, 2001 29,641 15,079 5,312 4,780 54,812
Purchase price adjustment - - - 838 838
---------- ----------- ----------- ---------- ----------
Balance, June 30, 2002 $ 29,641 $ 15,079 $ 5,312 $ 5,618 $ 55,650
========== =========== =========== ========== ==========
9
The Company adopted SFAS No. 142, in its entirety, effective January 1,
2002. The following presents the net income that would have been reported,
exclusive of goodwill amortization.
(Dollars in thousands) THREE MONTHS ENDED SIX MONTHS ENDED
(unaudited) JUNE 30, JUNE 30,
------------------------ -----------------------
2002 2001 2002 2001
------------------------ -----------------------
Reported net income $ 9,383 $ 7,888 $ 17,681 $ 14,529
Add: Goodwill amortization, net of taxes - 246 - 320
----------- ----------- ---------- ----------
Adjusted net income $ 9,383 $ 8,134 $ 17,681 $ 14,849
=========== =========== ========== ==========
Reported diluted earnings per share $ 0.21 $ 0.18 $ 0.40 $ 0.34
Add: Goodwill amortization, net of taxes - - - -
----------- ----------- ---------- ----------
Adjusted diluted earnings per share $ 0.21 $ 0.18 $ 0.40 $ 0.34
=========== =========== ========== ==========
The changes in the carrying amounts of intangible assets other than
goodwill for the year ended December 31, 2001 and six months ended June 30,
2002 are as follows (in thousands):
CORE MORTGAGE
(Unaudited) DEPOSIT SERVICING
INTANGIBLE RIGHTS TOTAL
------------ ------------ ----------
Balance, January 1, 2001 $ - $ 907 $ 907
Amortization - (1,154) (1,154)
Servicing rights originated - 19,839 19,839
Community acquisition 2,036 - 2,036
------------ ------------ ----------
Balance, Decmember 31, 2001 2,036 19,592 21,628
Amortization (191) (1,842) (2,033)
Servicing rights originated - 3,359 3,359
------------ ------------ ----------
Balance, June 30, 2002 $ 1,845 $ 21,109 $ 22,954
============ ============ ==========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements discuss future
expectations, activities or events and by their nature, they are subject to
risks and uncertainties. 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 will not update these
forward-looking statements to reflect circumstances or events that occur after
the date the forward-looking statements are made.
Many possible factors could affect the Company's future financial performance
and actual results may differ materially from what is expressed in any
forward-looking statement. Important factors that could cause actual results to
differ materially from estimates or projections contained in forward-looking
statements include, but are not limited to, the following: general business and
economic conditions in the markets the Company serves may be less favorable than
anticipated which could
10
decrease the demand for loan, deposit and other financial services and increase
loan delinquencies and defaults; changes in market rates and prices may
adversely impact the value of securities, loans, deposits and other financial
instruments; the Company's liquidity requirements could be adversely affected by
changes in its assets and liabilities; legislative or regulatory developments
including changes in laws concerning taxes, banking, securities, insurance and
other aspects of the financial securities industry; competitive factors,
including product and pricing pressures among financial services organizations,
may increase; and changes in fiscal and governmental policies of the United
States federal government could have an adverse effect on the Company's
business. For additional discussion of such risks, uncertainties and
assumptions, see the Company's Annual Report on Form 10-K for the year ended
December 31, 2001, filed with the Securities and Exchange Commission under the
Securities Exchange Act of 1934.
SIGNIFICANT DEVELOPMENTS
On July 16, 2002, the Company announced that it had entered into a definitive
agreement to sell three offices in south Texas to an investor group headed by
the current executive officers of the three locations. The three offices, the
Bank's Carrizo Springs, Crystal City and Pearsall offices, have combined loans
of $18 million and combined deposits of $37 million as of June 30, 2002. The
proposed sale is subject to customary closing conditions, including receipt of
all requisite regulatory approvals. Subject to receipt of all requisite
regulatory approvals, the Company anticipates closing the transaction during the
first quarter of 2003.
On May 22, 2002, the Company announced that it had entered into a definitive
merger agreement to acquire Dallas based ENB Bankshares, Inc. in a cash merger.
ENB Bankshares, Inc. is the privately held bank holding company of Eagle
National Bank, which operates one banking office in north Dallas, Texas. As of
June 30, 2002, Eagle National Bank had assets of $68 million, loans of $59
million and $59 million in deposits. The proposed merger is subject to customary
closing conditions including receipt of all requisite regulatory approvals and
approval of ENB Bankshares, Inc.'s shareholders. Subject to the satisfaction or
waiver of the closing conditions, the Company anticipates closing the
transaction during the third quarter of 2002.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SAME PERIOD IN 2001
NET INCOME - Net income for the six-month period ended June 30, 2002 was $17.7
million as compared to $14.5 million for the same period in 2001, an increase of
approximately $3.2 million or 21.7%. This increase is primarily attributable to
continued loan and deposit growth as well as the acquisitions of CaminoReal and
Community.
NET INTEREST INCOME - Net interest income for the six-month period ended June
30, 2002, was $68.3 million, as compared to $58.6 million for the same period in
2001, an increase of $9.7 million or 16.5%. The increase in net interest income
is primarily due to the growth in average earning assets of $386.5 million or
18.9% from the period ended June 30, 2001 to June 30, 2002. The growth in
average earning assets related to the acquisitions of CaminoReal and Community
was 11.1%. While average earning assets for the period ended June 30, 2002
increased over a year ago, the yield decreased 161 basis points from 8.54% for
the six-month period ended June 30, 2001, to 6.93% for the same period in 2002.
During 2001, the Federal Reserve Bank decreased the discount rate 475 basis
points. Consequently, the Bank's yields decreased in 2001 and 2002 as a result
of the Bank lowering its prime rate in relation to the Federal Reserve
decreases. As of June 30, 2002, average interest bearing liabilities were $1.7
billion, an increase of $222.8 million or 15.4% from June 30, 2001. Average
interest bearing deposits at June 30, 2002 were $1.5 billion, an increase of
14.6% from June 30, 2001.
11
The increase in average interest bearing deposits related to the acquisition of
CaminoReal and Community was 11.8%. The cost of interest bearing liabilities
decreased 208 basis points from 3.94% for the first six months of 2001 to 1.86%
during the same period in 2002. The decrease in the cost of interest bearing
liabilities is primarily the result of the decrease in the Federal Reserve
Bank's discount rate in 2001. The Company's 5.72% tax equivalent net interest
margin for the six months ended June 30, 2002 decreased from the 5.84% net
interest margin recorded during the same period in 2001.
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, 2002 and 2001, respectively:
CONSOLIDATED YIELD ANALYSIS
SIX MONTHS ENDED JUNE 30,
(DOLLARS IN THOUSANDS)
2002 2001
---------------------------------------- --------------------------------
YIELD ANALYSIS AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD BALANCE INTEREST YIELD
----------- ----------- ---------- ----------- -------- -------
INTEREST EARNING ASSETS:
Interest bearing deposits in financial institutions $ 2,266 $ 59 5.25% $ 1,115 $ 35 6.33%
Federal funds sold 30,969 260 1.69% 24,923 556 4.50%
Securites purchased under agreements to resell 4,648 79 3.43% 40,219 1,214 6.09%
Trading assets 102,050 1,993 3.94% 19,740 797 8.14%
Investment securities (taxable) 255,652 7,811 6.16% 265,811 8,802 6.68%
Investment securities (tax-exempt) 70,215 1,520 4.37% 77,711 1,690 4.39%
Loans held for sale (taxable) 269,961 9,798 7.32% 162,978 6,173 7.64%
Loans held for investment (taxable) 1,695,509 61,996 7.37% 1,453,249 67,413 9.35%
Loans (tax-exempt) 5,046 157 6.27% 4,109 125 6.13%
----------- ----------- ---------- ----------- -------- -------
Total Interest Earning Assets 2,436,316 83,673 6.93% 2,049,855 86,805 8.54%
NONINTEREST EARNING ASSETS:
Cash and due from banks 97,022 82,998
Premises and equipment, net 54,574 51,768
Other assets 202,922 136,206
Allowance for credit losses (24,014) (18,864)
----------- -----------
Total Noninterest Earning Assets 330,504 252,108
----------- -----------
TOTAL ASSETS $ 2,766,820 $ 2,301,963
=========== ===========
INTEREST BEARING LIABILITIES:
Demand and savings deposits 878,743 $ 4,712 1.08% $ 731,972 $ 9,595 2.64%
Certificates and other time deposits 580,393 8,544 2.97% 541,474 14,482 5.39%
Other borrowed funds 186,275 1,721 1.86% 168,441 4,036 4.83%
Notes payable 20,879 400 3.86% 1,600 66 8.32%
----------- ----------- ---------- ----------- -------- -------
Total Interest Bearing Liabilities 1,666,290 15,377 1.86% 1,443,487 28,179 3.94%
NONINTEREST BEARING LIABILITIES:
Demand deposits 780,822 617,459
Other liabilities 35,002 20,003
----------- -----------
Total Noninterest Bearing Liabilities 815,824 637,462
Trust preferred securities 57,500 44,793
Shareholders' equity 227,206 176,221
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,766,820 $ 2,301,963
=========== ===========
NET INTEREST INCOME & MARGIN $ 68,296 5.65% $ 58,626 5.77%
=========== ========== ======== =======
NET INTEREST INCOME & MARGIN (TAX EQUIVALENT) $ 69,121 5.72% $ 59,413 5.84%
=========== ========== ======== =======
PROVISION FOR CREDIT LOSSES - The provision for credit losses for the six months
ended June 30, 2002 was $5.7 million, as compared to $5.5 million for the same
period in 2001, an increase of $239
12
thousand or 4.4%. This increase in the provision for credit losses is to support
the loan growth for the six months ended 2002. After net charge-offs of $4.4
million, the Company's allowance for credit losses increased by $1.3 million
from $22.9 million on December 31, 2001, to $24.2 million on June 30, 2002.
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 six months ended June 30,
2002 was $39.2 million, as compared to $32.2 million for the same period in
2001, an increase of $7.0 million or 21.6%.
Noninterest income for the six months ended June 30, 2002 and 2001,
respectively, is summarized as follows:
2002 2001
------------------------------------------ ---------------------------------------
COMMERCIAL MORTGAGE COMMERCIAL MORTGAGE
BANKING BANKING COMBINED BANKING BANKING COMBINED
------------ ------------ ----------- ----------- ------------ ----------
Customer service fees $ 8,252 $ - $ 8,252 $ 6,686 $ - $ 6,686
Gain on sale of mortgage loans - 11,670 11,670 - 11,475 11,475
Mortgage origination income - 9,006 9,006 - 6,098 6,098
Other 5,872 4,384 10,256 4,250 3,704 7,954
------------ ------------ ----------- ----------- ------------ ----------
$ 14,124 $ 25,060 $ 39,184 $ 10,936 $ 21,277 $ 32,213
============ ============ =========== =========== ============ ==========
COMMERCIAL BANKING SEGMENT - Noninterest income from commercial banking for the
six-month period ended June 30, 2002 was $14.1 million, as compared to $10.9
million for the same period in 2001, an increase of $3.2 million or 29.2%.
Customer service fees increased $1.6 million as a result of the acquisitions of
Community and CaminoReal and the growth in deposit transaction accounts. Other
noninterest income increased $227 thousand from gain on the sale of trading
assets. The trading department was established in the second quarter of 2001. In
2002, the Bank began selling the guaranteed portion of SBA loans. A premium of
$186 thousand was recognized during the first six months of 2002 from the
Company's sale of the guaranteed portion of SBA loans. Additionally, the Company
sold the charter for Community Bank to Sabine State Bank & Trust Company in June
2002 for $150 thousand.
MORTGAGE BANKING SEGMENT - Noninterest income from the mortgage banking segment
increased 17.8% from $21.3 million for the six month period ended June 30, 2001
to $25.1 million for the same period in 2002. The income from the mortgage
banking segment typically consists of origination fees and gains on sale of
mortgage loans. Since June 2001, twenty-three new locations have been opened
with fourteen of the new locations in California. During the first six months of
2002, SCMC had $1.5 billion in loan fundings as compared to $1.2 billion for the
same period in 2001. Additionally, SCMC has a loan servicing portfolio of $1.2
billion as of June 30, 2002. Loan servicing fees totaled $1.5 million for the
first six months of 2002.
13
NONINTEREST EXPENSE - Noninterest expense increased $12.0 million or 18.9%, to
$75.4 million for the six-months ended June 30, 2002 as compared to $63.4
million for the same period in 2001.
Noninterest expense for the six months ended June 30, 2002 and 2001,
respectively, is summarized as follows:
2002 2001
------------------------------------ -------------------------------------
COMMERCIAL MORTGAGE COMMERCIAL MORTGAGE
BANKING BANKING COMBINED BANKING BANKING COMBINED
---------- -------- -------- ---------- -------- ---------
Salaries and employee benefits $ 30,538 $ 11,775 $ 42,313 $ 26,261 $ 10,185 $ 36,446
Occupancy expense 7,512 3,460 10,972 6,461 1,981 8,442
Net loss and carrying costs of
real estate acquired by foreclosure 71 - 71 97 - 97
FDIC assessment 189 - 189 210 - 210
Technology 2,432 121 2,553 2,484 188 2,672
Postage and delivery charges 1,119 407 1,526 904 267 1,171
Supplies 648 579 1,227 694 208 902
Professional fees 1,864 182 2,046 1,243 82 1,325
Minority interest expense 2,655 581 3,236 2,061 858 2,919
Conversion costs related to acquisitions - - - 1,030 - 1,030
Other 7,260 4,034 11,294 6,502 1,697 8,199
---------- -------- -------- ---------- -------- ---------
$ 54,288 $ 21,139 $ 75,427 $ 47,947 $ 15,466 $ 63,413
========== ======== ======== ========== ======== =========
COMMERCIAL BANKING SEGMENT - Noninterest expenses related to commercial banking
for the six month period ended June 30, 2002 were $54.3 million, as compared to
$47.9 million for the same period in 2001, an increase of $6.3 million or 13.2%.
Salaries and employee benefits from commercial banking for the six-month period
ended June 30, 2002 were $30.5 million, as compared to $26.3 million for the
same period in 2001, an increase of $4.3 million or 16.3%. Increased salaries
and employee benefits related to the acquisitions of Community and CaminoReal
for the first six months of 2002 were $2.1 million. Additionally, the Company
established a sales and trading department during the second quarter of 2001.
Occupancy expenses from commercial banking for the six-month period ended June
30, 2002 were $7.5 million, as compared to $6.5 million for the same period in
2001, an increase of $1.1 million or 16.3%. Increased expenses related to the
acquisitions of Community and CaminoReal for the first six months of 2002 were
$806 thousand.
Professional fees relating to commercial banking for the six-month period ended
June 30, 2002 were $1.9 million, as compared to $1.2 million for the same period
in 2001, an increase of $621 thousand or 50.0%. Computer software consulting
fees related to the trustee deposits held by the Bank was $412 thousand in 2002.
Also the Company incurred expenses of $109 thousand in the second quarter of
2002 related to its 401(k) plan conversion.
Conversion costs related to the acquisition of CaminoReal in March 2001 totaled
$1.0 million. The costs include retention and severance expenses as well as data
processing costs related to the conversion of CaminoReal's systems.
Minority interest expense increased $594 thousand or 28.8% from the six months
ended June 30, 2001 as compared to the same period in 2002. The increase is
related to the interest due on the additional trust preferred securities issued
in March 2001. Please refer to the subsequent discussion of Trust Preferred
Securities for additional details of the issuance.
Other expenses from commercial banking for the six-month period ended June 30,
2002 were $7.3 million, as compared to $6.5 million for the same period in 2001,
an increase of $758 thousand or 11.7%. The increase in other expenses related to
the CaminoReal and Community acquisitions was $456 thousand which includes
amortization of the core deposit intangible of $191 thousand.
14
MORTGAGE BANKING SEGMENT - Noninterest expenses related to mortgage banking for
the six-month period ended June 30, 2002 were $21.1 million, as compared to
$15.5 million for the same period in 2001, an increase of $5.7 million or 36.7%.
The increase in expenses is due to variable expenses related to the increase in
loan fundings and the opening of twenty-three new locations since June 2001.
Employees increased from 519 at June 30, 2001 to 975 at June 30, 2002.
Additionally, the amortization of mortgage servicing rights increased $1.7
million from June 30, 2001 to June 30, 2002. Mortgage servicing rights were $8.1
million at June 30, 2001 as compared $21.1 million at June 30, 2002, an increase
of 160.1%.
Provision for Income Taxes - The provision for income taxes as a percent of net
income before taxes decreased from 33.8% for the six-month period ended June 30,
2001 to 32.9% for the same period in 2002. This decrease is primarily due to the
elimination of goodwill amortization.
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO SAME PERIOD IN 2001
NET INCOME - Net income for the three-month period ended June 30, 2002 was $9.4
million as compared to $7.9 million for the same period in 2001, an increase of
approximately $1.5 million or 19.0%. This increase is primarily attributable to
continued loan and deposit growth as well as the acquisition of Community in
December 2001.
NET INTEREST INCOME - Net interest income for the three-month period ended June
30, 2002, was $35.3 million, as compared to $31.4 million for the same period in
2001, an increase of $3.8 million or 12.2%. The increase in net interest income
is primarily due to the growth in average earning assets of $277.1 million or
12.5% from the period ended June 30, 2001 to June 30, 2002. The growth in
average earning assets related to the acquisition of Community was 5.5%. While
average earning assets for the period ended June 30, 2002 increased over a year
ago, the yield decreased 138 basis points from 8.28% for the three-month period
ended June 30, 2001, to 6.90% for the same period in 2002. During 2001, the
Federal Reserve Bank decreased the discount rate 475 basis points. Consequently,
the Bank's yields decreased in 2001 and 2002 as a result of the Bank lowering
its prime rate in relation to the Federal Reserve decreases. As of June 30,
2002, average interest bearing liabilities were $1.7 billion, an increase of
$132.9 million or 8.5% from June 30, 2001. Average interest bearing deposits at
June 30, 2002 were $1.5 billion, an increase of 7.1% from June 30, 2001. The
increase in average interest bearing deposits related to the acquisition of
Community was 5.6%. The cost of interest bearing liabilities decreased 186 basis
points from 3.65% for the three months ended June 30, 2001 to 1.79% during the
same period in 2002. The decrease in the cost of interest bearing liabilities is
primarily the result of the decrease in the Federal Reserve Bank's discount rate
in 2001. The Company's 5.75% tax equivalent net interest margin for the three
months ended June 30, 2002 decreased from the 5.77% tax equivalent net interest
margin recorded during the same period in 2001.
15
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, 2002 and 2001, respectively:
CONSOLIDATED YIELD ANALYSIS
THREE MONTHS ENDED JUNE 30,
(DOLLARS IN THOUSANDS)
2002 2001
---------------------------------- -----------------------------------
YIELD ANALYSIS AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD BALANCE INTEREST YIELD
----------- -------- ------- ----------- -------- -------
INTEREST EARNING ASSETS:
Interest bearing deposits in financial institutions $ 2,276 $ 30 5.29% $ 1,460 $ 25 6.87%
Federal funds sold 26,459 116 1.76% 25,723 217 3.38%
Securites purchased under agreements to resell 762 8 4.21% 43,778 565 5.18%
Trading assets 100,851 943 3.75% 39,263 797 8.14%
Investment securities (taxable) 251,283 3,835 6.12% 302,374 5,045 6.69%
Investment securities (tax-exempt) 67,824 739 4.37% 76,842 837 4.37%
Loans held for sale (taxable) 311,533 5,722 7.37% 180,566 3,405 7.56%
Loans held for investment (taxable) 1,721,485 31,335 7.30% 1,535,663 34,662 9.05%
Loans (tax-exempt) 4,994 80 6.43% 4,689 65 5.56%
----------- -------- ------- ----------- -------- -------
Total Interest Earning Assets 2,487,467 42,808 6.90% 2,210,358 45,618 8.28%
NONINTEREST EARNING ASSETS:
Cash and due from banks 94,437 88,127
Premises and equipment, net 55,046 54,811
Other assets 208,437 157,073
Allowance for credit losses (24,267) (20,335)
----------- -----------
Total Noninterest Earning Assets 333,653 279,676
----------- -----------
Total Assets $ 2,821,120 $ 2,490,034
=========== ===========
INTEREST BEARING LIABILITIES:
Demand and savings deposits 884,354 $ 2,332 1.06% $ 788,577 $ 4,812 2.45%
Certificates and other time deposits 577,033 4,032 2.80% 576,542 7,309 5.08%
Other borrowed funds 210,922 995 1.89% 193,569 2,047 4.24%
Notes payable 20,879 197 3.78% 1,600 33 8.27%
----------- -------- ------- ----------- -------- -------
Total Interest Bearing Liabilities 1,693,188 7,556 1.79% 1,560,288 14,201 3.65%
NONINTEREST BEARING LIABILITIES:
Demand deposits 804,519 667,495
Other liabilities 34,915 23,118
----------- -----------
Total Noninterest Bearing Liabilities 839,434 690,613
Trust preferred securities 57,500 57,500
Shareholders' equity 230,998 181,633
----------- -----------
Total Liabilities and Shareholders' Equity $ 2,821,120 $ 2,490,034
=========== ===========
Net Interest Income & Margin $ 35,252 5.68% $ 31,417 5.70%
======== ======= ======== =======
Net Interest Income & Margin (tax equivalent) $ 35,657 5.75% $ 31,815 5.77%
======== ======= ======== =======
PROVISION FOR CREDIT LOSSES - The provision for credit losses for the second
quarters of 2002 and 2001 was $3.1 million. After net charge-offs of $2.7
million, the Company's allowance for credit losses increased by $419 thousand
from $23.8 million on March 31, 2002, to $24.2 million on June 30, 2002. 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.
16
NONINTEREST INCOME - Total non-interest income for the quarter ended June 30,
2002 was $23.0 million, as compared to $19.4 million for the same period in
2001, an increase of $3.6 million or 18.6%.
Noninterest income for the three months ended June 30, 2002 and 2001,
respectively, is summarized as follows:
2002 2001
------------------------------------ ------------------------------------
COMMERCIAL MORTGAGE COMMERCIAL MORTGAGE
BANKING BANKING COMBINED BANKING BANKING COMBINED
------------------------------------ ------------------------------------
Customer service fees $ 4,150 $ - $ 4,150 $ 3,889 $ - $ 3,889
Gain on sale of mortgage loans - 7,541 7,541 - 7,191 7,191
Mortgage origination income - 5,613 5,613 - 3,771 3,771
Other 3,214 2,476 5,690 2,107 2,434 4,541
---------- -------- -------- ---------- -------- --------
$ 7,364 $ 15,630 $ 22,994 $ 5,996 $ 13,396 $ 19,392
========== ======== ======== ========== ======== ========
COMMERCIAL BANKING SEGMENT - Noninterest income from commercial banking for the
three-month period ended June 30, 2002 was $7.4 million, as compared to $6.0
million for the same period in 2001, an increase of $1.4 million or 22.8%. Other
noninterest income increased 52.5% from $2.1 million for the three months ended
June 30, 2001 to $3.2 million for the same period in 2002. Included in the
increase is a $105 thousand increase from gains on the sale of trading assets.
The trading department was established in the second quarter of 2001. In 2002,
the Bank began selling the guaranteed portion of SBA loans. A premium of $186
thousand was recognized in the second quarter of 2002 from the Company's sale of
the guaranteed portion of SBA loans. Also the Bank had an increase of $241
thousand due to growth in the debit card and brokerage operations. Additionally,
the Company sold the charter for Community Bank to Sabine State Bank & Trust
Company in June 2002 for $150 thousand.
MORTGAGE BANKING SEGMENT - Noninterest income from the mortgage banking segment
increased 16.7% from $13.4 million for the second quarter of 2001 to $15.6
million for the same period in 2002. The income from the mortgage banking
segment typically consists of origination fees and gains on sale of mortgage
loans. Since June 2001, twenty-three new locations have been opened with
fourteen of the new locations in California. During the second quarter of 2002,
SCMC had $852.0 million in loan fundings as compared to $670.8 million for the
same period in 2001.
NONINTEREST EXPENSE - Noninterest expense increased $5.7 million or 16.1%, to
$41.1 million for the three month period ending June 30, 2002 as compared to
$35.4 million for the same period in 2001.
Noninterest expense for the three months ended June 30, 2002 and 2001,
respectively, is summarized as follows:
2002 2001
------------------------------------ ------------------------------------
COMMERCIAL MORTGAGE COMMERCIAL MORTGAGE
BANKING BANKING COMBINED BANKING BANKING COMBINED
------------------------------------ ------------------------------------
Salaries and employee benefits $ 15,562 $ 7,682 $ 23,244 $ 13,943 $ 6,697 $ 20,640
Occupancy expense 3,835 1,955 5,790 3,604 1,105 4,709
Net loss and carrying costs of
real estate acquired by foreclosure 5 - 5 82 - 82
FDIC assessment 137 - 137 114 - 114
Technology 1,275 64 1,339 1,414 77 1,491
Postage and delivery charges 556 240 796 506 157 663
Supplies 291 397 688 390 105 495
Professional fees 1,250 87 1,337 620 38 658
Minority interest expense 1,325 366 1,691 1,313 527 1,840
Other 3,663 2,380 6,043 3,695 974 4,669
---------- -------- -------- ---------- -------- --------
$ 27,899 $ 13,171 $ 41,070 $ 25,681 $ 9,680 $ 35,361
========== ======== ======== ========== ======== ========
17
COMMERCIAL BANKING SEGMENT - Noninterest expenses related to commercial banking
for the second quarter of 2002 were $27.9 million, as compared to $25.7 million
for the same period in 2001, an increase of $2.2 million or 8.6%. Salaries and
employee benefits from commercial banking for the three-month period ended June
30, 2002 were $15.6 million, as compared to $13.9 million for the same period in
2001, an increase of $1.6 million or 11.6%. Increased salaries and employee
benefits expenses related to the acquisition of Community in December 2001 were
$460 thousand. Additionally, the Company established a sales and trading
department during the second quarter of 2001.
Professional fees from commercial banking for the three-month period ended June
30, 2002 were $1.3 million, as compared to $620 thousand for the same period in
2001, an increase of $630 thousand or 101.6%. Computer software consulting
related to the trustee deposits held by the Bank was $412 thousand in the second
quarter of 2002. Also the Company incurred expenses of $109 thousand in the
second quarter of 2002 related to its 401(k) plan conversion.
MORTGAGE BANKING SEGMENT - Noninterest expenses related to mortgage banking for
the three-month period ended June 30, 2002 were $13.2 million, as compared to
$9.7 million for the same period in 2001, an increase of $3.5 million or 36.1%.
The increase in expenses is due to variable expenses related to the increase in
loan fundings and the opening of twenty-three new locations since June 2001.
Employees increased from 519 at June 30, 2001 to 975 at June 30, 2002.
Additionally, the amortization of mortgage servicing rights increased $915
thousand from the three months ended June 30, 2001 to the same period in 2002.
Mortgage servicing rights were $8.1 million at June 30, 2001 as compared $21.1
million at June 30, 2002, an increase of 160.1%.
PROVISION FOR INCOME TAXES - The provision for income taxes as a percent of net
income before taxes decreased from 36.1% for the second quarter of 2001 to 33.4%
for the same period in 2002. This decrease is primarily due to the elimination
of goodwill amortization.
FINANCIAL CONDITION
TOTAL ASSETS - The total consolidated assets of the Company increased $180.3
million from $2.78 billion at December 31, 2001 to $2.96 billion at June 30,
2002.
CASH AND CASH EQUIVALENTS - The Company had cash and cash equivalents of $123.2
million at June 30, 2002. Comparatively, the Company had $148.3 million in cash
and cash equivalents on December 31, 2001, a decrease of $25.1 million.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL - As of June 30, 2002,
securities purchased under agreements to resell totaled $2.8 million as compared
to $12.3 million as of December 31, 2001. The securities purchased are SBA or
USDA guaranteed loan certificates. These repurchase agreements generally have a
term of nine months or less.
TRADING ASSETS - Trading assets as of June 30, 2002 were $102.3 million. During
the second quarter of 2001, the Company began trading government guaranteed
loans and pools. These assets are held up to 120 days. In addition, a portion of
the loans are being retained as originator fees which are a by-product of the
pool formation process. The trading assets are carried at fair market value. The
realized and unrealized gains and losses are included in income.
SECURITIES - The Company's securities portfolio as of June 30, 2002, totaled
$319.1 million, as compared to $342.9 million on December 31, 2001, a decrease
of $23.8 million or 6.9%. On June 30, 2002, the unrealized gain on the available
for sale securities was $7.1 million.
18
LOANS HELD FOR SALE - Total loans held for sale increased from $261.5 million at
December 31, 2001 to $434.6 million at June 30, 2002, an increase of $173.1
million, or 66.2%. These loans represent loans funded by the Bank through a
mortgage warehouse line to SCMC.
LOANS HELD FOR INVESTMENT - As of June 30, 2002, loans held for investment were
$1.76 billion which was a $92.8 million, or 5.6%, increase from the balance of
$1.67 billion on December 31, 2001. At June 30, 2002, loans held for investment
as a percentage of assets and deposits were 59.5% and 75.8%, respectively.
The following table summarizes the Company's held for investment loan portfolio
by type of loan as of June 30, 2002 (in thousands):
PERCENT OF
AMOUNT TOTAL
---------------- ------------
Commercial, financial and industrial $ 541,107 24.66%
Real estate - commercial 583,284 26.58%
Real estate - residential mortgage 159,480 7.27%
Real estate - construction 319,093 14.54%
Foreign commercial and industrial 5,789 0.26%
Consumer and other 150,895 6.88%
Unearned discounts (22) 0.00%
---------------- ------------
Total loans held for investment 1,759,626 80.19%
Loans held for sale 434,634 19.81%
---------------- ------------
Total loans $ 2,194,260 100.00%
================ ============
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, 2002 and June 30,
2001, respectively, (in thousands):
2002 2001
----------- ------------
Allowance for credit losses, January 1, $ 22,927 $ 16,862
Charge-offs (5,372) (4,709)
Recoveries 951 773
Acquisition of CaminoReal Bancshares, Inc. - 1,895
Provision for credit losses 5,711 5,472
----------- ------------
Allowance for credit losses, June 30, $ 24,217 $ 20,293
=========== ============
Net charge-offs as a percentage of average
loans (annualized) 0.45% 0.49%
=========== ============
Provision for credit losses as a percentage of
average loans (annualized) 0.58% 0.68%
=========== ============
The following is a summary of the relationship of the allowance for credit
losses to loans held for investment at June 30, 2002, and December 31, 2001 (in
thousands):
JUNE 30, DECEMBER 31,
2002 2001
----------- ------------
Loans held for investment at period-end $ 1,759,626 $ 1,666,788
Allowance for credit losses $ 24,217 $ 22,927
Allowance as a percent of period-end loans held
for investment 1.38% 1.38%
19
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.
Sixteen properties make up the $2.4 million of other real estate owned ("ORE")
at June 30, 2002. All properties are carried at the lower of cost or fair market
value.
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 June 30, 2002,
the Company has no material foreign loans outstanding or loan concentrations.
The following table summarizes total nonperforming assets and potential problem
loans at December 31, 2001 and at June 30, 2002:
JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
(IN THOUSANDS)
Nonaccrual loans $ 14,936 $ 14,179
Restructured loans - 16
-------- ------------
Total nonperforming loans 14,936 14,195
Other real estate ("ORE") and other
foreclosed assets 2,456 1,964
-------- ------------
Total nonperforming assets $ 17,392 $ 16,159
======== ============
Total nonperforming assets as a % of loans,
ORE and other foreclosed assets 0.79% 0.84%
Allowance for credit losses as a percentage of
nonperforming assets 139.24% 141.88%
Accruing loans past due 90 days or more 1,062 1,360
Potential problem loans, other than those shown
above as nonperforming $ 51,326 $ 51,456
PREMISES AND EQUIPMENT - The Company's premises and equipment, net of
depreciation, as of June 30, 2002, was $55.4 million, as compared to $54.2
million as of December 31, 2001, an increase of $1.2 million.
DEPOSITS - Total deposits as of June 30, 2002, were $2.32 billion, as compared
to $2.27 billion on December 31, 2001, an increase of $53.6 million.
Non-interest bearing demand deposits at June 30, 2002, were $877.1 million, as
compared to $797.9 million at December 31, 2001, an increase of $79 million. The
percentage of noninterest bearing deposits to total deposits as of June 30, 2002
was 37.8%.
20
TRUST PREFERRED SECURITIES - In February 2001, the Company formed Sterling
Bancshares Capital Trust II ("Trust II") and Sterling Bancshares Capital Trust
III. On March 21, 2001, Trust II issued 1,150,000 9.20% Trust Preferred
Securities (the "Trust Preferred Securities") with an aggregate liquidation
value of $28,750,000. Concurrent with the issuance of the Trust Preferred
Securities, Trust II issued trust common securities to the Company in the
aggregate liquidation value of $889,175. The proceeds of the issuance of the
Trust Preferred Securities and trust common securities were invested in the
Company's 9.20% Junior Subordinated Deferrable Interest Debentures (the "Junior
Subordinated Debentures"). The proceeds of the issuance of the Junior
Subordinated Debentures were used by the Company to fund a portion of the cash
purchase price for the Company's acquisition of CaminoReal Bancshares of Texas,
Inc. The Junior Subordinated Debentures will mature on March 21, 2031, which
date may be shortened to a date not earlier than March 21, 2006, if certain
conditions are met (including the Company have received prior approval of the
Federal Reserve and any other required regulatory approvals). Trust II must
redeem the Trust Preferred Securities when the Junior Subordinated Debentures
are paid at maturity or upon any earlier prepayment of the Junior Subordinated
Debentures. The Junior Subordinated Debentures may be prepaid if certain events
occur, including a change in the tax status or regulatory capital treatment of
the Trust Preferred Securities or a change in existing laws that requires Trust
II to register as an investment company.
CAPITAL RESOURCES AND LIQUIDITY
SHAREHOLDERS' EQUITY - At June 30, 2002, the shareholders' equity totaled $233.8
million, as compared to $217.4 million at December 31, 2001. 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 June 30,
2002, with Tier-I capital, total risk-based capital, and leverage capital ratios
of 9.10%, 10.05%, and 8.40%, 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
commercial banks, available Federal Home Loan Bank ("FHLB") advances, as well as
a $20 million revolving credit facility with Wells Fargo Bank Minnesota, N. A.
The Company currently has $20 million outstanding under the terms of the credit
facility with Wells Fargo Bank Minnesota, N. A.
In accordance with the provisions of 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, J. Downey Bridgwater,
President and Chief Executive Officer, and Eugene S. Putnam, Jr., Chief
Financial Officer, respectively, of the Company have each executed a
certificate, copies of which are attached as Exhibits 99.1 and 99.2 to this
Quarterly Report on Form 10-Q of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes since December 31, 2001. For more
information regarding quantitative and qualitative disclosures about market
risk, please refer to the Company's Annual Report on Form 10-K as of and for the
year ended December 31, 2001, and in particular, Item 7 "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Interest Rate
Sensitivity and Liquidity".
21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES
(c) On March 7, 2002, the Company completed a private placement of 20,000
shares of the Company's Series I Convertible Preferred Stock (the "Series I
Preferred Stock"). The sales price was $12.08 per share for an aggregate
sales price of $241,600. No commissions were paid by the Company in
connection with the private placement. It is expected that the proceeds of
the private placement will be used for general corporate purposes.
The Series I Preferred Stock is convertible into shares of the Company's
common stock based upon performance goals for the Dallas banking office for
which such shares were issued. The conversion ratio ranges from 1.25 shares
of common stock if the performance goals are met prior to November 7, 2003,
to 1.1 shares of common stock if the performance goals are met prior to
November 7, 2004. After November 7, 2004, each share of Series I
Convertible Preferred Stock will automatically convert into one share of
common stock.
The private placement was limited to accredited investors as defined in
Rule 501 of Regulation D and the thirteen purchasers in the private
placement consisted solely of accredited investors. The private placement
was not registered under the Securities Act of 1933, as amended (the
"Securities Act"), and was made in reliance on Section 4(2) of the
Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's Annual Meeting of Stockholders was held on April 29, 2002, to
consider and vote on the following proposals:
Proposal 1: The Election of Directors
The following individuals were nominated and elected as Class I directors to
hold office until the 2005 annual meeting of the stockholders of the Company or
until their successors have been duly elected and qualified.
For Withheld
George Beatty, Jr. 36,685,485 241,872
Anat Bird 36,812,142 115,215
Paul Michael Mann, M.D. 36,813,889 113,468
Thomas A. Reiser 36,774,397 152,960
Gregory A. Stirman 36,839,446 87,911
Howard T. Tellepsen, Jr. 36,865,819 61,538
22
Christian A. Rasch was nominated and elected as a Class II directors to hold
office until the 2003 annual meeting of the stockholders of the Company or until
his successor has been duly elected and qualified.
For Withheld
Christian A. Rasch 36,848,246 79,111
The following directors continued in office after the annual meeting:
J. Downey Bridgwater James J. Kearney
John H. Buck George Martinez
James D. Callaway David B. Moulton
James M. Clepper G. Edward Powell
Bruce J. Harper Steven F. Retzloff
David L. Hatcher Ramundo Riojas E.
Glenn H. Johnson
Proposal 2: Approval of an amendment to the Company's Articles of Incorporation
(as amended and restated) to increase the number of authorized shares of the
Company's common stock , $1.00 par value per share, from 50,000,000 to
100,000,000.
For 35,213,706 Against 1,600,056 Abstain 113,594
------------ ------------- -----------
Proposal 3: Ratification of the appointment of Deloitte & Touche LLP as the
Company's independent public accountants for its fiscal year ending December 31,
2002.
For 36,518,190 Against 396,294 Abstain 12,872
-------------- ------------- ---------
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
*2.1 -- Agreement and Plan of Merger Among Sterling
Bancshares, Inc., Sterling Bancorporation, Inc. and
ENB Bankshares Inc. dated as of May 22, 2002
*2.2 -- Purchase and Assumption Agreement dated July 12,
2002 between Sterling Bank and James Wilson as
amended by First Amendment to Purchase and Assumption
Agreement dated as of August 2, 2002.
3.1 -- Restated and Amended Articles of Incorporation of
Sterling Bancshares, Inc. (filed as Exhibit 3.1 to
Registration Statement on Form S-3 (File Nos.
333-55724, 333-55724-01 and 333-55724-02) and
incorporated herein by reference).
*3.2 -- Articles of Amendment to the Restated and Amended
Articles of Incorporation of Sterling Bancshares,
Inc.
*3.3 -- Amended and Restated Bylaws of Sterling
Bancshares, Inc.
11 -- Statement Regarding Computation of Earnings Per
Share (included as Note (2) to Interim Consolidated
Financial Statements on page 5 of this Quarterly
Report on Form 10-Q).
*99.1 -- Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
*99.2 -- Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
--------
*As filed herewith.
23
(b) Reports on Form 8-K:
(1) Current Report on Form 8-K filed April 18, 2002
announcing the release of Sterling Bancshares'
preliminary earnings report for the three months
ended March 31, 2002.
(2) Current Report on Form 8-K filed May 22, 2002
announcing the execution of an Agreement and Plan of
Merger by ENB Bancshares, Inc. and Sterling
Bancshares Inc. providing for the merger of ENB
Bancshares, Inc. with Sterling Bancshares.
24
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)
Date: August 13, 2002 By: /s/ J. Downey Bridgwater
----------------------------------
J. Downey Bridgwater
President and
Chief Executive Officer
Date: August 13, 2002 By: /s/ Eugene S. Putnam, Jr.
----------------------------------
Eugene S. Putnam, Jr.
Executive Vice President
and Chief Financial Officer
25
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
*2.1 Agreement and Plan of Merger dated as of May 22, 2002, by and between
Sterling Bancshares, Inc. and ENB Bankshares, Inc.
*2.2 Purchase and Assumption Agreement dated July 12, 2002 between Sterling
Bank and James Wilson as amended by First Amendment to Purchase and
Assumption Agreement dated as of August 2, 2002.
3.1 Restated and Amended Articles of Incorporation of Sterling Bancshares,
Inc. (filed as Exhibit 3.1 to Registration Statement on Form S-3 (File
Nos. 333-55724, 333-55724-01 and 333-55724-02) and incorporated herein
by reference).
*3.2 Articles of Amendment to the Restated and Amended Articles of
Incorporation of Sterling Bancshares, Inc.
*3.3 Amended and Restated Bylaws of Sterling Bancshares, Inc.
11 Statement Regarding Computation of Earnings Per Share (included as
Note (2) to Interim Consolidated Financial Statements on page 6 of
this Current Report on Form 10-Q).
*99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
*99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
- --------
*As filed herewith.
26