<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-25141
------------------------
METROCORP BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 76-0579161
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) 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 / /
As of May 4, 1999, the number of outstanding shares of Common Stock, par
value $1.00 per share, was 7,104,560.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS.
METROCORP BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Cash and cash equivalents:
Cash and due from banks......................... $ 20,018 $ 21,606
Federal funds sold and other temporary
investments................................... 9,155 14,287
----------- ------------
Total cash and cash equivalents............... 29,173 35,893
Investment securities available-for-sale.......... 87,925 83,623
Investment securities held-to-maturity............ 39,688 39,567
Loans, net........................................ 426,873 411,567
Premises and equipment, net....................... 8,161 8,151
Accrued interest receivable....................... 3,234 3,251
Deferred income taxes............................. 3,843 3,025
Due from customers on acceptances................. 1,130 865
Other real estate and repossessed assets, net..... 224 675
Other assets...................................... 431 691
----------- ------------
Total assets.................................. $600,682 $587,308
----------- ------------
----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing............................. $ 93,953 $ 84,520
Interest-bearing................................ 385,377 394,986
----------- ------------
Total deposits................................ 479,330 479,506
Federal funds purchased........................... 25,000 25,000
Other borrowings.................................. 35,616 25,043
Accrued interest payable.......................... 880 1,030
Income taxes payable.............................. 1,061 20
Acceptances outstanding........................... 1,130 865
Other liabilities................................. 5,645 5,820
----------- ------------
Total liabilities............................. 548,662 537,284
----------- ------------
Commitments and contingencies..................... -- --
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; 7,104,560 and 7,004,560 shares
issued and outstanding, respectively.......... 7,105 7,005
Additional paid-in capital...................... 25,485 24,569
Retained earnings............................... 19,137 17,702
Accumulated other comprehensive income.......... 293 748
----------- ------------
Total shareholders' equity.................... 52,020 50,024
----------- ------------
Total liabilities and shareholders' equity.... $600,682 $587,308
----------- ------------
----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
METROCORP BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Interest income:
Loans........................................... $ 10,299 $ 9,313
Investment securities:
Taxable....................................... 1,680 1,531
Tax-exempt.................................... 248 240
Federal funds sold and other temporary
investments................................... 170 395
------------ ------------
Total interest income......................... 12,397 11,479
------------ ------------
Interest expense:
Time deposits................................... 3,295 3,623
Demand and savings deposits..................... 927 1,123
Other borrowings................................ 628 252
------------ ------------
Total interest expense........................ 4,850 4,998
------------ ------------
Net interest income............................... 7,547 6,481
Provision for loan losses......................... 1,010 900
------------ ------------
Net interest income after provision for loan
losses.......................................... 6,537 5,581
------------ ------------
Noninterest income:
Service charges on deposit accounts............. 1,018 614
Other loan-related fees......................... 372 414
Letters of credit commissions and fees.......... 102 89
Gain on sale of investment securities, net...... 24 --
Other noninterest income........................ 73 71
------------ ------------
Total noninterest income...................... 1,589 1,189
------------ ------------
Noninterest expense:
Employee compensation and benefits.............. 2,703 2,388
Occupancy....................................... 1,204 1,102
Other real estate, net.......................... 44 56
Data processing................................. 207 137
Professional fees............................... 178 82
Advertising..................................... 130 91
Other noninterest expense....................... 904 999
------------ ------------
Total noninterest expense..................... 5,369 4,855
------------ ------------
Income before provision for income taxes.......... 2,757 1,915
Provision for income taxes........................ 896 567
------------ ------------
Net income........................................ $ 1,861 $ 1,348
------------ ------------
------------ ------------
Earnings per common share:
Basic........................................... $ 0.26 $ 0.24
Diluted......................................... $ 0.26 $ 0.24
Weighted average shares outstanding:
Basic........................................... 7,095 5,564
Diluted......................................... 7,095 5,564
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
METROCORP BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net income........................................ $ 1,861 $ 1,348
------ ------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on investment
securities, net:
Unrealized holding gains (losses) arising during
the period.................................... (434) (108)
Less: reclassification adjustment for gains
included in net income.......................... (16) --
------ ------
Other comprehensive income (loss)............... (455) (108)
------ ------
Total comprehensive income...................... $ 1,406 $ 1,240
------ ------
------ ------
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
METROCORP BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TREASURY
--------------- PAID-IN RETAINED COMPREHENSIVE STOCK,
SHARES AT PAR CAPITAL EARNINGS INCOME (LOSS) AT COST TOTAL
------ ------ ---------- --------- ------------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998......... 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 income
(loss)........................... -- -- -- -- (108) -- (108)
Net income......................... -- -- -- 1,348 -- -- --
------ ------ ---------- --------- ----- -------- -------
Balance at March 31, 1998.......... 5,655 $5,655 $12,848 $ 13,351 $700 $ -- $32,554
------ ------ ---------- --------- ----- -------- -------
------ ------ ---------- --------- ----- -------- -------
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TREASURY
--------------- PAID-IN RETAINED COMPREHENSIVE STOCK,
SHARES AT PAR CAPITAL EARNINGS INCOME (LOSS) AT COST TOTAL
------ ------ ---------- --------- ------------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999......... 7,005 $7,005 $24,569 $ 17,702 $748 $ -- $50,024
Other comprehensive income
(loss)........................... -- -- -- -- (455) -- (455)
Issuance of common stock........... 100 100 916 -- -- -- 1,016
Net income......................... -- -- -- 1,861 -- -- 1,861
Dividends.......................... -- -- -- (426) -- -- (426)
------ ------ ---------- --------- ----- -------- -------
Balance at March 31, 1999.......... 7,105 $7,105 $25,485 $ 19,317 $293 $ -- $52,020
------ ------ ---------- --------- ----- -------- -------
------ ------ ---------- --------- ----- -------- -------
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
METROCORP BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income...................................... $ 1,861 $ 1,348
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation.................................. 513 481
Provision for loan losses..................... 1,010 900
Gain on sales of securities, net.............. (24) --
Loss on sale of other real estate............. 22 --
Deferred income taxes......................... (579) (1)
Changes in:
Accrued interest receivable................. 17 171
Other assets................................ 255 323
Deferred loan fees.......................... (150) 65
Other liabilities........................... 489 (111)
Income taxes payable........................ (175) 336
Other....................................... 1,041 (490)
------------ ------------
Net cash provided by operating
activities.............................. 4,279 3,022
------------ ------------
Cash flows from investing activities:
Purchases of securities available-for-sale.... (10,042) (5,877)
Proceeds from maturities of securities
available-for-sale.......................... 5,062 483
Purchases of securities held-to-maturity...... (1,857) --
Proceeds from maturities of securities
held-to-maturity............................ 1,745 2,787
Net change in loans........................... (16,804) (6,385)
Proceeds from sales of other real estate...... 434 223
Purchases of premises and equipment........... (524) (342)
------------ ------------
Net cash used by investing activities..... (21,986) (9,111)
------------ ------------
Cash flows from financing activities:
Net change in:
Deposits...................................... (176) 34,424
Other borrowings.............................. 10,573 (65)
Federal funds sold............................ -- (5,000)
Net proceeds from issuance of common stock...... 1,016 --
Treasury stock sold............................. -- 808
Dividends paid.................................. (426) --
------------ ------------
Net cash provided by financing
activities.............................. 10,987 30,167
------------ ------------
Net increase (decrease) in cash and cash
equivalents..................................... (6,720) 24,078
Cash and cash equivalents at beginning of
period.......................................... 35,893 31,218
------------ ------------
Cash and cash equivalents at end of period........ $ 29,173 $ 55,296
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements include the
accounts of MetroCorp Bancshares, Inc. (the "Company") and its wholly-owned
subsidiary MetroBank, National Association (the "Bank"). All material
intercompany accounts and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements were
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q. In the opinion of
management, the unaudited condensed consolidated financial statements reflect
all adjustments, consisting only of normal and recurring adjustments, necessary
to present fairly the Company's consolidated financial position at March 31,
1999, the Company's consolidated results of operations for the three months
ended March 31, 1999 and 1998, consolidated cash flows for the three months
ended March 31, 1999 and 1998 and consolidated changes in shareholders' equity
for the three months ended March 31, 1999 and 1998. Interim period results are
not necessarily indicative of results of operations or cash flows for a
full-year period. The 1998 year-end condensed consolidated balance sheet and
statement of changes in shareholders' equity data were derived from audited
financial statements, but do not include all disclosures required by generally
accepted accounting principles.
These financial statements and the notes thereto should be read in
conjunction with the Company's annual report on Form 10-K for the year ended
December 31, 1998.
2. EARNINGS PER COMMON SHARE
Basic earnings per share ("EPS") is computed by dividing net income
available to common shareholders by the weighted-average number of common shares
outstanding during the period. Diluted EPS is computed by dividing net income
available to common shareholders by the weighted-average number of common shares
and potential dilutive common shares outstanding during the period. Potential
dilutive common shares are computed using the treasury stock method.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------------------------
1999 1998
---------------- ----------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
Net income available to common shareholders....... $1,861 $1,348
------ ------
------ ------
Weighted-average common shares outstanding........ 7,095 5,564
Potentially dilutive common shares from options... -- --
------ ------
Weighted-average common shares and potentially
diluted common shares........................... 7,095 5,564
------ ------
------ ------
Basic EPS......................................... $ 0.26 $ 0.24
Diluted EPS....................................... $ 0.26 $ 0.24
</TABLE>
3. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." ("SFAS No. 133"). SFAS No. 133 becomes
effective for reporting periods beginning after June 15, 1999, and will not be
applied retroactively. SFAS No. 133 establishes accounting and reporting
standards for derivatives
7
<PAGE>
METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
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 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 SFAS No. 133 on future corporate operations.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Certain of the matters discussed in this Form 10-Q, including matters
discussed under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations," may constitute forward-looking statements
for purposes of the Private Securities Litigation Reform Act of 1995, as
amended, and as such may involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
MetroCorp Bancshares, Inc. (the "Company") to be materially different from
future results, performance or achievements expressed or implied by such
forward-looking statements. The words "expect," "anticipate," "intend,"
"contemplate," "plan," "believe," "seek," "estimate," "will," "would," "should,"
"projected," and similar expressions are intended to identify such
forward-looking statements. The Company's actual results may differ materially
from the results anticipated in these, forward-looking statements due to a
variety of factors, including, without limitation: the effects of future
economic conditions; governmental monetary and fiscal policies, as well as
legislative and regulatory changes; the risks of changes in interest rates on
the level and composition of deposits, loan demand, and the values of loan
collateral, securities and interest rate protection agreements, as well as
interest rate risks; the effects of competition from other commercial banks,
savings banks, savings and loan associations, consumer finance companies, credit
unions, securities brokerage and investment banking firms, insurance companies,
money market and other mutual funds and other financial institutions operating
in the Company's market area and elsewhere, including institutions operating
locally, regionally, nationally and internationally, together with such
competitors offering banking products and services by mail, telephone, computer
and the Internet; the failure of assumptions underlying the establishment of
reserves for loan losses and estimations of values of collateral and various
financial assets and liabilities; that technological changes, including "Year
2000" data systems compliance issues, are more difficult or expensive than
anticipated; and other uncertainties set forth in the Company's other public
reports and filings and public statements. All written or oral forward-looking
statements attributable to the Company are expressly qualified in their entirety
by these cautionary statements.
GENERAL. Net income for the quarters ended March 31, 1999 and 1998 was $1.9
million and $1.3 million, respectively. The increase in net income was primarily
due to higher net interest income resulting from a greater volume of loans and
investment securities. These increases were partially offset by higher
provisions for loan losses. Basic and diluted earnings per share for the three
months ended March 31, 1999 were $0.26, compared to $0.24 for the same period in
1998.
At March 31, 1999, total assets and net loans were $600.7 million and $426.9
million, respectively compared to $587.3 million and $411.6 million,
respectively at December 31, 1998. Total liabilities and total shareholders'
equity at March 31, 1999, were $548.7 million and $52.0 million, respectively
compared with $537.3 million and $50.0 million, respectively at December 31,
1998.
NET INTEREST INCOME. Net interest income for the quarter ended March 31,
1999 increased by $1.0 million or 15.4% to $7.5 million compared with $6.5
million for the same period in 1998. The increase was principally due to a
$986,000 increase in interest income on loans. Interest expense decreased by
$148,000 or 3.0% due to lower interest rates paid on deposits and improved
funding efficiency. The increase in loan and securities portfolios, coupled with
reduced interest expense, resulted in improved net interest margins and net
interest spreads which increased from 5.31% to 5.43%, and from 4.50% to 4.51%,
as of March 31, 1999 and 1998, respectively.
Interest income for the quarter ended March 31, 1999 increased to $12.4
million from $11.5 million for the same period in 1998. The increase was driven
by growth in the average loan portfolio of $72.9 million or 20.9% partially
offset by a decrease in the yield on average loans, which declined to 9.76% for
the three months ended March 31, 1999, from 10.67% in 1998. The average
securities portfolio increased by $8.7 million or 7.7%, while its yield rose six
basis points from 6.28% in 1998 to 6.34% as of March 31, 1999 as a result of
change in the mix of the investment portfolio from agency securities into
mortgage-backed securities.
9
<PAGE>
Interest expense decreased $148,000 to $4.9 million at March 31, 1999
compared with $5.0 million at March 31, 1998. The decrease was the result of
lower interest paid on time deposits and improved funding efficiency resulting
from a $15.5 million or 21.0% increase in average noninterest-bearing deposits.
The Company views time deposits as a stable means of supporting loan growth. The
Company believes that based on its historical experience its large time deposits
have core-type characteristics. The Company anticipates that this source of
funding will continue to sustain a portion of the Company's assets growth in the
future.
The following table presents the total dollar amount of interest income from
average interest-earning assets and the resultant 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 having a zero yield.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------------------
1999 1998
----------------------------------- -----------------------------------
AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ AVERAGE OUTSTANDING EARNED/ AVERAGE
BALANCE PAID YIELD/ RATE BALANCE PAID YIELD/ RATE
----------- --------- ----------- ----------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Total loans................................. $ 422,111 $ 10,299 9.76% $ 349,258 $ 9,313 10.67%
Taxable securities.......................... 103,020 1,680 6.52 95,255 1,531 6.43
Tax-exempt securities....................... 18,582 248 5.34 17,603 240 5.45
Federal funds sold and other temporary
investments................................. 12,493 170 5.44 26,031 395 6.07
----------- --------- ----------- ---------
Total interest-earning assets................. 556,206 12,397 8.92% 488,147 11,479 9.41%
--------- ---------
Less allowance for loan losses................ (6,218) (3,894)
----------- -----------
Total interest-earning assets, net of
allowance for loan losses................... 549,988 484,253
Nonearning assets............................. 38,902 33,972
----------- -----------
Total assets.............................. $ 588,890 $ 518,225
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits............ $ 32,761 $ 204 2.49% $ 28,753 $ 184 2.56%
Savings and money market accounts........... 97,257 723 2.97 84,646 939 4.44
Time deposits............................... 258,917 3,295 5.09 276,306 3,623 5.24
Federal funds purchased and securities sold
under repurchase agreements............... 25,000 306 4.90 1,111 16 5.76
Other borrowings............................ 26,345 322 4.89 16,468 236 5.73
----------- --------- ----------- ---------
Total interest-bearing liabilities.......... 440,280 4,850 4.41% 407,284 4,998 4.91%
--------- ---------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits......... 89,183 73,710
Other liabilities........................... 7,520 6,143
Total liabilities......................... 536,983 487,137
----------- -----------
Shareholders' equity.......................... 51,907 31,088
----------- -----------
Total liabilities and shareholders' equity.... $ 588,890 $ 518,225
----------- -----------
----------- -----------
Net interest income........................... $ 7,547 $ 6,481
--------- ---------
--------- ---------
Net interest spread........................... 4.51% 4.50%
Net interest margin........................... 5.43% 5.31%
</TABLE>
10
<PAGE>
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 VS. 1998
-------------------------------
INCREASE (DECREASE)
DUE TO
--------------------
VOLUME RATE TOTAL
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Total loans............................................... $ 4,813 $ (3,827) $ 986
Securities................................................ 183 (26) 157
Federal funds sold and other temporary investments........ (147) (78) (225)
--------- --------- ---------
Total increase (decrease) in interest income............ 4,849 (3,931) 918
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits.......................... 43 (23) 20
Savings and money market accounts......................... 1,208 (1,424) (216)
Time deposits............................................. 72 (400) (328)
Federal funds purchased................................... 506 (216) 290
Other borrowings.......................................... 308 (222) 86
--------- --------- ---------
Total increase (decrease) in interest expense........... 2,137 (2,285) (148)
--------- --------- ---------
Increase (decrease) in net interest income.................. $ 2,712 $ (1,646) $ 1,066
--------- --------- ---------
--------- --------- ---------
</TABLE>
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. The March 31, 1999 provision for loan losses increased by
$110,000, or 0.02%, to $1.0 million.
NONINTEREST INCOME. Noninterest income for the quarters ended March 31,
1999 and 1998, was $1.6 million and $1.2 million, respectively. The majority of
the growth in noninterest income resulted from increases in service charges on
deposit accounts. The increases in service charges were realized through an
improvement in monitoring the accounts subject to service charges. The following
table presents the major categories of noninterest income:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Service charges on deposit accounts................................... $ 1,018 $ 614
Other loan-related fees............................................... 372 414
Letters of credit commissions and fees................................ 102 89
Gain on sale of securities, net....................................... 24 --
Other noninterest income.............................................. 73 71
--------- ---------
Total noninterest income.......................................... $ 1,589 $ 1,189
--------- ---------
--------- ---------
</TABLE>
NONINTEREST EXPENSE. For the quarters ended March 31, 1999 and 1998,
noninterest expense totaled $5.4 million and $4.9 million, respectively. The
$514,000 or 10.42% increase was primarily due to higher employee benefits and
compensation, and occupancy expense related to the new branches opened during
1998. The Company's efficiency ratios were 58.9% and 63.3% as of March 31, 1999
and 1998, respectively.
11
<PAGE>
The improvement in the efficiency ratio in 1999 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 in noninterest expense:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Employee compensation and benefits...................................... $ 2,703 $ 2,388
Non-staff expenses:
Occupancy............................................................. 1,204 1,102
Other real estate, net................................................ 44 56
Data processing....................................................... 207 137
Professional fees..................................................... 178 82
Advertising........................................................... 130 91
Consultants/contract labor............................................ 205 138
Director compensation................................................. 66 89
Printing and supplies................................................. 143 114
Telecommunications.................................................... 124 95
Other noninterest expense............................................. 365 563
--------- ---------
Total non-staff expenses............................................ 2,666 2,467
--------- ---------
Total noninterest expense........................................... $ 5,369 $ 4,855
--------- ---------
--------- ---------
</TABLE>
Employee compensation and benefits expense for the quarters ended March 31,
1999 and 1998 was $2.7 million and $2.4 million, respectively, reflecting an
increase of $315,000 or 13.2% during the periods in consideration. The increase
in the quarter ended March 31, 1999 resulted primarily from the costs associated
with establishment of the Milam (Houston) and Harry Hines (Dallas) branches,
which opened in January 1998 and June 1998, respectively. Total full-time
equivalent employees at March 31, 1999 and 1998 were 286 and 226, respectively.
Non-staff expenses for the quarter ended March 31, 1999 increased by
$199,000 or 8.1% to $2.7 million when compared to the same period in 1998. The
increase in 1999 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.
INCOME TAXES. The provision for income taxes as a percentage of net income
before taxes increased from 29.6% for the quarter ended March 31, 1998 to 32.5%
for the quarter ended March 31, 1999, as a result of higher taxable income and a
reduction in nontaxable income related to a decrease in the tax-exempt municipal
securities portfolio.
FINANCIAL CONDITION
LOAN PORTFOLIO. Total loans increased from $417.7 million at December 31,
1998 to $433.2 million at March 31, 1999. The $15.5 million or 3.7% growth in
total loans reflected the improving local economy, opening of new branches and
the Company's investment in loan production capacity. At March 31, 1999 and
December 31, 1998, the ratio of total loans to total deposits was 90.4% and
87.1%, respectively. For the same periods, total loans represented 72.1% and
71.1% of total assets, respectively.
12
<PAGE>
The following table summarizes the loan portfolio of the Company by type of
loan:
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF DECEMBER 31,
1999 1998
--------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and industrial.......................................... $ 266,036 60.73% $ 256,311 60.73%
Real estate mortgage
Residential...................................................... 12,750 2.91 11,795 2.80
Commercial....................................................... 108,329 24.73 103,677 24.57
Real estate construction
Residential...................................................... 11,112 2.54 10,842 2.57
Commercial....................................................... 19,885 4.54 17,769 4.21
Consumer and other................................................. 11,539 2.63 12,117 2.87
Factored receivables............................................... 8,404 1.92 9,506 2.25
---------- --------- ---------- ---------
Gross loans........................................................ 438,055 100.00% 422,017 100.00%
---------- --------- ---------- ---------
--------- ---------
Less: unearned discounts, interest and deferred fees............... (4,837) (4,331)
---------- ----------
Total loans.................................................... $ 433,218 $ 417,686
---------- ----------
---------- ----------
</TABLE>
NONPERFORMING ASSETS. Nonperforming assets at March 31, 1999 and December
31, 1998 were $6.0 million and $5.3 million, respectively. Included in the
nonperforming assets are the portions guaranteed by the United States Small
Business Administration (the "SBA"), the Overseas Chinese Community Guaranty
Fund ("OCCGF") which is sponsored by the government of Taiwan, and the Export
Import Bank of the United States (the "Ex-Im Bank"), an agency of the U.S.
government, which were $2.8 million and $1.5 million at March 31, 1999 and
December 31, 1998, respectively.
The following table presents information regarding nonperforming assets at
the periods indicated:
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF DECEMBER 31,
1999 1998
--------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Nonaccrual loans........................................ $ 5,673 $ 3,329
Accruing loans 90 days or more past due................. 86 1,291
Other real estate....................................... 215 654
------ ------
Total nonperforming assets.......................... $ 5,964 $ 5,274
------ ------
------ ------
Nonperforming assets to total loans and other real
estate................................................ 1.38% 1.26%
Nonperforming assets to total assets.................... 0.99% 0.90%
</TABLE>
ALLOWANCE FOR LOAN LOSSES. For the quarter ended March 31, 1999, net loan
charge-offs were $784,000 or 0.19% of average loans outstanding, compared with
$827,000 or 0.22% of average loans outstanding for the year ended December 31,
1998. During the three months ended March 31, 1999, the provision for loan
losses increased by $110,000 to $1.0 million when compared with the $900,000
accrued for the first quarter in 1998. At March 31, 1999 and December 31, 1998,
the allowance for loan losses aggregated $6.3 million and $6.1 million, or 1.46%
and 1.46% of total loans, respectively.
13
<PAGE>
The following table presents an analysis of the allowance for loan losses
and other related data:
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF DECEMBER 31,
--------------- ------------------
1999 1998
--------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Average loans outstanding............................... $ 422,111 $ 368,394
--------------- --------
--------------- --------
Total loans outstanding at end of period................ $ 433,218 $ 417,686
--------------- --------
--------------- --------
Allowance for loan losses at beginning of period........ $ 6,119 $ 3,569
Provision for loan losses............................... 1,010 3,377
Charge-offs:
Commercial and industrial............................. (779) (237)
Real estate--mortgage................................. -- (114)
Real estate--construction............................. -- --
Consumer and other.................................... (42) (619)
--------------- --------
Total charge-offs................................... (821) (970)
--------------- --------
Recoveries:
Commercial and industrial............................. 28 77
Real estate--mortgage................................. -- 17
Real estate--construction............................. -- 16
Consumer and other.................................... 9 33
--------------- --------
Total recoveries.................................... 37 143
--------------- --------
Net loan charge-offs.................................... (784) (827)
--------------- --------
Allowance for loan losses at end of period.............. $ 6,345 $ 6,119
--------------- --------
--------------- --------
Ratio of allowance to end of period total loans......... 1.46% 1.46%
Ratio of net loan charge-offs to average loans.......... 0.19 0.22
Ratio of allowance to end of period nonperforming
loans................................................. 110.18 132.44
</TABLE>
SECURITIES. At March 31, 1999, the securities portfolio totaled $127.6
million, reflecting an increase of $4.4 million or 3.6% from $123.2 million for
the year ended December 31, 1998. The growth was due primarily to an increase in
fixed rate mortgage-backed securities which were funded by $10 million in
borrowings from the Federal Home Loan Bank Dallas (the "FHLB").
DEPOSITS. Total deposits during the first quarter 1999 decreased by
$176,000 or 0.04% to $479.3 million, from $479.5 million at December 31, 1998.
The noninterest-bearing deposits on March 31, 1999 increased by $9.5 million or
11.2% to $94.0 million from $84.5 million at December 31, 1998. The Company's
ratios of noninterest-bearing demand deposits to total deposits for March 31,
1999 and December 31, 1998 were 19.6% and 17.6%, respectively.
OTHER BORROWINGS. The Company had two ten-year loans totaling $35.0 million
from the FHLB of Dallas to further leverage its balance sheet and diversify its
funding sources, which increased $10.0 million from $25.0 million at December
31, 1998. The loans bear interest at the average rate of 4.9% 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 and $7.0 million at March 31,
1999 and December 31, 1998, respectively.
14
<PAGE>
CAPITAL RESOURCES. Shareholders' equity increased from $50.0 million at
December 31, 1998 to $52.0 million at March 31, 1999, an increase of $2.0
million or 4.0%. This increase was primarily due to net income of $1.9 million
for the quarter ended March 31, 1999.
The following table provides a comparison of the Company's and the Bank's
leverage and risk-weighted capital ratios as of March 31, 1999 to the minimum
and well-capitalized regulatory standards.
<TABLE>
<CAPTION>
ACTUAL RATIO
MINIMUM WELL AT
REQUIRED CAPITALIZED MARCH 31, 1999
------- ----------- --------------
<S> <C> <C> <C>
THE COMPANY
Leverage ratio.................................. 3.00%(1) N/A 8.78%
Tier 1 risk-based capital ratio................. 4.00 N/A 11.72
Risk-based capital ratio........................ 8.00 N/A 12.97
THE BANK
Leverage ratio.................................. 3.00%(2) 5.00% 7.11%
Tier 1 risk-based capital ratio................. 4.00 8.00 9.45
Risk-based capital ratio........................ 8.00 10.00 10.70
</TABLE>
- ------------------------
(1) The Federal Reserve Board may require the Company to maintain a leverage
ratio of up to 200 basis points above the required minimum.
(2) The OCC may require the Bank to maintain a leverage ratio of up to 200 basis
points above the required minimum.
YEAR 2000 COMPLIANCE. The Year 2000 risk involves computer programs and
computer software that may not able to perform without interruption into the
Year 2000. If computer systems do not correctly recognize the date change from
December 31, 1999 to January 1, 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.
The Company formally initiated its Year 2000 project and plan in November
1997 to ensure that its operational and financial systems will not be adversely
affected by Year 2000 problems. The Company formed a Year 2000 project team and
the Board of Directors and management are supporting all compliance efforts and
allocating 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 be affected by the
Year 2000 date change has been developed, verified and categorized as to its
importance to the Company and an assessment of all major IT and critical non-IT
systems has been completed. This assessment involved inputting into IT systems
test data simulating 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 has contacted all of its third
party vendors and software providers and has required them to demonstrate and
represent that the products provided are Year 2000 compliant. Furthermore, the
Company developed fully implemented a program of testing compliance with year
2000 requirements. During the first quarter 1999, the Company brought in-house
its data processing services. The data processing software purchased by the
Company is the same software that had been used by the Company in its vendor
provided system since 1995. The Company's previous service bureau, which
performed substantially all of the Company's data processing functions until
March 15, 1999, has warranted in writing that its software is Year 2000
compliant and pursuant to applicable regulatory guidelines. The Company
15
<PAGE>
completed Year 2000 compliance testing and certification on its in-house system
during the first quarter of 1999.
The Company has completed the following phases of its Year 2000 plan: (i)
recognizing Year 2000 issues, (ii) assessing the impact of Year 2000 issues on
the Company's critical systems and (iii) upgrading systems as necessary to
resolve those Year 2000 issues which have been identified.
COSTS OF COMPLIANCE. The Company budgeted $24,000 in 1999 for Year 2000
related expenses. As of March 31, 1999, the Company had not incurred any
significant costs in relation to Year 2000. The largest potential risk to the
Company concerning Year 2000 is the malfunction of its data processing system.
In the event its data processing system does not function properly, the Company
is prepared to perform functions manually. The Company believes it is in
compliance with regulatory guidelines regarding Year 2000 compliance.
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 are 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, which was approximately 10.0% of the Company's total dollar deposit
base, and all of its borrowers of $250,000 or more, which was approximately
69.0% of the Company's total dollar loan base. This survey was completed in the
third quarter of 1998. As of the date of this Form 10-Q, substantially all of
the borrowers with aggregate credit facilities greater than $250,000 and
approximately 57.0% of depositors have responded to the survey and all of those
customers are aware of Year 2000 issues, are in the process of updating their
systems and have informed the Company that they believe they will be ready for
the Year 2000 date change by the end of 1999. To the extent a problem has been
identified, the Company intends to monitor 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. The Company relies on the Federal Reserve Bank of Dallas for electronic
fund transfers who has assured the Company that its systems are Year 2000
compliant.
CONTINGENCY PLAN. The Company has finalized its contingency planning with
respect to the Year 2000 date change and believes that if its own systems should
fail, the Company could convert to a manual entry system for a period of up to
two weeks 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 has 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 has
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 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
16
<PAGE>
methodology for making provisions to the allowance for credit losses. In
addition, the Company plans to maintain additional cash on hand to meet any
unusual deposit withdrawal activity.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes in the market risk information
previously disclosed in the Company's Form 10-K for the year ended December 31,
1998. See Form 10-K, Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Interest Rate Sensitivity."
17
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The effective date of the Registration Statement for which use of proceeds
information is being disclosed herein was December 16, 1998 and the SEC file
number assigned to the Registration Statement was 333-62667. As of March 31,
1999, for the account of the Company, 1,552,500 shares of Common Stock were
registered with an aggregate offering price of $17.1 million, and 1,450,000
shares of Common Stock were sold at an aggregate price of $16.0 million. In
connection with the Offering, the Company incurred expenses of $1.1 million for
underwriting discounts and other expenses of $739,000 resulting in total
expenses of $1.8 million. No offering expenses were paid to an affiliate of the
Company.
The net proceeds of the Offering to the Company were $14.1 million, of which
the Company used $4.0 million to make a capital contribution to the Bank and
$10.1 million for working capital.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6A. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------- --------------------------------------------------------------------------------------------------------
<S> <C>
11 Computation of Earnings Per Common Share, Included as Note (2) to Interim Consolidated Financial
Statements on Page 3 of this Form 10-Q.
27 Financial Data Schedule. The required Financial Data Schedule has been included as Exhibit 27 of the
Form 10-Q filed electronically with the Securities and Exchange Commission.
</TABLE>
ITEM 6B. REPORTS ON FORM 8-K
On March 15, 1999, the Company filed a Form 8-K to report the dismissal of
PricewaterhouseCoopers LLP and the engagement of Deloitte & Touche LLP as
independent auditors for the fiscal year ended December 31, 1999.
18
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
<TABLE>
<S> <C> <C>
METROCORP BANCSHARES, INC.
By: /s/ DON J. WANG
-----------------------------------------
Date: May 11, 1999 Don J. Wang
Chairman of the Board and Chief Executive
Officer
By: /s/ ATTILIO F. GALLI
-----------------------------------------
Date: May 11, 1999 Attilio F. Galli
Chief Financial Officer
</TABLE>
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 20,018
<INT-BEARING-DEPOSITS> 672
<FED-FUNDS-SOLD> 9,155
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 87,925
<INVESTMENTS-CARRYING> 39,688
<INVESTMENTS-MARKET> 0
<LOANS> 433,218
<ALLOWANCE> 6,345
<TOTAL-ASSETS> 600,682
<DEPOSITS> 479,330
<SHORT-TERM> 25,000
<LIABILITIES-OTHER> 9,332<F1>
<LONG-TERM> 35,000<F2>
0
0
<COMMON> 7,105
<OTHER-SE> 44,915
<TOTAL-LIABILITIES-AND-EQUITY> 600,682
<INTEREST-LOAN> 10,299
<INTEREST-INVEST> 1,928
<INTEREST-OTHER> 170
<INTEREST-TOTAL> 12,397
<INTEREST-DEPOSIT> 4,222
<INTEREST-EXPENSE> 4,850
<INTEREST-INCOME-NET> 7,547
<LOAN-LOSSES> 1,010
<SECURITIES-GAINS> 24
<EXPENSE-OTHER> 5,369
<INCOME-PRETAX> 2,757
<INCOME-PRE-EXTRAORDINARY> 2,757
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,861
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.26
<YIELD-ACTUAL> 8.92
<LOANS-NON> 5,673
<LOANS-PAST> 86
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,119
<CHARGE-OFFS> (821)
<RECOVERIES> 37
<ALLOWANCE-CLOSE> 6,345
<ALLOWANCE-DOMESTIC> 6,345
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,761
<FN>
<F1>Includes accrued interest payable, income taxes payable, acceptable
outstanding and other liabilities.
<F2>Includes two 10-year loans from the Federal Home Loan Bank - Dallas.
</FN>
</TABLE>
