UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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COMMISSION FILE NUMBER: 0-25141
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METROCORP BANCSHARES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0579161
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
9600 BELLAIRE BOULEVARD, SUITE 252
HOUSTON, TEXAS 77036
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)
(713) 776-3876
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $1.00 per share
(TITLE OF CLASS)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 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).
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PART I
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Statements and financial discussion and analysis contained in this Annual
Report on Form 10-K and documents incorporated herein by reference that are not
historical facts are forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements describe the Company's future plans, strategies and
expectations, are based on assumptions and involve a number of risks and
uncertainties, many of which are beyond the Company's control. The important
factors that could cause actual results to differ materially from the results,
performance or achievements expressed or implied by the forward-looking
statements include, without limitation:
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.
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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
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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.
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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.
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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
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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%.
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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,
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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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
DEPOSITS
OWNED/ AT
LOCATION LEASED SQ. FT. DECEMBER 31, 1999
- - ------------------------------------- -------- ------- ----------------------
<S> <C> <C> <C>
(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
</TABLE>
- - ------------
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(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
</TABLE>
- - -------------------------------------------
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
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
------------ --------- -------- ------------ --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
(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%
</TABLE>
18
<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>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1999 VS. 1998 1998 VS. 1997
---------------------------- ------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO DUE TO
----------------- --------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ------- ------- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
(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
====== ======= ======= ====== ==== ======
</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 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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------------------------------------------
1999 1998 1997 1996
------------------- ------------------- ------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(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
========
</TABLE>
- - ------------
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
-------------------------------------------------------
AFTER
ONE YEAR ONE THROUGH AFTER
OR LESS FIVE YEARS FIVE YEARS TOTAL
-------- ----------- ---------- --------
<S> <C> <C> <C> <C>
(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
======== =========== ========== ========
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(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%
</TABLE>
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
<PAGE>
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
<PAGE>
The following table presents an analysis of the allowance for loan losses
and other related data:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995(1)
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
(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
</TABLE>
- - ------------
(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
<PAGE>
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.
<TABLE>
<CAPTION>
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
------- --------- ------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(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%
======= =========
</TABLE>
- - ------------
(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
<PAGE>
The following table presents the amortized cost of securities classified as
available-for-sale and their approximate fair values as of the dates shown:
<TABLE>
<CAPTION>
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
--------- ---------- ---------- ------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(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
=======
</TABLE>
The following table presents the amortized cost of securities classified as
held-to-maturity and their approximate fair values as of the dates shown:
<TABLE>
<CAPTION>
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
--------- ---------- ---------- ------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(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
=======
</TABLE>
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.
<TABLE>
<CAPTION>
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
------ ----- ------ ----- ------- ----- ------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(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 %
=====
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1999 1998 1997
-------------------- ------------------- -------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- ----- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C>
(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%
======== ===== ======== ==== ======== ====
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
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
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(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%
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
EVE AS A % OF
PRESENT VALUE OF
ASSETS
$ CHANGE IN EVE ----------------------
CHANGE IN RATES (DOLLARS IN THOUSANDS) % CHANGE IN EVE EVE RATIO CHANGE
------------------ ---------------------- --------------- --------- ----------
<S> <C> <C> <C> <C> <C>
-200 bp $ 361 0.61% 8.90% (1) bp
0 bp -- -- 8.91% --
+200 bp (4,441) (7.45)% 8.84% (58) bp
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
MINIMUM REQUIRED TO BE WELL CAPITALIZED ACTUAL
FOR CAPITAL UNDER PROMPT CORRECTIVE RATIO AT
ADEQUACY PURPOSES ACTION PROVISIONS DECEMBER 31, 1999
------------------ ------------------------ -----------------
<S> <C> <C> <C>
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
</TABLE>
- - ------------
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
EXHIBITS
Each exhibit marked with an asterisk is filed with this Annual Report on
Form 10-K.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------------------------ ------------------------------------------------------------------------------------------
<C> <S>
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.
</TABLE>
- - ------------
* 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
<PAGE>
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.
<TABLE>
<CAPTION>
SIGNATURE POSITIONS
- - ------------------------------------------------------ ------------------------------------------------------
<C> <S>
/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
</TABLE>
43
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
METROCORP BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TREASURY
------------------ PAID-IN RETAINED COMPREHENSIVE STOCK, AT
SHARES AT PAR CAPITAL EARNINGS INCOME (LOSS) COST TOTAL
------- ------- ----------- --------- -------------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
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
======= ======= =========== ========= ============== ========= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
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
========= ========== ========== =======
</TABLE>
F-13
<PAGE>
METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
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
========= ========== ========== =======
</TABLE>
- - ------------
(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
<PAGE>
METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1999, future contractual maturities of securities are as
follows (in thousands):
<TABLE>
<CAPTION>
INVESTMENTS INVESTMENTS
HELD-TO-MATURITY AVAILABLE-FOR-SALE
---------------------- ----------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- ------- --------- -------
<S> <C> <C> <C> <C>
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
========= ======= ========= =======
</TABLE>
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
<PAGE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
REAL ESTATE COMMERCIAL CONSUMER TOTAL
----------- ---------- -------- ---------
<S> <C> <C> <C> <C>
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
=========== ========== ======== =========
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
AMOUNT % AMOUNT % AMOUNT %
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
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%
======= ========= ======= ========= ======= =========
</TABLE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
TO BE WELL
MINIMUM REQUIRED CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------ ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
(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%
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
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
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
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 $ --
</TABLE>
F-28
<PAGE>
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:
<TABLE>
<CAPTION>
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
- - ------------------------- ----------- -------------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$8.3125 - $11.00 146,700 $10.14 3.97 years 100,000 $11.00
</TABLE>
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
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
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
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM METROCORP BANCSHARES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 29,945
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,471
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 74,959
<INVESTMENTS-CARRYING> 35,106
<INVESTMENTS-MARKET> 34,385
<LOANS> 488,132
<ALLOWANCE> 7,537
<TOTAL-ASSETS> 660,589
<DEPOSITS> 544,436
<SHORT-TERM> 32,636
<LIABILITIES-OTHER> 3,638
<LONG-TERM> 35,000
0
0
<COMMON> 7,122
<OTHER-SE> 45,458
<TOTAL-LIABILITIES-AND-EQUITY> 660,589
<INTEREST-LOAN> 45,322
<INTEREST-INVEST> 7,715
<INTEREST-OTHER> 631
<INTEREST-TOTAL> 53,668
<INTEREST-DEPOSIT> 18,091
<INTEREST-EXPENSE> 21,026
<INTEREST-INCOME-NET> 32,642
<LOAN-LOSSES> 5,550
<SECURITIES-GAINS> (14)
<EXPENSE-OTHER> 22,412
<INCOME-PRETAX> 10,768
<INCOME-PRE-EXTRAORDINARY> 10,768
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,130
<EPS-BASIC> 1.00
<EPS-DILUTED> 1.00
<YIELD-ACTUAL> 15.40
<LOANS-NON> 6,552
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,119
<CHARGE-OFFS> 4,402
<RECOVERIES> 270
<ALLOWANCE-CLOSE> 7,537
<ALLOWANCE-DOMESTIC> 5,410
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,127
</TABLE>
