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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2000
OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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Commission file number: 0-25141
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MetroCorp Bancshares, Inc.
(Exact name of registrant as specified in its charter)
Texas 76-0579161
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9600 Bellaire Boulevard, Suite 252
Houston, Texas 77036
(Address of principal executive offices including zip code)
(713) 776-3876
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
(Title of class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of March 9, 2001, the number of outstanding shares of Common Stock was
6,981,484. As of such date, the aggregate market value of the shares of Common
Stock held by non-affiliates, based on the closing price of the Common Stock
on the Nasdaq National Market System on such date of $10.063 per share, was
approximately $70,254,673.
Documents Incorporated by Reference:
Portions of the Company's Proxy Statement for the 2001 Annual Meeting of
Shareholders, which will be filed within 120 days after December 31, 2000, are
incorporated by reference into Part III, Items 10-13 of this Form 10-K.
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PART I
Special Cautionary Notice Regarding Forward-Looking Statements
Statements and financial discussion and analysis contained in this Annual
Report on Form 10-K and documents incorporated herein by reference that are
not historical facts are forward-looking statements made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements describe the Company's future plans, strategies and
expectations, are based on assumptions and involve a number of risks and
uncertainties, many of which are beyond the Company's control. The important
factors that could cause actual results to differ materially from the results,
performance or achievements expressed or implied by the forward-looking
statements include, without limitation:
. changes in interest rates and market prices, which could reduce the
Company's net interest margins, asset valuations and expense
expectations;
. changes in the levels of loan prepayments and the resulting effects on
the value of the Company's loan portfolio;
. changes in local economic and business conditions which adversely
affect the ability of the Company's customers to transact profitable
business with the Company, including the ability of borrowers to repay
their loans according to their terms or a change in the value of the
related collateral;
. increased competition for deposits and loans adversely affecting rates
and terms;
. the Company's ability to identify suitable acquisition candidates;
. the timing, impact and other uncertainties of the Company's ability to
enter new markets successfully and capitalize on growth opportunities;
. increased credit risk in the Company's assets and increased operating
risk caused by a material change in commercial, consumer and/or real
estate loans as a percentage of the total loan portfolio;
. the failure of assumptions underlying the establishment of and
provisions made to the allowance for loan losses;
. changes in the availability of funds resulting in increased costs or
reduced liquidity;
. increased asset levels and changes in the composition of assets and the
resulting impact on our capital levels and regulatory capital ratios;
. the Company's ability to acquire, operate and maintain cost effective
and efficient systems without incurring unexpectedly difficult or
expensive but necessary technological changes;
. the loss of senior management or operating personnel and the potential
inability to hire qualified personnel at reasonable compensation
levels; and
. changes in statutes and government regulations or their interpretations
applicable to bank holding companies and our present and future banking
and other subsidiaries, including changes in tax requirements and tax
rates.
All written or oral forward-looking statements attributable to the Company
are expressly qualified in their entirety by these cautionary statements. The
Company undertakes no obligation to publicly update or otherwise revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
2
Item 1. Business
General
MetroCorp Bancshares, Inc. (the "Company") was incorporated as a business
corporation under the laws of the State of Texas in 1998 to serve as a holding
company for MetroBank, National Association (the "Bank"). The Company's
headquarters are located at 9600 Bellaire Boulevard, Suite 252, Houston, Texas
77036, and its telephone number is (713) 776-3876.
The Company's mission is to enhance shareholder value by maximizing
profitability and operating as the premier multi-ethnic bank in each community
that it serves. The Company operates in a niche market by providing
personalized, culturally sensitive service to the Asian and Hispanic
communities in Houston and Dallas. The Company has strategically opened each
of its 14 banking offices in an area with a large Asian or Hispanic community
and intends to pursue branch opportunities in multi-ethnic markets with
significant small and medium-sized business activity.
Management believes that both the Asian and Hispanic communities present
excellent opportunities for future growth. Based on data obtained from the
Greater Houston Partnership, the greater Houston metropolitan area is home to
an Asian population of approximately 245,900, with people of Vietnamese,
Chinese, Korean and Taiwanese ancestry comprising the four largest groups.
Houston's Hispanic population is approximately 1,146,300 and represents
approximately one-quarter of the city's population. The Asian and Hispanic
communities together comprise almost one-third of the total population of
Houston. Similarly, based on data obtained from the Dallas Chamber of
Commerce, the greater Dallas metropolitan area has a growing Asian community
of approximately 131,300 and a Hispanic population of approximately 572,300
which constitute, in the aggregate, approximately one-quarter of the total
population of Dallas.
While the Company believes many of its competitors either fail to recognize
the cultural distinctions among various ethnic groups or focus on only one
ethnic group, management of the Company is acutely aware of and understands
the unique cultural nuances of each community it serves. Multi-ethnic
customers require a special level of understanding from their banker, whether
it be the specific characteristics of the businesses they operate or the
native dialect in which they converse. In order to better serve its customers,
the Company recruits bilingual, multilingual and multicultural employees,
publishes Company literature in four languages (English, Spanish, Vietnamese,
and Chinese) and celebrates cultural holidays such as Chinese New Year and
Cinco de Mayo at its branches. In addition, the active involvement of
directors and officers in various ethnic civic organizations allows management
to better understand and respond to the needs of each community that it
serves. Management believes that each ethnic group has its own unique cultural
characteristics and tailors its products and services to best serve each
group. For example, the Company offers deposit products that appeal to the
unique saving philosophies of various ethnic groups. The Company believes that
this awareness, personalized service and a broad array of products gives it a
distinct competitive advantage in its chosen market areas.
The Bank was organized in 1987 by Don J. Wang, the Company's current
Chairman of the Board, President and Chief Executive Officer, and five other
Asian-American small business owners, four of whom currently serve as
directors of the Company and the Bank. The organizers perceived that the
financial needs of various ethnic groups in Houston were not being adequately
served and sought to provide modern banking products and services that
accommodated the cultures of the businesses operating in these communities. In
1989, the Company expanded its service philosophy to Houston's Hispanic
community by acquiring from the Federal Deposit Insurance Corporation (the
"FDIC") the assets and liabilities of a community bank located in a primarily
Hispanic section of Houston. This acquisition broadened the Company's market
and increased its assets from approximately $30.0 million to approximately
$100.0 million. Other than this acquisition, the Company has accomplished its
growth internally through the establishment of de novo branches in market
areas with large Asian and Hispanic communities. Since its formation in 1987,
the Company has established 11 branches in the greater Houston metropolitan
area. In 1996, the Company expanded into the Dallas market. The success of the
Dallas branch, whose deposits increased to $45.9 million from opening to
December 31, 2000, prompted the Company to establish a second branch in the
greater Dallas metropolitan area in 1998 and a third branch in 1999.
3
Business
In connection with the Company's multi-ethnic approach to community
banking, the Company offers products designed to appeal to its customers and
further enhance profitability. The Company believes that it has developed a
reputation as the premier provider of financial products and services to small
and medium-sized businesses and consumers located in the Asian and Hispanic
communities that it serves. Each of its product lines is an outgrowth of the
Company's expertise in meeting the particular needs of its customers. The
Company's principal lines of business are the following:
Commercial and Industrial Loans. The primary lending focus of the
Company is to small and medium-sized businesses in a variety of industries.
Its commercial lending emphasis includes loans to wholesalers,
manufacturers and business service companies. The Company makes available
to businesses a broad range of short and medium-term commercial lending
products for working capital (including inventory and accounts receivable),
purchases of equipment and machinery and business expansion (including
acquisitions of real estate and improvements). As of December 31, 2000, the
Company's commercial and industrial loan portfolio totaled $298.1 million
or 60.9% of the gross loan portfolio. At that date, the Company had a
concentration of loans in the hotel and motel industry of $79.0 million.
Hotel and motel lending was originally targeted by the Company because of
management's particular expertise in this industry and a perception that it
was an under-served market. More recently, the Company has broadened its
lending strategy in efforts to further diversify its portfolio to other
industries such as retail centers, restaurants, self-service gasoline and
convenience marts, apartment buildings, and various other small businesses.
Commercial Mortgage Loans. The Company makes commercial mortgage loans
to finance the purchase of real property, which generally consists of
developed real estate. The Company's commercial mortgage loans are secured
by first liens on real estate, typically have variable rates and amortize
over a 15 to 20 year period, with balloon payments due at the end of five
to seven years. As of December 31, 2000, the Company had a commercial
mortgage portfolio of $128.2 million.
Construction Loans. The Company makes loans to finance the construction
of residential and non-residential properties. The majority of the
Company's residential construction loans are for single-family dwellings,
which are under earnest money contracts. The Company also originates loans
to finance the construction of commercial properties such as multi-family,
office, industrial, warehouse and retail centers. As of December 31, 2000,
the Company had a real estate construction portfolio of $39.6 million, of
which $7.5 million was residential and $32.1 million was commercial.
Residential Mortgage Brokerage and Lending. The Company uses its
existing branch network to offer a complete line of single-family
residential mortgage products. The Company solicits and receives a fee to
process residential mortgage loans, which are underwritten and pre-sold to
third party mortgage companies. The Company does not fund or service the
loans underwritten by third party mortgage companies. The Company also
makes five to seven year balloon residential mortgage loans with a 15-year
amortization to its existing customers on a select basis, which loans are
retained in the Company's portfolio. At December 31, 2000, the residential
mortgage portfolio totaled $10.1 million.
Government Guaranteed Small Business Lending. The Company has developed
an expertise in several government guaranteed lending programs in order to
provide credit enhancement to its commercial and industrial and mortgage
portfolios. As a Preferred Lender under the United States Small Business
Administration (the "SBA") federally guaranteed lending program, the
Company's pre-approved status allows it to quickly respond to customers'
needs. Depending upon prevailing market conditions, the Company may sell
the guaranteed portion of these loans into the secondary market, yet retain
servicing of these loans. The Company specializes in SBA loans to minority-
owned businesses. As of December 31, 2000, the Company had $88.1 million in
the retained portion of its SBA loans, approximately $56.3 million of which
was guaranteed by the SBA. For each of the last six years, the Company has
been the second (1995 to 1999) and third (year 2000) largest SBA loan
originator in Houston in terms of dollar volume. Another source of
government guaranteed lending provided by the Company is Business and
Industrial loans ("B&I Loans") which are secured by the U.S. Department of
Agriculture (the "USDA") and are
4
available to borrowers in areas with a population of less than 50,000. As
of December 31, 2000, the Company's USDA portfolio totaled $5.3 million.
The Company also offers guaranteed loans through the Overseas Chinese
Credit Guaranty Fund ("OCCGF"), which is sponsored by the government of
Taiwan. These loans are for people of Chinese decent or origin, who are not
mainland Chinese by birth and who reside "overseas." As of December 31,
2000, the Company's OCCGF portfolio totaled $6.6 million.
Trade Finance. Since its inception in 1987, the Company has originated
trade finance loans and letters of credit to facilitate export and import
transactions for small and medium-sized businesses. In this capacity, the
Company has worked with the Export Import Bank of the United States (the
"Ex-Im Bank"), an agency of the U.S. Government which provides guarantees
for trade finance loans. In 1998, the Company was named Small Business Bank
of the Year by the Ex-Im Bank, and it was the largest Ex-Im Bank loan
producer in the State of Texas. At December 31, 2000, the Company's
aggregate trade finance portfolio commitments totaled approximately $11.3
million.
The Company offers a variety of loan and deposit products and services to
retail customers through its branch network in Houston and Dallas. Loans to
retail customers include residential mortgage loans, residential construction
loans, automobile loans, lines of credit and other personal loans. Retail
deposit products and services include checking and savings accounts, money
market accounts, time deposits, ATM cards, debit cards and online banking.
The Company's overall business strategy is to (i) continue to service its
small and medium-sized owner-operated businesses and retail customers,
especially in the Asian and Hispanic communities by providing individualized,
responsive, quality service, and (ii) expand its geographic reach either
through selective acquisitions of existing financial institutions or by
establishing de novo branches in multi-ethnic markets with significant small
and medium-sized business activity.
In 1994, the Bank established an accounts receivable factoring subsidiary,
Advantage Finance Corporation ("AFC"), to provide financing to small and
medium-sized businesses that have accounts receivables. In late May 2000, the
Company discovered AFC had been a victim of a fraudulent scheme by a long-time
customer of AFC which required a one-time charge-off of $5.3 million against
the Bank's loan loss reserve during the second quarter of 2000. During the
second quarter of 2000, the Bank added back to its loan loss reserve an amount
equal to the charge-off. In order to concentrate its efforts on core business
strategies and products, effective December 20, 2000, the Company sold AFC to
a third party. The sale consisted of $3.2 million in AFC's factored
receivables, $1.2 million in AFC's relationship loans originated by the Bank,
along with associated fixed assets and prepaid expenses, offset by accounts
payable and deferred loan fees, for an aggregate cash payment of $4.3 million.
All of AFC's employees were offered employment with the purchaser as part of
the transaction. In connection with the sale of AFC, the Bank closed its
branch located in the Galleria area of Houston. However, the Bank retained the
loan and deposit portfolios associated with the Galleria branch, which totaled
$18.3 million and $13.5 million, respectively, at December 31, 2000.
Competition
The banking business is highly competitive, and the profitability of the
Company depends principally on the Company's ability to compete in the market
areas in which its banking operations are located. The Company competes with
other commercial banks, savings banks, savings and loan associations, credit
unions, finance companies, mutual funds, insurance companies, brokerage and
investment banking firms, asset-based non-bank lenders and certain other non-
financial entities, including retail stores which may maintain their own
credit programs and certain governmental organizations which may offer more
favorable financing. The Company has been able to compete effectively with
other financial institutions by emphasizing customer service, technology and
responsive decision-making. Additionally, management believes the Company
remains competitive by establishing long-term customer relationships, building
customer loyalty and providing a broad line of products and services designed
to address the specific needs of its customers.
5
Under the Gramm-Leach-Bliley Act, effective March 11, 2000, securities
firms and insurance companies that elect to become financial holding companies
may acquire banks and other financial institutions. The Gramm-Leach-Bliley Act
may significantly change the competitive environment in which the Company and
its subsidiaries conduct business. See "--Supervision and Regulation--The
Company--Financial Modernization". The financial services industry is also
likely to become even more competitive as further technological advances
enable more companies to provide financial services. These technological
advances may diminish the importance of depository institutions and other
financial intermediaries in the transfer of funds between parties.
Employees
As of December 31, 2000, the Company had 319 full-time equivalent
employees, 31 of whom were officers of the Bank classified as Vice President
or above. The Company considers its relations with employees to be
satisfactory.
Supervision and Regulation
The supervision and regulation of bank holding companies and their
subsidiaries is intended primarily for the protection of depositors, the
deposit insurance funds of the FDIC and the banking system as a whole, and not
for the protection of the bank holding company shareholders or creditors. The
banking agencies have broad enforcement power over bank holding companies and
banks including the power to impose substantial fines and other penalties for
violations of laws and regulations.
The following description summarizes some of the laws to which the Company
and the Bank are subject. References herein to applicable statutes and
regulations are brief summaries thereof, do not purport to be complete, and
are qualified in their entirety by reference to such statutes and regulations.
The Company
The Company is a bank holding company registered under the Bank Holding
Company Act, as amended, (the "BHCA"), and it is subject to supervision,
regulation and examination by the Board of Governors of the Federal Reserve
System ("Federal Reserve Board"). The BHCA and other federal laws subject bank
holding companies to particular restrictions on the types of activities in
which they may engage, and to a range of supervisory requirements and
activities, including regulatory enforcement actions for violations of laws
and regulations.
Regulatory Restrictions on Dividends: Source of Strength. It is the policy
of the Federal Reserve Board that bank holding companies should pay cash
dividends on common stock only out of income available over the past year and
only if prospective earnings retention is consistent with the organization's
expected future needs and financial condition. The policy provides that bank
holding companies should not maintain a level of cash dividends that
undermines the bank holding company's ability to serve as a source of strength
to its banking subsidiaries.
Under Federal Reserve Board policy, a bank holding company is expected to
act as a source of financial strength to each of its banking subsidiaries and
commit resources to their support. Such support may be required at times when,
absent this Federal Reserve Board policy, a holding company may not be
inclined to provide it. As discussed below, a bank holding company in certain
circumstances could be required to guarantee the capital plan of an
undercapitalized banking subsidiary.
In the event of a bank holding company's bankruptcy under Chapter 11 of the
U.S. Bankruptcy Code, the trustee will be deemed to have assumed and is
required to cure immediately any deficit under any commitment by the debtor
holding company to any of the federal banking agencies to maintain the capital
of an insured depository institution, and any claim for breach of such
obligation will generally have priority over most other unsecured claims.
6
Financial Modernization. On November 12, 1999, President Clinton signed
into law the Gramm-Leach-Bliley Act that eliminated the barriers to
affiliations among banks, securities firms, insurance companies and other
financial service providers. The Gramm-Leach-Bliley Act, effective March 11,
2000, permits bank holding companies to become financial holding companies and
thereby affiliate with securities firms and insurance companies and engage in
other activities that are financial in nature. No regulatory approval will be
required for a financial holding company to acquire a company, other than a
bank or savings association, engaged in activities that are financial in
nature or incidental to activities that are financial in nature, as determined
by the Federal Reserve Board.
Under the Gramm-Leach-Bliley Act, a bank holding company may become a
financial holding company if each of its subsidiary banks is well capitalized
under the Federal Deposit Insurance Corporation Improvement Act ("FDICIA")
prompt corrective action provisions, is well managed, and has at least a
satisfactory rating under the Community Reinvestment Act of 1977 ("CRA") by
filing a declaration that the bank holding company wishes to become a
financial holding company. The Gramm-Leach-Bliley Act defines "financial in
nature" to include securities underwriting, dealing and market making;
sponsoring mutual funds and investment companies; insurance underwriting and
agency; merchant banking activities; and activities that the Federal Reserve
Board has determined to be closely related to banking. Subsidiary banks of a
financial holding company must remain well capitalized and well managed in
order to continue to engage in activities that are financial in nature without
regulatory actions or restrictions, which could include divestiture of the
financial in nature subsidiary or subsidiaries. In addition, a financial
holding company may not acquire a company that is engaged in activities that
are financial in nature unless each of its subsidiary banks has a CRA rating
of satisfactory or better.
While the Federal Reserve Board will serve as the "umbrella" regulator for
financial holding companies and has the power to examine banking organizations
engaged in new activities, regulation and supervision of activities which are
financial in nature or determined to be incidental to such financial
activities will be handled along functional lines. Accordingly, activities of
subsidiaries of a financial holding company will be regulated by the agency or
authorities with the most experience regulating that activity as it is
conducted in a financial holding company.
Safe and Sound Banking Practices. Bank holding companies are not permitted
to engage in unsafe and unsound banking practices. The Federal Reserve Board's
Regulation Y, for example, generally requires a holding company to give the
Federal Reserve Board prior notice of any redemption or repurchase of its own
equity securities, if the consideration to be paid, together with the
consideration paid for any repurchases or redemptions in the preceding year,
is equal to 10% or more of the company's consolidated net worth. The Federal
Reserve Board may oppose the transaction if it believes that the transaction
would constitute an unsafe or unsound practice or would violate any law or
regulation. Prior approval of the Federal Reserve Board would not be required
for the redemption or purchase of equity securities for a bank holding company
that would be well capitalized both before and after such transaction, well-
managed and not subject to unresolved supervisory issues.
The Federal Reserve Board has broad authority to prohibit activities of
bank holding companies and their non-banking subsidiaries which represent
unsafe and unsound banking practices or which constitute violations of laws or
regulations, and can assess civil money penalties for certain activities
conducted on a knowing and reckless basis, if those activities caused a
substantial loss to a depository institution. The penalties can be as high as
$1.0 million for each day the activity continues.
Anti-Tying Restrictions. Bank holding companies and their affiliates are
prohibited from tying the provision of certain services, such as extensions of
credit, to other services offered by a holding company or its affiliates.
Capital Adequacy Requirements. The Federal Reserve Board has adopted a
system using risk-based capital guidelines to evaluate the capital adequacy of
bank holding companies. Under the guidelines, specific categories of assets
are assigned different risk weights, based generally on the perceived credit
risk of the asset. These risk weights are multiplied by corresponding asset
balances to determine a "risk-weighted" asset base. The guidelines
7
require a minimum total risk-based capital ratio of 8.0% (of which at least
4.0% is required to consist of Tier 1 capital elements). Total capital is the
sum of Tier 1 and Tier 2 capital. As of December 31, 2000, the Company's ratio
of Tier 1 capital to total risk-weighted assets was 11.74% and its ratio of
total capital to total risk-weighted assets was 13.00%.
In addition to the risk-based capital guidelines, the Federal Reserve Board
uses a leverage ratio as an additional tool to evaluate the capital adequacy
of bank holding companies. The leverage ratio is a company's Tier 1 capital
divided by its average total consolidated assets. Certain highly rated bank
holding companies may maintain a minimum leverage ratio of 3.0%, but other
bank holding companies may be required to maintain a leverage ratio of at
least 4.0%. As of December 31, 2000, the Company's leverage ratio was 8.39%.
The federal banking agencies' risk-based and leverage ratios are minimum
supervisory ratios generally applicable to banking organizations that meet
certain specified criteria. The federal bank regulatory agencies may set
capital requirements for a particular banking organization that are higher
than the minimum ratios when circumstances warrant. Federal Reserve Board
guidelines also provide that banking organizations experiencing internal
growth or making acquisitions will be expected to maintain strong capital
positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets.
Imposition of Liability for Undercapitalized Subsidiaries. Bank regulators
are required to take "prompt corrective action" to resolve problems associated
with insured depository institutions whose capital declines below certain
levels. In the event an institution becomes "undercapitalized," it must submit
a capital restoration plan. The capital restoration plan will not be accepted
by the regulators unless each company having control of the undercapitalized
institution guarantees the subsidiary's compliance with the capital
restoration plan up to a certain specified amount. Any such guarantee from a
depository institution's holding company is entitled to a priority of payment
in bankruptcy.
The aggregate liability of the holding company of an undercapitalized bank
is limited to the lesser of 5% of the institution's assets at the time it
became undercapitalized or the amount necessary to cause the institution to be
"adequately capitalized." The bank regulators have greater power in situations
where an institution becomes "significantly" or "critically" undercapitalized
or fails to submit a capital restoration plan. For example, a bank holding
company controlling such an institution can be required to obtain prior
Federal Reserve Board approval of proposed dividends, or might be required to
consent to a consolidation or to divest the troubled institution or other
affiliates.
Acquisitions by Bank Holding Companies. The BHCA requires every bank
holding company to obtain the prior approval of the Federal Reserve Board
before it may acquire all or substantially all of the assets of any bank, or
ownership or control of any voting shares of any bank, if after such
acquisition it would own or control, directly or indirectly, more than 5% of
the voting shares of such bank. In approving bank acquisitions by bank holding
companies, the Federal Reserve Board is required to consider the financial and
managerial resources and future prospects of the bank holding company and the
banks concerned, the convenience and needs of the communities to be served,
and various competitive factors.
Control Acquisitions. The Change in Bank Control Act prohibits a person or
group of persons from acquiring "control" of a bank holding company unless the
Federal Reserve Board has been notified and has not objected to the
transaction. Under a rebuttable presumption established by the Federal Reserve
Board, the acquisition of 10% of more of a class of voting stock of a bank
holding company with a class of securities registered under Section 12 of the
Exchange Act, such as the Company, would, under the circumstances set forth in
the presumption, constitute acquisition of control of the Company.
In addition, any entity is required to obtain the approval of the Federal
Reserve Board under the BHCA before acquiring 25% (5% in the case of an
acquirer that is a bank holding company) or more of the outstanding Common
Stock of the Company, or otherwise obtaining control or a "controlling
influence" over the Company.
8
The Bank
The Bank is a nationally chartered banking association, the deposits of
which are insured by the Bank Insurance Fund ("BIF") of the FDIC. The Bank's
primary regulator is the Office of the Comptroller of the Currency (the
"OCC"). By virtue of the insurance of its deposits, however, the Bank is also
subject to supervision and regulation by the FDIC. Such supervision and
regulation subjects the Bank to special restrictions, requirements, potential
enforcement actions, and periodic examination by the OCC. Because the Federal
Reserve Board regulates the bank holding company parent of the Bank, the
Federal Reserve Board also has supervisory authority, which directly affects
the Bank.
Financial Modernization. Under the Gramm-Leach-Bliley Act, a national bank
may establish a financial subsidiary and engage, subject to limitations on
investment, in activities that are financial in nature, other than insurance
underwriting, insurance company portfolio investment, real estate development,
real estate investment, annuity issuance and merchant banking activities. To
do so, a bank must be well capitalized, well managed and have a CRA rating of
satisfactory or better. National banks with financial subsidiaries must remain
well capitalized and well managed in order to continue to engage in activities
that are financial in nature without regulatory actions or restrictions, which
could include divestiture of the financial in nature subsidiary or
subsidiaries. In addition, a bank may not acquire a company that is engaged in
activities that are financial in nature unless the bank has a CRA rating of
satisfactory or better.
Branching. The establishment of a branch must be approved by the OCC, which
considers a number of factors, including financial history, capital adequacy,
earnings prospects, character of management, needs of the community and
consistency with corporate powers.
Restrictions on Transactions with Affiliates and Insiders. Transactions
between the Bank and its non-banking affiliates, including the Company, are
subject to Section 23A of the Federal Reserve Act. An affiliate of a bank is
any company or entity that controls, is controlled by, or is under common
control with the bank. In general, Section 23A imposes limits on the amount of
such transactions, and also requires certain levels of collateral for loans to
affiliated parties. It also limits the amount of advances to third parties
which are collateralized by the securities or obligations of the Company or
its non-banking subsidiaries.
Affiliate transactions are also subject to Section 23B of the Federal
Reserve Act which generally requires that certain transactions between the
Bank and its affiliates be on terms substantially the same, or at least as
favorable to the Bank, as those prevailing at the time for comparable
transactions with or involving other nonaffiliated persons.
The restrictions on loans to directors, executive officers, principal
shareholders and their related interests (collectively referred to herein as
"insiders") contained in the Federal Reserve Act and Regulation O apply to all
insured depository institutions and their subsidiaries. These restrictions
include limits on loans to one borrower and conditions that must be met before
such a loan can be made. There is also an aggregate limitation on all loans to
insiders and their related interests. These loans cannot exceed the
institution's total unimpaired capital and surplus, and the OCC may determine
that a lesser amount is appropriate. Insiders are subject to enforcement
actions for knowingly accepting loans in violation of applicable restrictions.
Restrictions on Distribution of Subsidiary Bank Dividends and Assets.
Dividends paid by the Bank have provided a substantial part of the Company's
operating funds and for the foreseeable future it is anticipated that
dividends paid by the Bank to the Company will continue to be the Company's
principal source of operating funds. Capital adequacy requirements serve to
limit the amount of dividends that may be paid by the Bank. Until capital
surplus equals or exceeds capital stock, a national bank must transfer to
surplus 10% of its net income for the preceding four quarters in the case of
an annual dividend or 10% of its net income for the preceding two quarters in
the case of a quarterly or semiannual dividend. At December 31, 2000, the
Bank's capital surplus exceeded its capital stock. Without prior approval, a
national bank may not declare a dividend if the total amount of all dividends,
declared by the bank in any calendar year exceeds the total of the bank's
retained net income
9
for the current year and retained net income for the preceding two years.
Under federal law, the Bank cannot pay a dividend if, after paying the
dividend, the Bank will be "undercapitalized." The OCC may declare a dividend
payment to be unsafe and unsound even though the Bank would continue to meet
its capital requirements after the dividend.
Because the Company is a legal entity separate and distinct from its
subsidiaries, its right to participate in the distribution of assets of any
subsidiary upon the subsidiary's liquidation or reorganization will be subject
to the prior claims of the subsidiary's creditors. In the event of a
liquidation or other resolution of an insured depository institution, the
claims of depositors and other general or subordinated creditors are entitled
to a priority of payment over the claims of holders of any obligation of the
institution to its shareholders, arising as a result of their status as
shareholders, including any depository institution holding company (such as
the Company) or any shareholder or creditor thereof.
Examinations. The OCC periodically examines and evaluates insured banks.
Based upon such an evaluation, the OCC may revalue the assets of the
institution and require that it establish specific reserves to compensate for
the difference between the OCC-determined value and the book value of such
assets.
Audit Reports. Insured institutions with total assets of $500 million or
more must submit annual audit reports prepared by independent auditors to
federal regulators. In some instances, the audit report of the institution's
holding company can be used to satisfy this requirement. Auditors must receive
examination reports, supervisory agreements, and reports of enforcement
actions. In addition, financial statements prepared in accordance with
accounting principles generally accepted in the U.S., management's
certifications concerning responsibility for the financial statements,
internal controls and compliance with legal requirements designated by the
OCC, and an attestation by the auditor regarding the statements of management
relating to the internal controls must be submitted. For institutions with
total assets of more than $3 billion, independent auditors may be required to
review quarterly financial statements. The Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") requires that independent audit
committees be formed, consisting of outside directors only. The committees of
such institutions must include members with experience in banking or financial
management, must have access to outside counsel, and must not include
representatives of large customers.
Capital Adequacy Requirements. Similar to the Federal Reserve Board's
requirements for bank holding companies, the OCC has adopted regulations
establishing minimum requirements for the capital adequacy of national banks.
The OCC may establish higher minimum requirements if, for example, a bank has
previously received special attention or has a high susceptibility to interest
rate risk.
The OCC's risk-based capital guidelines generally require national banks to
have a minimum ratio of Tier 1 capital to total risk-weighted assets of 4.0%
and a ratio of total capital to total risk-weighted assets of 8.0%. As of
December 31, 2000, the Bank's ratio of Tier 1 capital to total risk-weighted
assets was 11.21% and its ratio of total capital to total risk-weighted assets
was 12.47%.
The OCC's leverage guidelines require national banks to maintain Tier 1
capital of no less than 4.0% of average total assets, except in the case of
certain highly rated banks for which the requirement is 3.0% of average total
assets unless a higher leverage capital ratio is warranted by the particular
circumstances or risk profile of the depository institution. As of December
31, 2000, the Bank's ratio of Tier 1 capital to average total assets (leverage
ratio) was 8.01%.
Corrective Measures for Capital Deficiencies. The federal banking
regulators are required to take "prompt corrective action" with respect to
capital-deficient institutions. Agency regulations define, for each capital
category, the levels at which institutions are "well capitalized," "adequately
capitalized," "under capitalized," "significantly under capitalized" and
"critically under capitalized." A "well capitalized" bank has a total risk-
based capital ratio of 10.0% or higher; a Tier 1 risk-based capital ratio of
6.0% or higher; a leverage ratio of 5.0% or higher; and is not subject to any
written agreement, order or directive requiring it to maintain a specific
capital level for any capital measure. An "adequately capitalized" bank has a
total risk-based capital ratio of
10
8.0% or higher; a Tier 1 risk-based capital ratio of 4.0% or higher; a
leverage ratio of 4.0% or higher (3.0% or higher if the bank was rated a
composite 1 in its most recent examination report and is not experiencing
significant growth); and does not meet the criteria for a well capitalized
bank. A bank is "under capitalized" if it fails to meet any one of the ratios
required to be adequately capitalized.
In addition to requiring undercapitalized institutions to submit a capital
restoration plan, agency regulations authorize broad restrictions on certain
activities of undercapitalized institutions including asset growth,
acquisitions, branch establishment, and expansion into new lines of business.
With certain exceptions, an insured depository institution is prohibited from
making capital distributions, including dividends, and is prohibited from
paying management fees to control persons if the institution would be
undercapitalized after any such distribution or payment.
As an institution's capital decreases, the OCC's enforcement powers become
more severe. A significantly undercapitalized institution is subject to
mandated capital raising activities, restrictions on interest rates paid and
transactions with affiliates, removal of management, and other restrictions.
The OCC has only very limited discretion in dealing with a critically
undercapitalized institution and is virtually required to appoint a receiver
or conservator.
Banks with risk-based capital and leverage ratios below the required
minimums may also be subject to certain administrative actions, including the
termination of deposit insurance upon notice and hearing, or a temporary
suspension of insurance without a hearing in the event the institution has no
tangible capital.
Deposit Insurance Assessments. The Bank must pay assessments to the FDIC
for federal deposit insurance protection. The FDIC has adopted a risk-based
assessment system as required by FDICIA. Under this system, FDIC-insured
depository institutions pay insurance premiums at rates based on their risk
classification. Institutions assigned to higher-risk classifications (that is,
institutions that pose a greater risk of loss to their respective deposit
insurance funds) pay assessments at higher rates than institutions that pose a
lower risk. An institution's risk classification is assigned based on its
capital levels and the level of supervisory concern the institution poses to
the regulators. In addition, the FDIC can impose special assessments in
certain instances. The current range of BIF assessments is between 0% and
0.27% of deposits.
The FDIC established a process for raising or lowering all rates for
insured institutions semi-annually if conditions warrant a change. Under this
new system, the FDIC has the flexibility to adjust the assessment rate
schedule twice a year without seeking prior public comment, but only within a
range of five cents per $100 above or below the assessment schedule adopted.
Changes in the rate schedule outside the five-cent range above or below the
current schedule can be made by the FDIC only after a full rulemaking with
opportunity for public comment.
On September 30, 1996, President Clinton signed into law an act that
contained a comprehensive approach to recapitalizing the Savings Association
Insurance Fund ("SAIF") and to assure the payment of the Financing
Corporation's ("FICO") bond obligations. Under this act, banks insured under
the BIF are required to pay a portion of the interest due on bonds that were
issued by FICO to help shore up the ailing Federal Savings and Loan Insurance
Corporation in 1987. The BIF rate was required to equal one-fifth of the SAIF
rate through year-end 1999, or until the insurance funds were merged,
whichever occurred first. Thereafter, BIF and SAIF payers will be assessed pro
rata for the FICO bond obligations. With regard to the assessment for the FICO
obligation, for the fourth quarter of 2000, the BIF and SAIF rates were
.02120% of deposits.
Enforcement Powers. The FDIC and the other federal banking agencies have
broad enforcement powers, including the power to terminate deposit insurance,
impose substantial fines and other civil and criminal penalties, and appoint a
conservator or receiver. Failure to comply with applicable laws, regulations
and supervisory agreements could subject the Company or its banking
subsidiaries, as well as officers, directors and other institution-affiliated
parties of these organizations, to administrative sanctions and potentially
substantial civil money penalties. The appropriate federal banking agency may
appoint the FDIC as conservator or receiver
11
for a banking institution (or the FDIC may appoint itself, under certain
circumstances) if any one or more of a number of circumstances exist,
including, without limitation, the fact that the banking institution is
undercapitalized and has no reasonable prospect of becoming adequately
capitalized; fails to become adequately capitalized when required to do so;
fails to submit a timely and acceptable capital restoration plan; or
materially fails to implement an accepted capital restoration plan.
Brokered Deposit Restrictions. Adequately capitalized institutions (as
defined for purposes of the prompt corrective action rules described above)
cannot accept, renew or roll over brokered deposits except with a waiver from
the FDIC, and are subject to restrictions on the interest rates that can be
paid on such deposits. Undercapitalized institutions may not accept, renew, or
roll over brokered deposits.
Cross-Guarantee Provisions. The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") contains a "cross-guarantee" provision
which generally makes commonly controlled insured depository institutions
liable to the FDIC for any losses incurred in connection with the failure of a
commonly controlled depository institution.
Community Reinvestment Act. The CRA and the regulations issued thereunder
are intended to encourage banks to help meet the credit needs of their service
area, including low and moderate-income neighborhoods, consistent with the
safe and sound operations of the banks. These regulations also provide for
regulatory assessment of a bank's record in meeting the needs of its service
area when considering applications to establish branches, merger applications
and applications to acquire the assets and assume the liabilities of another
bank. FIRREA requires federal banking agencies to make public a rating of a
bank's performance under the CRA. In the case of a bank holding company, the
CRA performance record of the banks involved in the transaction are reviewed
in connection with the filing of an application to acquire ownership or
control of shares or assets of a bank or to merge with any other bank holding
company. An unsatisfactory record can substantially delay or block the
transaction.
Consumer Laws and Regulations. In addition to the laws and regulations
discussed herein, the Bank is also subject to certain consumer laws and
regulations that are designed to protect consumers in transactions with banks.
While the list set forth herein is not exhaustive, these laws and regulations
include the Truth in Lending Act, the Truth in Savings Act, the Electronic
Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit
Opportunity Act, and the Fair Housing Act, among others. These laws and
regulations mandate certain disclosure requirements and regulate the manner in
which financial institutions must deal with customers when taking deposits or
making loans to such customers. The Bank must comply with the applicable
provisions of these consumer protection laws and regulations as part of their
ongoing customer relations.
Instability of Regulatory Structure
Various legislation, such as the Gramm-Leach-Bliley Act which expanded the
powers of banking institutions and bank holding companies, and proposals to
overhaul the bank regulatory system and limit the investments that a
depository institution may make with insured funds, is from time to time
introduced in Congress. Such legislation may change banking statutes and the
operating environment of the Company and its banking subsidiaries in
substantial and unpredictable ways. The Company cannot determine the ultimate
effect that the Gramm-Leach-Bliley Act will have or the effect that potential
legislation, if enacted, or implementing regulations with respect thereto,
would have upon the financial condition or results of operations of the
Company or its subsidiaries.
Expanding Enforcement Authority
One of the major additional burdens imposed on the banking industry by
FDICIA is the increased ability of banking regulators to monitor the
activities of banks and their holding companies. In addition, the Federal
Reserve Board and OCC possess extensive authority to police unsafe or unsound
practices and violations of applicable laws and regulations by depository
institutions and their holding companies. For example, the FDIC
12
may terminate the deposit insurance of any institution which it determines has
engaged in an unsafe or unsound practice. The agencies can also assess civil
money penalties, issue cease and desist or removal orders, seek injunctions,
and publicly disclose such actions. FDICIA, FIRREA and other laws have
expanded the agencies' authority in recent years, and the agencies have not
yet fully tested the limits of their powers.
Effect on Economic Environment
The policies of regulatory authorities, including the monetary policy of
the Federal Reserve Board, have a significant effect on the operating results
of bank holding companies and their subsidiaries. Among the means available to
the Federal Reserve Board to affect the money supply are open market
operations in U.S. Government securities, changes in the discount rate or
federal funds rate on member bank borrowings, and changes in reserve
requirements against member bank deposits. These means are used in varying
combinations to influence overall growth and distribution of bank loans,
investments and deposits, and their use may affect interest rates charged on
loans or paid for deposits.
Federal Reserve Board monetary policies have materially affected the
operating results of commercial banks in the past and are expected to continue
to do so in the future. The nature of future monetary policies and the effect
of such policies on the business and earnings of the Company and its
subsidiaries cannot be predicted.
13
Item 2. Properties
Facilities
The Company conducts business at 15 locations, 11 of which are leased.
Included are 14 full-service banking locations and the Company's corporate
offices. The following table sets forth specific information on each such
location. The Company's headquarters are located at 9600 Bellaire Boulevard,
Suite 252, Houston, Texas. The lease for the Company's corporate headquarters
will expire in December 2005.
Deposits at
Sq. December 31,
Location Owned/Leased Ft. 2000
-------- ------------ ------ --------------
(in thousands)
Houston Area:
Bellaire Boulevard........................... Leased 7,002 $290,668
9600 Bellaire Boulevard, Suite 100
East......................................... Owned 16,400 85,288
6730 Capitol at Wayside
Chinatown.................................... Leased 2,500 23,370
1005 Saint Emanuel
Sugar Land................................... Owned 5,665 37,218
15144 Southwest Freeway
Harwin....................................... Leased 2,463 26,163
10000 Harwin Drive
Clear Lake................................... Owned 1,986 30,552
2424 Bay Area Boulevard
Veterans Memorial............................ Owned 5,571 23,369
13480 Veterans Memorial Boulevard
Milam........................................ Leased 2,546 11,220
2808 Milam Street
Corporate Offices............................ Leased 25,127 N/A
9600 Bellaire Boulevard, Suite 252
Boone Road................................... Leased 905 5,360
11205 Bellaire Boulevard, Suite B-9
Dulles....................................... Leased 479 12,085
4635 Highway 6
Long Point................................... Leased 3,000 12,876
1426 Blalock
Dallas Area:
Richardson................................... Leased 4,948 48,297
275 West Campbell Road
Dallas (Harry Hines)......................... Leased 3,000 13,447
2527 Royal Lane
Garland...................................... Leased 2,400 5,993
3500 West Walnut Street
14
Item 3. Legal Proceedings
Legal Proceedings
The Company and the Bank are from time to time parties to or otherwise
involved in legal proceedings arising in the normal course of business.
Management does not believe that there is any pending or threatened proceeding
against the Company or the Bank which, if determined adversely, would have a
material effect on the Company's or the Bank's business, financial condition,
results of operation or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of 2000.
PART II
Item 5. Market for Registrant's Common Equity and Related Share Matters
The Company's Common Stock is listed on the Nasdaq National Market System
("Nasdaq NMS") under the symbol "MCBI." As of March 9, 2001, there were
6,981,484 shares outstanding and 168 shareholders of record. The number of
beneficial owners is unknown to the Company at this time.
The following table presents the high and low sales prices for the Common
Stock reported on the Nasdaq NMS during the two years ended December 31, 2000:
2000 High Low
---- ------- ------
Fourth quarter................................................ $10.000 $7.875
Third quarter................................................. 9.750 6.500
Second quarter................................................ 8.125 6.250
First quarter................................................. 8.313 6.500
1999
----
Fourth quarter................................................ 9.875 7.750
Third quarter................................................. 10.188 8.375
Second quarter................................................ 10.000 8.375
First quarter................................................. 11.125 9.688
Dividends
Holders of Common Stock are entitled to receive dividends when, and if
declared by the Company's Board of Directors, out of funds legally available.
While the Company has declared and paid quarterly dividends since fourth
quarter 1998, there is no assurance that the Company will pay dividends in the
future.
The cash dividends paid per share by quarter for the Company's last two
fiscal years were as follows:
2000 1999
----- -----
Fourth quarter................................................... $0.06 $0.06
Third quarter.................................................... 0.06 0.06
Second quarter................................................... 0.06 0.06
First quarter.................................................... 0.06 0.06
The principal source of cash revenues to the Company is dividends paid by
the Bank with respect to the Bank's capital stock. There are certain
restrictions on the payment of such dividends imposed by federal banking laws,
regulations and authorities. Until capital surplus equals or exceeds capital,
a national bank must transfer to surplus 10% of its net income for the
preceding four quarters in the case of an annual dividend or 10% of its net
income for the preceding two quarters in the case of a quarterly or semiannual
dividend. As of December 31,
15
2000, the Bank's capital surplus exceeded its capital stock. Without prior
approval, a national bank may not declare a dividend if the total amount of
all dividends, declared by the bank in any calendar year exceeds the total of
the bank's retained net income for the current year and retained net income
for the preceding two years. As of December 31, 2000, an aggregate of
approximately $17.4 million was available for payment of dividends by the Bank
to the Company under applicable restrictions, without regulatory approval.
Regulatory authorities could impose administratively stricter limitations on
the ability of the Bank to pay dividends to the Company if such limits were
deemed appropriate to preserve certain capital adequacy requirements.
In the future, the declaration and payment of dividends on the Common Stock
will depend upon the earnings and financial condition of the Company,
liquidity and capital requirements, the general economic and regulatory
climate, the Company's ability to service any equity or debt obligations
senior to the Common Stock and other factors deemed relevant by the Company's
Board of Directors.
Recent Sales of Unregistered Securities
Not applicable.
16
Item 6. Selected Consolidated Financial Data
The following Selected Consolidated Financial Data of the Company should be
read in conjunction with the consolidated financial statements of the Company,
and the notes thereto, appearing elsewhere in this Annual Report on Form 10-K,
and the information contained in "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations." The selected historical
consolidated financial data as of and for each of the five years in the period
ended December 31, 2000 are derived from the Company's Consolidated Financial
Statements which have been audited by independent auditors. Certain prior year
amounts have been reclassified to conform with the 2000 presentation.
Years Ended December 31,
------------------------------------------------
2000 1999 1998 1997(1) 1996(1)
-------- -------- -------- -------- --------
(Dollars in thousands)
Income Statement Data:
Interest income.............. $ 63,466 $ 53,668 $ 47,696 $ 41,155 $ 31,523
Interest expense............. 27,276 21,026 20,052 18,138 13,927
-------- -------- -------- -------- --------
Net interest income........ 36,190 32,642 27,644 23,017 17,596
Provision for loan losses.... 7,508 5,550 3,377 3,350 2,118
-------- -------- -------- -------- --------
Net interest income after
provision for loan
losses.................... 28,682 27,092 24,267 19,667 15,478
Noninterest income after
provision for loan losses... 7,032 6,088 5,609 4,391 3,446
Noninterest expense.......... 27,230 22,412 20,980 18,096 16,102
-------- -------- -------- -------- --------
Income before provision for
income taxes.............. 8,484 10,768 8,896 5,962 2,822
Provision for income taxes... 3,001 3,638 2,777 1,794 809
-------- -------- -------- -------- --------
Net income................... $ 5,483 $ 7,130 $ 6,119 $ 4,168 $ 2,013
======== ======== ======== ======== ========
Per Share Data:
Net income:
Basic...................... $ 0.79 $ 1.00 $ 1.08 $ 0.75 $ 0.38
Diluted.................... 0.79 1.00 1.06 0.74 0.37
Book value................... 8.42 7.38 7.14 5.49 4.73
Tangible book value.......... 8.42 7.38 7.14 5.49 4.73
Cash dividends declared...... 0.24 0.24 0.06 -- --
Weighted average shares
outstanding (in thousands):
Basic...................... 6,972 7,114 5,691 5,581 5,364
Diluted.................... 6,973 7,114 5,749 5,616 5,444
Balance Sheet Data at period
end:
Total assets................. $736,757 $660,589 $587,308 $505,051 $426,987
Securities................... 143,759 110,065 123,190 112,624 103,680
Total loans.................. 483,738 495,669 417,686 348,910 280,597
Allowance for loan losses.... 9,271 7,537 6,119 3,569 2,141
Total deposits............... 625,906 544,436 479,506 445,859 381,289
Other borrowings............. 25,573 55,636 50,043 21,611 14,566
Total shareholders' equity... 58,701 52,580 50,024 30,506 25,398
Average Balance Sheet Data:
Total assets................. $698,209 $620,646 $532,751 $469,097 $373,697
Securities................... 127,865 119,952 114,248 113,250 115,224
Total loans.................. 486,549 456,653 368,394 310,781 223,514
Allowance for loan losses.... 8,589 6,720 5,049 2,722 1,869
Deposits..................... 590,217 501,808 477,793 416,895 333,355
Total shareholders' equity... 53,462 53,010 33,992 28,369 24,090
Performance Ratios:
Return on average assets..... 0.79% 1.16% 1.15% 0.89% 0.54%
Return on average equity..... 10.26 13.52 18.00 14.69 8.36
Net interest margin.......... 5.57 5.56 5.50 5.22 5.02
Efficiency ratio(2).......... 62.98 57.92 63.48 66.48 76.73
17
Years Ended December 31,
----------------------------------------
2000 1999 1998 1997(1) 1996(1)
------ ------ ------ ------- -------
(Dollars in thousands)
Asset Quality Ratios:
Nonperforming assets to total loans
and other real estate............... 0.62% 1.42% 1.26% 0.94% 0.82%
Nonperforming assets to total
assets.............................. 0.40 1.07 0.90 0.65 0.54
Net loan charge-offs to average
loans............................... 1.19 0.90 0.22 0.62 0.71
Allowance for loan losses to total
loans............................... 1.92 1.52 1.46 1.02 0.76
Allowance for loan losses to
nonperforming loans(3).............. 416.67 115.03 132.44 134.02 135.42
Capital Ratios(4):
Leverage ratio(5).................... 8.39% 8.48% 8.83% 5.92% 6.04%
Average shareholders' equity to
average total assets................ 7.66 8.54 6.38 6.05 6.45
Tier-1 risk-based capital ratio--
period end.......................... 11.74 10.76 11.73 8.45 8.69
Total risk-based capital ratio--
period end.......................... 13.00 12.01 12.98 9.46 9.44
- --------
(1) Financial data prior to December 31, 1998 has been adjusted to reflect the
four-for-one exchange for the Bank stock.
(2) Calculated by dividing total noninterest expense by net interest income
plus noninterest income, excluding net securities gains and losses.
(3) Nonperforming assets consist of nonaccrual loans, loans contractually past
due 90 days or more and restructured loans.
(4) Capital ratios prior to 1998 are those of MetroBank, N.A.
(5) The leverage ratio is calculated by dividing Tier 1 capital at December 31
by full year average assets.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company analyzes the major elements of the Company's balance
sheets and statements of income. This section should be read in conjunction
with the Company's Consolidated Financial Statements and accompanying notes
and other detailed information appearing elsewhere in this document.
For the Years Ended December 31, 2000, 1999 and 1998
Overview
From December 31, 1998 to December 31, 2000, the Company experienced
consistent growth as assets increased from $587.3 million at December 31, 1998
to $736.8 million at December 31, 2000, an increase of $149.4 million or
25.4%. The increase was primarily due to the expansion of the branch network
and an increase in deposits that funded loan and investment growth. The
Company opened six branches during this period. Loans and investment
securities accounted for the majority of the Company's asset growth,
increasing from $417.7 million and $123.2 million to $483.7 million and $143.8
million over the three-year period ending December 31, 2000, respectively.
Supporting this growth was an increase in deposits, which rose from $479.5
million to $625.9 million, representing a 30.5% increase during the period.
Including the net proceeds from the initial public offering of Common Stock in
December 1998, shareholders' equity increased to $58.7 million at December 31,
2000, an increase of $8.7 million or 17.3% compared with $50.0 million at
December 31, 1998.
Net income available to shareholders was $5.5 million, $7.1 million and
$6.1 million for the years ended December 31, 2000, 1999 and 1998,
respectively, and diluted net income per common share was $0.79, $1.00 and
$1.06 for these same periods. The Company posted returns on average assets of
0.79%, 1.16% and 1.15% and returns on average equity of 10.26%, 13.52% and
18.00% for the years ended December 31, 2000, 1999 and 1998, respectively. The
decreases in return on average assets and return on average equity were
primarily due to net charge-offs of $5.8 million in 2000 and $4.1 million in
1999.
18
Results of Operations
Net Interest Income
Net interest income represents the amount by which interest income on
interest-earning assets, including securities and loans, exceeds interest
expense incurred on interest-bearing liabilities, including deposits and other
borrowed funds. Net interest income is the principal source of the Company's
earnings. Interest rate fluctuations, as well as changes in the amount and
type of earning assets and liabilities, combine to affect net interest income.
2000 versus 1999. Net interest income totaled $36.2 million in 2000
compared with $32.6 million in 1999, an increase of $3.6 million or 11.0%. The
increase resulted primarily from a $9.8 million or 18.3% increase in interest
income on loans and investments largely due to four prime rate increases,
totaling 125 basis points, commencing in the fourth quarter of 1999 and
continuing into the second quarter of 2000. Interest expense increased by $6.3
million or 29.7% due to an increase in interest-bearing deposits coupled with
increases in the rates paid for those deposits. The increase in the loan and
investment portfolios, together with higher yields in these portfolios, was
offset by increased interest-bearing deposits earning higher rates, resulting
in slightly improved net interest margins of 5.57% in 2000 and 5.56% in 1999.
The net interest spread narrowed four basis points to 4.62% for 2000 from
4.66% in 1999.
Interest income increased to $63.5 million in 2000 from $53.7 million in
1999. The increase was driven by growth in the average loan portfolio of $30.0
million or 6.5% and growth in the average investment portfolio of $32.9
million or 25.3%. Interest income was also affected by an increase in the
yield on average earning assets (both loans and investments) to 9.77% in 2000
from 9.15% in 1999 as a result of the four prime rate increases. During 2000,
the increase in the investment portfolio was a result of liquidity created by
deposit growth.
Interest expense increased by $6.3 million to $27.3 million at December 31,
2000 compared with $21.0 million at December 31, 1999. The increase was
primarily due to growth in average interest-bearing deposits of $77.4 million
coupled with an increase of 66 basis points in rates paid on interest-bearing
liabilities from 4.49% at December 31, 1999 to 5.15% at December 31, 2000.
1999 versus 1998. Net interest income totaled $32.6 million in 1999
compared with $27.6 million in 1998, an increase of $5.0 million or 18.1%. The
increase resulted primarily from a $5.9 million or 12.5% increase in interest
income on loans primarily due to a $41.8 million or 16.0% increase in
commercial and industrial loans. Interest expense increased by $1.0 million or
4.9% due to an increase in the level of other borrowings, which consisted
primarily of $35.0 million from the Federal Home Loan Bank ("FHLB"). The
increase in the loan portfolio, together with higher yields in this portfolio,
resulted in an improved net interest margin of 5.56% from 5.50% for 1999 and
1998, respectively. The decrease in the securities portfolio from $123.2
million at December 31, 1998 to $110.1 million at December 31, 1999 was due to
portfolio repositioning as interest rates moved upward. This repositioning
necessitated sales of lower yielding holdings during the latter part of 1999.
The net interest spread increased four basis points to 4.66% for 1999 from
4.62% in 1998.
Interest income increased to $53.7 million in 1999 from $47.7 million in
1998. The increase was driven by growth in the average loan portfolio of $88.3
million or 23.9% while the Company experienced a decrease in the yield on
average loans to 9.92% in 1999 from 10.65% in 1998. The average securities
portfolio increased by $5.7 million or 5.0%, while its yield rose 6 basis
points from 6.37% in 1998 to 6.43% in 1999 as a result of continued portfolio
shifting to higher yielding issues.
Interest expense increased by $1.0 million to $21.0 million at December 31,
1999 compared with $20.0 million at December 31, 1998. The increase was
primarily due to growth in average FHLB borrowings and other borrowings of
$43.9 million during 1999. The Company viewed these funds as stable and a less
costly source of funding than time deposits. This decision lowered the
Company's cost of funds from 4.87% in 1998 to 4.49% in 1999.
19
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the
resulting yields, as well as the interest expense on average interest-bearing
liabilities, expressed both in dollars and rates. No tax-equivalent
adjustments were made and all average balances are yearly average balances.
Non-accruing loans have been included in the tables as loans carrying a zero
yield.
Years Ended December 31,
--------------------------------------------------------------------------------------
2000 1999 1998
---------------------------- ---------------------------- ----------------------------
Average Interest Average Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
----------- -------- ------- ----------- -------- ------- ----------- -------- -------
(Dollars in thousands)
Assets
Interest-earning assets:
Total loans............ $486,549 $52,280 10.75% $456,653 $45,322 9.92% $368,394 $39,219 10.65%
Taxable securities..... 106,902 7,668 7.17% 98,838 6,624 6.70% 96,518 6,312 6.54%
Tax-exempt securities.. 20,963 1,046 4.99% 21,114 1,091 5.17% 17,730 964 5.44%
Federal funds sold and
other temporary
investments........... 34,948 2,472 7.07% 9,959 631 6.34% 19,565 1,201 6.14%
-------- ------- -------- ------- -------- -------
Total interest-earning
assets................ 649,362 63,466 9.77% 586,564 53,668 9.15% 502,207 47,696 9.50%
Less allowance for loan
losses................. (8,589) (6,720) (5,049)
Total interest-earning
assets, net of
allowance for loan
losses................. 640,773 579,844 497,158
Noninterest-earning
assets................. 57,436 40,802 35,593
-------- -------- --------
Total assets........... $698,209 $620,646 $532,751
======== ======== ========
Liabilities and
shareholders' equity
Interest-bearing
liabilities:
Interest-bearing demand
deposits.............. $ 42,888 $ 1,283 2.99% $ 37,011 $ 1,039 2.81% $ 30,109 $ 783 2.60%
Saving and money market
accounts.............. 96,520 3,231 3.35% 97,629 3,020 3.09% 90,328 3,258 3.61%
Time deposits.......... 348,265 20,444 5.87% 275,663 14,032 5.09% 276,904 15,267 5.51%
Federal funds purchased
and securities sold
under repurchase
agreements............ 14,957 941 6.29% 24,774 1,301 5.25% 926 54 5.83%
Other borrowings....... 27,268 1,377 5.05% 33,264 1,634 4.91% 13,160 690 5.24%
Total interest-bearing
liabilities........... 529,898 27,276 5.15% 468,341 21,026 4.49% 411,427 20,052 4.87%
Noninterest-bearing
liabilities:
Non-interest bearing
demand deposits....... 102,544 91,505 80,452
Other liabilities...... 12,305 7,790 6,880
-------- -------- --------
Total liabilities...... 644,747 567,636 498,759
Shareholders' equity.... 53,462 53,010 33,992
-------- -------- --------
Total liabilities and
shareholders' equity.. $698,209 $620,646 $532,751
======== ======== ========
Net interest income..... $36,190 $32,642 $27,644
======= ======= =======
Net interest spread..... 4.62% 4.66% 4.62%
Net interest margin..... 5.57% 5.56% 5.50%
20
The following table presents the dollar amount of changes in interest
income and interest expense for the major components of interest-earning
assets and interest-bearing liabilities and distinguishes between the increase
related to higher outstanding balances and changes in interest rates. For
purposes of this table, changes attributable to both rate and volume have been
allocated to rate.
Years Ended December 31,
----------------------------------------------
2000 vs 1999 1999 vs 1998
--------------------- -----------------------
Increase Increase
(Decrease) (Decrease)
Due to Due to
-------------- ---------------
Volume Rate Total Volume Rate Total
------ ------ ------ ------ ------- ------
(Dollars in thousands)
Interest-earning assets:
Loans..................... $2,967 $3,991 $6,958 $9,396 $(3,293) $6,103
Securities................ 625 374 999 567 (128) 439
Federal funds sold and
other temporary
investments.............. 1,583 258 1,841 (590) 20 (570)
------ ------ ------ ------ ------- ------
Total increase (decrease)
in interest income...... 5,175 4,623 9,798 9,374 (3,402) 5,972
Interest-bearing
liabilities:
Interest-bearing demand
deposits................. 165 79 244 179 77 256
Saving and money market
accounts................. (34) 245 211 263 (501) (238)
Time deposits............. 3,696 2,716 6,412 (68) (1,166) (1,235)
Fed funds purchased....... (515) 156 (360) 1,391 (144) 1,247
Other borrowings.......... (295) 37 (257) 1,054 (110) 944
------ ------ ------ ------ ------- ------
Total increase (decrease)
in interest expense..... 3,017 3,233 6,250 2,818 (1,843) 974
------ ------ ------ ------ ------- ------
Increase (decrease) in net
interest income............ $2,158 $1,390 $3,548 $6,556 $(1,558) $4,998
====== ====== ====== ====== ======= ======
Provision for Loan Losses
Provisions for loan losses are charged to income to bring the Company's
allowance for loan losses to a level deemed appropriate by management based on
the factors discussed under "--Financial Condition--Allowance for Loan
Losses."
The 2000 provision for loan losses increased by $2.0 million or 35.28% to
$7.5 million. The increase in 2000 was primarily due to the replenishment of
the allowance for loan losses based on the loss in factoring receivables, net
charge-offs and an additional provision to bring the allowance for loan losses
to a level which management considers adequate to absorb probable losses
inherent in the loan portfolio. The ratio of the allowance for loan losses to
total loans in 2000 was 1.92% compared with 1.52% and 1.46% in 1999 and 1998,
respectively. The 1999 provision for loan losses increased by $2.1 million or
61.7% to $5.6 million from $3.4 million in 1998 due to an additional provision
made in the fourth quarter of 1999 based on loan losses which had occurred.
21
Noninterest Income
Noninterest income for the years ended December 31, 2000, 1999 and 1998 was
$7.0 million, $6.1 million and $5.6 million, respectively. The majority of the
growth in noninterest income occurred in the other loan related fees and other
noninterest income categories due to increases in SBA servicing and packaging
fees. The growth in service charges on deposit accounts is attributable to the
growth experienced in the deposit portfolios. The following table presents the
major categories of noninterest income:
Years Ended December
31,
---------------------
2000 1999 1998
------ ------ ------
(Dollars in
thousands)
Service charges on deposit accounts................... $3,883 $3,313 $3,364
Other loan-related fees............................... 1,697 1,658 1,371
Letters of credit commissions and fees................ 583 471 392
Gain (loss) on sale of investment securities, net..... 2 (14) 202
Other noninterest income.............................. 867 660 280
------ ------ ------
Total noninterest income............................ $7,032 $6,088 $5,609
====== ====== ======
Noninterest Expense
For the years ended December 31, 2000, 1999 and 1998, noninterest expense
totaled $27.2 million, $22.4 million and $21.0 million, respectively. The $4.8
million or 21.5% increase from 1999 to 2000 was primarily due to one-time
expenses, including expenses related to legal, forensic and special accounting
projects, the implementation of new software for analysis and online/internet
banking and operation systems improvements. The $1.4 million or 6.8% increase
from 1998 to 1999 was primarily due to increases in employee compensation and
benefits, occupancy expenses and outside legal and professional services. The
Company's efficiency ratios were 62.98%, 57.92% and 63.48% in 2000, 1999 and
1998, respectively. The softening of the efficiency ratio in 2000 was
primarily due to the one-time expenses mentioned above. The Company's
efficiency ratio in 2000, while softer than in 1999, and improved from 1998
and reflects the Company's continued efforts to control operating expenses and
gain other efficiencies through such means as upgraded centralized computer
and financial reporting systems. The following table presents the major
categories of noninterest expense:
Years Ended December
31,
------------------------
2000 1999 1998
------- ------- -------
(Dollars in thousands)
Employee compensation and benefits................. $12,381 $11,140 $ 9,898
Non-staff expenses:
Occupancy........................................ 5,790 5,117 4,907
Other real estate, net........................... (50) 83 374
Data processing.................................. 154 327 584
Advertising...................................... 436 459 392
Legal and professional fees...................... 3,197 1,656 1,021
Director compensation............................ 137 355 157
Printing and supplies............................ 410 502 432
Telecommunications............................... 580 504 414
Other noninterest expense........................ 4,195 2,269 2,801
------- ------- -------
Total non-staff expenses....................... 14,849 11,272 11,082
------- ------- -------
Total noninterest expense...................... $27,230 $22,412 $20,980
======= ======= =======
Employee compensation and benefits expense for the years ended December 31,
2000, 1999 and 1998 was $12.4 million, $11.1 million and $9.9 million,
respectively, reflecting increases of $1.2 million during each
22
period. The increases in 2000 and 1999 resulted primarily from the full-year
cost of the four new branches opened in 1999: the three Houston area branches,
Dulles, Long Point and Boone Road, opened in March, April and November 1999,
respectively, and the Garland (Dallas) branch opened in November 1999. The
increase in 1998 resulted primarily from expenses related to the opening of
two new branches: the Milam branch (Houston) that opened in January 1998 and
the Harry Hines branch (Dallas) that opened in June 1998. Total full-time
equivalent employees ("FTE") at December 31, 2000, 1999 and 1998 were 319,
283, and 280, respectively. Historically, part-time and temporary staff
members have not been included in the calculations for FTE; although, their
compensation and benefits have been included in noninterest expense in the
employee compensation and benefits category. For the year ended December 31,
2000, the part-time and temporary FTE are included in the calculation for FTE.
The adjusted number of FTE for 1999 and 1998, calculated to include the part-
time and temporary FTE was 300 and 292, respectively.
Non-staff expenses for 2000, 1999 and 1998 were $14.8 million, $11.3
million and $11.1 million, respectively, reflecting an increase of $3.6
million or 31.7% in 2000 compared with 1999 and an increase of $190,000 or
1.7%, in 1999 compared with 1998, respectively. The increase in 2000 was
primarily due to one-time expenses as previously mentioned. The operations and
system improvements include the implementation of a risk management system,
pricing and new product committees, and a formal strategic planning and
budgeting process. Additionally, during 2000, director compensation decreased
by $218,000 as there were no director stock bonus payments issued, and data
processing expense declined by $173,000 due to the full effect of moving the
Company's processing systems in-house from a third party provider. The
increase in 1999 was primarily due to legal and professional fees related to
problem loans.
Income Taxes
Income tax expense includes the regular federal income tax at the statutory
rate plus the income tax component of the Texas franchise tax. The amount of
federal income tax expense is influenced by the amount of taxable income, the
amount of tax-exempt income, the amount of non-deductible interest expense and
the amount of other non-deductible expenses. Taxable income for the income tax
component of the Texas franchise tax is the federal pre-tax income, plus
certain officers' salaries, less interest income on federal securities.
Income tax expense is influenced by the level and mix of taxable and tax-
exempt income and the amount of non-deductible interest and other expenses. In
2000, income tax expense was $3.0 million, a $637,000 or 17.5% decrease from
income tax expense of $3.6 million in 1999. Income tax expense for 1999 was up
31.0% over the 1998 income tax expense of $2.8 million. The Texas franchise
tax was $298,600, $209,900, and $193,000 in 2000, 1999, and 1998,
respectively. The effective tax rates in 2000, 1999 and 1998, respectively,
were 35.4%, 33.8%, and 31.2%.
Impact of Inflation
The effects of inflation on the local economy and on the Company's
operating results have been relatively modest for the past several years.
Since substantially all of the Company's assets and liabilities are monetary
in nature, such as cash, securities, loans and deposits, their values are less
sensitive to the effects of inflation than to changing interest rates, which
do not necessarily change in accordance with inflation rates. The Company
tries to control the impact of interest rate fluctuations by managing the
relationship between its interest rate sensitive assets and liabilities. See
"--Financial Condition--Interest Rate Sensitivity and Liquidity."
Financial Condition
Loan Portfolio
At December 31, 2000, total loans decreased by $11.9 million or 2.4% to
$483.7 million from $495.7 million at December 31, 1999. The decrease was due
to the $5.3 million factoring receivables charge-off in May 2000, a $13.0
million sale of SBA loans in July 2000 and was offset by net loan fundings of
approximately $6.4
23
million. At December 31, 1999, total loans were $495.7 million, an increase of
$78.0 million or 18.7% compared to total loans at December 31, 1998. Total
loans at December 31, 1998 were $417.7 million. The growth in loans over the
past five years reflected the healthy local economy, the opening of new
branches and the Company's investment in loan production capacity.
For the years ended December 31, 2000, 1999 and 1998, the ratios of total
loans to total deposits were 77.3%, 91.0% and 87.1%, respectively. For the
same periods, total loans represented 65.7%, 75.0% and 71.1% of total assets,
respectively.
The following table summarizes the loan portfolio of the Company by type of
loan:
As of December 31,
---------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------- ----------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)
Commercial and
industrial............. $298,134 60.92% $298,150 59.55% $256,311 60.73% $193,355 54.77% $133,564 47.05%
Real estate mortgage:
Residential............ 10,141 2.07 10,934 2.18 11,795 2.79 11,797 3.34 8,703 3.07
Commercial............. 128,242 26.20 126,363 25.24 103,677 24.57 110,860 31.40 104,425 36.78
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
138,383 28.27 137,297 27.42 115,472 27.36 122,657 34.75 113,128 39.85
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Real estate
construction:
Residential............ 7,542 1.54 11,348 2.27 10,842 2.57 9,859 2.79 1,543 0.54
Commercial............. 32,059 6.55 28,661 5.72 17,769 4.21 11,750 3.33 16,096 5.67
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
39,601 8.09 40,009 7.99 28,611 6.78 21,609 6.12 17,639 6.21
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Consumer and other...... 11,986 2.45 11,550 2.31 12,117 2.87 10,147 2.87 13,343 4.70
Factored receivables.... 1,297 0.26 13,700 2.74 9,506 2.25 5,249 1.49 6,217 2.19
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Gross loans............. 489,401 100.00% 500,706 100.00% 422,017 100.00% 353,017 100.00% 283,891 100.00%
====== ====== ====== ====== ======
Less: unearned
discounts, interest and
deferred fees.......... (5,663) (5,037) (4,331) (4,107) (3,294)
-------- -------- -------- -------- --------
Total loans............. $483,738 $495,669 $417,686 $348,910 $280,597
======== ======== ======== ======== ========
Each of the following principal product lines is an outgrowth of the
Company's expertise in meeting the particular needs of the small and medium-
sized businesses and consumers in the Asian and Hispanic communities:
Commercial and Industrial Loans. The primary lending focus of the Company
is to small and medium-sized businesses in a wide variety of industries. The
Company's commercial lending emphasis includes loans to wholesalers,
manufacturers and business service companies. A broad range of short and
medium-term commercial lending products are made available to businesses for
working capital (including inventory and accounts receivable), purchases of
equipment and machinery and business expansion (including acquisitions of real
estate and improvements). Generally, the Company's commercial loans are
underwritten on the basis of the borrower's ability to service such debt as
reflected by cash flow projections. Commercial loans are generally secured by
business assets, which may include accounts receivable and inventory,
certificates of deposit, securities, real estate, guarantees or other
collateral. The Company also generally obtains personal guarantees from the
principals of the business. Working capital loans are primarily collateralized
by short-term assets, whereas term loans are primarily collateralized by long-
term assets. As a result, commercial loans involve additional complexities,
variables and risks and require more thorough underwriting and servicing than
other types of loans. Indigenous to individuals in the Asian business
community is the desire to own the building and land which houses their
businesses. Accordingly, while a loan may be principally driven and classified
by the type of business operated, real estate is frequently the primary source
of collateral. As of December 31, 2000, approximately $186.2 million or 62.4%
of the commercial and industrial loan portfolio was secured by real estate.
The Company continually monitors real estate value trends and takes into
consideration changes in market
24
trends in its underwriting standards. Commercial loans are generally for
amounts between $10,000 and $250,000, and as of December 31, 2000, the average
commercial loan amount was $166,000. As of December 31, 2000, the Company's
commercial and industrial loan portfolio totaled $298.1 million or 60.9% of
the gross loan portfolio.
Commercial Mortgage Loans. In addition to commercial loans, the Company
makes commercial mortgage loans to finance the purchase of real property,
which generally consists of developed real estate. The Company's commercial
mortgage loans are secured by first liens on real estate, typically have
variable rates and amortize over a 15 to 20 year period with balloon payments
due at the end of five to seven years. Payments on loans secured by such
properties are dependent on the successful operation or management of the
properties. Accordingly, repayment of these loans may be subject to adverse
conditions in the real estate market or the economy to a greater extent than
other types of loans. In underwriting commercial mortgage loans, consideration
is given to the property's historical cash flow, current and projected
occupancy, location and physical condition. The underwriting analysis also
includes credit checks, appraisals, environmental impact reports and a review
of the financial condition of the borrower. As of December 31, 2000, the
Company had a commercial mortgage portfolio of $128.2 million.
Construction Loans. The Company makes loans to finance the construction of
residential and non-residential properties. The substantial majority of the
Company's residential construction loans are for single-family dwellings which
are pre-sold or are under earnest money contracts.
The Company also originates loans to finance the construction of commercial
properties such as multi-family, office, industrial, warehouse and retail
centers. Construction loans involve additional risks attributable to the fact
that loan funds are advanced upon the security of a project under
construction, and the project is of uncertain value prior to its completion.
Because of uncertainties inherent in estimating construction costs, the market
value of the completed project and the effects of governmental regulation on
real property, it can be difficult to accurately evaluate the total funds
required to complete a project and the related loan to value ratio. As a
result of these uncertainties, construction lending often involves the
disbursement of substantial funds with repayment dependent, in part, on the
success of the ultimate project rather than the ability of a borrower or
guarantor to repay the loan. If the Company is forced to foreclose on a
project prior to completion, there is no assurance that the Company will be
able to recover all of the unpaid portion of the loan. In addition, the
Company may be required to fund additional amounts to complete a project and
may have to hold the property for an indeterminable period of time. While the
Company has underwriting procedures designed to identify what it believes to
be acceptable levels of risks in construction lending, no assurance can be
given that these procedures will prevent losses from the risks described
above. As of December 31, 2000, the Company had a real estate construction
portfolio of $39.6 million, of which $7.5 million was residential and $32.1
million was commercial.
Residential Mortgage Brokerage and Lending. The Company uses its existing
branch network to offer a complete line of single-family residential mortgage
products through third party mortgage companies. The Company specializes in
mortgages that conform with government sponsored programs, such as those
offered by the Federal National Mortgage Association ("FNMA"). The Company
solicits and receives a fee to process these residential mortgage loans, which
are then underwritten and pre-sold to third party mortgage companies. The
Company does not fund or service these loans. The volume of residential
mortgage loans processed by the Company and pre-sold to third party mortgage
companies in 2000 was $10.8 million. Since the Company does not fund these
loans, there is no risk of nonpayment to the Company. The Company also makes
five to seven year balloon residential mortgage loans primarily secured by
non-owner occupied residential properties, which are retained in the Company's
residential mortgage portfolio. At December 31, 2000, the Company's
residential mortgage portfolio totaled $10.1 million. In 2000, the Bank
originated thirteen FNMA loans and two portfolio loans totaling $1.2 million.
Government Guaranteed Small Business Lending. The Company has developed an
expertise in several government guaranteed lending programs in order to
provide credit enhancement to its commercial and industrial
25
and mortgage portfolio. As a Preferred Lender under the federally guaranteed
SBA lending program, the Company's pre-approved status allows it to quickly
respond to customers' needs. Under this program, the Company originates and
funds SBA 7-A and 504 chapter loans qualifying for federal guarantees of 75%
to 90% of principal and accrued interest. Depending upon prevailing market
conditions, the Company may sell the guaranteed portion of these loans into
the secondary market with servicing retained. The Company specializes in SBA
loans to minority-owned businesses. Over the last eight years, the Company has
originated over $154.1 million in SBA guaranteed loans. As of December 31,
2000, the Company had $88.1 million in the retained portion of SBA loans,
approximately $56.3 million of which was guaranteed by the SBA. For each of
the last six years, the Company has been the second largest SBA loan
originator in Houston in terms of dollar volume and in 2000 was the third
largest SBA originator. SBA loan originations were $24.1 million and $27.9
million for the years ended December 31, 2000 and 1999, respectively. Another
source of government guaranteed lending is B&I Loans which are secured by the
U.S. Department of Agriculture and are available to borrowers in areas with a
population of less than 50,000. The Company also offers guaranteed loans
through the OCCGF, which is sponsored by the government of Taiwan. These loans
are for people of Chinese decent or origin, who are not mainland Chinese by
birth and reside "overseas." As of December 31, 2000, the Company's OCCGF
portfolio totaled $6.6 million.
Trade Finance. Since 1987, the Company has originated trade finance loans
and letters of credit to facilitate export and import transactions for small
and medium-sized businesses. In this capacity, the Company has worked with the
Ex-Im Bank, an agency of the U.S. Government which provides guarantees for
trade finance loans. In 1998, the Company was named Small Business Bank of the
Year by the Ex-Im Bank, and it was the largest Ex-Im Bank producer in the
State of Texas. Trade finance credit facilities rely heavily on the quality of
the business customer's accounts receivable and the ability to perform the
underlying transaction which, if monitored and controlled properly, limits the
financial risks to the Company associated with this short-term financing. To
mitigate the risk of nonpayment, the Company generally obtains a governmental
guaranty or credit insurance from a governmental agency such as the Ex-Im
Bank. At December 31, 2000, the Company's aggregate trade finance portfolio
commitments totaled approximately $11.3 million.
The Company offers a wide variety of loan products to retail customers
through its branch network in Houston and Dallas. Loans to retail customers
include residential mortgage loans, residential construction loans, automobile
loans, lines of credit and other personal loans. The terms of these loans
typically range from 12 to 60 months depending on the nature of the collateral
and the size of the loan.
The Company selectively extends credit for the purpose of establishing
long-term relationships with its customers. The Company mitigates the risks
inherent in lending by focusing on businesses and individuals with
demonstrated payment history, historically favorable profitability trends and
stable cash flows. In addition to these primary sources of repayment, the
Company looks to tangible collateral and personal guarantees as secondary
sources of repayment. Lending officers are provided with detailed underwriting
policies covering all lending activities in which the Company is engaged and
that require all lenders to obtain appropriate approvals for the extension of
credit. The Company also maintains documentation requirements and extensive
credit quality assurance practices in order to identify credit portfolio
weaknesses as early as possible so any exposures that are discovered may be
reduced.
Inherent in all lending is the risk of nonpayment. The types of collateral
required, the terms of the loans and the underwriting practices discussed
under each category above are all designed to minimize the risk of nonpayment.
In addition, as further risk protection, the Company rarely makes loans at its
legal lending limit. Although the Company's legal loan limit is $9.8 million,
the Company generally does not make loans larger than $4.0 million. Loans are
approved by lending officers and the Directors Credit Committee pursuant to a
lending authorization schedule delegated by the Directors Credit Committee
which is based on each loan officer's credit experience and portfolio. Control
systems and procedures are in place to ensure all loans are approved in
accordance with credit policies. The Company's policies and procedures
designed to minimize the risk of nonpayment with respect to outstanding loans
are discussed under "--Nonperforming Assets."
26
At December 31, 2000, 1999 and 1998, (except for the 1998 concentrations in
the convenience/gasoline stations and grocery store industries and the 2000
concentration in the apartment building industry) the Company had gross loan
concentrations (greater than 25% of capital) in the following industries:
As of December 31,
-----------------------
2000 1999 1998
------- ------- -------
(in thousands)
Hotels/motels....................................... $79,007 $74,070 $57,885
Retail centers...................................... 85,177 61,087 50,274
Restaurants......................................... 24,967 25,805 17,474
Apartment buildings................................. 8,391 14,526 15,994
Convenience/gasoline stations....................... 19,585 20,746 11,364
Grocery stores...................................... -- -- 2,066
The contractual maturity ranges of the commercial and industrial and real
estate portfolio and the amount of such loans with predetermined interest
rates and floating rates in each maturity range as of December 31, 2000 are
summarized in the following table:
As of December 31, 2000
----------------------------------
After
One
One Through After
Year or Five Five
Less Years Years Total
------- -------- -------- --------
(Dollars in thousands)
Commercial and industrial............... $75,298 $140,641 $ 82,195 $298,134
Real estate mortgage:
Residential........................... 352 19,946 11,761 32,059
Commercial............................ 7,033 509 -- 7,542
Real estate construction:
Residential........................... 9,814 100,048 18,380 128,242
Commercial............................ 1,907 3,751 4,483 10,141
------- -------- -------- --------
Total................................. $94,404 $264,895 $116,819 $476,118
======= ======== ======== ========
Loans with a predetermined interest
rate................................... $19,794 $ 77,553 $ 27,196 $124,543
Loans with a floating interest rate..... 74,610 187,342 89,623 351,575
------- -------- -------- --------
Total................................. $94,404 $264,895 $116,819 $476,118
======= ======== ======== ========
Effective January 1, 1995, the Company adopted SFAS 114, Accounting for
Creditors for Impairment of a Loan, as amended by SFAS 118, Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures. Under
SFAS 114, as amended, a loan is considered impaired based on current
information and events, if it is probable that the Company will be unable to
collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. The measurement of impaired loans
is based on the present value of expected future cash flows discounted at the
loan's effective interest rate or the loan's observable market price or based
on the fair value of the collateral if the loan is collateral-dependent. The
implementation of SFAS 114 did not have a material adverse affect on the
Company's financial statements.
Nonperforming Assets
The Company believes that it has procedures in place to maintain a high
quality loan portfolio. These procedures include the approval of lending
policies and underwriting guidelines by the Board of Directors, review by an
independent internal loan review department, quarterly review by an
independent outside loan review company, approval from the Directors Credit
Committee for large credit relationships and loan documentation procedures.
The loan review department reports credit risk grade changes on a monthly
basis to management and the Board of Directors. The Company performs monthly
and quarterly concentration analyses based on industries, collateral types,
business lines, large credit sizes and officer portfolio loads. There can be
no assurance, however, that the Company's loan portfolio will not become
subject to increasing pressures from deteriorating borrower credit due to
general economic conditions.
27
The Company generally places a loan on nonaccrual status and ceases
accruing interest when, in the opinion of management, full payment of loan
principal or interest is in doubt. All loans past due 90 days are placed on
nonaccrual status unless the loan is both well secured and in the process of
collection. Cash payments received while a loan is classified as nonaccrual
are recorded as a reduction of principal as long as significant doubt exists
as to collection of the principal. Otherwise, interest is recognized on a cash
basis. In addition to nonaccrual loans, the Company evaluates on an ongoing
basis additional loans which are potential problem loans as to risk exposure
in determining the adequacy of the allowance for loan losses.
The Company updates appraisals on loans secured by real estate when loans
are renewed, prior to foreclosure and at other times as necessary,
particularly in problem loan situations. In instances where updated appraisals
reflect reduced collateral values, an evaluation of the borrower's overall
financial condition is made to determine the need, if any, for possible write
downs or appropriate additions to the allowance for loan losses. The Company
records other real estate at fair value at the time of acquisition less
estimated costs to sell.
2000 versus 1999. Nonperforming assets at December 31, 2000 and 1999 were
$3.0 million and $7.0 million, respectively. The decrease was primarily due to
improvements in asset quality. Included in the nonperforming assets are the
portions guaranteed by the SBA, OCCGF and Ex-Im Bank, which totaled $1.0
million and $1.8 million for December 31, 2000 and 1999, respectively.
Nonperforming assets for the year ended December 31, 2000 decreased by $4.0
million or 57.0% due to efforts to improve asset quality. Nonperforming
assets, net of their guaranteed portions, were $1.9 million and $5.2 million
at December 31, 2000 and 1999, respectively. The ratios for net nonperforming
assets to total loans and other real estate were 0.40% and 1.05%, for December
31, 2000 and 1999, respectively. The ratios for net nonperforming assets to
total assets were 0.26% and 0.79%, for the same periods, respectively.
1999 versus 1998. Nonperforming assets at December 31, 1999 and 1998 were
$7.0 million and $5.3 million, respectively. Included in the nonperforming
assets are the portions guaranteed by the SBA, OCCGF and Ex-Im Bank, which
totaled $1.8 million for 1999. Nonperforming assets for the year ended
December 31, 1999 increased by $1.7 million or 33.0%. The increase was due to
the addition of eight loans to nonaccrual status because they were either 90
days or more past due.
The following table presents information regarding nonperforming assets at
the periods indicated:
As of December 31,
--------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(Dollars in thousands)
Nonaccrual loans................... $2,225 $6,552 $3,329 $2,663 $3,329
Accruing loans 90 days or more past
due............................... -- -- 1,291 -- 1,291
Other real estate and other assets
repossessed....................... 757 490 654 606 654
------ ------ ------ ------ ------
Total nonperforming assets....... $2,982 $7,042 $5,274 $3,269 $5,274
====== ====== ====== ====== ======
Nonperforming assets to total loans
and other real estate............. 0.62% 1.42% 1.26% 0.94% 0.82%
Nonperforming assets to total
assets............................ 0.40% 1.07% 0.90% 0.65% 0.54%
28
Allowance for Loan Losses
The allowance for loan losses is established through charges to earnings in
the form of a provision for loan losses. Management has established an
allowance for loan losses, which it believes, is adequate for estimated losses
inherent in the Company's loan portfolio. Based on an evaluation of the loan
portfolio, management presents a quarterly review of the allowance for loan
losses to the Company's Board of Directors, indicating any change in the
allowance since the last review and any recommendations as to adjustments in
the allowance. In making its evaluation, management considers the
diversification by industry of the Company's commercial loan portfolio, the
effect of changes in the local real estate market on collateral values, the
results of recent regulatory examinations, the effects on the loan portfolio
of current economic indicators and their probable impact on borrowers, the
amount of charge-offs for the period, the amount of nonperforming loans and
related collateral security and the evaluation of its loan portfolio by the
independent third party loan review function. Charge-offs occur when loans are
deemed to be uncollectible in whole or in part.
The Company follows a loan review program to evaluate the credit risk in
the loan portfolio. Through the loan review process, the Company maintains an
internally classified loan list which, along with the delinquency list of
loans, helps management assess the overall quality of the loan portfolio and
the adequacy of the allowance for loan losses. Loans classified as
"substandard" are those loans with clear and defined weaknesses such as a
highly-leveraged position, unfavorable financial ratios, uncertain repayment
sources or poor financial condition, which may jeopardize recoverability of
the debt. Loans classified as "doubtful" are those loans which have
characteristics similar to substandard loans but with an increased risk that a
loss may occur, or at least a portion of the loan may require a charge-off if
liquidated at present. Although loans classified as substandard do not
duplicate loans classified as doubtful, both substandard and doubtful loans
include some loans that are delinquent at least 30 days or on nonaccrual
status. Loans classified as "loss" are those loans which are in the process of
being charged off.
In addition to the internally classified loan list and delinquency list of
loans, the Company maintains a separate "watch list" which further aids the
Company in monitoring loan portfolios. Watch list loans show warning elements
where the present status portrays one or more deficiencies that require
attention in the short-term or where pertinent ratios of the loan account have
weakened to a point where more frequent monitoring is warranted. These loans
do not have all of the characteristics of a classified loan (substandard or
doubtful) but do show weakened elements compared with those of a satisfactory
credit. The Company reviews these loans to assist in assessing the adequacy of
the allowance for loan losses.
In order to determine the adequacy of the allowance for loan losses,
management establishes specific allowances for loans which management believes
require reserves greater than those allocated according to their
classification or the delinquent status of specific loans. Management then
considers the risk classification or delinquency status of the remaining
portfolio and other factors, such as collateral value, portfolio composition,
trends in economic conditions and the financial strength of borrowers. The
Company then charges to operations a provision for loan losses to maintain the
allowance for loan losses at an adequate level determined by the foregoing
methodology.
Beginning in December 1996, in accordance with the American Institute of
Certified Public Accountants' ("AICPA") Audit and Accounting Guide for Banks
and Savings Institutions, the Company allocates the allowance for loan losses
according to management's assessments of risk inherent in the portfolio.
For the years ended December 31, 2000, 1999 and 1998, net loan charge-offs
were $5.8 million, $4.1 million and $0.8 million, respectively. Of the $5.8
million in net charge-offs in 2000, $5.3 million was the result of potential
losses due to a fraudulent scheme by a customer of AFC. The ratios of net loan
charge-offs to average total loans outstanding for the same periods were
1.19%, 0.90% and 0.22%, respectively.
During 2000, the provision for loan losses increased by $2.0 million to
$7.5 million as the Company made additional provisions to bring the allowance
for loan losses to a level which management considers adequate to absorb
probable losses inherent in the loan portfolio.
29
In addition, as part of the sale of AFC, the Bank retained approximately
$216,000 of allowance for loan losses formerly allocated to AFC which resulted
in an increased allowance spread over fewer loans. During 1999, the provision
for loan losses increased by $2.2 million to $5.6 million as the Company made
a $2.1 million provision during the fourth quarter as a result of loan losses
which occurred during the year. The provision for loan losses for the year
ended December 31, 1998 was $3.6 million. At December 31, 2000, 1999 and 1998,
the allowance for loan losses aggregated $9.3 million, $7.5 million and $6.1
million, respectively or 1.92%, 1.52% and 1.46% of total loans, respectively.
The following table presents an analysis of the allowance for loan losses
and other related data:
As of December 31,
----------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(Dollars in thousands)
Average total loans
outstanding............ $486,549 $456,653 $368,394 $310,781 $223,514
======== ======== ======== ======== ========
Total loans outstanding
at end of period....... $483,738 $495,669 $417,686 $348,910 $280,597
======== ======== ======== ======== ========
Allowance for loan
losses at beginning of
period................. $ 7,537 $ 6,119 $ 3,569 $ 2,141 $ 1,612
Provision for loan
losses................. 7,508 5,550 3,377 3,350 2,118
Charge-offs:
Commercial and
industrial........... (1,479) (3,563) (237) (827) (1,236)
Real estate--
mortgage............. (23) (32) (114) (584) --
Real estate--
construction......... -- -- -- -- --
Consumer and other.... (5,524) (807) (619) (812) (570)
-------- -------- -------- -------- --------
Total charge-offs... (7,026)(/1/) (4,402)(/2/) (970) (2,223) (1,806)
-------- -------- -------- -------- --------
Recoveries:
Commercial and
industrial........... 901 94 77 79 146
Real estate--
mortgage............. 8 -- 17 156 --
Real estate--
construction......... -- -- 16 -- --
Consumer and other.... 343 176 33 66 71
-------- -------- -------- -------- --------
Total recoveries.... 1,252 270 143 301 217
-------- -------- -------- -------- --------
Net loan charge-offs.... (5,774) (4,132) (827) (1,922) (1,589)
-------- -------- -------- -------- --------
Allowance for loan
losses at end of
period................. $ 9,271 $ 7,537 $ 6,119 $ 3,569 $ 2,141
======== ======== ======== ======== ========
Ratio of allowance to
end of period total
loans.................. 1.92% 1.52% 1.46% 1.02% 0.76%
Ratio of net loan
charge-offs to average
total loans............ 1.19% 0.90% 0.22% 0.62% 0.71%
Ratio of allowance to
end of period non-
performing loans....... 416.67% 115.03% 132.44% 134.02% 135.42%
- --------
(1) For the year ended December 31, 2000, the Company charged off $7.0 million
in loans or 1.19% of average total loans outstanding and recoveries were
$1.3 million. Of the loans charged off, $5.3 million or 1.09% of average
total loans outstanding consisted of a factoring receivables charge-off of
which the Bank had been a victim of a fraudulent scheme by a long-time
customer of AFC.
(2) For the year ended December 31, 1999, the Company charged off $4.4 million
in loans or 0.90% of average total loans outstanding and recoveries were
$270,000. Of the loans charged off, $1.1 million or 0.22% of average total
loans outstanding consisted of loans in the Company's stated areas of
concentration while $2.8 million or 0.55% of average total loans
outstanding consisted of loans to entities in the oil related services,
technology services, communication services and consumer lending
industries.
30
The following table describes the allocation of the allowance for loan
losses among various categories of loans and certain other information. The
allocation is made for analytical purposes and is not necessarily indicative
of the categories in which future losses may occur. The total allowance is
available to absorb losses from any segment of the credit portfolio.
As of December 31,
-----------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------- ----------------- ----------------- ----------------- -----------------
Percent of Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to Loans to
Gross Gross Gross Gross Gross
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
(Dollars in thousands)
Balance of allowance for
loan losses applicable
to:
Commercial and
industrial............ $4,814 60.92% $3,783 59.55% $3,249 60.73% $1,414 54.77% $1,099 47.05%
Real estate--mortgage.. 758 28.27% 823 27.42% 725 27.37% 883 34.75% 620 39.85%
Real estate--
construction.......... 230 8.09% 204 7.99% 139 6.78% 111 6.12% 88 6.21%
Consumer and other..... 444 2.45% 357 2.31% 415 2.87% 358 2.87% 248 4.70%
Factored receivables... 20 0.26% 243 2.74% 266 2.25% 341 1.49% 62 2.19%
Unallocated............ 3,005 -- 2,127 -- 1,325 -- 462 -- 24 --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for loan
losses................. $9,271 100.00% $7,537 100.00% $6,119 100.00% $3,569 100.00% $2,141 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Securities
The Company uses its securities portfolio primarily as a source of income
and secondarily as a source of liquidity. At December 31, 2000, the fair value
of securities net of FHLB and Federal Reserve Bank stock totaled $139.0
million, an increase of $34.1 million or 32.5%. At December 31, 1999, the fair
value of securities net of FHLB and Federal Reserve Bank stock totaled $104.9
million, a decrease of $15.3 million or 12.7% from $120.2 million in 1998. The
increase in 2000 was primarily due to increased deposit growth. The decline in
1999 was primarily due to a year-end repositioning of securities to higher
yielding issues, while growth in 1998 was due primarily to an increase in
fixed rate mortgage-backed securities which were funded by $25.0 million in
borrowings from the FHLB.
The Company follows SFAS 115, Accounting for Certain Investments in Debt
and Equity Securities. At the date of purchase, the Company is required to
classify debt and equity securities into one of three categories: held-to-
maturity, trading or available-for-sale. Investments in debt securities are
classified as held-to-maturity and measured at amortized cost in the financial
statements only if management has the positive intent and ability to hold
those securities to maturity. The Company does not have a trading account.
Investments not classified as either held-to-maturity or trading are
classified as available-for-sale and measured at fair value in the financial
statements with unrealized gains and losses reported, net of tax, as a
component of accumulated other comprehensive income in shareholders' equity
until realized. On January 1, 2001, the Company reclassified its held-to-
maturity investment securities to the available-for-sale category as allowed
under SFAS 133. The adoption of SFAS 133 allowed this one-time
reclassification of securities between held-to-maturity or available-for-sale.
31
The following table presents the amortized cost of securities classified as
available-for-sale and their approximate fair values as of the dates shown:
As of December 31, 2000 As of December 31, 1999
---------------------------------------- ---------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gain Loss Value Cost Gain Loss Value
--------- ---------- ---------- -------- --------- ---------- ---------- -------
(Dollars in thousands)
U.S. Treasury securities
and obligations of U.S.
government agencies.... $ 25,810 $ -- $(142) $ 25,668 $20,990 $-- $(1,924) $19,066
Obligations of state and
political
subdivisions........... 9,560 24 -- 9,584 11,206 -- (653) 10,553
Mortgage-backed
securities and
collateralized mortgage
obligations............ 68,511 247 -- 68,758 39,274 -- (2,003) 37,271
Other debt securities... 3,010 72 -- 3,082 3,767 -- (141) 3,626
FHLB/Federal Reserve
Bank stock............. 4,924 -- -- 4,924 4,443 -- -- 4,443
-------- ---- ----- -------- ------- --- ------- -------
Total securities....... $111,815 $343 $(142) $112,016 $79,680 $-- $(4,721) $74,959
======== ==== ===== ======== ======= === ======= =======
The following table presents the amortized cost of securities classified as
held-to-maturity and their approximate fair values as of the dates shown:
As of December 31, 2000 As of December 31, 1999
--------------------------------------- ---------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gain Loss Value Cost Gain Loss Value
--------- ---------- ---------- ------- --------- ---------- ---------- -------
(Dollars in thousands)
U.S. Treasury securities
and obligations of U.S.
government agencies.... $ 4,969 $ -- $ (12) $ 4,957 $ 4,965 $-- $(202) $ 4,763
Obligations of state and
political
subdivisions........... 10,447 -- (37) 10,410 10,445 -- (449) 9,997
Mortgage-backed
securities and
collateralized mortgage
obligations............ 13,797 234 -- 14,031 16,951 -- (26) 16,924
Other debt securities... 2,530 -- (67) 2,463 2,745 -- (44) 2,701
------- ---- ----- ------- ------- --- ----- -------
Total securities....... $31,743 $234 $(116) $31,861 $35,106 $-- $(721) $34,385
======= ==== ===== ======= ======= === ===== =======
The following table summarizes the contractual maturity of investment
securities at amortized cost (including federal funds sold and other temporary
investments) and their weighted average yields. No tax-equivalent adjustments
were made.
As of December 31, 2000
-------------------------------------------------------------------------
After One After Five
Year But Years But
Within One Within Five Within Ten After Ten
Year Years Years Years Total
------------ ------------ ------------- -------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------- ----- -------- ----- -------- -----
(Dollars in thousands)
U.S. Treasury securities
and obligations of U.S.
government agencies.... $2,005 6.62% $4,961 7.17% $10,867 6.55% $ 12,766 6.92% $ 30,599 6.81%
Obligations of state and
political
subdivisions........... -- -- 870 4.80 6,703 5.03 12,410 4.98 19,983 4.99
Mortgage-backed
securities and
collateralized mortgage
obligations............ -- -- -- -- 9,216 7.22 73,494 7.09 82,710 7.10
Other debt securities... -- -- 2,052 6.84 2,320 8.11 1,171 10.20 5,543 8.08
FHLB/Federal Reserve
Bank stock............. -- -- -- -- -- -- 4,924 6.35 4,924 6.35
------ ---- ------ ---- ------- ---- -------- ----- -------- ----
Total securities....... $2,005 6.62% $7,883 6.82% $29,106 6.54% $104,765 6.82% $143,759 6.76%
====== ==== ====== ==== ======= ==== ======== ===== ======== ====
The following table summarizes the fair value and classification of
securities:
As of December 31,
--------------------------
2000 1999 1998
-------- -------- --------
(Dollars in thousands)
Available-for-sale................................ $112,016 $ 74,959 $ 83,623
Held-to-maturity.................................. 31,743 34,385 39,567
-------- -------- --------
Total securities................................ $143,759 $109,344 $123,190
======== ======== ========
32
The securities portfolio includes mortgage-backed securities which have
been developed by pooling a number of real estate mortgages and are
principally issued by federal agencies such as the FNMA and the Federal Home
Loan Mortgage Corporation. These securities are deemed to have high credit
ratings, and certain minimum levels of regular monthly cash flows of principal
and interest are guaranteed by the issuing agencies. Included in the Company's
mortgage-backed securities at years ended December 31, 2000, 1999 and 1998,
were $22.6 million, $2.6 million and $7.0 million in agency-issued collateral
mortgage obligations.
As of the years ended December 31, 2000, 1999 and 1998, 88.9%, 46.2% and
50.6%, respectively, of the mortgage-backed securities held by the Company had
final maturities of more than ten years. However, unlike U.S. Treasury and
U.S. Government agency securities, which have a lump sum payment at maturity,
mortgage-backed securities provide cash flows from regular principal and
interest payments and principal prepayments throughout the lives of the
securities. Mortgage-backed securities which are purchased at a premium will
generally suffer decreasing net yields as interest rates drop because
homeowners tend to refinance their mortgages. Thus, the premium paid must be
amortized over a shorter period. Therefore, securities purchased at a discount
will obtain higher net yields in a decreasing interest rate environment. As
interest rates rise, the opposite will generally be true. During a period of
increasing interest rates, fixed rate mortgage-backed securities do not tend
to experience heavy prepayments of principal and consequently, the average
life of this security will not be unduly shortened. At December 31, 2000,
approximately $12.2 of the Company's mortgage-backed securities earn interest
at floating rates and reprice within one year, and accordingly are less
susceptible to declines in value should interest rates increase.
Derivatives
In the third quarter of 1999, the Company entered into two interest rate
swaps in an effort to match the repricing of its liabilities with its assets.
The swaps each have a notional amount of $10 million. The Company pays a
floating interest rate of LIBOR (London Interbank Offered Rate) less 5 basis
points and receives a fixed rate of 7.15% on each swap. As of December 31,
2000, the swaps were in effect. Each swap matures in 2009 but is callable
every six months. No additional derivatives were entered into during 2000.
Deposits
The Company's lending and investing activities are funded principally by
deposits, approximately 39.9% of which were demand, savings and money market
deposits at December 31, 2000. Average noninterest-bearing demand deposits at
December 31, 2000 were $102.5 million compared with $91.5 million at year-end
1999, an increase of $11.0 million or 12.0%. Total deposits at December 31,
2000 were $625.9 million, an increase of $81.5 million or 15.0% from $544.4
million at December 31, 1999. Average total deposits during 2000 increased by
17.6% to $590.2 million. Average total deposits during 1999 increased by 5.0%
to $501.8 million from $477.8 million in 1998. The increases during 2000 and
1999 resulted primarily from the effect of opening new deposit gathering
branches, the sale of certificates of deposit in established branches, and
"relationship banking" initiatives. The Company's ratios of average
noninterest-bearing demand deposits to average total deposits for the years
ended December 31, 2000, 1999 and 1998 were 17.4%, 18.2% and 16.8%,
respectively.
As part of its effort to cross-sell its products and services, the Company
actively solicits time deposits from existing customers. In addition, the
Company receives time deposits from government municipalities and utility
districts as well as from corporations seeking to place deposits in minority-
owned businesses, such as the Company. These time deposits typically renew at
maturity and have provided a stable base of time deposits. Unlike other
financial institutions, where large time deposits are often considered
volatile, the Company believes that based on its historical experience its
large time deposits have core-type characteristics. It has been the Company's
experience that, generally, Asian customers and customers near retirement age
have a higher proportion of savings in time deposits than in other investment
vehicles because of the security provided by FDIC insurance. In pricing its
time deposits, the Company seeks to be competitive but typically prices near
the middle of a given market. Of the $174.4 million of time deposits greater
than $100,000 at December 31, 2000, accounts totaling $106.5 million have been
with the Company longer than one year.
33
The average daily balances and weighted average rates paid on deposits for
each of the years ended December 31, 2000, 1999, and 1998 are presented below:
Years Ended December 31,
-------------------------------------------
2000 1999 1998
------------- ------------- -------------
Amount Rate Amount Rate Amount Rate
-------- ---- -------- ---- -------- ----
(Dollars in thousands)
Interest-bearing deposits:
Money market checking........... $ 42,888 2.99% $ 37,011 2.81% $ 30,109 2.60%
Savings and money market
deposits....................... 96,520 3.35 97,629 3.09 90,328 3.61
Time deposits less than
$100,000....................... 185,310 5.89 132,012 4.94 151,356 5.37
Time deposits $100,000 and
over........................... 162,955 5.92 143,651 5.23 125,548 5.69
-------- ---- -------- ---- -------- ----
Total interest-bearing
deposits..................... 487,673 5.14 410,303 4.41 397,341 4.86
Noninterest-bearing deposits...... 102,544 -- 91,505 -- 80,452 --
-------- ---- -------- ---- -------- ----
Total deposits................ $590,217 4.25% $501,808 3.61% $477,793 4.04%
======== ==== ======== ==== ======== ====
The following table sets forth the amount of the Company's time deposits
that are $100,000 or greater by time remaining until maturity:
As of
December 31, 2000
----------------------
(Dollars in thousands)
Three months of less.................................. $ 67,102
Over three through six months......................... 40,695
Over six through 12 months............................ 55,045
Over 12 months........................................ 11,583
--------
Total............................................... $174,425
========
Other Borrowings
During the third quarter of 1998, the Company obtained two ten-year loans
totaling $25.0 million from the FHLB of Dallas to further leverage its balance
sheet. The loans bear interest at the average rate of 4.99% per annum until
the fifth anniversary of the loans, at which time the loans may be repaid or
the interest rate may be renegotiated. Other short-term borrowings principally
consist of U.S. Treasury tax note option accounts and have a maturity of 14
days or less.
Additionally, the Company had several unused, unsecured lines of credit
with correspondent banks totaling $5.0 million at December 31, 2000, $12.0
million at December 31, 1999 and $7.0 million at December 31, 1998.
The following table presents the categories of other borrowings by the
Company:
As of December 31,
-----------------------
2000 1999 1998
------- ------- -------
(Dollars in thousands)
FHLB short-term loans:
on December 31..................................... $ -- $20,000 $25,000
average during the year............................ 14,957 24,774 860
maximum month end balance during the year.......... 20,000 39,430 25,000
FHLB notes:
on December 31..................................... $25,000 $35,000 $25,000
average during the year............................ 27,268 32,753 12,673
maximum month end balance during the year.......... 35,000 35,000 25,000
Other short-term borrowings:
on December 31..................................... $ 573 $ 636 $ 43
average during the year............................ 532 510 487
maximum month end balance during the year.......... 577 640 649
The weighted average rate paid on other borrowings as of December 31, 2000
was 4.99%.
34
As of December 31, 2000, FHLB notes consisted of two 10-year notes of $15.0
and $10.0 million with fixed interest rates of 4.97% and 5.02%, respectively,
which are scheduled to mature during the fourth quarter of 2008. In the first
quarter of 1999, the Company borrowed an additional $10.0 million from the
FHLB with a fixed interest rate of 4.70% that was repaid in March 2000.
Additionally, this loan was renewed for one month at a rate of 6.08% and was
repaid in April 2000. Six-month term funds were acquired in October 1999 in
the amount of $20.0 million with a fixed rate of 5.89% which repriced to 6.32%
in March 2000 and was repaid in September 2000.
Interest Rate Sensitivity and Liquidity
The Company's Funds Management Policy provides management with the
necessary guidelines for effective funds management, and the Company has
established a measurement system for monitoring its net interest rate
sensitivity position. The Company manages its sensitivity position within
established guidelines.
Interest rate risk is managed by the Asset and Liability Committee ("ALCO")
which is composed of directors and senior officers of the Company, in
accordance with policies approved by the Company's Board of Directors. The
ALCO formulates strategies based on appropriate levels of interest rate risk.
In determining the appropriate level of interest rate risk, the ALCO considers
the impact on earnings and capital of the current outlook on interest rates,
potential changes in interest rates, regional economies, liquidity, business
strategies and other factors. The ALCO meets regularly to review, among other
things, the sensitivity of assets and liabilities to interest rate changes,
the book and market values of assets and liabilities, unrealized gains and
losses, purchase and sale activities, commitments to originate loans and the
maturities of investments and borrowings. Additionally, the ALCO reviews
liquidity, cash flow flexibility, maturities of deposits and consumer and
commercial deposit activity. Management uses two methodologies to manage
interest rate risk: (i) an analysis of relationships between interest-earning
assets and interest-bearing liabilities and (ii) an interest rate shock
simulation model. The Company has traditionally managed its business to reduce
its overall exposure to changes in interest rates, however, under current
policies of the Company's Board of Directors, management has been given some
latitude to increase the Company's interest rate sensitivity position within
certain limits if, in management's judgment, it will enhance profitability. As
a result, changes in market interest rates may have a greater impact on the
Company's financial performance in the future than they have had historically.
The Company manages its exposure to interest rates by structuring its
balance sheet in the ordinary course of business. The Company has not entered
into instruments such as leveraged derivatives, structured notes, caps,
floors, financial options, financial futures contracts or forward delivery
contracts for the purpose of reducing interest rate risk. During 1999, the
Company entered into two interest rate swaps. The Company pays a floating
interest rate of LIBOR less 5 basis points and receives a fixed rate of 7.15%
on each swap. Each swap matures in 2009 but is callable every six months.
An interest rate sensitive asset or liability is one that, within a defined
time period, either matures or experiences an interest rate change in line
with general market interest rates. The management of interest rate risk is
performed by analyzing the maturity and repricing relationships between
interest-earning assets and interest-bearing liabilities at specific points in
time ("GAP") and by analyzing the effects of interest rate changes on net
interest income over specific periods of time by projecting the performance of
the mix of assets and liabilities in varied interest rate environments.
Interest rate sensitivity reflects the potential effect on net interest income
of a movement in interest rates. A company is considered to be asset
sensitive, or having a positive GAP, when the amount of its interest-earning
assets maturing or repricing within a given period exceeds the amount of its
interest-bearing liabilities also maturing or repricing within that time
period. Conversely, a company is considered to be liability sensitive, or
having a negative GAP, when the amount of its interest-bearing liabilities
maturing or repricing within a given period exceeds the amount of its
interest-earning assets also maturing or repricing within that time period.
During a period of rising interest rates, a negative GAP would tend to affect
adversely net interest income, while a positive GAP would tend to result in an
increase in net interest income. During a period of falling interest rates, a
negative GAP would tend to result in an increase in net interest income, while
a positive GAP would tend to affect net interest income adversely.
35
The following table sets forth an interest rate sensitivity analysis for
the Company at December 31, 2000:
Volumes Subject to Repricing Within
-------------------------------------------------------------------------------
Greater
0-30 31-180 181-365 1-3 3-5 5-10 than 10
days days days years years years years Total
-------- -------- -------- -------- ------- ------- -------- --------
(Dollars in thousands)
Interest-earning assets:
Securities............. $ 1,286 $ 11,178 $ 10,034 $ 24,696 $16,452 $36,171 $ 43,942 $143,759
Total loans............ 353,606 23,078 23,394 53,381 22,957 4,868 2,454 483,738
Federal funds sold and
other temporary
investments........... 49,653 -- -- -- -- -- -- 49,653
-------- -------- -------- -------- ------- ------- -------- --------
Total interest-bearing
assets................ 404,545 34,256 33,428 78,077 39,409 41,039 46,396 677,150
Interest-bearing
liabilities:
Demand, money market
and savings deposits.. -- 28,341 28,340 70,851 14,170 -- -- 141,702
Time deposits.......... 76,245 159,381 102,763 24,395 4,669 8,823 4 376,280
Federal funds
purchased............. -- -- -- -- -- -- -- --
Other borrowings....... -- 25,000 -- 573 -- -- -- 25,573
-------- -------- -------- -------- ------- ------- -------- --------
Total interest-bearing
liabilities........... 76,245 212,722 131,103 95,819 18,839 8,823 4 543,555
-------- -------- -------- -------- ------- ------- -------- --------
Period GAP............. 328,300 (178,466) (97,675) (17,742) 20,570 32,216 46,392 133,595
Cumulative GAP......... $328,300 $149,834 $ 52,159 $ 34,417 $54,987 $87,203 $133,595
Period GAP to total
assets................ 44.56% (24.22)% (13.26)% (2.41)% 2.79% 4.37% 6.30%
Cumulative GAP to total
assets................ 44.56% 20.34 % 7.08 % 4.67 % 7.46% 11.84% 18.13%
Cumulative interest-
earning assets to
cumulative interest-
bearing liabilities... 530.59% 151.85 % 112.42 % 106.67 % 110.28% 116.04% 117.19%
The preceding table provides Company management with repricing data within
given time frames. The purpose of this information is to assist management in
the elements of pricing and of matching interest sensitive assets with
interest sensitive liabilities within time frames. The table indicates a
positive GAP on a cumulative basis for the three time periods covering the
next 365 days of $328.3 million, $149.8 million and $52.2 million,
respectively. With this condition, the Company is susceptible to a decrease in
net interest income should market interest rates decrease. The Company is
aware of this imbalance and has initiated strategies to lower the positive GAP
by emphasizing the origination of fixed rate loans while shortening the terms
of fixed rate liability products. GAP reflects a one-day position that is
continually changing and is not indicative of the Company's position at any
other time. While the GAP position is a useful tool in measuring interest rate
risk and contributes toward effective asset and liability management, it is
difficult to predict the effect of changing interest rates solely on that
measure, without accounting for alterations in the maturity or repricing
characteristics of the balance sheet that occur during changes in market
interest rates. For example, the GAP position reflects only the prepayment
assumptions pertaining to the current rate environment. Assets tend to prepay
more rapidly during periods of declining interest rates than during periods of
rising interest rates. Because of this and other risk factors not contemplated
by the GAP position, an institution could have a matched GAP position in the
current rate environment and still have its net interest income exposed to
increased rate risk. The Company's Rate Committee and the ALCO review the
Company's interest rate risk position on a weekly and monthly basis,
respectively.
As a financial institution, the Company's primary component of market risk
is interest rate volatility, primarily in the prime lending rate. Fluctuations
in interest rates will ultimately impact both the level of income and expense
recorded on most of the Company's assets and liabilities, and the market value
of all interest-earning assets and interest-bearing liabilities, other than
those which have a short term to maturity. Based upon the nature of the
Company's operations, the Company is not subject to foreign exchange or
commodity price risk. The Company does not own any trading assets.
36
The Company's exposure to market risk is reviewed on a regular basis by the
ALCO. Interest rate risk is the potential of economic losses due to future
interest rate changes. These economic losses can be reflected as a loss of
future net interest income and/or a loss of current fair market values. The
objective is to measure the effect on net interest income and to adjust the
balance sheet to minimize the inherent risk while at the same time maximizing
income. Management realizes certain risks are inherent, and that the goal is
to identify, monitor, manage or exploit the risks.
The Company applies an economic value of equity ("EVE") methodology to
gauge its interest rate risk exposure as derived from its simulation model.
Generally, EVE is the discounted present value of the difference between
incoming cash flows on interest-earning assets and other investments and
outgoing cash flows on interest-bearing liabilities. The application of the
methodology attempts to quantify interest rate risk by measuring the change in
the EVE that would result from a theoretical instantaneous and sustained 200
basis point shift in market interest rates.
Presented below, as of December 31, 2000, is an analysis of the Company's
interest rate risk as measured by changes in EVE for parallel shifts of 200
basis points in market interest rates:
EVE as a % of
$ Change Present Value of
in EVE Assets
Change (Dollars % -------------------------------
in in Change EVE
Rates thousands) in EVE Ratio Change
------ ---------- ------ ----- ------
-200 bp $ 3,307 5.27% 8.87% 33 bp
0 bp -- -- 8.54% --
+200 bp (10,181) (16.21)% 7.33% (121) bp
The percentage change in EVE as a result of a 200 basis point decrease in
interest rates at December 31, 2000 was 5.27%. The percentage change in EVE as
a result of a 200 basis point increase in interest rates on December 31, 2000
was (16.21%).
The Company has attempted to narrow the bands of extremes in the investment
portfolio's performance acknowledging that some earnings opportunities must be
allowed to pass in the interest of minimizing extreme losses during periods of
volatile interest rates. During the third and fourth quarters of 1999,
increasing interest rates caused increased prepayment speeds in the Company's
mortgage-backed securities as well as accelerating call activity in U.S.
Government agency fixed income securities. As a result of a shift in
investment philosophy combined with calls and increased prepayments,
management has been able to restructure the portfolio and reduce the negative
convexity.
The Company's EVE is most directly affected by the convexity and duration
of its investment portfolio. The duration and negative convexity of the
Company's investment portfolio produce disproportionate effects on the value
of the portfolio with changes in interest rates. Convexity measures the
percentage of portfolio price appreciation or depreciation relative to a
decrease or increase in interest rates. The higher the negative convexity, the
greater the decline in the value of a fixed income security as interest rates
increase. The Company's investment portfolio is primarily comprised of long-
term, fixed income securities, the value of which would be adversely affected
in a rising interest rate environment.
Management believes that the EVE methodology overcomes three shortcomings
of the typical maturity GAP methodology. First, it does not use arbitrary
repricing intervals and accounts for all expected future cash flows. Second,
because the EVE method projects cash flows of each financial instrument under
different interest rate environments, it can incorporate the effect of
embedded options on an institution's interest rate risk exposure. Third, it
allows interest rates on different instruments to change by varying amounts in
response to a change in market interest rates, resulting in more accurate
estimates of cash flows.
As with any method of gauging interest rate risk, however, there are
certain shortcomings inherent to the EVE methodology. The model assumes
interest rate changes are instantaneous parallel shifts in the yield curve. In
reality, rate changes are rarely instantaneous. The use of the simplifying
assumption that short-term and long-
37
term rates change by the same degree may also misstate historical rate
patterns which rarely show parallel yield curve shifts. Further, the model
assumes that certain assets and liabilities of similar maturity or repricing
will react identically to changes in rates. In reality, the market value of
certain types of financial instruments may adjust in anticipation of changes
in market rates, while any adjustment in the valuation of other types of
financial instruments may lag behind the change in general market rates.
Additionally, the EVE methodology does not reflect the full impact of
contractual restrictions on changes in rates for certain assets, such as
adjustable rate loans. When interest rates change, actual loan prepayments and
actual early withdrawals from time deposits may deviate significantly from the
assumptions used in the model. Finally, this methodology does not measure or
reflect the impact that higher rates may have on the ability of adjustable
rate loan clients to service their debt. All of these factors are considered
in monitoring the Company's exposure to interest rate risk.
The prime rate in effect for December 31, 2000 and December 31, 1999 was
9.5% and 8.5%, respectively. Management believes that in the short-term the
prime rate will continue to soften.
Liquidity
Liquidity involves the Company's ability to raise funds to support asset
growth or reduce assets to meet deposit withdrawals and other payment
obligations, to maintain reserve requirements and otherwise to operate the
Company on an ongoing basis. The Company's liquidity needs are met primarily
by financing activities, which consist mainly of growth in time deposits,
supplemented by available investment securities available-for-sale, other
borrowings and earnings through operating activities. Although access to
purchased funds from correspondent banks is available and has been utilized on
occasion to take advantage of investment opportunities, the Company does not
generally rely on these external funding sources. The cash and federal funds
sold position, supplemented by amortizing investments along with payments and
maturities within the loan portfolio, have historically created an adequate
liquidity position.
The Company uses federal funds purchased and other borrowings as funding
sources and in its management of interest rate risk. Federal funds purchased
generally represent overnight borrowings. Other borrowings principally consist
of U.S. Treasury tax note option accounts that have maturities of 14 days or
less and borrowings from the FHLB.
FHLB advances may be utilized from time to time as either a short-term
funding source or a longer-term funding source. FHLB advances can be
particularly attractive as a longer-term funding source to balance interest
rate sensitivity and reduce interest rate risk. The Company is eligible for
several borrowing programs through the FHLB. The first, a short-term borrowing
program, requires delivery of eligible securities for collateral. Maturities
under this program range from one to 365 days. At year end 1999, the Company
had $20.0 million in borrowings under this program which was repaid in
September 2000. The Company currently maintains some of its investment
securities in safekeeping at the FHLB of Dallas.
Under another borrowing program, long-term borrowings are available to the
Company from the FHLB. These borrowings have maturities greater than one year
and are collateralized first by FHLB stock, second by the Company's one to
four family mortgage loans and third by the Company's investment securities in
safekeeping at the FHLB. Borrowings secured by the Company's one to four
family mortgage loans are limited to 75% of the loan value. At December 31,
1999, the Company had $35.0 million in borrowings under this program of which
$10 million was repaid in March 2000.
Capital Resources
Capital management consists of providing equity to support both current and
future operations. The Company is subject to capital adequacy requirements
imposed by the Federal Reserve Board and the Bank is subject to capital
adequacy requirements imposed by the OCC. Both the Federal Reserve Board and
the OCC have adopted risk-based capital requirements for assessing bank
holding company and bank capital adequacy. These standards define capital and
establish minimum capital requirements in relation to assets and off-balance
38
sheet exposure, adjusted for credit risk. The risk-based capital standards
currently in effect are designed to make regulatory capital requirements more
sensitive to differences in risk profiles among bank holding companies and
banks, to account for off-balance sheet exposure and to minimize disincentives
for holding liquid assets. Assets and off-balance sheet items are assigned to
broad risk categories, each with appropriate relative risk weights. The
resulting capital ratios represent capital as a percentage of total risk-
weighted assets and off-balance sheet items.
The risk-based capital standards of the Federal Reserve Board require all
bank holding companies to have "Tier 1 capital" of at least 4.0% and "total
risk-based" capital (Tier 1 and Tier 2) of at least 8.0% of total risk-
adjusted assets. "Tier 1 capital" generally includes common shareholders'
equity and qualifying perpetual preferred stock together with related
surpluses and retained earnings, less deductions for goodwill and various
other intangibles. "Tier 2 capital" may consist of a limited amount of
intermediate-term preferred stock, a limited amount of term subordinated debt,
certain hybrid capital instruments and other debt securities, perpetual
preferred stock not qualifying as Tier 1 capital, and a limited amount of the
general valuation allowance for loan losses. The sum of Tier 1 capital and
Tier 2 capital is "total risk-based capital."
The Federal Reserve Board has also adopted guidelines which supplement the
risk-based capital guidelines with a minimum ratio of Tier 1 capital to
average total consolidated assets ("leverage ratio") of 3.0% for institutions
with well diversified risk, including no undue interest rate exposure;
excellent asset quality; high liquidity; good earnings; and that are generally
considered to be strong banking organizations, rated composite 1 under
applicable federal guidelines, and that are not experiencing or anticipating
significant growth. Other banking organizations are required to maintain a
leverage ratio of at least 4.0%. These rules further provide that banking
organizations experiencing internal growth or making acquisitions will be
expected to maintain capital positions substantially above the minimum
supervisory levels and comparable to peer group averages, without significant
reliance on intangible assets.
Pursuant to FDICIA, each federal banking agency revised its risk-based
capital standards to ensure that those standards take adequate account of
interest rate risk, concentration of credit risk and the risks of
nontraditional activities, as well as reflect the actual performance and
expected risk of loss on multifamily mortgages. The Bank is subject to capital
adequacy guidelines of the OCC that are substantially similar to the Federal
Reserve Board's guidelines. Also pursuant to FDICIA, the OCC has promulgated
regulations setting the levels at which an insured institution such as the
Bank would be considered "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized." The Bank is classified "well capitalized" for purposes of
the OCC's prompt corrective action regulations. See "Business--Supervision and
Regulation--The Company" and "--The Bank."
Shareholders' equity increased from $52.6 million at December 31, 1999 to
$58.7 million at December 31, 2000, an increase of $6.1 million or 11.6%. This
increase was primarily the result of net income of $5.5 million offset by
dividends paid of $1.7 million, common stock issuances of $445,000, treasury
stock purchases of $1.4 million, and a net unrealized gain on securities of
$3.3 million.
39
The following table provides a comparison of the Company's and the Bank's
leverage and risk-weighted capital ratios as of December 31, 2000 to the
minimum and well-capitalized regulatory standards:
Minimum Required To be Well Capitalized
for Capital under Prompt Corrective Actual Ratio at
Adequacy Purposes Action Provisions December 31, 2000
----------------- ----------------------- -----------------
The Company
Leverage ratio........ 4.00%(1) N/A 8.39%
Tier 1 risk-based
capital ratio........ 4.00 N/A 11.74
Risk-based capital
ratio................ 8.00% N/A 13.00%
The Bank
Leverage ratio........ 4.00%(2) 5.00% 8.01%
Tier 1 risk-based
capital ratio........ 4.00 8.00 11.21
Risk-based capital
ratio................ 8.00% 10.00% 12.47%
- --------
(1) The Federal Reserve Board may require the Company to maintain a leverage
ratio above the required minimum.
(2) The OCC may require the Bank to maintain a leverage ratio above the
required minimum.
New Accounting Pronouncements
In June 1998, FASB issued SFAS 133, Accounting for Derivative Instruments
and Hedging Activities. (SFAS 133). The statement becomes effective for
reporting periods beginning after June 15, 2000, and will not be applied
retroactively. SFAS 133 establishes accounting and reporting standards for
derivatives instruments and hedging activities. Under the standard, all
derivatives must be measured at fair value and recognized as either assets or
liabilities in the financial condition. In addition, hedge accounting should
only be provided for transactions that meet certain specified criteria. The
accounting for changes in fair value (gains and losses) of a derivative is
dependent on the intended use of the derivative and its designation.
Derivatives may be used to: 1) hedge exposure to change in fair value of a
recognized asset or liability or a from commitment, referred to as a fair
value hedge, 2) hedge exposure to variable cash flow of forecasted
transactions, referred to as cash flow hedge, or 3) hedge foreign currency
exposure. For information regarding the market risk of the Company's financial
instruments, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Interest Rate Sensitivity and Liquidity." The
Company's principal market risk exposure is to interest rates.
In September 2000, FASB issued SFAS 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, which
replaces SFAS 125. The Statement revises the standards for accounting for the
securitization and other transfers of financial assets and collateral, and
requires certain disclosures, but carries over most of SFAS 125's provisions
without reconsideration. SFAS 140 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001. Management believes that adopting these components of SFAS 140 will not
have a material impact on the Company's financial position or results of
operations. SFAS 140 must be applied prospectively.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
For information regarding the market risk of the Company's financial
instruments, see "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Interest Rate Sensitivity and Liquidity."
The Company's principal market risk exposure is to interest rates.
Item 8. Financial Statements and Supplementary Data
Reference is made to the financial statements, the reports thereon, the
notes thereto and supplementary data commencing at page F-1 of this Form 10-K,
which financial statements, reports, notes and data are incorporated herein by
reference.
40
Quarterly Financial Data (Unaudited)
The following table represents summarized data for each of the quarters in
fiscal 2000 and 1999 (in thousands, except earnings per share):
2000 1999
-------------------------------- -------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
Interest income......... $16,352 $16,416 $15,528 $15,170 $14,606 $13,738 $12,895 $12,397
Interest expense........ 7,345 7,389 6,501 6,041 5,772 5,399 5,005 4,850
------- ------- ------- ------- ------- ------- ------- -------
Net interest income... 9,007 9,027 9,027 9,129 8,834 8,339 7,890 7,547
Provision for loan
losses................. 730 499 5,580 699 2,100 1,380 1,060 1,010
------- ------- ------- ------- ------- ------- ------- -------
Net interest income
after provision for
loan losses.......... 8,277 8,528 3,447 8,430 6,734 6,959 6,830 6,537
Noninterest income...... 1,813 1,832 1,913 1,474 1,135 1,445 1,833 1,589
Noninterest expense..... 6,757 6,719 7,265 6,489 6,047 5,410 5,468 5,369
------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes................ 3,333 3,641 (1,905) 3,415 1,822 2,994 3,195 2,757
Provision for income
taxes.................. 1,151 1,324 (752) 1,278 659 1,033 1,050 896
------- ------- ------- ------- ------- ------- ------- -------
Net income.............. $ 2,182 $ 2,317 $(1,153) $ 2,137 $ 1,163 $ 1,961 $ 2,145 $ 1,861
======= ======= ======= ======= ======= ======= ======= =======
Earnings per share
Basic.................. $ 0.31 $ 0.33 $ (0.17) $ 0.30 $ 0.16 $ 0.28 $ 0.30 $ 0.26
Diluted................ 0.31 0.33 (0.17) 0.30 0.16 0.28 0.30 0.26
Weighted average shares
outstanding
Basic.................. 6,976 6,956 6,942 7,014 7,122 7,121 7,118 7,095
Diluted................ 6,977 6,956 6,942 7,014 7,122 7,121 7,118 7,095
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
41
PART III
Item 10. Directors and Executive Officers of the Company
The information under the captions "Election of Directors", "Continuing
Directors and Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive Proxy Statement for its 2001
Annual Meeting of Shareholders to be filed with the Commission pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"2001 Proxy Statement"), is incorporated herein by reference in response to
this item.
Item 11. Executive Compensation
The information under the caption "Executive Compensation and Other
Matters" in the 2001 Proxy Statement is incorporated herein by reference in
response to this item.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information under the caption "Beneficial Ownership of Common Stock by
Management of the Company and Principal Shareholders" in the 2001 Proxy
Statement is incorporated herein by reference in response to this item.
Item 13. Certain Relationships and Related Transactions
The information under the caption "Interests of Management and Others in
Certain Transactions" in the 2001 Proxy Statement is incorporated herein by
reference in response to this item.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 10-K
Consolidated Financial Statements
Reference is made to the Consolidated Financial Statements, the reports
thereon, the notes thereto and supplementary data commencing at page F-1 of
this Annual Report on Form 10-K. Set forth below is a list of such
Consolidated Financial Statements:
Independent Auditors' Reports
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Income for the Years Ended December 31, 2000,
1999, and 1998
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2000, 1999, and 1998
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 2000, 1999, and 1998
Consolidated Statements of Cash Flows for the Years Ended December 31,
2000, 1999, and 1998
Notes to Consolidated Financial Statements
Financial Statement Schedules
All supplemental schedules are omitted as inapplicable or because the
required information is included in the Consolidated Financial Statements or
notes thereto.
42
Exhibits
Exhibit
Number Description
------- -----------
3.1 Amended and Restated Articles of Incorporation of the Company
(incorporated herein by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (Registration No. 333-62667) (the
"Registration Statement")).
3.2 Amended and Restated Bylaws of the Company (incorporated herein by
reference to Exhibit 3.2 to the Registration Statement).
4 Specimen form of certificate evidencing the Common Stock (incorporated
herein by reference to Exhibit 4 to the Registration Statement).
10.1 Agreement and Plan of Reorganization by and among MetroCorp
Bancshares, Inc., MC Bancshares of Delaware, Inc. and MetroBank, N.A.
(incorporated herein by reference to Exhibit 10.1 to the Registration
Statement).
10.2+ Form of Director Stock Option Agreement (incorporated herein by
reference to Exhibit 10.2 to the Registration Statement).
10.3+ MetroCorp Bancshares, Inc. Non-Employee Director Stock Bonus Plan
(incorporated herein by reference to Exhibit 10.3 to the Registration
Statement).
10.4 MetroCorp Bancshares, Inc. 1998 Employee Stock Purchase Plan
(incorporated herein by reference to Exhibit 10.4 to the Registration
Statement).
10.5+ MetroCorp Bancshares, Inc. 1998 Stock Incentive Plan (incorporated
herein by reference to Exhibit 10.5 to the Registration Statement).
10.6+ First Amendment to the MetroCorp Bancshares, Inc. 1998 Employee Stock
Purchase Plan (incorporated herein by reference to Exhibit 10.6 to the
Company's Form 10-K for the year ended December 31, 1998).
10.7+ First Amendment to the MetroCorp Bancshares, Inc. Non-Employee
Director Stock Bonus Plan (incorporated herein by reference to Exhibit
4.5 to the Company's Registration Statement on Form S-8 (Registration
Number 333-94327)).
10.8+ Second Amendment to the MetroCorp Bancshares, Inc. Non-Employee
Director Stock Bonus Plan (incorporated herein by reference to Exhibit
4.6 to the Company's Registration Statement on Form S-8 (Registration
Number 333-94327)).
10.9*+ MetroCorp Bancshares, Inc. Executive Bonus Plan
23.1* Consent of Deloitte & Touche LLP.
23.2* Consent of Pricewaterhouse Coopers LLP.
- --------
* Filed herewith.
+ Management contract or compensatory plan or arrangement.
Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during the quarter
ended December 31, 2000.
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Houston, on March 15, 2001.
MetroCorp Bancshares, Inc.
/s/ Don J. Wang
By:__________________________________
Don J. Wang
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the indicated capacities on
March 15, 2001.
Signature Title
--------- -----
/s/ Don J. Wang Chairman of the Board, President
______________________________________ and Chief Executive Officer
Don J. Wang (principal executive officer)
/s/ Ruth E. Ransom Chief Financial Officer and
______________________________________ Senior Vice President (principal
Ruth E. Ransom financial officer and principal
accounting officer)
/s/ Tiong L. Ang Director
______________________________________
Tiong L. Ang
/s/ May P. Chu Director
______________________________________
May P. Chu
/s/ Helen P. Chen Director
______________________________________
Helen P. Chen
/s/ Tommy F. Chen Director
______________________________________
Tommy F. Chen
/s/ George M. Lee Director
______________________________________
George M. Lee
/s/ John M. Lee Director
______________________________________
John M. Lee
/s/ David Tai Director
______________________________________
David Tai
/s/ Joe Ting Director
______________________________________
Joe Ting
44
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
METROCORP BANCSHARES, INC. AND SUBSIDIARIES
Page
----
Independent Auditors' Reports............................................ F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999............. F-4
Consolidated Statements of Income for the Years Ended December 31, 2000,
1999, and 1998.......................................................... F-5
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2000, 1999, and 1998....................................... F-6
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 2000, 1999, and 1998................................. F-7
Consolidated Statements of Cash Flows for the Years Ended December 31,
2000, 1999, and 1998.................................................... F-8
Notes to Consolidated Financial Statements............................... F-9
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
MetroCorp Bancshares, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheets of MetroCorp
Bancshares, Inc. and subsidiary (the "Company") as of December 31, 2000 and
1999, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of MetroCorp Bancshares, Inc. as
of December 31, 2000 and 1999, and the results of their operations and their
cash flows for each of the years then ended in conformity with accounting
principles generally accepted in the United States of America.
Deloitte & Touche LLP
March 13, 2001
Houston, Texas
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
MetroCorp Bancshares, Inc.
In our opinion, the accompanying consolidated statements of income, of
comprehensive income, of changes in shareholders' equity and of cash flows
present fairly, in all material respects, the results of operations and cash
flows of MetroCorp Bancshares, Inc. and subsidiaries (the Company) for the
year ended December 31, 1998, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
PricewaterhouseCoopers LLP
Houston, Texas
March 19, 1999
F-3
METROCORP BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 31,
------------------
2000 1999
-------- --------
ASSETS
Cash and cash equivalents:
Cash and due from banks.................................. $ 42,573 $ 29,945
Federal funds sold and other temporary investments....... 49,653 6,471
-------- --------
Total cash and cash equivalents........................ 92,226 36,416
Investment securities available-for-sale, at fair value
(amortized cost of $111,815 and $79,680, respectively).... 112,016 74,959
Investment securities held-to-maturity, at amortized cost
(fair value of $31,861 and $34,385, respectively)......... 31,743 35,106
Loans, net................................................. 474,467 488,132
Premises and equipment, net................................ 6,575 8,106
Accrued interest receivable................................ 4,271 3,855
Deferred income taxes...................................... 5,797 6,477
Due from customers on acceptances.......................... 3,322 831
Other real estate and repossessed assets, net.............. 757 490
Other assets............................................... 5,583 6,217
-------- --------
Total assets........................................... $736,757 $660,589
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing...................................... $107,924 $ 96,253
Interest-bearing......................................... 517,982 448,183
-------- --------
Total deposits......................................... 625,906 544,436
Other borrowings........................................... 25,000 55,636
Accrued interest payable................................... 1,816 1,558
Income taxes payable....................................... 671 --
Acceptances outstanding.................................... 3,322 831
Other liabilities.......................................... 21,341 5,548
-------- --------
Total liabilities...................................... 678,056 608,009
Commitments and contingencies (Note 15).................... -- --
Shareholders' equity:
Preferred stock $1.00 par value, 2,000,000 shares
authorized; none of which are issued and outstanding.... -- --
Common stock, $1.00 par value, 20,000,000 shares
authorized; 7,180,030 and 7,122,479 shares are issued
and 6,979,530 and 7,102,479 shares are outstanding at
December 31, 2000 and 1999, respectively................ 7,180 7,122
Additional paid-in-capital............................... 26,033 25,646
Retained earnings........................................ 26,936 23,124
Accumulated other comprehensive income (loss)............ 121 (3,145)
Treasury stock, at cost (200,500 and 20,000 shares at
December 31, 2000 and 1999, respectively)............... (1,569) (167)
-------- --------
Total shareholders' equity............................. 58,701 52,580
-------- --------
Total liabilities and shareholders' equity............. $736,757 $660,589
======== ========
The accompanying notes are an integral part of these financial statements.
F-4
METROCORP BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Years ended December
31,
-------------------------
2000 1999 1998
------- ------- -------
Interest income:
Loans.............................................. $52,280 $45,322 $39,219
Investment securities:
Taxable.......................................... 7,668 6,624 6,312
Tax-exempt....................................... 1,046 1,091 964
Federal funds sold and other temporary
investments....................................... 2,472 631 1,201
------- ------- -------
Total interest income.......................... 63,466 53,668 47,696
------- ------- -------
Interest expense:
Time deposits...................................... 20,444 14,032 15,267
Demand and savings deposits........................ 4,514 4,059 4,041
Other borrowings................................... 2,318 2,935 744
------- ------- -------
Total interest expense......................... 27,276 21,026 20,052
------- ------- -------
Net interest income.................................. 36,190 32,642 27,644
Provision for loan losses............................ 7,508 5,550 3,377
------- ------- -------
Net interest income after provision for loan losses.. 28,682 27,092 24,267
------- ------- -------
Noninterest income:
Service charges on deposit accounts................ 3,883 3,313 3,364
Other loan-related fees............................ 1,697 1,658 1,371
Letters of credit commissions and fees............. 583 471 392
Gain (loss) on sale of investment securities, net.. 2 (14) 202
Other noninterest income........................... 867 660 280
------- ------- -------
Total noninterest income....................... 7,032 6,088 5,609
------- ------- -------
Noninterest expense:
Employee compensation and benefits................. 12,381 11,140 9,898
Occupancy.......................................... 5,790 5,117 4,907
Other real estate, net............................. (50) 83 374
Data processing.................................... 154 327 580
Professional fees.................................. 3,197 658 444
Advertising........................................ 436 459 392
Other noninterest expense.......................... 5,322 4,628 4,385
------- ------- -------
Total noninterest expense...................... 27,230 22,412 20,980
------- ------- -------
Income before provision for income taxes............. 8,484 10,768 8,896
Provision for income taxes........................... 3,001 3,638 2,777
------- ------- -------
Net income........................................... $ 5,483 $ 7,130 $ 6,119
======= ======= =======
Earnings per common share:
Basic.............................................. $ 0.79 $ 1.00 $ 1.08
Diluted............................................ $ 0.79 $ 1.00 $ 1.06
Weighted average shares outstanding:
Basic.............................................. 6,972 7,114 5,691
Diluted............................................ 6,973 7,114 5,749
The accompanying notes are an integral part of these financial statements.
F-5
METROCORP BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Years ended December
31,
---------------------
2000 1999 1998
------ ------ ------
Net income.............................................. $5,483 $7,130 $6,119
------ ------ ------
Other comprehensive income (loss), net of tax (Note 9):
Unrealized gains (losses) on investment securities,
net of tax:
Unrealized holding gains (losses) arising during the
period............................................. 3,237 (3,867) 73
Less: reclassification adjustment for gains (losses)
included in net income............................. 29 (26) (133)
------ ------ ------
Other comprehensive income (loss) .................... 3,266 (3,893) (60)
------ ------ ------
Total comprehensive income............................ $8,749 $3,237 $6,059
====== ====== ======
The accompanying notes are an integral part of these financial statements.
F-6
METROCORP BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2000, 1999 and 1998
(in thousands)
Accumulated
Common Stock Additional other Treasury
-------------- paid-in Retained comprehensive stock,
Shares At par capital earnings income (loss) at cost Total
------ ------ ---------- -------- ------------- -------- -------
Balance at January 1,
1998................... 5,556 $5,655 $12,795 $12,003 $ 808 $ (755) $30,506
Issuance of common
stock.................. 1,350 1,350 11,721 -- -- -- 13,071
Repurchase of common
stock.................. (26) -- -- -- -- (204) (204)
Shares issued for
incentive plans........ 33 -- -- -- -- 254 254
Sale of treasury stock.. 92 -- 53 -- -- 705 758
Other comprehensive
loss................... -- -- -- -- (60) -- (60)
Net income.............. -- -- -- 6,119 -- -- 6,119
Dividends............... -- -- -- (420) -- -- (420)
----- ------ ------- ------- ------ ------- -------
Balance at December 31,
1998................... 7,005 7,005 24,569 17,702 748 -- 50,024
----- ------ ------- ------- ------ ------- -------
Issuance of common
stock.................. 117 117 1,077 -- -- -- 1,194
Repurchase of common
stock.................. (20) -- -- -- -- (167) (167)
Other comprehensive
loss................... -- -- -- -- (3,893) -- (3,893)
Net income.............. -- -- -- 7,130 -- -- 7,130
Dividends............... -- -- -- (1,708) -- -- (1,708)
----- ------ ------- ------- ------ ------- -------
Balance at December 31,
1999................... 7,102 7,122 25,646 23,124 (3,145) (167) 52,580
----- ------ ------- ------- ------ ------- -------
Issuance of common
stock.................. 58 58 387 -- -- -- 445
Repurchase of common
stock.................. (181) -- -- -- -- (1,402) (1,402)
Other comprehensive
gain................... -- -- -- -- 3,266 -- 3,266
Net income.............. -- -- -- 5,483 -- -- 5,483
Dividends............... -- -- -- (1,671) -- -- (1,671)
----- ------ ------- ------- ------ ------- -------
Balance at December 31,
2000................... 6,979 $7,180 $26,033 $26,936 $ 121 $(1,569) $58,701
===== ====== ======= ======= ====== ======= =======
The accompanying notes are an integral part of these financial statements.
F-7
METROCORP BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the year ended
December 31,
-------------------------
2000 1999 1998
------- ------- -------
Cash flows from operating activities:
Net income........................................ $ 5,483 $ 7,130 $ 6,119
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation.................................... 2,105 2,132 2,096
Provision for loan losses....................... 7,508 5,550 3,377
(Gain) loss on securities sales................. (2) 14 (202)
(Gain) loss on sale of other real estate........ (50) 50 200
Loss (gain) on sale of premises................. 4 -- --
Deferred loan fees.............................. 625 668 204
Deferred income taxes........................... (963) (1,464) (1,354)
Changes in:
Accrued interest receivable................... (416) (604) (110)
Accrued interest payable...................... 258 528 (6)
Income taxes payable.......................... 671 (27) 1,887
Other liabilities............................. 15,204 (272) (1,046)
Other assets.................................. 634 (5,526) (357)
------- ------- -------
Net cash provided by operating activities... 31,061 8,179 10,808
------- ------- -------
Cash flows from investing:
Purchases of securities available-for-sale........ (49,398) (29,221) (52,601)
Proceeds from sales, maturities and principal
paydowns of securities available-for-sale........ 17,264 31,990 10,472
Purchases of securities held-to-maturity.......... -- (2,822) (1,218)
Proceeds from maturities and principal paydowns of
securities held-to-maturity...................... 3,375 7,283 32,882
Net change in loans............................... 3,271 (83,310) (69,807)
Proceeds from sale of other real estate........... 2,044 662 355
Proceeds from sale of premises & equipment........ 25 -- --
Purchases of premises and equipment............... (603) (2,087) (2,174)
------- ------- -------
Net cash used in investing activities....... (24,022) (77,505) (82,091)
------- ------- -------
Cash flows from financing:
Net change in:
Deposits........................................ 81,470 64,930 33,647
Other borrowings................................ (30,063) 5,593 28,432
Proceeds from issuance of common stock............ 445 1,194 13,071
Treasury stock issuance sold (purchased), net..... (1,402) (167) 808
Dividends paid.................................... (1,679) (1,701) --
------- ------- -------
Net cash provided by financing activities... 48,771 69,849 75,958
------- ------- -------
Net increase in cash and cash equivalents........... 55,810 523 4,675
Cash and cash equivalents at begining of period..... 36,416 35,893 31,218
------- ------- -------
Cash and cash equivalents at end of period.......... $92,226 $36,416 $35,893
======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-8
METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
The consolidated financial statements of MetroCorp Bancshares, Inc. (the
"Company") include the accounts of the Company and its wholly-owned
subsidiary, MetroBank, National Association (the "Bank"). The Bank was formed
in 1987 and is engaged in commercial banking activities through its fourteen
branches in Houston and Dallas, Texas. In August 1993, the Bank formed a
wholly-owned subsidiary, Island Commercial Corporation (ICC), to own and
operate certain foreclosed properties. ICC was dissolved in April 1999. In
February 1994, the Bank formed a wholly-owned subsidiary, Advantage Finance
Corporation (AFC), to purchase and finance accounts receivable. Effective
December 20, 2000, AFC was sold to a third party.
Effective October 26, 1998, the Company was formed as a bank holding
company. The Bank is indirectly a 100% wholly-owned subsidiary of the Company.
The Company exchanged 5,654,560 shares of the Company's Common Stock for all
of the issued and outstanding shares of common stock of the Bank through an
exchange of four Company shares of Common Stock for one share of the Bank's
common stock outstanding. The accompanying financial statements have been
restated to reflect the effect of the four-for-one exchange ratio on all share
amounts and earnings per share for all periods presented.
The accounting principles followed by the Company and the methods of
applying these principles conform with accounting principles generally
accepted in the United States and with general practices within the banking
industry. Certain principles which significantly affect the determination of
financial position, results of operations and cash flows are summarized below.
Use of Estimates
These financial statements are prepared in conformity with accounting
principles generally accepted in the United States, which require management
to make estimates and assumptions. These assumptions affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Significant estimates
include the allowance for loan losses. Amounts are recognized when it is
probable that an asset has been impaired or a liability has been incurred and
the cost can be reasonable estimated. Actual results could differ from those
estimates.
Principles of Consolidation
All significant intercompany accounts and transactions are eliminated in
consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks,
federal funds sold, and other temporary investments with original maturities
of less than three months.
Investment Securities
Investments in securities for which the Company has both the ability and
intent to hold to maturity are classified as investments held-to-maturity and
are stated at amortized cost. Amortization of premiums and accretion of
discounts are recognized as adjustments to interest income using the
effective-interest method. Investments in securities which management believes
may be sold prior to maturity are classified as investments available-for-sale
and are stated at fair value. Unrealized net gains and losses, net of the
associated deferred income tax effect, are excluded from income and reported
as a separate component of shareholders' equity in "Accumulated other
comprehensive income (loss)." Realized gains and losses from sales of
investments available-for-sale are recognized through income at the time of
sale using the specific identification method.
F-9
METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Loans and Allowance for Loan Losses
Loans are reported at the principal amount outstanding, reduced by unearned
discounts, net deferred loan fees, and an allowance for loan losses. Unearned
income on installment loans is recognized using the effective interest method
over the term of the loan. Interest on other loans is calculated using the
simple interest method on the daily principal amount outstanding.
From time to time, the Company may sell certain of its SBA loans or only
the guaranteed portion of such loans. A portion of the gain on the sale of
such SBA loans, or the guaranteed portions thereof, is recognized as other
operating income at the time of the sale. The remaining portion of the gain is
deferred and amortized over the remaining life of the loan as an adjustment to
yield. Upon the sale of such loans, or the guaranteed portion thereof, the
Company receives a fee for servicing the loans. The servicing costs are
amortized over the estimated life of the loan, discounted at the rate of the
related note plus 1%. The servicing asset is amortized in proportion to and
over the period of estimated servicing income.
Loans are placed on nonaccrual status when principal or interest is past
due more than 90 days or when, in management's opinion, collection of
principal and interest is not likely to be made in accordance with a loan's
contractual terms. Interest accrued but not collected at the date a loan is
placed on nonaccrual status is reversed against interest income. In addition,
the amortization of deferred loan fees is suspended when a loan is placed on
nonaccrual status. Interest income on nonaccrual loans is recognized only to
the extent received in cash; however, where there is doubt regarding the
ultimate collectibility of the loan principal, cash receipts, whether
designated as principal or interest, are thereafter applied to reduce the
principal balance of the loan. Loans are restored to accrual status only when
interest and principal payments are brought current and, in management's
judgement; future payments are reasonably assured.
The Bank applies SFAS 114, Accounting by Creditors for Impairment of a
Loan, as amended by SFAS 118, Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures. Under SFAS 114, as amended, a loan,
with the exception of groups of smaller-balance homogenous loans that are
collectively evaluated for impairment, is considered impaired when, based on
current information, it is probable that the borrower will be unable to pay
contractual interest or principal payments as scheduled in the loan agreement.
SFAS 118 permits a creditor to use existing methods for recognizing interest
income on impaired loans. The Bank recognizes interest income on impaired
loans pursuant to the discussion above for nonaccrual loans. Impairment is
measured by the difference between the recorded investment in the loan
(including accrued interest, net deferred loan fees or costs and unamortized
premium or discount) and the estimated present value of total expected future
cash flows, discounted at the loan's effective rate, or the fair value of the
collateral, if the loan is collateral dependent. Impairment is recognized by
adjusting an allocation of the existing allowance for loan losses.
Specifically, SFAS 114 requires that the allowance for loan losses related
to impaired loans be determined based on the difference of carrying value of
loans and the present value of expected cash flows discounted at the loan's
effective interest rate or, as a practical expedient, the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent.
Estimates of loan losses involve an exercise of judgment. While it is
possible that in the short-term the Company may sustain losses which are
substantial in relation to the allowance for loan losses, it is the judgment
of management that the allowance for loan losses reflected in the consolidated
balance sheets is adequate to absorb probable losses that exist in the current
loan portfolio.
F-10
METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The allowance for loan losses provides for the risk of losses inherent in
the lending process. The allowance for loan losses is based on periodic
reviews and analyses of the loan portfolio which include consideration of such
factors as the risk rating of individual credits, the size and diversity of
the portfolio, economic conditions, prior loss experience and results of
periodic credit reviews of the portfolio. The allowance for loan losses is
increased by provisions for loan losses charged against income and reduced by
charge-offs, net of recoveries. In management's judgement, the allowance for
loan losses is considered adequate to absorb losses inherent in the loan
portfolio.
Nonrefundable Fees and Costs Associated with Lending Activities
Loan origination fees in excess of the associated costs are recognized over
the life of the related loan as an adjustment to yield using the interest
method.
Generally, loan commitment fees are deferred, except for certain
retrospectively determined fees, and recognized as an adjustment of yield by
the interest method over the related loan life or, if the commitment expires
unexercised, recognized in income upon expiration of the commitment.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation.
For financial accounting purposes, depreciation is computed using the
straight-line method over the estimated useful lives of the assets.
Expenditures for maintenance and repairs, which do not extend the life of bank
premises and equipment, are charged to operations as incurred.
Other Real Estate
Other real estate consists of properties acquired through a foreclosure
proceeding or acceptance of a deed in lieu of foreclosure. These properties
are initially recorded at fair value less estimated costs to sell. On an
ongoing basis they are carried at the lower of cost or fair value minus
estimated costs to sell based on appraised value. Operating expenses, net of
related revenue and gain and losses on sale of such assets, are reported as
other real estate expense.
Other Borrowings
Other borrowings include U.S. Treasury tax note option accounts with
maturities of 14 days or less and Federal Home Loan Bank (FHLB) borrowings.
Income Taxes
The Bank accounts for income taxes in accordance with SFAS 109, Accounting
for Income Taxes. SFAS 109 provides for an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Bank's financial statements or tax returns. When management determines that it
is more likely than not that a deferred tax asset will not be realized, a
valuation allowance is established. In estimating future tax consequences,
SFAS 109 generally considers all expected future events other than enactments
of changes in tax laws or rates.
Earnings Per Share
Basic earnings per common share is calculated by dividing earnings
available for common shareholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share is
F-11
METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
calculated by dividing net earnings available for common shareholders by the
weighted average number of common and potentially dilutive common shares.
Stock options can be dilutive common shares and are therefore considered in
the earnings per share calculation, if dilutive. The number of potentially
dilutive common shares is determined using the treasury stock method. Earnings
per common share have been computed based on weighted average number of shares
outstanding after giving retroactive effect to the four-for-one stock exchange
in connection with the holding company formation.
Interest Rate Risk Management
The operations of the Bank are subject to the risk of interest rate
fluctuations to the extent that interest-bearing assets and interest-bearing
liabilities mature or reprice at different times or in differing amounts. Risk
management activities are aimed at optimizing net interest income, given a
level of interest rate risk consistent with the Bank's business strategies.
Asset liability management activities are conducted in the context of the
Bank's asset sensitivity to interest rate changes. This asset sensitivity
arises due to interest-earning assets repricing more frequently than interest-
bearing liabilities. For example, if interest rates are declining, margins
will narrow as assets reprice downward more quickly than liabilities. The
converse applies when interest rates are on the rise.
As part of the Bank's interest rate risk management, loans of approximately
$228,714,000 and $185,721,000, at December 31, 2000 and December 31, 1999,
respectively, contain interest rate floors to reduce the unfavorable impact to
the Bank if interest rates were to decline. The interest rate floors on these
loans range from 7.5% to 11.0%.
Financial Instruments with Off-Balance Sheet Risk
The Company enters into traditional off-balance sheet financial instruments
such as interest rate exchange agreements ("swaps") in the normal course of
business in an effort to reduce its exposure to changes in interest rates. The
off-balance sheet financial instruments utilized by the Company are typically
classified as hedges of existing assets, liabilities or anticipated
transactions. To qualify for hedge accounting, the hedged asset or liability
must be interest rate sensitive and the off-balance sheet financial instrument
must be designated and be effective as a hedge of the asset, liability or
anticipated transaction. The effectiveness of a hedge is evaluated at
inception and throughout the hedge period. Gains or losses on early
termination of financial contracts, if any, are amortized over the remaining
terms of the hedged items. The market value of off-balance sheet instruments
that are hedging assets carried at lower of cost or market value are included
in the overall valuation analysis of the hedged asset to determine if a loss
allowance is necessary. Payments made and received on off-balance sheet
instruments entered into in an effort to alter the interest rate
characteristics of the hedged item are offset against the related interest
income and expense.
Other Off-Balance Sheet Instruments
The Company has entered into other off-balance sheet financial instruments
consisting of commitments to extend credit. Such financial instruments are
recorded in the financial statements when they are funded.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133,
as amended, becomes effective for reporting periods beginning after June 15,
2000, and will not be applied retroactively. In June 1999, FASB issued SFAS
137 that
F-12
METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
deferred the effective date of adoption of SFAS 133 for one year. This was
followed in June 2000 by the issuance of SFAS 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, which amended SFAS 133.
SFAS 133 establishes accounting and reporting standards for derivatives
instruments and hedging activities. Under the standard, all derivatives must
be measured at fair value and recognized as either assets or liabilities in
the statement of financial condition. In addition, hedge accounting should
only be provided for transactions that meet certain specified criteria. The
accounting for changes in fair value (gains or losses) of a derivative is
dependent on the intended use of the derivative and its designation.
Derivatives may be used to: 1) hedge exposure to change the fair value of a
recognized asset or liability or from a commitment, referred to as a fair
value hedge, 2) hedge exposure to variable cash flow of forecasted
transactions, referred to as cash flow hedge, or 3) hedge foreign currency
exposure. The implementation of this pronouncement on January 1, 2001 did not
have a material effect on the Company's financial statements, nor does
management expect SFAS 133 to have a significant impact on future operations.
The Bank entered into two interest rate swaps in 1999 which are each
considered a fair value hedge under SFAS 133. Amounts receivable or payable
based on the interest rate differentials of interest rate swaps are accrued
monthly and are reflected in interest expense. At December 31, 2000, the fair
value of the swaps were estimated to be ($35,000).
In September 2000, FASB issued SFAS 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, which
replaces SFAS 125. The Statement revises the standards for accounting for the
securitization and other transfers of financial assets and collateral, and
requires certain disclosures, but carries over most of SFAS 125's provisions
without reconsideration. SFAS 140 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001. Management believes that adopting these components of SFAS 140 will not
have a material impact on the Company's financial position or results of
operations. SFAS 140 must be applied prospectively.
Reclassifications
Certain 1999 and 1998 amounts have been reclassified to conform to the 2000
presentation.
2. Cash and Cash Equivalents
The Bank is required by the Board of Governors of the Federal Reserve
System to maintain average reserve balances. "Cash and cash equivalents" in
the consolidated balance sheets includes amounts so restricted of
approximately $200,000 at both December 31, 2000 and 1999.
3. Investment Securities
In the normal course of business, the Bank invests in federal government,
federal agency, state and municipal securities which inherently carry interest
rate risks based upon overall economic trends and related market yield
fluctuations. Securities within the available-for-sale portfolio may be used
as part of the Company's asset/liability strategy and may be sold in response
to changes in interest rate risk, prepayment risk or other similar economic
factors. Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than temporary
would result in write-down of the individual securities to their fair value.
The related write-downs would be included in earnings as realized losses.
F-13
METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of December 31, 2000
----------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------- ---------- ---------- --------
(in thousands)
Available-for-sale:
U.S. Treasury securities and
obligations of U.S. government
agencies........................... $ 25,810 $ -- $ (142) $ 25,668
Obligations of state and political
subdivisions....................... 9,560 24 -- 9,584
Mortgage-backed securities and
collateralized mortgage
obligations........................ 68,511 247 -- 68,758
Other debt securities............... 3,010 72 -- 3,082
FHLB and Federal Reserve Bank stock
(1)(2)............................. 4,924 -- -- 4,924
-------- ---- ------- --------
Total securities.................. $111,815 $343 $ (142) $112,016
======== ==== ======= ========
Held-to-maturity:
U.S. Treasury securities and
obligations of U.S. government
agencies........................... $ 4,969 $ -- $ (12) $ 4,957
Obligations of state and political
subdivisions....................... 10,447 -- (37) 10,410
Mortgage-backed securities and
collateralized mortgage
obligations........................ 13,797 234 -- 14,031
Other debt securities............... 2,530 -- (67) 2,463
-------- ---- ------- --------
Total securities.................. $ 31,743 $234 $ (116) $ 31,861
======== ==== ======= ========
As of December 31, 1999
----------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------- ---------- ---------- --------
(in thousands)
Available-for-sale:
U.S. Treasury securities and
obligations of U.S. government
agencies........................... $ 20,990 $ -- $(1,924) $ 19,066
Obligations of state and political
subdivisions....................... 11,206 (653) 10,553
Mortgage-backed securities and
collateralized mortgage
obligations........................ 39,274 -- (2,003) 37,271
Other debt securities............... 3,767 -- (141) 3,626
FHLB and Federal Reserve Bank stock
(1)(2)............................. 4,443 -- -- 4,443
-------- ---- ------- --------
Total securities.................. $ 79,680 $ -- $(4,721) $ 74,959
======== ==== ======= ========
Held-to-maturity:
U.S. Treasury securities and
obligations of U.S. government
agencies........................... $ 4,965 $ -- $ (202) $ 4,763
Obligations of state and
politicalsubdivisions.............. 10,446 -- (449) 9,997
Mortgage-backed securities and
collateralized mortgage
obligations........................ 16,950 -- (26) 16,924
Other debt securities............... 2,745 -- (44) 2,701
-------- ---- ------- --------
Total securities.................. $ 35,106 $ -- $ (721) $ 34,385
======== ==== ======= ========
- --------
(1) FHLB stock held by the Bank is subject to certain restrictions under a
credit policy of the FHLB dated May 1, 1997. Redemption of FHLB stock is
dependent upon repayment of borrowings from the FHLB.
(2) Federal Reserve Bank stock held by the Bank is subject to certain
restrictions under Federal Reserve Bank policy.
F-14
METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following sets forth information concerning sales (excluding
maturities) of available-for-sale securities (in thousands):
Years ended December
31,
--------------------
2000 1999 1998
------- ------- ----
Available-for-sale:
Amortized cost .......................................... $11,153 $21,433 $--
Proceeds................................................. 11,231 21,419 --
Gross realized gains..................................... 121 404 --
Gross realized losses.................................... 119 418 --
Investments carried at approximately $5,501,000 and $7,032,000 at December
31, 2000 and 1999, respectively, were pledged to secure public deposits and
short-term borrowings of approximately $1,768,000 and $1,703,000,
respectively. Additionally, investments in the securities portfolio carried at
approximately $21,780,000 and $55,024,000 were pledged as collateral for
borrowed funds at December 31, 2000 and 1999, respectively.
At December 31, 2000, future contractual maturities of securities are as
follows (in thousands):
Investments Investments
available-for-sale held-to-maturity
------------------ -----------------
Amortized Fair Amortized Fair
cost value cost value
--------- -------- --------- -------
Within one year.......................... $ 1,998 $ 2,005 $ -- $ --
Within two to five years................. 4,893 5,048 779 788
Within six to ten years.................. 8,163 8,161 13,909 13,942
After ten years.......................... 23,326 23,120 3,258 3,100
Mortgage-backed securities and
collateralized mortgage obligations..... 68,511 68,758 13,797 14,031
-------- -------- ------- -------
Debt securities.......................... 106,891 107,092 31,743 31,861
FHLB/Federal Reserve Bank equity
securities.............................. 4,924 4,924 -- --
-------- -------- ------- -------
Total securities..................... $111,815 $112,016 $31,743 $31,861
======== ======== ======= =======
The Bank holds mortgage-backed securities which may mature at an earlier
date than the contractual maturity due to prepayments. The Bank also holds
certain securities which may be called by the issuer at an earlier date than
the contractual maturity date.
The Company does not own any securities of any one issuer (other than U.S.
government and its agencies) of which aggregate adjusted cost exceeded 10% of
consolidated shareholders' equity at December 31, 2000 or 1999.
F-15
METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Loans and Allowance for Loan Losses
The Bank makes commercial, real estate and other loans to commercial and
individual customers throughout the markets it serves in Texas and Louisiana.
The loan portfolio is summarized by major categories as follows (in
thousands):
As of December
31,
------------------
2000 1999
-------- --------
Commercial and industrial................................... $298,134 $298,150
Real estate-mortgage........................................ 138,383 137,297
Real estate-construction.................................... 39,601 40,009
Consumer and other.......................................... 11,986 11,550
Factored receivables........................................ 1,297 13,700
-------- --------
Gross loans............................................... 489,401 500,706
Unearned discounts and interest............................. (1,061) (1,038)
Deferred loan fees.......................................... (4,602) (3,999)
-------- --------
Total loans............................................... 483,738 495,669
Allowance for loan losses................................... (9,271) (7,537)
-------- --------
Loans, net................................................ $474,467 $488,132
======== ========
Although the Bank's loan portfolio is diversified, a substantial portion of
its customers' ability to service their debts is dependent primarily on the
service sectors of the economy. At December 31, 2000 and 1999, the Bank's loan
portfolio consisted of concentrations in the following industries. With the
exception of the concentration in the apartment building industry at December
31, 2000, all such amounts represent a concentration greater than 25% of
capital (in thousands):
As of December
31,
-----------------
2000 1999
-------- --------
Hotels/motels................................................ $ 79,007 $ 74,070
Retail centers............................................... 85,177 61,087
Restaurants.................................................. 24,967 25,805
Apartment buildings.......................................... 8,391 14,526
Convenience/gasoline stations ............................... 19,585 20,746
All other ................................................... 272,274 304,472
-------- --------
Gross loans ............................................... $489,401 $500,706
======== ========
Selected information regarding the loan portfolio is presented below (in
thousands):
As of December
31,
-----------------
2000 1999
-------- --------
Variable rate loans........................................... $351,575 $345,095
Fixed rate loans.............................................. 137,826 155,611
-------- --------
Gross loans................................................. $489,401 $500,706
======== ========
F-16
METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Changes in the allowance for loan losses are as follows (in thousands):
As of December 31,
------------------------
2000 1999 1998
------- ------- ------
Balance at beginning of year.......................... $ 7,537 $ 6,119 $3,569
Provision for loan losses............................. 7,508 5,550 3,377
Charge-offs .......................................... (7,025) (4,402) (970)
Recoveries ........................................... 1,251 270 143
------- ------- ------
Balance at end of year................................ $ 9,271 $ 7,537 $6,119
======= ======= ======
Loans for which the accrual of interest has been discontinued totaled
approximately $2,225,000 and $6,552,000 at December 31, 2000 and 1999,
respectively. Had these loans remained on an accrual basis, interest in the
amount of approximately $215,000 and $357,000 would have been accrued on these
loans during the years ended December 31, 2000 and 1999, respectively.
Included in "other assets" on the balance sheet at December 31, 2000 is
$4.7 million due from the SBA, the Export Import Bank of the United States
("Ex-Im Bank"), an independent agency of the United States Government, and the
Overseas Chinese Community Guaranty Fund ("OCCGF"), an agency sponsored by the
government of Taiwan. This amount represents the guaranteed portion of loans
previously charged-off. Included on the balance sheet at December 31, 1999 is
$5.2 million due from the SBA.
The recorded investment in loans for which impairment has been recognized
in accordance with SFAS 114, as amended by SFAS 118, and the related specific
allowance for loan losses on such loans at December 31, 2000 and 1999, is
presented below (in thousands):
Real
Estate Commercial Consumer Total
------ ---------- -------- -------
December 31, 2000
Impaired loans having related allowance for
loan losses............................... $ 242 $ 1,944 $39 $ 2,225
Less: Allowance for loan losses.......... (11) (370) (14) (395)
Less: Guaranteed portion (SBA, OCCGF and
Ex-Im Bank)............................. -- (1,049) -- (1,049)
------ ------- --- -------
Impaired loans, net of allowance for
loan losses and guarantees............ $ 231 $ 525 $25 $ 781
====== ======= === =======
December 31, 1999
Impaired loans having related allowance for
loan losses............................... $1,981 $ 4,490 $81 $ 6,552
Less: Allowance for loan losses.......... (163) (869) (22) (1,054)
Less: Guaranteed portion (SBA, OCCGF and
Ex-Im Bank)............................. -- (1,821) -- (1,821)
------ ------- --- -------
Impaired loans, net of allowance for
loan losses and guarantees............ $1,818 $ 1,800 $59 $ 3,677
====== ======= === =======
For the years ended December 31, 2000 and 1999, the average recorded
investment in impaired loans was approximately $2,908,000 and $6,552,000,
respectively. The related amount of interest income recognized while the loans
were impaired approximated $64,000 and $168,000 for the years ended December
31, 2000 and 1999, respectively.
Additionally, at December 31, 2000 and 1999, loans carried at approximately
$9,782,000 and $148,589,000, respectively, were pledged to secure borrowed
funds.
F-17
METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Premises and Equipment
Premises and equipment are summarized as follows (in thousands):
Estimated As of
useful December 31,
lives (in -----------------
years) 2000 1999
--------- -------- -------
Furniture, fixtures and equipment............... 3-10 $ 9,769 $ 9,908
Building and improvements....................... 3-20 3,943 3,943
Land............................................ -- 1,679 1,679
Leasehold improvements.......................... 5 2,298 2,397
-------- -------
17,689 17,927
Accumulated depreciation.................................. (11,114) (9,821)
-------- -------
Premises and equipment, net............................... $ 6,575 $ 8,106
======== =======
6. Interest-Bearing Deposits
The Bank had $19.7 million in brokered deposits as of December 31, 2000.
There were no major deposit concentrations as of December 31, 2000.
The types of accounts and their respective balances included in interest-
bearing deposits are as follows (in thousands):
As of
December 31,
-----------------
2000 1999
-------- --------
Interest-bearing demand deposits.......................... $ 46,530 $ 40,473
Savings and money market accounts......................... 95,172 96,869
Time deposits less than $100,000.......................... 201,855 152,914
Time deposits $100,000 and over........................... 174,425 157,927
-------- --------
Interest-bearing deposits................................. $517,982 $448,183
======== ========
At December 31, 2000, the scheduled maturities of time deposits are as
follows (in thousands):
2001................................................................ $331,530
2002................................................................ 18,416
2003................................................................ 4,596
2004................................................................ 749
2005................................................................ 1,149
After 2005.......................................................... 19,840
--------
$376,280
========
7. Other Borrowings
During the third quarter 1998, the Company obtained two ten-year loans
totaling $25,000,000 from the FHLB of Dallas The loans bear interest at the
average rate of 4.99% per annum until the fifth anniversary of the loans, at
which time the loans may be repaid or the interest rate may be renegotiated.
In the first quarter of 1999, the Company obtained an additional ten-year loan
in the amount of $10,000,000 from the FHLB with a fixed interest rate of 4.7%
which was repaid in March 2000.
F-18
METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other short-term borrowings at December 31, 2000 and 1999 consist of
$573,000 and $636,000, respectively, in Treasury, Tax and Loan ("TT&L)
payments in Company accounts for the benefit of the U.S. Treasury. These funds
typically remain in the Company for one day and are then moved to the U.S.
Treasury.
Six-month term funds were acquired in October 1999 from the FHLB in the
amount of $20,000,000 with a fixed rate of 5.89% and were repaid in September
2000.
Additionally, the Bank has several unused, unsecured lines of credit with
correspondent banks totaling $5,000,000 at December 31, 2000 and $12,000,000
at December 31, 1999.
8. Income Taxes
Deferred income taxes result from differences between the amounts of assets
and liabilities as measured for income tax return and for financial reporting
purposes. The significant components of the net deferred tax asset are as
follows (in thousands):
As of
December 31,
-------------
2000 1999
------ ------
Deferred Tax Assets:
Unrealized losses on available-for-sale securities, net ..... $ -- $1,581
Allowance for loan losses ................................... 3,152 2,340
Recognition of deferred loan fees............................ 1,621 1,463
Depreciation................................................. 1,066 867
Recognition of interest on nonaccrual loans.................. 295 173
Other........................................................ 107 240
------ ------
Gross deferred tax assets.................................... 6,241 6,664
------ ------
Deferred Tax Liabilities:
Unrealized gains on investments securities available-for-
sale, net................................................... 62 --
FHLB stock dividends......................................... 305 187
Other........................................................ 77 --
------ ------
Gross deferred tax liabilities............................... 444 187
------ ------
Net deferred tax asset..................................... $5,797 $6,477
====== ======
The Bank has provided no valuation allowance for the net deferred tax asset
at December 31, 2000 or December 31, 1999 due primarily to its ability to
offset reversals of net deductible temporary differences against income taxes
paid in previous years and expected to be paid in future years.
Components of the provision for income taxes are as follows (in thousands):
Years ended
December 31,
------------------------
2000 1999 1998
------ ------- -------
Current provision for federal income taxes......... $3,964 $ 5,102 $ 4,131
Deferred federal income tax benefit................ (963) (1,464) (1,354)
------ ------- -------
Total provision for income taxes................. $3,001 $ 3,638 $ 2,777
====== ======= =======
F-19
METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the provision for income taxes computed at statutory
rates compared to the actual provision for income taxes is as follows (in
thousands):
Years ended December 31,
-----------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Federal income tax expense at
statutory rate............... $2,885 34% $3,661 34% $3,025 34%
Tax-exempt interest income.... (356) (4) (371) (3) (321) (4)
Other, net.................... 472 5 348 3 73 1
------ --- ------ --- ------ ---
Provision for income taxes.. $3,001 35% $3,638 34% $2,777 31%
====== === ====== === ====== ===
9. Other Comprehensive Income (Loss)
The following sets forth the deferred tax benefit (expense) related to
other comprehensive income (in thousands):
Years ended
December 31,
--------------------
2000 1999 1998
------- ------ ----
Unrealized gains (losses) arising during the period.. $(1,682) $1,975 $(38)
Less: reclassification adjustment for gains realized
in net income....................................... -- 13 69
------- ------ ----
Other comprehensive income......................... $(1,682) $1,988 $ 31
======= ====== ====
10. 401(k) Profit Sharing Plan
The Company has established a defined contributory profit sharing plan
pursuant to Internal Revenue Code Section 401(k) covering substantially all
employees (the "Plan"). The Plan provides for pretax employee contributions of
up to 15% of annual compensation. The Company matches each participant's
contributions to the Plan up to 4% of such participant's salary. The Company
made contributions before expenses to the Plan of approximately $291,000,
$271,000 and $235,000 during the years ended December 31, 2000, 1999 and 1998,
respectively.
11. Shareholders' Equity
On December 16, 1998, the Company completed its initial public offering of
Common Stock. After deduction of underwriting discount and expenses of the
offering, the aggregate net offering proceeds were $13.1 million.
The Company's Non-Employee Director Plan ("Non-Employee Director Plan")
authorizes the issuance of up to 60,000 shares of Common Stock to the
directors of the Company who do not serve as an officer or employee of the
Company. Under the Non-Employee Director Plan, up to 12,000 shares of Common
Stock may be issued each year for a five-year period if the Company achieves a
certain return on equity ratio with no shares to be issued if the Company's
return on equity is below 13.0%. In 1999 and 1998, the Company exceeded a
13.0% return on equity. As of December 31, 2000, 24,000 shares have been
issued under the Non-Employee Director Plan. Based on the Company's return on
average equity for the year ended December 31, 2000, no shares will be issued
for 2000.
The Company's Executive Plan ("Executive Plan") authorizes the issuance of
up to 50,000 shares of Common Stock to Don Wang as Chairman of the Board and
Chief Executive Officer of the Bank, and David Tai as President of the Bank.
Under the Executive Plan, up to 10,000 shares of Common Stock may be issued
each
F-20
METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
year for a five-year period if the Company achieves a certain return on equity
ratio with no shares to be issued if the Company's return on equity is below
13.0%. Shares will be allocated to these executive officers based on the
determination of the Company's Compensation Committee. There are currently no
shares issued under the Executive Plan.
The Company's 1998 Employee Stock Purchase Plan ("Purchase Plan")
authorizes the offer and sale of up to 200,000 shares of Common Stock to
employees of the Company and its subsidiaries. The Purchase Plan will be
implemented through ten annual offerings. Each year the Board of Directors
will determine the number of shares to be offered under the Purchase Plan;
provided that in any one year the offering may not exceed 20,000 shares plus
any unsubscribed shares from prior years. The offering price per share will be
an amount equal to 90% of the closing trading price of a share of Common Stock
on the business day immediately prior to the commencement of such offering. In
each offering, each employee may purchase a number of whole shares of Common
Stock that are equal to 20% of the employee's base salary divided by the
offering price. Pursuant to the Purchase Plan, the employee pays for the
Common Stock either immediately or through a payroll deduction program over a
period of up to one year, at the employee's option. The first annual offering
under the Purchase Plan began in the second quarter of 1999. As of December
31, 2000, there have been 11,640 shares issued under this plan.
12. Regulatory Matters
Regulatory restrictions limit the payment of cash dividends by the Bank.
The approval of the Office of the Comptroller of the Currency ("OCC") is
required for any cash dividend paid by the Bank if the total of all cash
dividends declared in any calendar year exceeds the total of its net income
for that year combined with the net addition to undivided profits for the
preceding two years. As of December 31, 2000, approximately $17.4 million was
available for payment of dividends by the Bank to the Company under applicable
restrictions, without regulatory approval. The Company declared dividends of
$0.24 per share to the shareholders of record during the year ended December
31, 2000 and declared a dividend of $0.06 per share to shareholders of record
as of December 31, 1999, which was paid on January 15, 2000.
The declaration and payment of dividends on the Common Stock by the Company
depends upon the earnings and financial condition of the Company, liquidity
and capital requirements, the general economic and regulatory climate, the
Company's ability to service any equity or debt obligations senior to the
Common Stock and other factors deemed relevant by the Company's Board of
Directors.
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. The
regulations require the Company to meet specific capital adequacy guidelines
that involve quantitative measures of the Company's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital classification is also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of
total and Tier 1 capital, as defined in the regulations, to risk-weighted
assets, as defined, and of Tier 1 capital to average assets, as defined.
Management believes, as of December 31, 2000, that the Company and the Bank
meet all capital adequacy requirements to which it is subject.
The most recent notifications from the OCC categorized the Bank as "well
capitalized", as defined, under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Bank must
F-21
METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage
ratios as set forth in the table below. There are no conditions or events
since the notifications that management believes have changed the Bank's level
of capital adequacy.
The Company's and the Bank's actual capital amounts and ratios are
presented in the following table:
Minimum
required for To be well
capital capitalized under
adequacy prompt corrective
Actual purposes action provisions
------------- ------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- --------- --------
(in thousands)
As of December 31, 2000
Total risk-based capital
ratio
MetroCorp Bancshares,
Inc...................... $64,855 13.00% $39,920 8.00% $ N/A N/A
MetroBank, N.A............ 62,217 12.47% 39,920 8.00% 51,809 10.00%
Tier 1 risk-based capital
ratio
MetroCorp Bancshares,
Inc...................... 58,580 11.74% 19,960 4.00% N/A N/A
MetroBank, N.A............ 55,942 11.21% 19,960 4.00% 31,085 6.00%
Leverage ratio
MetroCorp Bancshares,
Inc...................... 58,580 8.39% 27,928 4.00% N/A N/A
MetroBank, N.A............ 55,942 8.01% 27,928 4.00% 32,846 5.00%
As of December 31, 1999
Total risk-based capital
ratio
MetroCorp Bancshares,
Inc...................... $62,214 12.01% $41,447 8.00% $ N/A N/A
MetroBank, N.A............ 57,595 11.12% 41,447 8.00% 51,809 10.00%
Tier 1 risk-based capital
ratio
MetroCorp Bancshares,
Inc...................... 55,725 10.76% 20,724 4.00% N/A N/A
MetroBank, N.A............ 51,106 9.86% 20,724 4.00% 31,085 6.00%
Leverage ratio
MetroCorp Bancshares,
Inc...................... 55,725 8.48% 26,278 4.00% N/A N/A
MetroBank, N.A............ 51,106 7.78% 26,277 4.00% 32,846 5.00%
13. Off-Balance Sheet Risk
The Bank is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include various guarantees, commitments to extend
credit and standby letters of credit. Additionally, these instruments may
involve, to varying degrees, credit risk in excess of the amount recognized in
the statement of financial condition. The Bank's maximum exposure to credit
loss under such arrangements is represented by the contractual amount of those
instruments. The Bank applies the same credit policies and collateralization
guidelines in making commitments and conditional obligations as it does for
on-balance instruments. Commitments to extend credit at December 31, 2000 and
1999 aggregated approximately $68,275,000 and $79,400,000, respectively.
Commitments under letters of credit at December 31, 2000 and 1999 totaled
$2,316,000 and $4,300,000, respectively.
During 1999, the Bank entered into two interest rate swaps in an effort to
match the repricing of its liabilities with its assets. The swaps each have a
notional amount of $10,000,000. With respect to each swap, the Bank pays a
floating interest rate tied to LIBOR and receives a fixed rate of 7.15%. The
interest rate on each swap was 6.0775% at December 31, 1999, and 6.6241% at
December 31, 2000. The fair value of the interest rate swaps at December 31,
2000 was estimated to be ($35,000).
F-22
METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Fair Value of Financial Instruments
SFAS 107, Disclosures About Fair Value of Financial Instruments, requires
disclosures of estimated fair values for all financial instruments and the
methods and assumptions used by management to estimate the fair value for each
type of financial instrument. Fair value is the amount at which a financial
instrument could be exchanged in a current transaction between parties, other
than in a forced sale or liquidation, and is best evidenced by a quoted market
price, if one exists.
Quoted market prices are not available for a significant portion of the
Bank's financial instruments. As a result, the fair values presented are
estimates derived using present value or other valuation techniques and may
not be indicative of the net realizable value. In addition, the calculation of
estimated fair value is based on market conditions at a specific point in time
and may not be reflective of future fair value.
Certain financial instruments and all non-financial instruments are
excluded from the scope of SFAS 107. Accordingly, the fair value disclosures
required by SFAS 107 provide only a partial estimate of the fair value of the
Bank. For example, the values associated with the various ongoing businesses,
which the Bank operates, are excluded. The Bank has developed long-term
relationships with its customers through its deposit base referred to as core
deposit intangibles. In the opinion of management, these items, in the
aggregate, add value to the Bank under SFAS 107 however, their fair value is
not disclosed in this note.
The following summary presents the methodologies and assumptions used to
estimate the fair value of the Bank's financial instruments, required to be
valued pursuant to SFAS 107:
Assets for Which Fair Value Approximates Carrying Value
The fair values of certain financial assets and liabilities carried at
cost, including cash and due from banks, deposits with banks, federal funds
sold, due from customers on acceptances and accrued interest receivable, are
considered to approximate their respective carrying values due to their short-
term nature and negligible credit losses.
Investment Securities
Fair values are based upon publicly quoted market prices.
Loans
The fair value of loans originated by the Bank is estimated by discounting
the expected future cash flows using a discount rate commensurate with the
risks involved. The loan portfolio is segregated into groups of loans with
homogeneous characteristics and expected future cash flows and interest rates
reflecting appropriate credit risk are determined for each group. An estimate
of future credit losses based on historical experience is factored into the
discounted cash flow calculation. Estimated fair value of the loan portfolio
at December 31, 2000 and 1999 was $494.2 million and $497.9 million,
respectively.
Liabilities for Which Fair Value Approximates Carrying Value
SFAS 107 requires that the fair value disclosed for deposit liabilities
with no stated maturity (i.e., demand, savings, and certain money market
deposits) be equal to the carrying value. SFAS 107 does not allow for the
recognition of the inherent funding value of these instruments. The fair value
of federal funds purchased, borrowed funds, acceptances outstanding, accounts
payable and accrued liabilities are considered to approximate their respective
carrying values due to their short-term nature.
F-23
METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Time Deposits
The fair value of time deposits is estimated by discounting cash flows
based on contractual maturities at the interest rates for raising funds of
similar maturity. Given the level of interest rates prevalent at December 31,
2000, fair value of time deposits approximated their carrying value.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of the commitments to extend credit is considered to
approximate carrying value at December 31, 2000 and 1999.
15. Commitments and Contingencies
The Bank leases certain branch premises and equipment under operating
leases which expire between 2001 and 2006. The Bank incurred rental expense of
approximately $861,000, $828,000, and $689,000 for the years ended December
31, 2000, 1999 and 1998, respectively, under these lease agreements. Future
minimum lease payments at December 31, 2000 due under these lease agreements
are as follows (in thousands):
Year Amount
---- ------
2001.................................................................. $ 840
2002.................................................................. 705
2003.................................................................. 605
2004.................................................................. 594
2005.................................................................. 542
After 2005............................................................ 417
------
$3,703
======
The Bank is a defendant in several legal actions arising from its normal
business activities. Management, based on consultation with legal counsel,
believes that the ultimate liability, if any, resulting from these legal
actions will not materially affect the Company's financial position, results
of operations, or cash flows.
F-24
METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. Parent Company Financial Information
The condensed balance sheets, statements of income and statements of cash
flows for MetroCorp Bancshares, Inc. (parent only) are presented below:
Condensed Balance Sheets
(in thousands, except share amounts)
As of
December 31,
----------------
2000 1999
------- -------
Assets
Cash and due from subsidiary bank........................... $ 3,187 $ 5,338
Investments in bank subsidiary.............................. 56,063 47,961
------- -------
Total assets.............................................. $59,250 $53,299
======= =======
Liabilities and Shareholders' Equity
Other liabilities........................................... $ 549 $ 719
------- -------
Total liabilities......................................... 549 719
Shareholders' equity:
Preferred stock $1.00 par value, 2,000,000 shares
authorized, none of which are issued and outstanding....... -- --
Common stock, $1.00 par value, 20,000,000 shares authorized;
7,180,030 and 7,122,479 shares issued and 6,979,530 and
7,102,479 shares outstanding, respectively................. 7,180 7,122
Additional paid-in-capital.................................. 26,033 25,646
Retained earnings........................................... 26,936 23,124
Net accumulated other comprehensive income from subsidiary.. 121 (3,145)
Treasury stock, at cost..................................... (1,569) (167)
------- -------
Total shareholders' equity................................ 58,701 52,580
------- -------
Total liabilities and shareholders' equity.................. $59,250 $53,299
======= =======
Condensed Statement of Income
(in thousands)
Years Ended
December 31,
--------------------
2000 1999 1998
------ ------ ------
Dividends from subsidiary................................. $1,671 $1,708 $ 420
Equity in undistributed income of subsidiary.............. 4,136 5,902 5,699
------ ------ ------
Total income............................................ 5,807 7,610 6,119
Operating expenses........................................ 324 480 --
------ ------ ------
Net income................................................ $5,483 $7,130 $6,119
====== ====== ======
F-25
METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Condensed Statement of Cash Flows
(in thousands)
Years Ended
December 31,
-------------------------
2000 1999 1998
------- ------- -------
Cash flow from operating activities:
Net income........................................ $ 5,483 $ 7,130 $ 6,119
Equity in undistributed income of subsidiary...... (4,136) (5,902) (5,699)
(Decrease) increase in other liabilities.......... (170) 65 --
------- ------- -------
Net cash provided by operating activities....... 1,177 1,293 420
Cash flow from investment activities:
Investment in subsidiary.......................... (700) (5,000) (4,000)
------- ------- -------
Net cash used in investing activities........... (700) (5,000) (4,000)
Cash flow from financing activities:
Proceeds from issuance of common stock............ 445 1,194 13,071
Payment to repurchase common stock................ (1,402) (167) --
Dividends paid.................................... (1,671) (1,701) --
Other, net........................................ -- -- 228
------- ------- -------
Net cash provided by (used in) financing
activities..................................... (2,628) (674) 13,299
------- ------- -------
Net increase (decrease) in cash and cash
equivalents........................................ (2,151) (4,381) 9,719
Cash and cash equivalents at beginning of year...... 5,338 9,719 --
------- ------- -------
Cash and cash equivalents at end of year............ $ 3,187 $ 5,338 $ 9,719
======= ======= =======
Dividends declared but not paid..................... $ 419 $ 427 $ 420
17. Related Party Transactions
In the ordinary course of business, the Bank enters into transactions with
its officers and directors and their affiliates. It is the Bank's policy that
all transactions with these parties are on the same terms, including interest
rates and collateral requirements on loans, as those prevailing at the same
time for comparable transactions with unrelated parties. At December 31, 2000
and 1999, certain officers and directors and their affiliated companies were
indebted to the Bank in the aggregate amounts of approximately $6,263,000 and
$4,989,000, respectively.
The following is an analysis of activity for the years ended December 31,
2000 and 1999 for such amounts (in thousands):
2000 1999
------- -------
Balance at January 1...................................... $ 4,989 $ 3,468
New loans and advances.................................. 5,270 4,370
Repayments.............................................. (3,996) (2,849)
------- -------
Balance at December 31.................................... $ 6,263 $ 4,989
======= =======
In addition, as of December 31, 2000 and 1999, the Bank held demand and
other deposits for related parties of approximately $2,685,000 and $3,210,000,
respectively.
New Era Insurance Company is the agency used by the Company for the
insurance coverage the Company provides to employees of the Company and the
Bank and their dependents. The insurance coverage consists of
F-26
METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
medical, dental, life, accidental death and dismemberment and long-term
disability insurance. The Company's President and CEO is a principal
shareholder in New Era Insurance Company. The Company paid New Era Insurance
Company $1,140,000 and $1,098,000 for such insurance coverage for the years
ended December 31, 2000 and 1999, respectively.
Guamnitz, Inc. owns the buildings in which the Company's corporate
headquarters and the Bank's Bellaire branch are located and has entered into
lease agreements for these locations with the Company. A Company director is
Chairman of the Board and the controlling shareholder of Gaumnitz, Inc. The
lease covering the Company's headquarters is for a term of four years and nine
months commencing on February 1, 2001 at a net rent of $24,833 per month. The
lease covering the Bank's Bellaire branch is for a term of four years and
eleven months commencing on January 1, 1997 at a net rent of $10,503 per
month. For these respective lease agreements, the Company paid Gaumnitz, Inc.
$400,000 and $380,000 during the years ended December 31, 2000 and 1999,
respectively.
18. Earnings Per Share
The following data show the amounts used in computing earnings per share
(EPS) and the weighted average number of shares of dilutive potential Common
Stock. Computations reflect the effects of a four for one exchange of common
shares, as further described in Note 1.
Years ended
December 31,
--------------------
2000 1999 1998
------ ------ ------
(in thousands)
Net income available to common shareholders' equity
used in basic and diluted EPS........................ $5,483 $7,130 $6,119
====== ====== ======
Weighted average common shares in basic EPS........... 6,972 7,114 5,691
Effects of dilutive securities: Options............... 1 -- 58
------ ------ ------
Weighted average common and potentially dilutive
common shares used in diluted EPS.................... 6,973 7,114 5,749
====== ====== ======
Outstanding options were excluded from the calculation of weighted average
common and potentially dilutive common shares used in diluted earnings per
share for the year ended December 31, 1999, because they were antidilutive.
19. Supplemental Statement of Cash Flow Information:
Years ended
December 31,
-----------------------
2000 1999 1998
------- ------- -------
(in thousands)
Cash payments during the year for:
Interest............................................. $27,018 $20,498 $20,058
Income taxes......................................... 3,086 5,324 5,177
Noncash investing and financing activities:
Dividends declared not paid.......................... 419 427 420
Other real estate acquired in foreclosure of customer
loans............................................... 2,261 527 834
F-27
METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
20. Stock-Based Compensation Plan
The Company grants stock options under several stock-based incentive
compensation plans. The Company applies Accounting Principles Board ("APB")
Opinion 25 and related Interpretations in accounting for such plans. In 1995,
the FASB issued SFAS 123 Accounting for Stock-Based Compensation which, if
fully adopted by the Company, would change the methods the Company applies in
recognizing the cost of the plans. Adoption of the cost recognition provisions
of SFAS 123 is optional and the Company has decided not to elect these
provisions of SFAS 123. However, pro forma disclosures as if the Company
adopted the cost recognition provisions of SFAS 123 in 1995 are required by
SFAS 123 and are presented below.
Stock Options
The Company has outstanding options issued to five of the six founding
directors of the Bank to purchase 100,000 shares of Common Stock pursuant to
the 1998 Director Stock Option Agreement ("Founding Director Plan"). Pursuant
to the Founding Director Plan, each of the five participants was granted non-
qualified options to purchase 20,000 shares of Common Stock at a price of
$11.00 per share. A total of 20,000 share options which were initially granted
to one of the founding directors were cancelled upon his resignation as a
director. The options must be exercised by July 24, 2003. Of the six founding
directors of the Bank, the five participants currently serve as directors of
the Company and the Bank. The remaining options must be exercised by July 24,
2003.
The Company's 1998 Stock Incentive Plan ("Incentive Plan") authorizes the
issuance of up to 200,000 shares of Common Stock under both "non-qualified"
and "incentive" stock options and performance shares of Common Stock. Non-
qualified options and incentive stock options will be granted at no less than
the fair market value of the Common Stock and must be exercised within seven
years. Performance shares are certificates representing the right to acquire
shares of Common Stock upon the satisfaction of performance goals established
by the Company. Holders of performance shares have all of the voting, dividend
and other rights of shareholders of the Company, subject to the terms of the
award agreement relating to such shares. If the performance goals are
achieved, the performance shares will vest and may be exchanged for shares of
Common Stock. If the performance goals are not achieved, the performance
shares may be forfeited. There are options to acquire 50,200 shares of Common
Stock outstanding under the Incentive Plan. In 2000, there were options
granted to acquire 10,000 shares of Common Stock.
The options granted during 1998 vested under the Founding Director Plan
immediately on the date of the grant and have contractual terms of five years.
The options granted during 1999 and 2000 under the Incentive Plan vest 30% in
each of the two years following the date of the grant and 40% in the third
year following the date of the grant and have contractual terms of seven
years. All options are granted at a fixed exercise price. The exercise price
for the options granted under the Founding Director Plan is $11.00 per share
and the exercise price for the options granted under the Incentive Plan is the
fair market value of the Company's Common Stock on the grant date, which was
$8.3125 for the options granted in 1999 and $7.25 for the options granted in
2000. Any excess of the fair market value on the grant date over the exercise
price is recognized as compensation expense in the accompanying financial
statements. There was no compensation expense for the years ended December 31,
2000, 1999 or 1998. If the fair value method of valuing compensation related
to options would have been used, pro forma net earnings and pro forma diluted
earnings per share would have been $5.4 million, or $0.79 per share for the
year ended December 31, 2000, $7.1 million, or $1.00 per share for the year
ended December 31, 1999 and $5.9 million, or $1.03 per share for the year
ended December 31, 1998.
F-28
METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the status of the Company's stock options granted to directors
and employees as of December 31, 2000, 1999 and 1998 and the changes during
the years ended on these dates is presented below:
MCBI Stock Options
-----------------------------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
# Shares Weighted # Shares Weighted # Shares Weighted
of Average of Average of Average
Underlying Exercise Underlying Exercise Underlying Exercise
Options Prices Options Prices Options Prices
---------- -------- ---------- -------- ---------- --------
Outstanding at beginning
of the year............ 146,700 $ 10.14 100,000 $ 11.00 -- $ --
Granted................. 10,000 7.25 46,700 8.3125 120,000 11.00
Exercised............... -- -- -- -- -- --
Canceled................ (6,000) 8.3125 -- -- (20,000) 11.00
Outstanding at end of
the year............... 150,700 10.0253 146,700 10.14 100,000 11.00
Exercisable at end of
the year............... 112,210 10.7076 100,000 11.00 100,000 11.00
Weighted average fair
value of all options
granted................ $ 2.78 $ -- $ 2.62
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
Assumptions 2000 1999 1998
----------- ------- ------- -------
Expected term..................................... 5 years 5 years 3 years
Expected Volatility............................... 20.00% 19.30% 24.15%
Expected dividend yield........................... -- -- --
Risk-free interest rate........................... 6.30% 6.40% 5.45%
The following table summarizes information about stock options outstanding
at December 31, 2000:
Options Outstanding Options Exercisable
------------------------------------- -----------------------
Weighted Wgtd.Avg. Weighted
Range of Number Average Remaining Number Average
Exercise Outstanding Exercise Contractual Outstanding Exercise
Prices at 12/31/00 Price Life at 12/31/00 Price
-------- ----------- -------- ----------- ----------- --------
$7.25-$11.00 150,700 $10.0253 3.75 years 112,210 $10.7076
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995,
and the Company anticipates making awards in the future under its stock-based
compensation plans. The Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected
stock price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
F-29