-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K6eKe3LtYJ2VUhaAGOBTJA7dI3nWjz7HE5FzOBNlee0bokVMNEzLbfIhghjeQnvE 01HUCbQTgz3KjGWSrjqbYA== 0000890566-00-000443.txt : 20000510 0000890566-00-000443.hdr.sgml : 20000510 ACCESSION NUMBER: 0000890566-00-000443 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 DATE AS OF CHANGE: 20000509 FILER: COMPANY DATA: COMPANY CONFORMED NAME: METROCORP BANCSHARES INC CENTRAL INDEX KEY: 0001068300 STANDARD INDUSTRIAL CLASSIFICATION: 6022 IRS NUMBER: 760579161 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-25141 FILM NUMBER: 589356 BUSINESS ADDRESS: STREET 1: 9600 BELLAIRE BLVD SUITE 152 CITY: HOUSTON STATE: TX ZIP: 77036 BUSINESS PHONE: 7137763876 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ 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, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------------ COMMISSION FILE NUMBER: 0-25141 ------------------------ 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) ------------------------ 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) ------------------------ 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 13, 2000, the number of outstanding shares of Common Stock was 6,959,748. 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 $6.50 per share, was approximately $33,547,332. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Company's Proxy Statement for the 2000 Annual Meeting of Shareholders (Part III, Items 10-13). 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: o changes in interest rates and market prices, which could reduce the Company's net interest margins, asset valuations and expense expectations; o changes in the levels of loan prepayments and the resulting effects on the value of the Company's loan portfolio; o 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; o increased competition for deposits and loans adversely affecting rates and terms; o the Company's ability to identify suitable acquisition candidates; o the timing, impact and other uncertainties of the Company's ability to enter new markets successfully and capitalize on growth opportunities; o 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; o the failure of assumptions underlying the establishment of and provisions made to the allowance for loan losses; o changes in the availability of funds resulting in increased costs or reduced liquidity; o increased asset levels and changes in the composition of assets and the resulting impact on our capital levels and regulatory capital ratios; o the Company's ability to acquire, operate and maintain cost effective and efficient systems without incurring unexpectedly difficult or expensive but necessary technological changes; o the loss of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensation levels; and o 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. 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. 1 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 15 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. The greater Houston metropolitan area is home to an Asian population of approximately 234,000, with people of Vietnamese, Chinese, Korean and Taiwanese ancestry comprising the four largest groups. Houston's Hispanic population is approximately 1.1 million 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, the greater Dallas metropolitan area has a growing Asian community of approximately 100,000 and a significant Hispanic population of approximately 783,000 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 its 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 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 12 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 in three years, prompted the Company to establish a second branch in the greater Dallas metropolitan area in 1998 and a third branch in 1999. 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 2 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, 1999, the Company's commercial and industrial loan portfolio totaled $298.1 million or 59.5% of the gross loan portfolio. At that date, the Company had a concentration of loans to hotels and motels of $74.1 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 decreased its emphasis in hotel and motel lending in order to further diversify its portfolio. 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, 1999, the Company had a commercial mortgage portfolio of $126.4 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 contract. 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, 1999, the Company had a real estate construction portfolio of $40.0 million, of which $11.3 million was residential and $28.7 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 then pre-sold to and underwritten by 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, 1999, the residential mortgage portfolio totaled $10.9 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 preapproved 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, 1999, the Company had $57.1 million in the retained portion of its SBA loans, approximately $35.1 million of which was guaranteed by the SBA. For each of the last five years, the Company has been the second 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 and are available to borrowers in areas with a population of less than 50,000. The Company also offers guaranteed loans through the Overseas Chinese Credit Guaranty Fund ("OCCGF"), which is sponsored by the government of Taiwan. 3 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, 1999, the Company's OCCGF portfolio totaled $6.1 million. FACTORING. In 1994, the Company established an accounts receivable factoring subsidiary, Advantage Finance Corporation ("Advantage"), to provide financing to small and medium-sized businesses that have accounts receivable from predominantly Fortune 1,000 companies. Advantage's 1999 volume was $86.6 million in short-term (usually 30 day) accounts receivable, up from $80.9 million during 1998, an increase of 7.0%. At December 31, 1999, factored receivables outstanding totaled $13.7 million, compared with $9.5 million at December 31, 1998. In addition to enhancing the Company's profitability, many of the customers obtained through these efforts have established more traditional banking relationships with the Company. 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, 1999, the Company's aggregate trade finance portfolio commitments totaled approximately $10.5 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. 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. 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. 4 EMPLOYEES As of December 31, 1999, the Company had 283 full-time equivalent employees, 28 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. 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 of 1991 ("FDICIA") prompt corrective action provisions, is well managed, and has at 5 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 nonbanking 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 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, 1999, the Company's ratio of Tier 1 capital to total risk-weighted assets was 10.76% and its ratio of total capital to total risk-weighted assets was 12.01%. 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, 1999, the Company's leverage ratio was 8.48%. 6 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. 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, 7 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 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 nonbanking 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 nonbanking 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, 1999, 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. 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. 8 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 generally accepted accounting principles, 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. 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, 1999, the Bank's ratio of Tier 1 capital to total risk-weighted assets was 9.86% and its ratio of total capital to total risk-weighted assets was 11.12%. 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, 1999, the Bank's ratio of Tier 1 capital to average total assets (leverage ratio) was 7.78%. 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 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. 9 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 1999, the BIF rate was .01184% of deposits and the SAIF rate was .05920% of deposits, and for the first quarter of 2000, both the BIF and SAIF rates are .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 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 10 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 may terminate the deposit insurance of any institution which it determines has engaged in an unsafe or unsound practice. The agencies can also assess civil money penalties, issue cease and desist or removal orders, seek injunctions, and publicly disclose such actions. FDICIA, FIRREA and other laws have expanded the agencies' authority in recent years, and the agencies have not yet fully tested the limits of their powers. EFFECT ON ECONOMIC ENVIRONMENT The policies of regulatory authorities, including the monetary policy of the Federal Reserve Board, have a significant effect on the operating results of bank holding companies and their subsidiaries. Among the means available to the Federal Reserve Board to affect the money supply are open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid for deposits. Federal Reserve Board monetary policies have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future. The nature of future monetary policies and the effect of such policies on the business and earnings of the Company and its subsidiaries cannot be predicted. 11 ITEM 2. PROPERTIES FACILITIES The Company conducts business at 16 locations, 12 of which are leased. Included are 15 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 March of 2003. The Company is evaluating the possibility of relocating its corporate offices to another facility.
DEPOSITS OWNED/ AT LOCATION LEASED SQ. FT. DECEMBER 31, 1999 - - ------------------------------------- -------- ------- ---------------------- (DOLLARS IN THOUSANDS) HOUSTON AREA: Bellaire Blvd........................ Leased 7,002 $256,809 9600 Bellaire Boulevard, Suite 100 East................................. Owned 16,400 79,598 6730 Capitol at Wayside Galleria............................. Leased 6,384 16,764 5065 Westheimer, Suite 1111 Chinatown............................ Leased 2,500 22,420 1005 St. Emanuel Sugar Land........................... Owned 5,665 34,320 15144 Southwest Freeway Harwin............................... Leased 2,463 22,851 10000 Harwin Dr. Clear Lake........................... Owned 1,986 20,293 2424 Bay Area Boulevard Veterans Memorial.................... Owned 5,571 17,351 13480 Veterans Memorial Blvd. Milam................................ Leased 2,546 11,615 2808 Milam St. Corporate............................ Leased 25,127 N/A 9600 Bellaire Boulevard, Suite 252 Boone Road(1)........................ Leased 905 279 11205 Bellaire Boulevard, Suite B-9 Dulles(2)............................ Leased 479 6,553 4635 Highway 6 Long Point(3)........................ Leased 3,000 5,450 1426 Blalock DALLAS AREA: Richardson........................... Leased 4,948 45,886 275 West Campbell Rd. Dallas (Harry Hines)................. Leased 3,000 8,569 2527 Royal Lane Garland(4)........................... Leased 2,400 1,177 3500 West Walnut Street
- - ------------ (1) Opened for business on November 26, 1999. (2) Opened for business on March 30, 1999. (3) Opened for business on April 15, 1999. (4) Opened for business on November 12, 1999. 12 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 or results of operation. 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 1999. 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is listed on the Nasdaq National Market System ("Nasdaq NMS") under the symbol "MCBI." As of March 13, 2000, there were 6,959,748 shares outstanding and 147 shareholders of record. The number of beneficial owners is unknown to the Company at this time. The Common Stock was first listed on the Nasdaq NMS on December 16, 1998. Prior to that date, there was no established trading market for the Common Stock. Since the Common Stock began trading on the Nasdaq NMS, the high and low closing prices were as follows: HIGH LOW ---------- --------- 1999 - - ------------------------------------- Fourth quarter....................... $ 9.875 $ 7.750 Third quarter........................ 10.1875 8.375 Second quarter....................... 10.00 8.375 First quarter........................ 11.125 9.6875 1998 - - ------------------------------------- Fourth quarter (since December 16, 1998).............................. 11.750 9.750 Third quarter........................ N/A N/A Second quarter....................... N/A N/A First quarter........................ N/A N/A DIVIDENDS Holders of Common Stock are entitled to receive dividends when, as and if declared by the Company's Board of Directors out of funds legally available therefor. 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 were as follows: 1999 1998 --------- --------- Fourth quarter....................... $ 0.06 $ 0.06 Third quarter........................ 0.06 -- Second quarter....................... 0.06 -- First quarter........................ 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, 1999, 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, 1999, an aggregate of approximately $15.8 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. 14 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, 1999 are derived from the Company's Consolidated Financial Statements which have been audited by independent accountants. Certain prior year amounts have been reclassified to conform with the 1999 presentation.
YEARS ENDED DECEMBER 31, ----------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) INCOME STATEMENT DATA: Interest income...................... $ 53,668 $ 47,696 $ 41,155 $ 31,523 $ 23,065 Interest expense..................... 21,026 20,052 18,138 13,927 9,640 --------- --------- --------- --------- --------- Net interest income.............. 32,642 27,644 23,017 17,596 13,425 Provision for loan losses............ 5,550 3,377 3,350 2,118 792 --------- --------- --------- --------- --------- Net interest income after provision for loan losses...... 27,092 24,267 19,667 15,478 12,633 Noninterest income................... 6,088 5,609 4,391 3,446 2,903 Noninterest expense.................. 22,412 20,980 18,096 16,102 11,845 --------- --------- --------- --------- --------- Income before provision for income taxes................... 10,768 8,896 5,962 2,822 3,691 Provision for income taxes........... 3,638 2,777 1,794 809 1,091 --------- --------- --------- --------- --------- Net income....................... $ 7,130 $ 6,119 $ 4,168 $ 2,013 $ 2,600 ========= ========= ========= ========= ========= PER SHARE DATA(1): Net income: Basic............................ $ 1.00 $ 1.08 $ 0.75 $ 0.38 $ 0.52 Diluted.......................... 1.00 1.06 0.74 0.37 0.51 Book value........................... 7.38 7.14 5.49 4.73 4.38 Tangible book value.................. 7.38 7.14 5.49 4.73 4.38 Cash dividends....................... 0.24 0.06 -- -- -- Weighted average shares outstanding (in thousands): Basic............................ 7,114 5,691 5,581 5,364 5,015 Diluted.......................... 7,114 5,749 5,616 5,444 5,104 BALANCE SHEET DATA: Total assets......................... $ 660,589 $ 587,308 $ 505,051 $ 426,987 $ 322,799 Securities........................... 110,065 123,190 112,624 103,680 110,761 Total loans.......................... 495,669 417,686 348,910 280,597 177,206 Allowance for loan losses............ 7,537 6,119 3,569 2,141 1,612 Total deposits....................... 544,436 479,506 445,859 381,289 285,153 Other borrowings..................... 55,636 50,043 21,611 14,566 9,273 Total shareholders' equity........... 52,580 50,024 30,506 25,398 23,519 AVERAGE BALANCE SHEET DATA: Total assets......................... $ 620,646 $ 532,751 $ 469,097 $ 373,697 $ 271,087 Securities........................... 119,952 114,248 113,250 115,224 99,398 Total loans.......................... 456,653 368,394 310,781 223,514 146,210 Allowance for loan losses............ 6,720 5,049 2,722 1,869 1,442 Total deposits....................... 501,808 477,793 416,895 333,355 233,749 Total shareholders' equity........... 53,010 33,992 28,369 24,090 21,561 PERFORMANCE RATIOS: Return on average assets............. 1.16% 1.15% 0.89% 0.54% 0.96% Return on average equity............. 13.52 18.00 14.69 8.36 12.06 Net interest margin.................. 5.55 5.50 5.22 5.02 5.27 Efficiency ratio(2).................. 57.92 63.48 66.48 76.73 72.82 ASSET QUALITY RATIOS: Nonperforming assets to total loans and other real estate.............. 1.42% 1.26% 0.94% 0.82% 1.11% Nonperforming assets to total assets............................. 1.07 0.90 0.65 0.54 0.61 Net loan charge-offs to average loans.............................. 0.90 0.22 0.62 0.71 0.30 Allowance for loan losses to total loans.............................. 1.52 1.46 1.02 0.76 0.91 Allowance for loan losses to nonperforming loans(3)............. 115.03 132.44 134.02 135.42 111.48 CAPITAL RATIOS(4): Leverage ratio....................... 8.48% 8.83% 5.90% 6.04% 7.30% Average shareholders' equity to average total assets 8.54 6.38 6.05 6.45 7.95 Tier 1 risk-based capital ratio...... 10.76 11.73 8.40 8.69 10.65 Total risk-based capital ratio....... 12.01 12.98 9.50 9.44 11.39
- - ------------------------------------------- (1) Financial data dated 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 loans 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. 15 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 operations. 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, 1999, 1998 AND 1997 OVERVIEW From December 31, 1996 to December 31, 1999, the Company experienced consistent growth as assets increased from $427.0 million at December 31, 1996 to $660.6 million at December 31, 1999, an increase of $233.6 million or 54.7%. The increase was primarily due to the expansion of the branch network and an increase in the number of products and services available to customers. The Company opened seven branches during this period. Loans accounted for the majority of the Company's asset growth, increasing from $280.6 million to $495.7 million over the three-year period ending December 31, 1999. Supporting this substantial expansion was an increase in deposits, which rose from $381.3 million to $544.4 million, representing a 42.7% increase during the period. Including the net proceeds from the initial public offering of Common Stock in December 1998, shareholders' equity increased to $52.6 million, an increase of $27.2 million or 107% at December 31, 1999, compared with $25.4 million as of December 31, 1996. Net income available to shareholders was $7.1 million, $6.1 million and $4.2 million for the years ended December 31, 1999, 1998 and 1997, respectively, and diluted net income per common share was $1.00, $1.06 and $0.74, for these same periods. Earnings growth from 1997 to 1999 resulted primarily from a combination of loan growth, an increase in net interest margin and a decrease in expenses, reflected in an improved efficiency ratio. The Company posted returns on average assets of 1.16%, 1.15% and 0.89% and returns on average equity of 13.52%, 18.00% and 14.69% for the years ended December 31, 1999, 1998 and 1997, respectively. 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. 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 consists primarily of $35.0 million from the Federal Home Loan Bank ("FHLB"). The increase in the loan portfolio, together with higher margins in this portfolio, resulted in an improved net interest margin of 5.55% from 5.50% for 1999 and 1998, respectively. The decrease in the securities portfolio from December 31, 1998 of $123.2 million to $110.1 million at December 31, 1999 is 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% for 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. 16 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 views these funds as stable and a less costly source of funding than time deposits. This decision has lowered the Company's cost of funds from 4.87% for 1998 to 4.49% for 1999. The Company anticipates that this source of funding will continue to sustain a portion of the Company's asset growth in the future. 1998 VERSUS 1997. Net interest income totaled $27.6 million in 1998, compared with $23.0 million in 1997, an increase of $4.6 million or 20.1%. The increase resulted primarily from a $6.2 million or 18.8% increase in interest income on loans primarily due to a $63.0 million or 32.6% increase in commercial and industrial loans. Interest expense increased $1.9 million or 10.6% due to a $23.7 million increase in the level of interest-bearing deposits. The increase in the loan and securities portfolios, coupled with higher margins on such portfolios, resulted in improved net interest margins and net interest spreads. Net interest margins were 5.50% and 5.22% and net interest spreads were 4.62% and 4.43% for 1998 and 1997, respectively. Interest income increased to $47.7 million in 1998 from $41.2 million in 1997. The increase was driven by growth in the average loan portfolio of $57.6 million or 18.5% while the Company experienced an increase in the yield on average loans to 10.65% in 1998 from 10.63% in 1997. As a result of strong loan growth, the average securities portfolio increased by $1.0 million or 0.9%, while its yield rose eight basis points from 6.29% in 1997 to 6.37% in 1998 as a result of a change in the mix of the investment portfolio from agency securities into mortgage-backed securities. Interest expense increased to $20.0 million in 1998 from $18.1 million in 1997. This increase was primarily the result of $28.5 million of growth in average time deposits during 1998. The higher level of time deposits was the primary funding source of the Company's loan growth. 17 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, ---------------------------------------------------------------------------------------- 1999 1998 1997 ----------------------------------- ----------------------------------- ------------ AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE AVERAGE OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING BALANCE PAID RATE BALANCE PAID RATE BALANCE ------------ --------- -------- ------------ --------- -------- ------------ (DOLLARS IN THOUSANDS) ASSETS Interest-earning assets: Total loans...................... $456,653 $45,322 9.92% $368,394 $39,219 10.65% $310,781 Taxable securities............... 98,838 6,624 6.70 96,518 6,312 6.54 95,680 Tax-exempt securities............ 21,114 1,091 5.17 17,730 964 5.44 17,570 Federal funds sold and other temporary investments.............. 9,959 631 6.34 19,565 1,201 6.14 16,926 ------------ --------- ------------ --------- ------------ Total interest-earning assets.... 586,564 53,668 9.15% 502,207 47,696 9.50% 440,957 --------- --------- Less allowance for loan losses....... (6,720) (5,049) (2,722) ------------ ------------ ------------ Total interest-earning assets, net of allowance for loan losses.......... 579,844 497,158 438,235 Noninterest-earning assets........... 40,802 35,593 30,862 ------------ ------------ ------------ Total assets................... $620,646 $532,751 $469,097 ============ ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Interest-bearing demand deposits....................... $ 37,011 1,039 2.81% $ 30,109 783 2.60% $ 26,765 Savings and money market accounts....................... 97,629 3,020 3.09 90,328 3,258 3.61 76,799 Time deposits.................... 275,663 14,032 5.09 276,904 15,267 5.51 248,447 Federal funds purchased and securities sold under repurchase agreements......................... 24,774 1,301 5.25 926 54 5.83 1,804 Other borrowings................. 33,264 1,634 4.91 13,160 690 5.24 16,084 ------------ --------- ------------ --------- ------------ Total interest-bearing liabilities... 468,341 21,026 4.49% 411,427 20,052 4.87% 369,899 --------- --------- Noninterest-bearing liabilities: Noninterest-bearing demand deposits....................... 91,505 80,452 64,884 Other liabilities................ 7,790 6,880 5,945 Total liabilities 567,636 498,759 440,728 ------------ ------------ ------------ Shareholders' equity................. 53,010 33,992 28,369 ------------ ------------ ------------ Total liabilities and shareholders' equity............................. $620,646 $532,751 $469,097 ============ ============ ============ Net interest income.................. $32,642 $27,644 ========= ========= Net interest spread.................. 4.66% 4.62% Net interest margin.................. 5.56% 5.50% INTEREST AVERAGE EARNED/ YIELD/ PAID RATE --------- -------- ASSETS Interest-earning assets: Total loans...................... $33,028 10.63% Taxable securities............... 6,161 6.44 Tax-exempt securities............ 968 5.51 Federal funds sold and other temporary investments.............. 998 5.90 --------- Total interest-earning assets.... 41,155 9.33% --------- Less allowance for loan losses....... Total interest-earning assets, net of allowance for loan losses.......... Noninterest-earning assets........... Total assets................... LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Interest-bearing demand deposits....................... 697 2.60% Savings and money market accounts....................... 2,733 3.56 Time deposits.................... 13,685 5.51 Federal funds purchased and securities sold under repurchase agreements......................... 100 5.54 Other borrowings................. 923 5.74 --------- Total interest-bearing liabilities... 18,138 4.90% --------- Noninterest-bearing liabilities: Noninterest-bearing demand deposits....................... Other liabilities................ Total liabilities Shareholders' equity................. Total liabilities and shareholders' equity............................. Net interest income.................. $23,017 ========= Net interest spread.................. 4.43% Net interest margin.................. 5.22%
18 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, -------------------------------------------------------- 1999 VS. 1998 1998 VS. 1997 ---------------------------- ------------------------ INCREASE INCREASE (DECREASE) (DECREASE) DUE TO DUE TO ----------------- -------------- VOLUME RATE TOTAL VOLUME RATE TOTAL ------ ------- ------- ------ ---- ------ (DOLLARS IN THOUSANDS) INTEREST-EARNING ASSETS: Total loans...................... $9,396 $(3,293) $ 6,103 $6,123 $ 68 $6,191 Securities....................... 567 (128) 439 115 32 147 Federal funds sold and other temporary investments.......... (590) 20 (570) 156 47 203 ------ ------- ------- ------ ---- ------ Total increase (decrease) in interest income........... 9,374 (3,402) 5,972 6,394 147 6,541 INTEREST-BEARING LIABILITIES: Interest-bearing demand deposits....................... 179 77 256 87 (1) 86 Savings and money market accounts....................... 263 (501) (238) 481 44 525 Time deposits.................... (68) (1,166) (1,235) 1,567 15 1,582 Federal funds purchased.......... 1,391 (144) 1,247 (49) 3 (46) Other borrowings................. 1,054 (110) 944 (168) (65) (233) ------ ------- ------- ------ ---- ------ Total increase (decrease)in interest expense.......... 2,818 (1,843) 974 1,918 (4) 1,914 ------ ------- ------- ------ ---- ------ Increase (decrease) in net interest income............................. $6,556 $(1,558) $ 4,998 $4,476 $151 $4,627 ====== ======= ======= ====== ==== ======
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 "-- Allowance for Loan Losses." The 1999 provision for loan losses increased by $2.2 million, or 64.3%, to $5.6 million primarily due to an additional provision of $2.1 million made in the fourth quarter of 1999. The additional provision was made as a result of significant charge-offs totaling $1.83 million related to four borrowing relationships and to reflect loan growth of 18.6%. The 1998 provision for loan losses increased by $27,000, or 1.0% to $3.4 million from $3.4 million in 1997. The increased provision for 1998 reflects loan growth of 19.7%. In 1997, the provision was impacted by a significant charge-off totaling $700,000 related to one borrower in the food service industry. NONINTEREST INCOME Noninterest income for the years ended December 31, 1999, 1998 and 1997, was $6.1 million, $5.6 million and $4.4 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 following table presents the major categories of noninterest income: YEARS ENDED DECEMBER 31, ------------------------------- 1999 1998 1997 --------- --------- --------- (DOLLARS IN THOUSANDS) Service charges on deposit accounts........................... $ 3,313 $ 3,364 $ 2,248 Other loan-related fees.............. 1,658 1,371 1,440 Letters of credit commissions and fees............................... 471 392 357 Gain (loss) on sale of investment securities, net.................... (14) 202 189 Other noninterest income............. 660 280 157 --------- --------- --------- Total noninterest income........ $ 6,088 $ 5,609 $ 4,391 ========= ========= ========= 19 NONINTEREST EXPENSE For the years ended 1999, 1998 and 1997, noninterest expense totaled $22.4 million, $21.0 million and $18.1 million, respectively. The $1.4 million or 6.8% increase in 1999 was primarily due to employee compensation and benefits, occupancy expenses and outside legal and professional services. The increase in 1998 of $2.9 million or 16.0% was primarily due to higher employee compensation and benefits and occupancy expense related to the new branches opened during the year. The Company's efficiency ratios were 57.92%, 63.48% and 66.48% in 1999, 1998 and 1997, respectively. The improvement in the efficiency ratio in 1999 and 1998 reflects the Company's continued efforts to control operating expenses and gain other efficiencies through such means as upgrading centralized computer systems. The following table presents the major categories of noninterest expense: YEARS ENDED DECEMBER 31, ------------------------------- 1999 1998 1997 --------- --------- --------- (DOLLARS IN THOUSANDS) Employee compensation and benefits... $ 11,140 $ 9,898 $ 8,940 Non-staff expenses: Occupancy....................... 5,117 4,907 3,843 Other real estate, net.......... 83 374 474 Data processing................. 327 584 465 Legal and professional fees..... 1,656 1,021 1,083 Advertising..................... 459 392 332 Director compensation........... 355 157 360 Printing and supplies........... 502 432 369 Telecommunications.............. 504 414 349 Other noninterest expense....... 2,269 2,801 1,881 --------- --------- --------- Total non-staff expenses... 11,272 11,082 9,156 --------- --------- --------- Total noninterest expense................. $ 22,412 $ 20,980 $ 18,096 ========= ========= ========= Employee compensation and benefits expense for the years ended December 31, 1999, 1998 and 1997, was $11.1 million, $9.9 million and $8.9 million, respectively, reflecting increases of $1.2 million, $1.0 million and $892,000 during the same periods. The increase in 1999 resulted primarily from expenses related to the opening of the Company's four new branches. The three Houston area branches, Dulles, Long Point and Boone Road, opened in March, April and November 1999, respectively. The Garland (Dallas) branch opened in November 1999. The increase in 1998 resulted primarily from the costs associated with establishment of the Milam (Houston) branch which opened in early January of 1998. The increase in 1997 resulted principally from the effects of a full year of expenses for the four branches opened in 1996, and the addition of the Veterans Memorial (Houston) branch which opened in April of 1997. Additionally, staff was added to support the residential mortgage division and the factoring subsidiary. Total full-time equivalent employees at December 31, 1999, 1998 and 1997 were 283, 280 and 225, respectively. Non-staff expenses for 1999, 1998 and 1997 were $11.3 million, $11.1 million and $9.2 million, respectively, reflecting increases of $190,000 or 2.0%, $1.9 million or 20.7% and $1.1 million or 13.6%, respectively. The increase in 1999 was primarily due to legal and professional fees related to problem loans. The increase in 1998 was primarily due to the opening of two branches. The increase in 1997 was the result of a full year of higher occupancy expense from the increased number of operating branches as well as the cost of technology upgrades. Additionally, during 1999 and 1998 other real estate expenses decreased by $291,000 and $100,000, respectively, due to reduced foreclosed property expenses, while in 1997 other real estate expenses increased approximately $275,000 in connection with the maintenance of an asset acquired by foreclosure in the second quarter until its sale in December of 1997. 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 20 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 1999, income tax expense was $3.6 million, an $800,000 or 28.6% increase from income tax expense of $2.8 million in 1998. Income tax expense for 1998 was up 55.6% over the 1997 income tax expense of $1.8 million. The income tax component of the Texas franchise tax was $209,900, $193,000 and $132,000, in 1999, 1998 and 1997, respectively. The effective tax rates in 1999, 1998 and 1997, respectively, were 33.8% 31.2% and 30.1%. 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. FINANCIAL CONDITION LOAN PORTFOLIO Total loans increased by $78.0 million or 18.6% to $495.7 million at December 31, 1999. Total loans were $417.7 million at December 31, 1998, an increase of $68.8 million or 19.7% from total loans of $348.9 million at December 31, 1997. The growth in loans for both years reflected the improving local economy, the opening of new branches and the Company's investment in loan production capacity. For the years ended December 31, 1999, 1998 and 1997, the ratio of total loans to total deposits was 91.0%, 87.1% and 78.3%, respectively. For the same periods, total loans represented 75.0%, 71.1% and 69.1% of total assets, respectively. The following table summarizes the loan portfolio of the Company by type of loan:
AS OF DECEMBER 31, ------------------------------------------------------------------------------------- 1999 1998 1997 1996 ------------------- ------------------- ------------------- ------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT -------- -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Commercial and industrial............ $298,150 59.54% $256,311 60.73% $193,355 54.77% $133,564 47.05% Real estate mortgage Residential...................... 10,934 2.18 11,795 2.80 11,797 3.35 8,703 3.07 Commercial....................... 126,363 25.24 103,677 24.57 110,860 31.40 104,425 36.78 -------- -------- -------- -------- -------- -------- -------- -------- 137,297 27.42 115,472 27.37 122,657 34.75 113,128 39.85 -------- -------- -------- -------- -------- -------- -------- -------- Real estate construction Residential...................... 11,348 2.27 10,842 2.57 9,859 2.79 1,543 0.54 Commercial....................... 28,661 5.72 17,769 4.21 11,750 3.33 16,096 5.67 -------- -------- -------- -------- -------- -------- -------- -------- 40,009 7.99 28,611 6.78 21,609 6.12 17,639 6.21 -------- -------- -------- -------- -------- -------- -------- -------- Consumer and other................... 11,550 2.31 12,117 2.87 10,147 2.87 13,343 4.70 Factored receivables................. 13,700 2.74 9,506 2.25 5,249 1.49 6,217 2.19 -------- -------- -------- -------- -------- -------- -------- -------- Gross loans.......................... 500,706 100.00% 422,017 100.00% 353,017 100.00% 283,891 100.00% ======== ======== ======== ======== Less: unearned discounts, interest and deferred fees.................. (5,037) (4,331) (4,107) (3,294) -------- -------- -------- -------- Total loans.......................... $495,669 $417,686 $348,910 $280,597 ======== ======== ======== ======== 1995(1) ------------------- AMOUNT PERCENT -------- -------- Commercial and industrial............ $53,850 29.88% Real estate mortgage Residential...................... -- -- Commercial....................... -- -- -------- -------- 94,411 52.38 -------- -------- Real estate construction Residential...................... -- -- Commercial....................... -- -- -------- -------- 11,772 6.53 -------- -------- Consumer and other................... 18,065 10.02 Factored receivables................. 2,147 1.19 -------- -------- Gross loans.......................... 180,245 100.00% ======== Less: unearned discounts, interest and deferred fees.................. (3,039) -------- Total loans.......................... $177,206 ========
- - ------------ (1) The Company's loan portfolio records were historically categorized by collateral codes. In 1998, the Company recoded its loan portfolio to reflect the business purpose of the loans. Detailed information prior to 1996 is unavailable due to a system conversion in 1995. 21 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, 1999, approximately $176.1 million or 59.0% 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 trends in its underwriting standards. Commercial loans are generally for amounts between $10,000 and $250,000, and as of December 31, 1999, the average commercial loan amount was $121,500. As of December 31, 1999, the Company's commercial and industrial loan portfolio totaled $298.1 million or 59.5% of the gross loan portfolio. At that date, the Company had a concentration of loans to hotels and motels of $74 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 decreased its emphasis in hotel and motel lending in order to further diversify its 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, 1999, the Company had a commercial mortgage portfolio of $126.4 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 contract. 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 22 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, 1999, the Company had a real estate construction portfolio of $40.0 million, of which $11.3 million was residential and $28.7 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") and the Houston Housing Partnership. The residential mortgage products generally amortize over five to 15 years and usually have a maximum term of five years. The Company solicits and receives a fee to process these residential mortgage loans, which are then pre-sold to and underwritten by third party mortgage companies. The Company does not fund or service these loans. The volume of residential mortgage loans processed by the Company and presold to third party mortgage companies increased from $11.8 million in 1998 to $16.0 million at December 31, 1999. 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 with a 15 year amortization to its existing customers on a select basis, which are retained in the Company's portfolio. Residential mortgage collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. At December 31, 1999, the Company's residential mortgage portfolio totaled $10.9 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 portfolio. As a Preferred Lender under the federally guaranteed SBA lending program, the Company's preapproved 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 seven years, the Company has originated over $130 million in SBA guaranteed loans. As of December 31, 1999, the Company had $57.1 million in the retained portion of SBA loans, approximately $35.1 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. SBA loan originations were $27.9 million and $28.6 million for the years ended December 31, 1999 and 1998, 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, 1999, the Company's OCCGF portfolio totaled $6.1 million. FACTORING. In 1994, the Company established an accounts receivable factoring subsidiary, Advantage, to provide financing to small and medium-sized businesses that have accounts receivable from predominantly Fortune 1,000 companies. In factoring receivables, Advantage relies heavily on the quality of the client's accounts receivable and the financial strength of the client's customers, who typically make their payments directly to a lockbox controlled by Advantage. As a result, these transactions are subject to risks relating to disputes between the Company's client and its customers in instances where the customer refuses to make payment. Advantage's clients are typically businesses that are experiencing rapid growth and have an increased demand for working capital, usually with annual sales between $1.0 million and $25.0 million. Advantage's volume of purchases has grown steadily since 1995, its first full year of operations, from $14.5 million in short-term (usually 30 day) accounts receivable to $86.6 million during 1999. At December 31, 1999, factored receivables outstanding totaled $13.7 million, compared with $9.5 23 million at December 31, 1998. In addition to enhancing profitability, many of the customers obtained through these efforts have also established more traditional banking relationships with the Company. 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 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, 1999, the Company's aggregate trade finance portfolio commitments totaled approximately $10.5 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 and size 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 $7.8 million, the Company generally does not make loans larger than $3.0 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." At year end December 31, 1999 and 1998, the Company had gross loan concentrations (greater than 25% of capital) in the following industries: AS OF DECEMBER 31, -------------------- 1999 1998 --------- --------- (DOLLARS IN THOUSANDS) Hotels/motels........................ $ 74,070 $ 57,885 Retail centers....................... 61,087 50,274 Restaurants.......................... 25,805 17,474 Convenience/gasoline stations........ 20,746 11,364 Apartment buildings.................. 14,526 15,994 Grocery stores....................... -- 2,066 24 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, 1999 are summarized in the following table:
AS OF DECEMBER 31, 1999 ------------------------------------------------------- AFTER ONE YEAR ONE THROUGH AFTER OR LESS FIVE YEARS FIVE YEARS TOTAL -------- ----------- ---------- -------- (DOLLARS IN THOUSANDS) Commercial and industrial............ $72,286 $ 149,516 $ 76,348 $298,150 Real estate mortgage: Residential..................... 464 5,622 4,848 10,934 Commercial...................... 15,154 83,870 27,339 126,363 Real estate construction Residential..................... 9,502 1,846 -- 11,348 Commercial...................... 24 16,465 12,172 28,661 -------- ----------- ---------- -------- Total...................... $97,430 $ 257,319 $ 120,707 $475,456 ======== =========== ========== ======== Loans with a predetermined interest rate............................... $31,036 $ 82,064 $ 32,496 $145,596 Loans with a floating interest rate............................... 66,394 175,255 88,211 329,860 -------- ----------- ---------- -------- Total...................... $97,430 $ 257,319 $ 120,707 $475,456 ======== =========== ========== ========
Effective January 1, 1995, the Company adopted Statement of Financial Accounting Standards No. 114, ACCOUNTING FOR CREDITORS FOR IMPAIRMENT OF A LOAN, as amended by Statement of Financial Accounting Standards No. 118, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN-INCOME RECOGNITION AND DISCLOSURES. Under Statement No. 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 Statement No. 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, Directors Credit Committee approval 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. 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 25 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. 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%, to $7.0 million, from $5.3 million at year end 1998. The increase was due to the addition of eight loans to nonaccrual status because they were either 90 days or more past due or an extraordinary event had occurred. Of these eight loans, one has been paid off and two have been brought to "current" status. 1998 VERSUS 1997. Nonperforming assets at year-end December 31, 1998 and 1997 were $5.3 million and $3.3 million, respectively. Included in the nonperforming assets are the portions guaranteed by the SBA, OCCGF and Ex-Im Bank, which totaled $1.5 million for 1998. The increases in nonperforming assets for the years ended December 31, 1998 and 1997, were $2.0 million or 60.6% and $949,000 or 40.9%, respectively. The increase in 1998 was primarily due to adding nine loans to nonaccrual status because they were 90 days or more past due. The following table presents information regarding nonperforming assets at the periods indicated:
AS OF DECEMBER 31, ----------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Nonaccrual loans..................... $ 6,552 $ 3,329 $ 2,663 $ 1,581 $ 1,264 Accruing loans 90 days or more past due................................ -- 1,291 -- -- 182 Other real estate.................... 490 654 606 739 534 --------- --------- --------- --------- --------- Total nonperforming assets....... $ 7,042 $ 5,274 $ 3,269 $ 2,320 $ 1,980 ========= ========= ========= ========= ========= Nonperforming assets to total loans and other real estate.............. 1.42% 1.26% 0.94% 0.82% 1.11% Nonperforming assets to total assets............................. 1.07% 0.90% 0.65% 0.54% 0.61%
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. 26 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 AICPA's 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 year ended December 31, 1999, net loan charge-offs were $4.1 million or 0.90% of average loans outstanding, compared with $827,000 or 0.22% of average loans outstanding for 1998, and $1.9 million or 0.62% in net loan charge-offs for 1997. 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 significant charge-offs totaling $1.83 million related to four borrowing relationships. During 1998, the provision for loan losses increased slightly by $27,000 to $3.4 million. In 1997, the Company recorded a provision of $3.4 million. For 1997, the increase was primarily related to a significant charge-off totaling $700,000 related to one borrower in the food service industry as well as loan growth. At December 31, 1999, 1998 and 1997, the allowance for loan losses aggregated $7.5 million, $6.1 million and $3.6 million, or 1.52%, 1.46% and 1.02% of total loans, respectively. 27 The following table presents an analysis of the allowance for loan losses and other related data:
YEARS ENDED DECEMBER 31, ------------------------------------------------------------ 1999 1998 1997 1996 1995(1) ---------- ---------- ---------- ---------- ------------ (DOLLARS IN THOUSANDS) Average loans outstanding............ $ 456,653 $ 368,394 $ 310,781 $ 223,514 $ 146,210 ========== ========== ========== ========== ============ Total loans outstanding at end of period............................. $ 495,669 $ 417,686 $ 348,910 $ 280,597 $ 177,206 ========== ========== ========== ========== ============ Allowance for loan losses at beginning of period................ $ 6,119 $ 3,569 $ 2,141 $ 1,612 $ 1,264 Provision for loan losses............ 5,550 3,377 3,350 2,118 792 Charge-offs: Commercial and industrial....... (3,563) (237) (827) (1,236) (386) Real estate -- mortgage......... (32) (114) (584) -- (53) Real estate -- construction..... -- -- -- -- -- Consumer and other.............. (807) (619) (812) (570) (260) ---------- ---------- ---------- ---------- ------------ Total charge-offs............. (4,402)(2) (970) (2,223) (1,806) (699) ---------- ---------- ---------- ---------- ------------ Recoveries: Commercial and industrial....... 94 77 79 146 98 Real estate -- mortgage......... -- 17 156 -- 108 Real estate -- construction..... -- 16 -- -- -- Consumer and other.............. 176 33 66 71 49 ---------- ---------- ---------- ---------- ------------ Total recoveries.............. 270 143 301 217 255 ---------- ---------- ---------- ---------- ------------ Net loan charge-offs................. (4,132) (827) (1,922) (1,589) (444) ---------- ---------- ---------- ---------- ------------ Allowance for loan losses at end of period............................. $ 7,537 $ 6,119 $ 3,569 $ 2,141 $ 1,612 ========== ========== ========== ========== ============ Ratio of allowance to end of period total loans........................ 1.52% 1.46% 1.02% 0.76% 0.91% Ratio of net loan charge-offs to average loans...................... 0.90 0.22 0.62 0.71 0.30 Ratio of allowance to end of period nonperforming loans................ 115.03 132.44 134.02 135.42 111.48
- - ------------ (1) The Company's loan portfolio records were historically categorized by collateral codes. In 1998, the Company recoded its loan portfolio to reflect the business purpose of the loans. Detailed information for charge-offs and recoveries by business purpose prior to 1996 is unavailable due to a system conversion in 1995. For years prior to 1996, charge-offs and recoveries were recorded by collateral code. (2) For the year ended December 31, 1999, the Company charged off $4.4 million in loans or 0.89% of total loans outstanding. Of the loans charged off, $1.1 million or 0.22% of total loans outstanding consisted of loans in the Company's stated areas of concentration while $2.8 million or 0.55% of total loans outstanding consisted of loans to entities in the oil related services, technology services, communication services and consumer lending industries. The remaining $500,000 of loan charge-offs occurred in miscellaneous business categories. 28 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, ------------------------------------------------------------------------------------- 1999 1998 1997 1996 ------------------- ------------------- ------------------- ------------------- PERCENT PERCENT PERCENT PERCENT OF LOANS OF LOANS OF LOANS OF LOANS TO GROSS TO GROSS TO GROSS TO GROSS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS ------- --------- ------- --------- ------- --------- ------- --------- (DOLLARS IN THOUSANDS) Balance of allowance for loan losses applicable to: Commercial and industrial........ $3,783 69.93% $3,249 60.73% $1,414 54.77% $1,099 47.05% Real estate -- mortgage.......... 823 15.21 725 27.37 883 34.75 620 39.85 Real estate -- construction...... 204 3.77 139 6.78 111 6.12 88 6.21 Consumer and other............... 357 6.60 415 2.87 358 2.87 248 4.70 Factored receivables............. 243 4.49 266 2.25 341 1.49 62 2.19 Unallocated...................... 2,127 -- 1,325 -- 462 -- 24 -- ------- --------- ------- --------- ------- --------- ------- --------- Total allowance for loan losses....................... $7,537 100.00% $6,119 100.00% $3,569 100.00% $2,141 100.00% ======= ========= ======= ========= ======= ========= ======= ========= 1995(1) ------------------- PERCENT OF LOANS TO GROSS AMOUNT LOANS ------- --------- Balance of allowance for loan losses applicable to: Commercial and industrial........ $ 588 29.88% Real estate -- mortgage.......... 620 52.38 Real estate -- construction...... 29 6.53 Consumer and other............... 329 10.02 Factored receivables............. -- 1.19 Unallocated...................... 46 -- ------- --------- Total allowance for loan losses....................... $1,612 100.00% ======= =========
- - ------------ (1) The Company's loan portfolio records were historically categorized by collateral codes. In 1998, the Company recoded its loan portfolio to reflect the business purpose of the loans. Detailed information for the allowance for loan losses by business purpose prior to 1996 is unavailable due to a system conversion in 1995. For years prior to 1996, the allowance for loan losses was recorded by collateral code. SECURITIES The Company uses its securities portfolio primarily as a source of income and secondarily as a source of liquidity. At December 31, 1999, securities totaled $110.0 million, a decrease of $17.6 million or 8.6% from $123.2 million in 1998. At December 31, 1998, securities increased $10.6 million to $123.2 million from $112.6 million at December 31, 1997. 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 million in borrowings from the FHLB. The 1997 increase occurred primarily in U.S. Government securities and the small increase in the portfolio as compared with the overall asset growth reflected the Company's use of funds from customers' deposits to fund loans. The Company follows Statement of Financial Accounting Standards No. 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. At each reporting date, the appropriateness of the classification is reassessed. 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. 29 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, 1999 AS OF DECEMBER 31, 1998 ------------------------------------------------ ------------------------------------- GROSS GROSS GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED COST GAIN LOSS VALUE COST GAIN LOSS --------- ---------- ---------- ------- --------- ---------- ---------- (DOLLARS IN THOUSANDS) U.S. Treasury securities............. $ 1,990 $ 11 $ -- $ 2,001 $ 1,984 $ 88 $-- U.S. Government agency securities.... 58,274 -- (3,938) 54,336 66,809 775 (225) Municipal securities................. 11,206 -- (653) 10,553 9,910 578 -- Other securities..................... 8,210 -- (141) 8,069 3,704 -- -- --------- ---------- ---------- ------- --------- ---------- ---------- Total securities................. $79,680 $ 11 $ (4,732) $74,959 $82,407 $1,441 $ (225) ========= ========== ========== ======= ========= ========== ========== FAIR VALUE ------- U.S. Treasury securities............. $ 2,072 U.S. Government agency securities.... 67,359 Municipal securities................. 10,488 Other securities..................... 3,704 ------- Total securities................. $83,623 =======
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, 1999 AS OF DECEMBER 31, 1998 ------------------------------------------------ ------------------------------------- GROSS GROSS GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED COST GAIN LOSS VALUE COST GAIN LOSS --------- ---------- ---------- ------- --------- ---------- ---------- (DOLLARS IN THOUSANDS) U.S. Government agency securities.... $24,661 $ 99 $ (372) $24,388 $30,979 $ 569 $ (7) Municipal securities................. 10,445 32 (480) 9,997 8,588 264 (63) --------- ---------- ---------- ------- --------- ---------- ---------- Total securities................. $35,106 $131 $ (852) $34,385 $39,567 $ 833 $ (70) ========= ========== ========== ======= ========= ========== ========== FAIR VALUE ------- U.S. Government agency securities.... $31,541 Municipal securities................. 8,789 ------- Total securities................. $40,330 =======
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, 1999 ----------------------------------------------------------------------------------------- AFTER ONE YEAR AFTER FIVE YEARS WITHIN ONE YEAR BUT WITHIN FIVE BUT WITHIN TEN YEARS YEARS AFTER TEN YEARS TOTAL --------------- --------------- ------------------- ---------------- -------- AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT ------ ----- ------ ----- ------- ----- ------- ----- -------- (DOLLARS IN THOUSANDS) U.S. Treasury securities............. $-- -- % $1,990 6.21 % $ -- -- % $ -- -- % $ 1,990 U.S. Government agency securities.... -- -- 2,170 6.63 13,187 6.38 67,577 6.63 82,934 Municipal securities................. -- -- 745 3.23 8,365 4.82 12,541 4.76 21,651 Federal funds sold................... 5,494 6.50 -- -- -- -- -- -- 5,494 Temporary investments................ -- -- -- -- -- -- -- -- -- Other securities..................... 3,768 5.51 -- -- -- -- 4,442 -- 8,210 ------ ----- ------ ----- ------- ----- ------- ----- -------- Total securities..................... $9,262 6.10 % $4,905 5.95 % $21,553 5.78 % $84,560 6.33 % $114,786 ====== ===== ====== ===== ======= ===== ======= ===== ======== YIELD ----- U.S. Treasury securities............. 6.21 % U.S. Government agency securities.... 6.59 Municipal securities................. 4.73 Federal funds sold................... 6.50 Temporary investments................ -- Other securities..................... ----- Total securities..................... 6.19 % =====
The following table summarizes the carrying value and classification of securities: AS OF DECEMBER 31, ---------------------------------- 1999 1998 1997 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Available-for-sale................... $ 74,959 $ 83,623 $ 41,612 Held-to-maturity..................... 35,106 39,567 71,012 ---------- ---------- ---------- Total securities................ $ 110,065 $ 123,190 $ 112,624 ========== ========== ========== U.S. Government agency securities include 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 30 issuing agencies. Included in the Company's mortgage-backed securities at years ended December 31, 1999 and 1998, were $2.6 million and $7.0 million in agency-issued collateral mortgage obligations. As of the years ended December 31, 1999 and 1998, 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, 1999 approximately $6.5 million 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 As of December 31, 1999, the Company had entered into an interest rate swap in an effort to match the repricing of its liabilities with its assets. The swap has a notional amount of $20 million. The Company pays a floating interest rate of LIBOR less five basis points and receives a fixed rate of 7.15%. The swap matures in 2009. As of December 31, 1998, the Company did not have any off-balance sheet derivative contracts outstanding. However, in 1998 and 1999 the securities portfolio did contain some securities with options callable by the issuers. In a declining rate environment, the likelihood that these options will be called may increase. DEPOSITS The Company's lending and investing activities are funded principally by deposits, approximately 42.9% of which were demand, savings and money market deposits at December 31, 1999. Average noninterest-bearing deposits at December 31, 1999 were $91.5 million compared with $80.5 million at year end 1998, an increase of $11.0 million or 13.6%. Approximately 18.2% of average deposits for the year ended December 31, 1999 were noninterest-bearing. Total deposits at December 31, 1999 were $544.4 million, an increase of $64.9 million or 13.5% from $479.5 million at December 31, 1998. Average total deposits during 1999 increased by 5.0% to $501.8 million. Average total deposits during 1998 increased to $477.8 million from $416.9 million in 1997, an increase of $60.9 million or 14.6%. The increases during 1999 and 1998 resulted primarily from the opening of new deposit gathering branches and the sale of certificates of deposit in established branches. The Company's ratios of average noninterest-bearing demand deposits to average total deposits for the years ended December 31, 1999, 1998 and 1997 were 18.2%, 16.8% and 15.6%, 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 $157.9 million of time deposits greater than $100,000 at December 31, 1999, accounts totaling $75.2 million have been with the Company longer than one year. 31 The average daily balances and weighted average rates paid on deposits for each of the years ended December 31, 1999, 1998 and 1997 are presented below:
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------ 1999 1998 1997 -------------------- ------------------- ------------------- AMOUNT RATE AMOUNT RATE AMOUNT RATE -------- ----- -------- ---- -------- ---- (DOLLARS IN THOUSANDS) Interest-bearing deposits: Money market checking............ $ 37,011 2.81% $ 30,109 2.60% $ 26,765 2.60% Savings and money market deposits....................... 97,629 3.09 90,328 3.61 76,799 3.56 Time deposits less than $100,000....................... 132,012 4.94 151,356 5.37 145,004 5.41 Time deposits $100,000 and over........................... 143,651 5.23 125,548 5.69 103,443 5.64 -------- ----- -------- ---- -------- ---- Total interest-bearing deposits.................. 410,303 4.41 397,341 4.86 352,011 4.86 Noninterest-bearing deposits......... 91,505 -- 80,452 -- 64,884 -- -------- ----- -------- ---- -------- ---- Total deposits.............. $501,808 3.61% $477,793 4.04% $416,895 4.11% ======== ===== ======== ==== ======== ====
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, 1999 ----------------- (DOLLARS IN THOUSANDS) Three months or less................. $ 42,733 Over three through six months........ 27,606 Over six through 12 months........... 49,547 Over 12 months....................... 38,040 ----------------- Total........................... $ 157,927 ================= 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 5.0% 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 $12.0 million at December 31, 1999 and $7.0 million at each of December 31, 1998 and 1997. 32 The following table presents the categories of other borrowings by the Company: AS OF DECEMBER 31, ------------------------------- 1999 1998 1997 --------- --------- --------- (DOLLARS IN THOUSANDS) FHLB short term loans: on December 31.................. $ 20,000 $ 25,000 $ 5,000 average during the year......... 24,774 860 1,804 maximum month-end balance during the year...................... 39,430 25,000 7,000 FHLB notes: on December 31.................. $ 35,000 $ 25,000 $ 15,900 average during the year......... 32,753 12,673 16,084 maximum month-end balance during the year...................... 35,000 25,000 18,800 Other short-term borrowings: on December 31.................. $ 636 $ 43 $ 711 average during the year......... 510 487 678 maximum month-end balance during the year...................... 640 649 1,296 The average rate paid and the weighted average rate paid on other borrowings as of December 31, 1999 was 5.02% and 5.27%, respectively. As of December 31, 1998, FHLB notes consisted of two 10-year notes of $15.0 million 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% which is scheduled to mature in 2009. The $15.9 million of FHLB notes outstanding at December 31, 1997 was repaid in 1998. 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 an interest rate swap. The 33 Company pays a floating interest rate of LIBOR less five basis points and receives a fixed rate of 7.15%. The swap matures in 2009. 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. The following table sets forth an interest rate sensitivity analysis for the Company at December 31, 1999:
VOLUMES SUBJECT TO REPRICING WITHIN -------------------------------------------------------------------------------------- GREATER 0-30 31-180 180-365 1-3 3-5 5-10 THAN 10 DAYS DAYS DAYS YEARS YEARS YEARS YEARS TOTAL --------- --------- --------- --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Interest-earning assets: Securities....................... $ 1,684 $ 5,931 $ 6,190 $ 20,751 $ 6,445 $ 43,547 $ 25,517 $ 110,065 Total loans...................... 340,970 37,480 23,621 50,872 33,383 6,889 2,454 495,669 Federal funds sold and other temporary investments.......... 5,494 -- -- -- -- -- -- 5,494 --------- --------- --------- --------- --------- --------- --------- --------- Total interest-earning assets.... 348,148 43,411 29,811 71,623 39,828 50,436 27,971 611,228 Interest-bearing liabilities: Demand, money market and savings deposits....................... -- 54,936 27,469 54,936 -- -- -- 137,341 Time deposits.................... 27,215 120,504 114,577 33,802 5,861 8,878 5 310,842 Federal funds purchased.......... 20,000 -- -- -- -- -- -- 20,000 Other borrowings................. -- -- -- 636 -- 35,000 -- 35,636 --------- --------- --------- --------- --------- --------- --------- --------- Total interest-bearing liabilities.................... 47,215 175,440 142,046 89,374 5,861 43,878 5 503,819 --------- --------- --------- --------- --------- --------- --------- --------- Period GAP....................... $ 300,933 $(132,029) $(112,235) $ (17,751) $ 33,967 $ 6,558 $ 27,966 $ 107,409 Cumulative GAP................... 300,933 168,904 56,668 38,917 72,884 79,442 107,409 Period GAP to total assets....... 45.56% (19.99)% (16.99)% (2.69)% 5.14% 0.99% 4.23% Cumulative GAP to total assets... 45.56% 25.57% 8.58% 5.89% 11.03% 12.03% 16.26% Cumulative interest-earning assets to cumulative interest-bearing liabilities... 737.37% 175.86% 115.54% 108.57% 115.85% 115.77% 121.32%
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 $300.9 million, $168.9 million and $56.7 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 34 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. 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 and accept 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, 1999, 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 PRESENT VALUE OF ASSETS $ CHANGE IN EVE ---------------------- CHANGE IN RATES (DOLLARS IN THOUSANDS) % CHANGE IN EVE EVE RATIO CHANGE ------------------ ---------------------- --------------- --------- ---------- -200 bp $ 361 0.61% 8.90% (1) bp 0 bp -- -- 8.91% -- +200 bp (4,441) (7.45)% 8.84% (58) bp
The percentage change in EVE as a result of a 200 basis point decrease in interest rates at December 31, 1999 was 0.61% compared with 1.04% as of December 31, 1998. The percentage change in EVE as a result of a 200 basis point increase in interest rates on December 31, 1999 of (7.45)% was six basis points less than the (7.54)% change as of December 31, 1998. 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. 35 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-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, 1999 and December 31, 1998 was 8.5% and 7.75%, respectively. Management believes that in the short term the prime rate will continue an upward trend. 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 held-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. 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 36 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. 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 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% to 5.0%. 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 $50.0 million at December 31, 1998 to $52.6 million at December 31, 1999, an increase of $2.6 million or 5.2%. This increase was primarily the result of net income of $7.1 million offset by dividends paid of $1.7 million and unrealized losses on securities of $3.1 million. 37 The following table provides a comparison of the Company's and the Bank's leverage and risk-weighted capital ratios as of December 31, 1999 to the minimum and well-capitalized regulatory standards:
MINIMUM REQUIRED TO BE WELL CAPITALIZED ACTUAL FOR CAPITAL UNDER PROMPT CORRECTIVE RATIO AT ADEQUACY PURPOSES ACTION PROVISIONS DECEMBER 31, 1999 ------------------ ------------------------ ----------------- THE COMPANY Leverage ratio.................. 4.00%(1) N/A 8.48% Tier 1 risk-based capital ratio......................... 4.00 N/A 10.76 Risk-based capital ratio........ 8.00 N/A 12.01 THE BANK Leverage ratio.................. 4.00%(2) 5.00% 7.78% Tier 1 risk-based capital ratio......................... 4.00 8.00 9.86 Risk-based capital ratio........ 8.00 10.00 11.12
- - ------------ (1) The Federal Reserve Board may require the Company to maintain a leverage ratio of up to 100 basis points above the required minimum. (2) The OCC may require the Bank to maintain a leverage ratio of up to 100 basis points above the required minimum. YEAR 2000 COMPLIANCE GENERAL The Year 2000 risk involves computer programs and computer software that are not able to perform without interruption into and during the Year 2000. If computer systems do not correctly recognize the date change from December 31, 1999 to January 1, 2000 or do not correctly recognize certain other date changes during the year 2000, computer applications that rely on the date field could fail or create erroneous results. Such erroneous results could affect interest, payment or due dates or cause the temporary inability to process transactions, send invoices or engage in similar normal business activities. If the Company, its suppliers, and its borrowers do not address these issues, there could be a material adverse impact on the Company's financial condition or results of operations. STATE OF READINESS The Company formally initiated its Year 2000 project and plan in November 1997 to ensure that its operational and financial systems would not be adversely affected by Year 2000 problems. The Company formed a Year 2000 project team and the Board of Directors and management supported all compliance efforts and allocated the necessary resources to ensure completion. An inventory of all systems and products (including both information technology ("IT") and non-informational technology ("non-IT") systems) that could have been affected by the Year 2000 date change was developed, verified and categorized as to its importance to the Company and an assessment of all major IT and critical non-IT systems was completed. This assessment involved inputting into IT systems test data which simulates the Year 2000 date change and reviewing the system output for accuracy. The Company's assessment of critical non-IT systems involved reviewing such systems to determine whether they were date dependent. Based on such assessment, the Company believes that none of its critical non-IT systems are date dependent. The software for the Company's systems is provided through service bureaus and software vendors. The Company contacted all of its third party vendors and software providers and required them to demonstrate and represent that the products provided would be Year 2000 compliant and a program of testing compliance was planned. The Company's service bureau, which performs substantially all of the Company's data processing functions, warranted in writing that its software was Year 2000 compliant and pursuant to applicable regulatory guidelines, the Company reviewed the results of user group tests performed by the service provider to verify this assertion. In addition, during the first quarter of 1999, the Company began performing all data processing functions in-house. The data processing software purchased by the Company is the same software that was used by the Company in its vendor provided system. 38 RISKS RELATED TO THIRD PARTIES The impact of Year 2000 noncompliance by third parties with which the Company transacts business cannot be accurately gauged. The Company identified its largest dollar deposit (aggregate deposits over $200,000) and loan ($250,000 or more) customers and, based on information available to the Company, conducted a preliminary evaluation to determine which of those customers were likely to be affected by Year 2000 issues. The Company then surveyed those customers deemed at risk to determine their readiness with respect to Year 2000 issues, including their awareness of Year 2000 issues, plans to address such issues and progress with respect to such plans. The survey included approximately 69.0% of all depositors with balances of $200,000 or greater and all of its borrowers of $250,000 or more. The responses indicated that customers were aware of Year 2000 issues, were in the process of updating their systems and had informed the Company that they believe they would be ready for the Year 2000 date change by the end of 1999. To the extent a problem was identified, the Company monitored the customer's progress in resolving such problem. In the event that Year 2000 noncompliance adversely affects a borrower, the Company may be required to charge off the loan to that borrower. For a discussion of possible effects of such charge-offs, see "Contingency Plans" below. With respect to its borrowers, the Company includes in its loan documents a Year 2000 disclosure form as an addendum to the loan agreement in which the borrower represents and warrants its Year 2000 compliance to the Company. With respect to depositors, the Company had additional cash on hand to handle any unusual withdrawal activity. TRANSITION INTO THE YEAR 2000 The Company suffered no failures in any system or product upon the date change from December 31, 1999 to January 1, 2000. In addition, management is not aware of any vendor or provider used by the Company for data processing or related services which experienced a material failure of its product or service due to a Year 2000 related problem. The Company is also subject to risks associated with Year 2000 noncompliance by its customers. Management is not aware of any customer which suffered losses related to a Year 2000 problem which would adversely affect that customer's financial condition or its ability to repay any outstanding loan it has from the Company. COSTS OF COMPLIANCE The Company budgeted $24,000 to address Year 2000 issues. As of March 15, 2000, the Company's expenses did not exceed the amount budgeted. While the Company believes that it will incur no additional material expenses related to the Year 2000 issue, there can be no assurance that the Company will not be impacted by a Year 2000 related problem which occurs after the date hereof or by the failure of a third party to achieve proper Year 2000 compliance. ONGOING PLANS Although many of the critical dates related to potential Year 2000 related problems have passed, experts predict that Year 2000 related failures could occur throughout the year, such as on February 29, 2000 and December 31, 2000. Accordingly, the Company's Year 2000 project team will continue to monitor the Company's IT and non-IT systems and attempt to identify any potential problems during the course of the year. In addition, the Company will continue to monitor the Year 2000 compliance of the third parties with which the Company transacts business. CONTINGENCY PLANS The Company continues to maintain its contingency plans with respect to Year 2000 related issues and believes that if its own systems should fail, the Company could convert to a manual entry system for a period of up to six months without significant losses. The Company believes that any mission critical systems could be recovered and operating within seven days. In the event that the Federal Reserve Bank of Dallas is unable to handle electronic funds transfers, the Company does not expect the impact to be material to its financial condition or results of operations as long as the Company is able to utilize an alternative electronic funds transfer source. As part of its contingency planning, the Company reviewed its loan customer base and the potential impact on capital of Year 2000 noncompliance. Based upon such review, using what it considers to be a reasonable worst case scenario, the Company assumed that certain of its commercial borrowers whose businesses are most likely to be affected by Year 2000 noncompliance would be unable to repay their loans, resulting in charge-offs of loan amounts in excess of collateral values. If such 39 were the case, the Company believes that it is unlikely that its exposure would exceed $300,000, although there are no assurances that this amount will not be substantially higher. The Company does not believe that this amount is material enough for the Company to adjust its current methodology for making provisions to the allowance for loan losses. NEW ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME which establishes standards for reporting and displaying comprehensive income and its components in an entity's financial statements. This statement requires that an enterprise (i) classify items of other comprehensive income by their nature in a financial statement and (ii) display the accumulated balance of other comprehensive income as a separate component in the equity section of a statement of financial position. This statement is effective for reporting periods beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The adoption of Statement No. 130 had no impact on the Company's earnings, liquidity or capital resources. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. Statement No. 131 establishes standards for the way public business enterprises report information about operating segments in annual financial statements and for related disclosures about products and services, geographic areas and major customers. This statement is effective for reporting periods beginning after December 15, 1997. The Company reviewed the application of Statement No. 131 and has determined there is only one segment to report in the future. In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 98-1 ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE ("SOP 98-1"), which will become effective for financial statements for the calendar year 1999, with early adoption encouraged. SOP 98-1 requires the capitalization of eligible costs of specified activities related to computer software developed or obtained for internal use. The Company is assessing how the capitalization of these costs, which are currently expensed by the Company, will affect its earnings, liquidity, or capital resources. Management does not believe the impact of adoption will be material. In June 1998, FASB issued Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The statement becomes effective for reporting periods beginning after June 15, 2000, and will not be applied retroactively. Statement No. 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 the 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. 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 The financial statements, the reports thereon, the notes thereto and supplementary data commence at page F-1 of this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 40 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 2000 Annual Meeting of Shareholders to be filed with the Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "2000 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 2000 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 2000 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 2000 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 AND FINANCIAL STATEMENT SCHEDULES 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, 1999 and 1998 Consolidated Statements of Income for the Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 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. 41 EXHIBITS Each exhibit marked with an asterisk is filed with this Annual Report on Form 10-K.
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)). 21 -- Subsidiaries of MetroCorp Bancshares, Inc. (incorporated herein by reference to Exhibit 21 to the Registration Statement). 23.1* -- Consent of Deloitte & Touche LLP 23.2* -- Consent of PricewaterhouseCoopers LLP 27* -- Financial Data Schedule.
- - ------------ * Filed herewith. REPORTS ON FORM 8-K The Company did not file any Current Reports on Form 8-K during the quarter ended December 31, 1999. 42 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 29, 2000. METROCORP BANCSHARES, INC. By: /s/ DON J. WANG DON J. WANG CHAIRMAN OF THE BOARD AND PRESIDENT 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 29, 2000.
SIGNATURE POSITIONS - - ------------------------------------------------------ ------------------------------------------------------ /s/DON J. WANG Chairman of the Board and President DON J. WANG (principal executive officer) /s/RUTH E. RANSOM Chief Financial Officer and Senior Vice RUTH E. RANSOM President (principal financial officer and principal accounting officer) /s/TOMMY F. CHEN Director TOMMY F. CHEN /s/HELEN F. CHEN Director HELEN F. CHEN /s/MAY P. CHU Director MAY P. CHU /s/JANE W. KWAN Director JANE W. KWAN /S/GEORGE M. LEE Director GEORGE M. LEE /S/JOHN LEE Director JOHN LEE /s/DAVID TAI Director DAVID TAI /s/JOE TING Director JOE TING
43 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS METROCORP BANCSHARES, INC. AND SUBSIDIARIES PAGE ----- Independent Auditors' Reports........................................... F-2 Consolidated Balance Sheets as of December 31, 1999 and 1998............................................ F-4 Consolidated Statements of Income for the Years Ended December 31, 1999, 1998 and 1997......................................................... F-5 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 1999, 1998 and 1997.................................................................. F-6 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1999, 1998 and 1997.................................................................. F-7 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997................................................... 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 sheet of MetroCorp Bancshares, Inc. and subsidiary (the "Company") as of December 31, 1999, and the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for the year then ended. These consolidated 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 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 audit provides a reasonable basis for our opinion. In our opinion, the 1999 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 1999, and the consolidated results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Houston, Texas February 4, 2000 F-2 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of MetroCorp Bancshares, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of comprehensive income, of changes in shareholders' equity and of cash flows present fairly, in all material respects, the financial position of MetroCorp Bancshares, Inc. and subsidiaries (the Company) at December 31, 1998, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1998, in conformity with accounting principles generally accepted in the United States. 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 of these statements in accordance with auditing standards generally accepted in the United States 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 audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Houston, Texas March 19, 1999 F-3 METROCORP BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) DECEMBER 31, ---------------------- 1999 1998 ---------- ---------- ASSETS Cash and cash equivalents: Cash and due from banks......... $ 29,945 $ 21,606 Federal funds sold and other temporary investments.......... 6,471 14,287 ---------- ---------- Total cash and cash equivalents............. 36,416 35,893 Investment securities available-for-sale, at fair value (amortized cost of $79,680 and $82,407 at December 31, 1999 and 1998, respectively)................ 74,959 83,623 Investment securities held-to-maturity, at amortized cost (fair value of $34,385 and $40,330 at December 31, 1999 and 1998, respectively)...................... 35,106 39,567 Loans, net........................... 488,132 411,567 Premises and equipment, net.......... 8,106 8,151 Accrued interest receivable.......... 3,855 3,251 Deferred income taxes................ 6,477 3,025 Due from customers on acceptances.... 831 865 Other real estate and repossessed assets, net........................ 490 675 Other assets......................... 6,217 691 ---------- ---------- Total assets............... $ 660,589 $ 587,308 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing............. $ 96,253 $ 84,520 Interest-bearing................ 448,183 394,986 ---------- ---------- Total deposits............. 544,436 479,506 Other borrowings..................... 55,636 50,043 Accrued interest payable............. 1,558 1,030 Income taxes payable................. -- 20 Acceptances outstanding.............. 831 865 Other liabilities.................... 5,548 5,820 ---------- ---------- Total liabilities.......... 608,009 537,284 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; 7,122,479 and 7,004,560 shares issued and 7,102,479 and 7,004,560 shares outstanding, respectively................... 7,122 7,005 Additional paid-in capital...... 25,646 24,569 Retained earnings............... 23,124 17,702 Accumulated other comprehensive income (loss).................. (3,145) 748 Treasury stock, at cost (20,000 shares at December 31, 1999)... (167) -- ---------- ---------- Total shareholders' equity.................. 52,580 50,024 ---------- ---------- Total liabilities and shareholders' equity.... $ 660,589 $ 587,308 ========== ========== 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, ------------------------------- 1999 1998 1997 --------- --------- --------- Interest Income: Loans........................... $ 45,322 $ 39,219 $ 33,028 Investment securities: Taxable.................... 6,624 6,312 6,161 Tax-exempt................. 1,091 964 968 Federal funds sold and other temporary investments......... 631 1,201 998 --------- --------- --------- Total interest income...... 53,668 47,696 41,155 --------- --------- --------- Interest expense: Time deposits................... 14,032 15,267 13,685 Demand and savings deposits..... 4,059 4,041 3,430 Other borrowings................ 2,935 744 1,023 --------- --------- --------- Total interest expense..... 21,026 20,052 18,138 --------- --------- --------- Net interest income.................. 32,642 27,644 23,017 Provision for loan losses............ 5,550 3,377 3,350 --------- --------- --------- Net interest income after provision for loan losses.................... 27,092 24,267 19,667 --------- --------- --------- Noninterest income: Service charges on deposit accounts...................... 3,313 3,364 2,248 Other loan-related fees......... 1,658 1,371 1,440 Letters of credit commissions and fees...................... 471 392 357 Gain (loss) on sale of investment securities, net.... (14) 202 189 Other noninterest income........ 660 280 157 --------- --------- --------- Total noninterest income... 6,088 5,609 4,391 --------- --------- --------- Noninterest expense: Employee compensation and benefits...................... 11,140 9,898 8,940 Occupancy....................... 5,117 4,907 3,843 Other real estate, net.......... 83 374 474 Data processing................. 327 580 465 Professional fees............... 658 444 431 Advertising..................... 459 392 332 Other noninterest expense....... 4,628 4,385 3,611 --------- --------- --------- Total noninterest expense................. 22,412 20,980 18,096 --------- --------- --------- Income before provision for income taxes.............................. 10,768 8,896 5,962 Provision for income taxes........... 3,638 2,777 1,794 --------- --------- --------- Net income........................... $ 7,130 $ 6,119 $ 4,168 ========= ========= ========= Earnings per common share: Basic........................... $ 1.00 $ 1.08 $ 0.75 Diluted......................... $ 1.00 $ 1.06 $ 0.74 Weighted average shares outstanding: Basic........................... 7,114 5,691 5,581 Diluted......................... 7,114 5,749 5,616 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, ------------------------------- 1999 1998 1997 --------- --------- --------- Net income........................... $ 7,130 $ 6,119 $ 4,168 --------- --------- --------- Other comprehensive income (loss), net of tax (see Note 9): Unrealized gains (losses) on investment securities, net of tax: Unrealized holding gains (losses) arising during the period......................... (3,867) 73 538 Less: reclassification adjustment for gains included in net income....... (26) (133) (125) --------- --------- --------- Other comprehensive income (loss)......................... (3,893) (60) 413 --------- --------- --------- Total comprehensive income...... $ 3,237 $ 6,059 $ 4,581 ========= ========= ========= 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, 1999, 1998 AND 1997 (IN THOUSANDS)
ACCUMULATED COMMON STOCK ADDITIONAL OTHER TREASURY ------------------ PAID-IN RETAINED COMPREHENSIVE STOCK, AT SHARES AT PAR CAPITAL EARNINGS INCOME (LOSS) COST TOTAL ------- ------- ----------- --------- -------------- --------- ------- Balance at January 1, 1997 5,364 $5,364 $11,804 $ 7,835 $ 395 $ -- $25,398 Issuance of common stock............. 211 211 789 -- -- -- 1,000 Repurchase of common stock........... (99) -- -- -- -- (755) (755) Exercise of stock options and related tax benefit........................ 80 80 202 -- -- -- 282 Other comprehensive income........... -- -- -- -- 413 -- 413 Net income........................... -- -- -- 4,168 -- -- 4,168 ------- ------- ----------- --------- -------------- --------- ------- Balance at December 31, 1997......... 5,556 5,655 12,795 12,003 808 (755) 30,506 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) Issuance of common stock............. 1,350 1,350 11,721 -- -- -- 13,071 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 ======= ======= =========== ========= ============== ========= =======
The accompanying notes are an integral part of these financial statements. F-7 METROCORP BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) YEAR ENDED DECEMBER 31, ---------------------------------- 1999 1998 1997 ---------- ---------- ---------- Cash flows from operating activities: Net income...................... $ 7,130 $ 6,119 $ 4,168 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation.................. 2,132 2,096 1,689 Provision for loan losses 5,550 3,377 3,350 Loss (gain) on sales of investment securities, net........................ 14 (202) (189) Loss (gain) on sales of other real estate................ 50 200 (28) Deferred loan fees............ 668 204 1,010 Deferred income taxes......... (1,464) (1,354) (660) Changes in: Accrued interest receivable.............. (604) (110) (324) Accrued interest payable... 528 (6) 112 Income taxes payable....... (27) 1,887 20 Other liabilities.......... (272) (1,046) 1,066 Other assets............... (5,526) (357) (253) ---------- ---------- ---------- Net cash provided by operating activities............ 8,179 10,808 9,961 ---------- ---------- ---------- Cash flows from investing activities: Purchases of investment securities available-for-sale............ (29,221) (52,601) (26,212) Proceeds from sales, maturities and principal paydowns of investment securities available-for-sale............ 31,990 10,472 11,021 Purchases of investment securities held-to-maturity... (2,822) (1,218) (4,975) Proceeds from maturities and principal paydowns of investment securities held-to-maturity.............. 7,283 32,882 12,031 Net change in loans............. (83,310) (69,807) (73,591) Proceeds from sales of other real estate................... 662 355 2,539 Purchases of premises and equipment..................... (2,087) (2,174) (1,691) ---------- ---------- ---------- Net cash used in investing activities............ (77,505) (82,091) (80,878) ---------- ---------- ---------- Cash flows from financing activities: Net change in: Deposits...................... 64,930 33,647 64,570 Other borrowings.............. 5,593 28,432 7,045 Net proceeds from issuance of common stock.................. 1,194 13,071 1,282 Treasury stock (purchased) sold, net........................... (167) 808 (755) Dividends paid.................. (1,701) -- -- ---------- ---------- ---------- Net cash provided by financing activities............ 69,849 75,958 72,142 ---------- ---------- ---------- Net increase in cash and cash equivalents........................ 523 4,675 1,225 Cash and cash equivalents at beginning of year.................. 35,893 31,218 29,993 ---------- ---------- ---------- Cash and cash equivalents at end of year............................... $ 36,416 $ 35,893 $ 31,218 ========== ========== ========== 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 fifteen 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 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. USE OF ESTIMATES IN THE FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions which affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities. Because of the inherent uncertainties in this process, actual future results could differ from those expected at the reporting date. 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 The Company segregates its investment portfolio in accordance with the requirements of Statement of Financial Accounting Standards No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, as either investments held-to-maturity or investments available-for-sale. All investment transactions are recorded on a trade date basis. 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." 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. 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 F-9 METROCORP BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. Nonrefundable service charges for the origination of loans, net of direct costs, are deferred and amortized over the terms of the related loans using a method which approximates the effective-interest method. 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 judgment, future payments are reasonably assured. The Bank applies Statement of Financial Accounting Standards No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, as amended by Statement of Financial Accounting Standards No. 118, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN-INCOME RECOGNITION AND DISCLOSURES. Under Statement No. 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. Statement No. 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. 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 judgment, the allowance for loan losses is considered adequate to absorb losses inherent in the loan portfolio. 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. F-10 METROCORP BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INCOME TAXES The Bank accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES. Statement No. 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, Statement No. 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 net income available for common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing net earnings available for common shareholders by the weighted average number of common and potentially dilutive common shares. Stock options may be potentially 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 4-for-1 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 $185,721,000 and $184,671,000, at December 31, 1999 and December 31, 1998, 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 11.25%. 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. F-11 METROCORP BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) OTHER OFF-BALANCE SHEET INSTRUMENTS The Company has entered into other off-balance sheet financial instruments consisting or commitments to extend credit. Such financial instruments are recorded in the financial statements when they are funded. NEW ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME which establishes standards for reporting and displaying comprehensive income and its components in an entity's financial statements. This statement requires that an enterprise (i) classify items of other comprehensive income by their nature in a financial statement and (ii) display the accumulated balance of other comprehensive income as a separate component in the equity section of a statement of financial position. This statement became effective for reporting periods beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The adoption of Statement No. 130 had no impact on the Company's earnings, liquidity or capital resources. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. Statement No. 131 establishes standards for the way public business enterprises report information about operating segments in annual financial statements and for related disclosures about products and services, geographic areas and major customers. This statement became effective for reporting periods beginning after December 15, 1997. The Company reviewed the application of Statement No. 131 and has determined there is only one segment to report in the future. In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED FOR INTERNAL USE (SOP 98-1), which became effective for financial statements for the calendar year 1999. SOP 98-1 requires the capitalization of eligible costs of specified activities related to computer software developed or obtained for internal use. The adoption of SOP 98-1 had no impact on the Company's earnings, liquidity or capital resources. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. Statement No. 133, as amended, becomes effective for reporting periods beginning after June 15, 2000, and will not be applied retroactively. Statement No. 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 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 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. Management is currently assessing the potential impact of Statement No. 133 on future corporate operations. RECLASSIFICATIONS Certain 1997 and 1998 amounts have been reclassified to conform to the 1999 presentation. F-12 METROCORP BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 December 31, 1999 and 1998. 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. Investment securities at December 31, 1999 and 1998, respectively, are summarized as follows (in thousands):
AS OF DECEMBER 31, 1999 ------------------------------------------------ GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE --------- ---------- ---------- ------- Available-for-sale: Federal Home Loan Mortgage Corporation (FHLMC) mortgage- backed securities (MBS)........ $ 2,886 $-- $ (196) $ 2,690 Municipal securities............. 11,206 -- (653) 10,553 Government National Mortgage Association (GNMA) mortgage- backed securities (MBS)........ 29,700 -- (1,496) 28,204 Federal Home Loan Bank (FHLB).... 19,000 -- (1,935) 17,065 U.S. Treasury Notes.............. 1,990 11 -- 2,001 Privately issued and collateralized by MBS.......... 3,767 -- (141) 3,626 Federal National Mortgage Association (FNMA) mortgage-backed securities (MBS).......................... 6,688 -- (311) 6,377 FHLB stock(1).................... 3,768 -- -- 3,768 Federal Reserve Bank stock(2).... 675 -- -- 675 --------- ---------- ---------- ------- $79,680 $ 11 $ (4,732) $74,959 ========= ========== ========== ======= Held-to-maturity: FNMA-MBS......................... $ 5,015 $ 19 $ (123) $ 4,911 FHLMC-MBS........................ 8,216 38 (188) 8,067 GNMA-MBS......................... 8,685 42 (17) 8,709 Municipal securities............. 10,445 32 (480) 9,997 Small Business Administration (SBA)/Small Business Investment Company (SBIC)................. 2,745 -- (44) 2,701 --------- ---------- ---------- ------- $35,106 $ 131 $ (852) $34,385 ========= ========== ========== =======
F-13 METROCORP BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AS OF DECEMBER 31, 1998 ------------------------------------------------ GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE --------- ---------- ---------- ------- Available-for-sale: FHLMC-MBS........................ $18,927 $ 548 $ (52) $19,423 Municipal securities............. 9,910 578 -- 10,488 GNMA-MBS......................... 30,909 207 (118) 30,998 FHLB............................. 10,998 4 (42) 10,960 U.S. Treasury Notes.............. 1,984 88 -- 2,072 FNMA-MBS......................... 5,975 16 (13) 5,978 FHLB stock(1).................... 3,149 -- -- 3,149 Federal Reserve Bank stock(2).... 555 -- -- 555 --------- ---------- ---------- ------- $82,407 $1,441 $ (225) $83,623 ========= ========== ========== ======= Held-to-maturity: FNMA-MBS......................... $ 6,274 $ 86 $ (3) $ 6,357 FHLMC-MBS........................ 8,246 131 -- 8,377 GNMA-MBS......................... 11,572 273 -- 11,845 Municipal securities............. 8,588 264 (63) 8,789 SBA/SBIC......................... 4,887 79 (4) 4,962 --------- ---------- ---------- ------- $39,567 $ 833 $ (70) $40,330 ========= ========== ========== =======
- - ------------ (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. The following sets forth information concerning sales (excluding maturities) of available-for-sale securities (in thousands): YEARS ENDED DECEMBER 31, -------------------- 1999 1998 --------- --------- Available-for-sale: Amortized cost.................. $ 21,433 $ -- Proceeds........................ 21,419 -- Gross realized gains............ 404 -- Gross realized losses........... 418 -- Investments carried at approximately $7,032,000 and $4,603,000 at December 31, 1999 and 1998, respectively, were pledged to secure public deposits and short-term borrowings of approximately $1,703,000 and $562,000, respectively. Additionally, investments in the securities portfolio carried at approximately $55,024,000 and $42,263,000 were pledged as collateral for borrowed funds at December 31, 1999 and 1998, respectively. F-14 METROCORP BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At December 31, 1999, future contractual maturities of securities are as follows (in thousands):
INVESTMENTS INVESTMENTS HELD-TO-MATURITY AVAILABLE-FOR-SALE ---------------------- ---------------------- AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE --------- ------- --------- ------- Within one year...................... $ -- $ -- $ -- $ -- Within two to five years............. 2,604 2,572 2,301 2,309 Within six to ten years.............. 13,125 12,908 8,427 7,892 After ten years...................... 19,377 18,905 64,509 60,315 --------- ------- --------- ------- Debt securities................. 35,106 34,385 75,237 70,516 FHLB/FRB equity securities........... -- -- 4,443 4,443 --------- ------- --------- ------- $35,106 $34,385 $79,680 $74,959 ========= ======= ========= =======
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 the U.S. government and its agencies) of which aggregate adjusted cost exceeded 10% of the consolidated shareholders' equity at December 31, 1999 or 1998. 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, ---------------------- 1999 1998 ---------- ---------- Commercial and industrial............ $ 298,150 $ 256,311 Real estate-mortgage................. 137,297 115,472 Real estate-construction............. 40,009 28,611 Consumer and other................... 11,550 12,117 Factored receivables................. 13,700 9,506 ---------- ---------- Gross loans..................... 500,706 422,017 Unearned discounts and interest...... (1,038) (1,000) Deferred loan fees................... (3,999) (3,331) ---------- ---------- Total loans..................... $ 495,669 $ 417,686 Allowance for loan losses............ (7,537) (6,119) ---------- ---------- Loans, net...................... $ 488,132 $ 411,567 ========== ========== F-15 METROCORP BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, 1999 and 1998, the Bank's loan portfolios consisted of concentrations in the following industries. With the exception of the December 31, 1998 concentrations in the convenience/gasoline stations and grocery stores industries, all such amounts represent a concentration greater than 25% of capital (in thousands): AS OF DECEMBER 31, ---------------------- 1999 1998 ---------- ---------- Hotels/motels........................ $ 74,070 $ 57,885 Retail centers....................... 61,087 50,274 Restaurants.......................... 25,805 17,474 Apartment buildings.................. 14,526 15,994 Convenience/gasoline stations........ 20,746 11,364 Grocery stores....................... -- 2,066 All other............................ 304,472 266,960 ---------- ---------- Gross loans..................... $ 500,706 $ 422,017 ========== ========== Selected information regarding the loan portfolio is presented below (in thousands): AS OF DECEMBER 31, ---------------------- 1999 1998 ---------- ---------- Variable rate loans.................. $ 345,095 $ 327,112 Fixed rate loans..................... 155,611 94,905 ---------- ---------- $ 500,706 $ 422,017 ========== ========== Changes in the allowance for loan losses are as follows (in thousands): DECEMBER 31, ------------------------------- 1999 1998 1997 --------- --------- --------- Balance at beginning of year......... $ 6,119 $ 3,569 $ 2,141 Provision for loan losses............ 5,550 3,377 3,350 Charge-offs.......................... (4,402) (970) (2,223) Recoveries........................... 270 143 301 --------- --------- --------- Balance at end of year............... $ 7,537 $ 6,119 $ 3,569 ========= ========= ========= Loans for which the accrual of interest has been discontinued totaled approximately $6,552,000, $3,329,000 and $2,663,000 at December 31, 1999, 1998 and 1997, respectively. Had these loans remained on an accrual basis, interest in the amount of approximately $357,000, $181,000 and $62,000 would have been accrued on these loans during the years ended December 31, 1999, 1998 and 1997, respectively. Included in "other assets" on the balance sheet is $5.2 million due from the United States Small Business Administration (SBA). This amount represents the guaranteed portion of loans previously charged-off. F-16 METROCORP BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The recorded investment in loans for which impairment has been recognized in accordance with Statement No. 114, as amended by Statement No. 118, and the related specific allowance for loan losses on such loans at December 31, 1999 and 1998 is presented below (in thousands):
REAL ESTATE COMMERCIAL CONSUMER TOTAL ----------- ---------- -------- --------- 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 and Overseas Chinese Credit Guarantee Fund (OCCGF)........ -- (1,821) -- (1,821) ----------- ---------- -------- --------- Impaired loans, net of allowance for loan losses and guarantees............. $ 1,818 $ 1,800 $ 59 $ 3,677 =========== ========== ======== ========= DECEMBER 31, 1998 Impaired loans having related allowance for loan losses.......... $ 5,528 $ 16,449 $ 151 $ 22,128 Less: Allowance for loan losses........................ (231) (1,312) (44) (1,587) Less: Guaranteed portion (SBA and Overseas Chinese Credit Guarantee Fund (OCCGF)........ -- (5,427) -- (5,427) ----------- ---------- -------- --------- Impaired loans, net of allowance for loan losses and guarantees............. $ 5,297 $ 9,710 $ 107 $ 15,114 =========== ========== ======== =========
For the years ended December 31, 1999 and 1998, the average recorded investment in impaired loans was approximately $19,849,000 and $14,532,000, respectively. The related amount of interest income recognized while the loans were impaired approximated $790,000, $1,176,000 and $526,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Additionally, at December 31, 1999 and 1998, loans carried at approximately $148,589,000 and $11,188,000, 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): AS OF DECEMBER 31 ESTIMATED USEFUL -------------------- LIVES (IN YEARS) 1999 1998 ---------------- --------- --------- Furniture, fixtures and equipment.... 3-10 $ 9,908 $ 8,316 Building and improvements............ 3-20 3,943 3,901 Land................................. -- 1,679 1,679 Leasehold improvements............... 5 2,397 1,945 --------- --------- 17,927 15,841 Accumulated depreciation............. (9,821) (7,690) --------- --------- Premises and equipment, net.......... $ 8,106 $ 8,151 ========= ========= 6. INTEREST-BEARING DEPOSITS The types of accounts and their respective balances included in interest-bearing deposits are as follows (in thousands): AS OF DECEMBER 31, ---------------------- 1999 1998 ---------- ---------- Interest-bearing demand deposits..... $ 40,473 $ 32,136 Savings and money market accounts.... 96,869 97,269 Time deposits less than $100,000..... 152,914 132,972 Time deposits $100,000 and over...... 157,927 132,609 ---------- ---------- Interest-bearing deposits............ $ 448,183 $ 394,986 ========== ========== At December 31, 1999, the scheduled maturities of time deposits are as follows (in thousands): 2000................................. $ 255,611 2001................................. 28,125 2002................................. 3,744 2003................................. 2,833 2004................................. 528 After 2004........................... 20,000 ---------- $ 310,841 ========== 7. OTHER BORROWINGS During the third quarter of 1998, the Company obtained two ten-year loans totaling $25,000,000 from the Federal Home Loan Bank of Dallas ("FHLB"). The loans bear interest at the average rate of 5.0% 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 addition, at December 31, 1998, the Company had prepayable floating rate FHLB notes in the amount of $25,000,000 outstanding. 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%. These borrowings are collateralized by FHLB stock, 1-4 family mortgage loans and securities held at the FHLB. F-18 METROCORP BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Other short-term borrowings at December 31, 1999 and 1998 consist of $636,000 and $43,000, 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%. These borrowings are collateralized by securities held at the FHLB. Additionally, the Bank has several unused, unsecured lines of credit with correspondent banks totaling $12,000,000 at December 31, 1999 and $7,000,000, at December 31, 1998. 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, -------------------- 1999 1998 --------- --------- DEFERRED TAX ASSETS: Unrealized losses on available for sale securities, net............... $ 1,581 $ -- Allowance for loan losses............ 2,340 1,624 Recognition of deferred loan fees.... 1,463 1,225 Depreciation......................... 867 549 Recognition of interest on nonaccrual loans.............................. 173 112 Other................................ 240 73 --------- --------- Gross deferred tax assets............ 6,664 3,583 --------- --------- DEFERRED TAX LIABILITIES: Unrealized gains on investment securities available-for-sale, net................................ -- 407 FHLB stock dividends................. 187 151 --------- --------- Gross deferred tax liabilities....... 187 558 --------- --------- Net deferred tax asset.......... $ 6,477 $ 3,025 ========= ========= The Bank has provided no valuation allowance for the net deferred tax asset at December 31, 1999 or 1998 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, ------------------------------- 1999 1998 1997 --------- --------- --------- Current provision for federal income taxes.............................. $ 5,102 $ 4,131 $ 2,454 Deferred federal income tax benefit............................ (1,464) (1,354) (660) --------- --------- --------- Total provision for income taxes......................... $ 3,638 $ 2,777 $ 1,794 ========= ========= ========= 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, ----------------------------------------------------------------- 1999 1998 1997 ------------------- ------------------- ------------------- AMOUNT % AMOUNT % AMOUNT % ------- --------- ------- --------- ------- --------- Federal income tax expense at statutory rate..................... $3,661 34% $3,025 34% $2,027 34% Tax-exempt interest income........... (371) (3) (321) (4) (329) (6) Other, net........................... 348 3 73 1 96 2 ------- --------- ------- --------- ------- --------- Provision for income taxes...... $3,638 34% $2,777 31% $1,794 30% ======= ========= ======= ========= ======= =========
9. OTHER COMPREHENSIVE INCOME (EXPENSE) The following sets forth the deferred tax benefit (expense) related to other comprehensive income (in thousands): YEARS ENDED DECEMBER 31, ------------------------------- 1999 1998 1997 --------- ----- ------ Unrealized gains (losses) arising during the period.................. $ 1,975 $ (38) $ (277) Less: reclassification adjustment for gains realized in net income....... 13 69 64 --------- ----- ------ Other comprehensive income........... $ 1,988 $ 31 $ (213) ========= ===== ====== 10. 401(K) PROFIT SHARING PLAN The Company sponsors a 401(k) Profit Sharing Plan (Plan) for all full-time employees. The Plan is a defined contribution plan providing for pretax employee contributions of up to 6% of annual compensation plus any additional discretionary after-tax employee contributions. The Company matches up to 4% of each participant's salary to the Plan. The Company made contributions before expenses to the Plan of approximately $271,000, $235,000 and $248,000 during the years ended December 31, 1999, 1998 and 1997, respectively. 11. SHAREHOLDERS' EQUITY On December 16, 1998, the Company completed its initial public offering of common stock, issuing 1,350,000 shares at a price of $11.00 per share before expenses. 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 Stock Bonus Plan (Director Plan) authorizes the issuance of 60,000 shares of common stock to the directors of the Company who do not serve as officers or employees of the Company. Under the 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 being issued if the return on equity is below 13%. In 1998 and 1999, the Company exceeded a 13% return on equity. To date, 12,000 shares have been issued pursuant to the Director Plan and $126,700 in compensation expense for these shares was recorded in 1999. An additional $79,000 in compensation expense was accrued in 1999 in anticipation of an additional 12,000 shares being issued pursuant to the Director Plan in 2000 for the Company's performance during the 1999 fiscal year. F-20 METROCORP BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's 1998 Employee Stock Purchase Plan (Purchase Plan) authorizes the issuance of up to 200,000 shares of common stock to employees of the Company and its subsidiaries. Each year, the Board of Directors will determine the number of shares to be offered under the Purchase Plan; provided that the offering in any one year may not exceed 20,000 shares plus any unsubscribed shares from previous years. The offering price of a share will be an amount equal to 90% of the closing price of a share of common stock on the business day immediately prior to the commencement of such offering. 6,188 shares have been issued pursuant to the Purchase Plan to date. No compensation expense was recorded. 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, 1999 approximately $15.8 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, 1999 and declared a dividend of $0.06 per share to shareholders of record as of December 31, 1998, which was paid on January 15, 1999. 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 to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 1999, that the Company and the Bank meets 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 adequately capitalized, the Bank must 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. F-21 METROCORP BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's and the Bank's actual capital amounts and ratios are presented in the following table.
TO BE WELL MINIMUM REQUIRED CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ------------------ ------------------ ------------------ AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------- ------ ------- ------ ------- ------ (IN THOUSANDS) AS OF DECEMBER 31, 1999: Total capital (to risk weighted assets) 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 capital (to risk weighted assets) 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% AS OF DECEMBER 31, 1998: Total capital (to risk weighted assets) MetroCorp Bancshares, Inc....... $54,537 13.00% $33,604 8.00% N/A N/A MetroBank, N.A.................. 45,472 10.80 33,646 8.00 42,058 10.00% Tier 1 capital (to risk weighted assets) MetroCorp Bancshares, Inc....... 49,276 11.70% 16,802 4.00% N/A N/A MetroBank, N.A.................. 40,204 9.60 16,823 4.00 25,235 6.00% Leverage ratio MetroCorp Bancshares, Inc....... 49,276 8.80% 22,315 4.00% N/A N/A MetroBank, N.A.................. 40,204 7.20 22,315 4.00 27,894 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 sheet instruments. Commitments to extend credit at December 31, 1999 and 1998 aggregated approximately $79,400,000 and $81,672,000, respectively. Commitments under letters of credit at December 31, 1999 and 1998, totaled $4,300,000 and $10,278,000, respectively. During 1999, the Bank entered into an interest rate swap in an effort to match the repricing of its liabilities with its assets. The swap has a notional amount of $20,000,000. The Bank pays a floating interest rate tied to LIBOR and receives a fixed rate of 7.15%. The interest rate on the swap was 6.0775% at December 31, 1999. This swap matures in 2009. The fair value of the interest rate swap at December 31, 1999 is estimated to be $680,000. F-22 METROCORP BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, Statement No. 107 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 nonfinancial instruments are excluded from the scope of Statement No. 107. Accordingly, the fair value disclosures required by Statement No. 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 Statement No. 107; however, their fair value is not disclosed in this note. Fair values among financial institutions are not comparable due to the wide range of permitted valuation techniques and numerous estimates that must be made. This lack of an objective valuation standard introduces a great degree of subjectivity to these derived or estimated fair values. Therefore, caution should be exercised in using this information for purposes of evaluating the financial condition of the Bank compared with other financial institutions. 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 Statement No. 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 as disclosed in Note 2. 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, 1999 approximated $497,895,000. LIABILITIES FOR WHICH FAIR VALUE APPROXIMATES CARRYING VALUE Statement No. 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. Statement No. 107 does not allow for the recognition of the inherent funding value of these instruments. The fair value of F-23 METROCORP BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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, 1999, 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, 1999 and 1998. 15. COMMITMENTS AND CONTINGENT LIABILITIES The Bank leases certain branch premises and equipment under operating leases which expire between 2001 and 2005. The Bank incurred rental expense of approximately $828,000, $689,000 and $558,000 for the years ended December 31, 1999, 1998 and 1997, respectively, under these lease agreements. Future minimum lease payments at December 31, 1999, due under these lease agreements are as follows (in thousands): YEAR AMOUNT - - ------------------------------------- ------ 2000................................. $ 807 2001................................. 662 2002................................. 263 2003................................. 144 2004................................. 124 After 2004........................... 58 ------ $2,058 ====== 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 SHEET (IN THOUSANDS) AS OF AS OF DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------ ASSETS Cash and due from subsidiary bank.... $ 5,338 $ 9,719 Investments in bank subsidiary....... 47,961 40,953 ------------ ------------ Total assets.................... $ 53,299 $ 50,672 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Other liabilities.................... $ 719 $ 648 ------------ ------------ Total liabilities............... 719 648 ------------ ------------ 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; 7,122,479 and 7,004,560 issued and 7,102,479 and 7,004,560 outstanding, respectively.......... 7,122 7,005 Additional paid-in-capital........... 25,646 24,569 Retained earnings.................... 23,124 17,702 Net accumulated other comprehensive income from subsidiary............. (3,145) 748 Treasury stock, at cost.............. (167) -- ------------ ------------ Total shareholders' equity........... 52,580 50,024 ------------ ------------ Total liabilities and shareholders' equity........... $ 53,299 $ 50,672 ============ ============ CONDENSED STATEMENTS OF INCOME (IN THOUSANDS) YEARS ENDED DECEMBER 31, -------------------- 1999 1998 --------- --------- Dividends from subsidiary............ $ 1,708 $ 420 Equity in undistributed income of subsidiary......................... 5,902 5,699 --------- --------- Total income.................... 7,610 6,119 Operating expenses................... 480 -- --------- --------- Net income........................... $ 7,130 $ 6,119 ========= ========= F-25 METROCORP BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS) YEARS ENDED DECEMBER 31, -------------------- 1999 1998 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................... $ 7,130 $ 6,119 Adjustments to reconcile net income to net cash provided by (used) in operating activities: Equity in undistributed income of subsidiary.................. (5,902) (5,699) Increase (decrease) in other liabilities.................... 65 -- --------- --------- Net cash provided by operating activities.... 1,293 420 --------- --------- CASH FLOW FROM INVESTMENT ACTIVITIES: Investment in subsidiary........ $ (5,000) $ (4,000) --------- --------- Net cash provided by (used in) investing activities.............. (5,000) (4,000) --------- --------- CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock.......................... 1,194 13,071 Payment to repurchase common stock.......................... (167) -- Cash dividend on common stock... (1,701) -- Other, net...................... -- 228 --------- --------- Net cash (used in) provided by financing activities.............. (674) 13,299 --------- --------- Net (decrease) increase in cash and cash equivalents................... (4,381) 9,719 Cash and cash equivalents at beginning of year.................. $ 9,719 $ -- --------- --------- Cash and cash equivalents at end of year............................... $ 5,338 $ 9,719 ========= ========= Dividends declared but not paid...... $ 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 be 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, 1999 and 1998, certain officers and directors and their affiliated companies were indebted to the Bank in the aggregate amounts of approximately $4,989,000 and $3,468,000, respectively. The following is an analysis of activity for the year ended December 31, 1999 for such amounts (in thousands): 1999 --------- Balance at January 1................. $ 3,468 New loans and advances.......... 4,370 Repayments...................... (2,849) --------- Balance at December 31............... $ 4,989 ========= In addition, as of December 31, 1999 and 1998, the Bank held demand and other deposits for related parties of approximately $3,210,000 and $2,031,000, respectively. F-26 METROCORP BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 medical, dental, life, accidental death and dismemberment and long-term disability insurance. The Company's President is a principal shareholder in New Era Insurance Company. The Company paid New Era Insurance Company $1,098,000 and $837,400 for such insurance coverage for the years ended December 31, 1999 and 1998, respectively. 18. EARNINGS PER SHARE The following data show the amounts used in computing net income 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, ------------------------------- 1999 1998 1997 --------- --------- --------- (IN THOUSANDS) Net income available to common shareholders' equity used in basic and diluted EPS.................... $ 7,130 $ 6,119 $ 4,168 ========= ========= ========= Weighted average common shares in basic EPS....................... 7,114 5,691 5,581 Effects of dilutive securities: Options......................... -- 58 35 --------- --------- --------- Weighted average common and potentially dilutive common shares used in diluted EPS................ 7,114 5,749 5,616 ========= ========= ========= 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 (IN THOUSANDS) YEARS ENDED DECEMBER 31, ------------------------------- 1999 1998 1997 --------- --------- --------- (IN THOUSANDS) CASH PAYMENTS DURING THE YEAR FOR: Interest........................ $ 20,498 $ 20,058 $ 18,026 Income taxes.................... 5,324 5,177 1,342 Noncash investing and financing activities: Dividends declared not paid..... 427 420 -- Other real estate acquired in foreclosure of customer loans......................... 527 834 2,340 20. STOCK-BASED COMPENSATION PLAN The Company grants stock options under several stock-based incentive compensation plans. The Company applies APB Opinion 25 and related Interpretations in accounting for such plans. In 1995, the FASB issued Statement No. 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 Statement No. 123 is optional and the Company has decided not to elect these provisions of Statement No. 123. However, pro forma disclosures as if the Company adopted the cost recognition provisions of Statement No. 123 in 1995 are required by Statement No. 123 and are presented below. F-27 METROCORP BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 were 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 options which were initially granted to one of the founding directors were canceled upon his resignation as a director during 1998. The remaining options must be exercised by July 24, 2003. The Company's 1998 Stock Incentive Plan (Incentive Plan) authorizes the issuance of 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 ten years. Performance shares are certificates representing the right to acquire shares of common stock upon 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. Grants of options to acquire 46,700 shares of common stock were made pursuant to the Incentive Plan during 1999. The options granted during 1998 vested immediately on the date of the grant and have contractual terms of five years. The options granted during 1999 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. 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, 1999, 1998 or 1997. 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 $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. A summary of the status of the Company's stock options granted to employees as of December 31, 1999, 1998 and 1997 and the changes during the year ended on these dates is presented below:
EMPLOYEE STOCK OPTIONS -------------------------------------------------------------------------- 1999 1998 1997 ---------------------- ---------------------- ---------------------- # 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.. 100,000 $ 11.00 -- $-- 79,860 $ 2.71 Granted.............................. 46,700 8.3125 120,000 11.00 -- -- Exercised............................ -- -- -- -- 79,860 2.71 Canceled............................. -- -- 20,000 11.00 -- -- Outstanding at end of year........... 146,700 10.14 100,000 11.00 -- -- Exercisable at end of year........... 100,000 100,000 11.00 -- -- Weighted-average future value of all options granted.................... $ -- $2.62 $ --
F-28 METROCORP BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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: ASSUMPTION 1999 1998 - - ------------------------------------- -------- -------- Expected term........................ 5 years 3 years Expected volatility.................. 19.30% 24.15% Expected dividend yield.............. -- -- Risk-free interest rate.............. 6.40% 5.45% The following table summarizes information about stock options outstanding at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------------- ------------------------------ NUMBER WGTD. AVG. NUMBER OUTSTANDING WGTD. AVG. REMAINING EXERCISABLE WGTD. AVG. RANGE OF EXERCISE PRICES AT 12/31/99 EXERCISE PRICE CONTRACTUAL LIFE AT 12/31/99 EXERCISE PRICE - - ------------------------- ----------- -------------- ---------------- ----------- -------------- $8.3125 - $11.00 146,700 $10.14 3.97 years 100,000 $11.00
The effects of applying Statement No. 123 in this pro forma disclosure are not indicative of future amounts. Statement No. 123 does not apply to awards prior to 1995, and the Company anticipates making awards in the future under its stock-based compensation plans. F-29 EX-23.1 2 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 333-75487, 333-91589 and 333-94327 of MetroCorp Bancshares, Inc. on Form S-8 of our report dated February 4, 2000, appearing in this Annual Report on Form 10-K of MetroCorp Bancshares, Inc. for the year ended December 31, 1999. /s/Deloitte & Touche LLP Deloitte & Touche LLP Houston, Texas March 29, 2000 EX-23.2 3 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Numbers 333-75487, 333-91589 and 333-94327) of MetroCorp Bancshares, Inc. of our report dated March 19, 1999 relating to financial statements, which appears in this Annual Report on Form 10-K. /s/PricewaterhouseCoopers LLP Houston, Texas March 29, 2000 EX-27.1 4
9 THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM METROCORP BANCSHARES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1999 DEC-31-1999 29,945 0 6,471 0 74,959 35,106 34,385 488,132 7,537 660,589 544,436 32,636 3,638 35,000 0 0 7,122 45,458 660,589 45,322 7,715 631 53,668 18,091 21,026 32,642 5,550 (14) 22,412 10,768 10,768 0 0 7,130 1.00 1.00 15.40 6,552 0 0 0 6,119 4,402 270 7,537 5,410 0 2,127
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