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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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).
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.
3
These loans are for people of Chinese decent or origin, who are not
mainland Chinese by birth and who reside "overseas." As of December
31, 1999, the Company's OCCGF portfolio totaled $6.1 million.
FACTORING. In 1994, the Company established an accounts receivable
factoring subsidiary, Advantage Finance Corporation ("Advantage"), to
provide financing to small and medium-sized businesses that have
accounts receivable from predominantly Fortune 1,000 companies.
Advantage's 1999 volume was $86.6 million in short-term (usually 30 day)
accounts receivable, up from $80.9 million during 1998, an increase of
7.0%. At December 31, 1999, factored receivables outstanding totaled
$13.7 million, compared with $9.5 million at December 31, 1998. In
addition to enhancing the Company's profitability, many of the customers
obtained through these efforts have established more traditional banking
relationships with the Company.
TRADE FINANCE. Since its inception in 1987, the Company has
originated trade finance loans and letters of credit to facilitate
export and import transactions for small and medium-sized businesses. In
this capacity, the Company has worked with the Export Import Bank of the
United States (the "Ex-Im Bank"), an agency of the U.S. government
which provides guarantees for trade finance loans. In 1998, the Company
was named Small Business Bank of the Year by the Ex-Im Bank, and it was
the largest Ex-Im Bank loan producer in the State of Texas. At December
31, 1999, the Company's aggregate trade finance portfolio commitments
totaled approximately $10.5 million.
The Company offers a variety of loan and deposit products and services to
retail customers through its branch network in Houston and Dallas. Loans to
retail customers include residential mortgage loans, residential construction
loans, automobile loans, lines of credit and other personal loans. Retail
deposit products and services include checking and savings accounts, money
market accounts, time deposits, ATM cards, debit cards and online banking.
The Company's overall business strategy is to (i) continue to service its
small and medium-sized owner-operated businesses and retail customers,
especially in the Asian and Hispanic communities by providing individualized,
responsive, quality service, and (ii) expand its geographic reach either through
selective acquisitions of existing financial institutions or by establishing de
novo branches in multi-ethnic markets with significant small and medium-sized
business activity.
COMPETITION
The banking business is highly competitive, and the profitability of the
Company depends principally on the Company's ability to compete in the market
areas in which its banking operations are located. The Company competes with
other commercial banks, savings banks, savings and loan associations, credit
unions, finance companies, mutual funds, insurance companies, brokerage and
investment banking firms, asset-based non-bank lenders and certain other
non-financial entities, including retail stores which may maintain their own
credit programs and certain governmental organizations which may offer more
favorable financing. The Company has been able to compete effectively with other
financial institutions by emphasizing customer service, technology and
responsive decision-making. Additionally, management believes the Company
remains competitive by establishing long-term customer relationships, building
customer loyalty and providing a broad line of products and services designed to
address the specific needs of its customers.
Under the Gramm-Leach-Bliley Act, effective March 11, 2000, securities
firms and insurance companies that elect to become financial holding companies
may acquire banks and other financial institutions. The Gramm-Leach-Bliley Act
may significantly change the competitive environment in which the Company and
its subsidiaries conduct business. See "-- Supervision and Regulation -- The
Company -- Financial Modernization". The financial services industry is also
likely to become even more competitive as further technological advances enable
more companies to provide financial services. These technological advances may
diminish the importance of depository institutions and other financial
intermediaries in the transfer of funds between parties.
4
EMPLOYEES
As of December 31, 1999, the Company had 283 full-time equivalent
employees, 28 of whom were officers of the Bank classified as Vice President or
above. The Company considers its relations with employees to be satisfactory.
SUPERVISION AND REGULATION
The supervision and regulation of bank holding companies and their
subsidiaries is intended primarily for the protection of depositors, the deposit
insurance funds of the FDIC and the banking system as a whole, and not for the
protection of the bank holding company shareholders or creditors. The banking
agencies have broad enforcement power over bank holding companies and banks
including the power to impose substantial fines and other penalties for
violations of laws and regulations.
The following description summarizes some of the laws to which the Company
and the Bank are subject. References herein to applicable statutes and
regulations are brief summaries thereof, do not purport to be complete, and are
qualified in their entirety by reference to such statutes and regulations.
THE COMPANY
The Company is a bank holding company registered under the Bank Holding
Company Act, as amended, (the "BHCA"), and it is subject to supervision,
regulation and examination by the Board of Governors of the Federal Reserve
System ("Federal Reserve Board"). The BHCA and other federal laws subject bank
holding companies to particular restrictions on the types of activities in which
they may engage, and to a range of supervisory requirements and activities,
including regulatory enforcement actions for violations of laws and regulations.
REGULATORY RESTRICTIONS ON DIVIDENDS; SOURCE OF STRENGTH. It is the policy
of the Federal Reserve Board that bank holding companies should pay cash
dividends on common stock only out of income available over the past year and
only if prospective earnings retention is consistent with the organization's
expected future needs and financial condition. The policy provides that bank
holding companies should not maintain a level of cash dividends that undermines
the bank holding company's ability to serve as a source of strength to its
banking subsidiaries.
Under Federal Reserve Board policy, a bank holding company is expected to
act as a source of financial strength to each of its banking subsidiaries and
commit resources to their support. Such support may be required at times when,
absent this Federal Reserve Board policy, a holding company may not be inclined
to provide it. As discussed below, a bank holding company in certain
circumstances could be required to guarantee the capital plan of an
undercapitalized banking subsidiary.
In the event of a bank holding company's bankruptcy under Chapter 11 of the
U.S. Bankruptcy Code, the trustee will be deemed to have assumed and is required
to cure immediately any deficit under any commitment by the debtor holding
company to any of the federal banking agencies to maintain the capital of an
insured depository institution, and any claim for breach of such obligation will
generally have priority over most other unsecured claims.
FINANCIAL MODERNIZATION. On November 12, 1999, President Clinton signed
into law the Gramm-Leach-Bliley Act that eliminated the barriers to affiliations
among banks, securities firms, insurance companies and other financial service
providers. The Gramm-Leach-Bliley Act, effective March 11, 2000, permits bank
holding companies to become financial holding companies and thereby affiliate
with securities firms and insurance companies and engage in other activities
that are financial in nature. No regulatory approval will be required for a
financial holding company to acquire a company, other than a bank or savings
association, engaged in activities that are financial in nature or incidental to
activities that are financial in nature, as determined by the Federal Reserve
Board.
Under the Gramm-Leach-Bliley Act, a bank holding company may become a
financial holding company if each of its subsidiary banks is well capitalized
under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") prompt corrective action provisions, is well managed, and has at
5
least a satisfactory rating under the Community Reinvestment Act of 1977
("CRA") by filing a declaration that the bank holding company wishes to become
a financial holding company. The Gramm-Leach-Bliley Act defines "financial in
nature" to include securities underwriting, dealing and market making;
sponsoring mutual funds and investment companies; insurance underwriting and
agency; merchant banking activities; and activities that the Federal Reserve
Board has determined to be closely related to banking. Subsidiary banks of a
financial holding company must remain well capitalized and well managed in order
to continue to engage in activities that are financial in nature without
regulatory actions or restrictions, which could include divestiture of the
financial in nature subsidiary or subsidiaries. In addition, a financial holding
company may not acquire a company that is engaged in activities that are
financial in nature unless each of its subsidiary banks has a CRA rating of
satisfactory or better.
While the Federal Reserve Board will serve as the "umbrella" regulator
for financial holding companies and has the power to examine banking
organizations engaged in new activities, regulation and supervision of
activities which are financial in nature or determined to be incidental to such
financial activities will be handled along functional lines. Accordingly,
activities of subsidiaries of a financial holding company will be regulated by
the agency or authorities with the most experience regulating that activity as
it is conducted in a financial holding company.
SAFE AND SOUND BANKING PRACTICES. Bank holding companies are not permitted
to engage in unsafe and unsound banking practices. The Federal Reserve Board's
Regulation Y, for example, generally requires a holding company to give the
Federal Reserve Board prior notice of any redemption or repurchase of its own
equity securities, if the consideration to be paid, together with the
consideration paid for any repurchases or redemptions in the preceding year, is
equal to 10% or more of the company's consolidated net worth. The Federal
Reserve Board may oppose the transaction if it believes that the transaction
would constitute an unsafe or unsound practice or would violate any law or
regulation. Prior approval of the Federal Reserve Board would not be required
for the redemption or purchase of equity securities for a bank holding company
that would be well capitalized both before and after such transaction,
well-managed and not subject to unresolved supervisory issues.
The Federal Reserve Board has broad authority to prohibit activities of
bank holding companies and their nonbanking subsidiaries which represent unsafe
and unsound banking practices or which constitute violations of laws or
regulations, and can assess civil money penalties for certain activities
conducted on a knowing and reckless basis, if those activities caused a
substantial loss to a depository institution. The penalties can be as high as
$1.0 million for each day the activity continues.
ANTI-TYING RESTRICTIONS. Bank holding companies and their affiliates are
prohibited from tying the provision of certain services, such as extensions of
credit, to other services offered by a holding company or its affiliates.
CAPITAL ADEQUACY REQUIREMENTS. The Federal Reserve Board has adopted a
system using risk-based capital guidelines to evaluate the capital adequacy of
bank holding companies. Under the guidelines, specific categories of assets are
assigned different risk weights, based generally on the perceived credit risk of
the asset. These risk weights are multiplied by corresponding asset balances to
determine a "risk-weighted" asset base. The guidelines require a minimum total
risk-based capital ratio of 8.0% (of which at least 4.0% is required to consist
of Tier 1 capital elements). Total capital is the sum of Tier 1 and Tier 2
capital. As of December 31, 1999, the Company's ratio of Tier 1 capital to total
risk-weighted assets was 10.76% and its ratio of total capital to total
risk-weighted assets was 12.01%.
In addition to the risk-based capital guidelines, the Federal Reserve Board
uses a leverage ratio as an additional tool to evaluate the capital adequacy of
bank holding companies. The leverage ratio is a company's Tier 1 capital divided
by its average total consolidated assets. Certain highly rated bank holding
companies may maintain a minimum leverage ratio of 3.0%, but other bank holding
companies may be required to maintain a leverage ratio of at least 4.0%. As of
December 31, 1999, the Company's leverage ratio was 8.48%.
6
The federal banking agencies' risk-based and leverage ratios are minimum
supervisory ratios generally applicable to banking organizations that meet
certain specified criteria. The federal bank regulatory agencies may set capital
requirements for a particular banking organization that are higher than the
minimum ratios when circumstances warrant. Federal Reserve Board guidelines also
provide that banking organizations experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions substantially
above the minimum supervisory levels, without significant reliance on intangible
assets.
IMPOSITION OF LIABILITY FOR UNDERCAPITALIZED SUBSIDIARIES. Bank regulators
are required to take "prompt corrective action" to resolve problems associated
with insured depository institutions whose capital declines below certain
levels. In the event an institution becomes "undercapitalized," it must submit
a capital restoration plan. The capital restoration plan will not be accepted by
the regulators unless each company having control of the undercapitalized
institution guarantees the subsidiary's compliance with the capital restoration
plan up to a certain specified amount. Any such guarantee from a depository
institution's holding company is entitled to a priority of payment in
bankruptcy.
The aggregate liability of the holding company of an undercapitalized bank
is limited to the lesser of 5% of the institution's assets at the time it became
undercapitalized or the amount necessary to cause the institution to be
"adequately capitalized." The bank regulators have greater power in situations
where an institution becomes "significantly" or "critically"
undercapitalized or fails to submit a capital restoration plan. For example, a
bank holding company controlling such an institution can be required to obtain
prior Federal Reserve Board approval of proposed dividends, or might be required
to consent to a consolidation or to divest the troubled institution or other
affiliates.
ACQUISITIONS BY BANK HOLDING COMPANIES. The BHCA requires every bank
holding company to obtain the prior approval of the Federal Reserve Board before
it may acquire all or substantially all of the assets of any bank, or ownership
or control of any voting shares of any bank, if after such acquisition it would
own or control, directly or indirectly, more than 5% of the voting shares of
such bank. In approving bank acquisitions by bank holding companies, the Federal
Reserve Board is required to consider the financial and managerial resources and
future prospects of the bank holding company and the banks concerned, the
convenience and needs of the communities to be served, and various competitive
factors.
CONTROL ACQUISITIONS. The Change in Bank Control Act prohibits a person or
group of persons from acquiring "control" of a bank holding company unless the
Federal Reserve Board has been notified and has not objected to the transaction.
Under a rebuttable presumption established by the Federal Reserve Board, the
acquisition of 10% of more of a class of voting stock of a bank holding company
with a class of securities registered under Section 12 of the Exchange Act, such
as the Company, would, under the circumstances set forth in the presumption,
constitute acquisition of control of the Company.
In addition, any entity is required to obtain the approval of the Federal
Reserve Board under the BHCA before acquiring 25% (5% in the case of an acquirer
that is a bank holding company) or more of the outstanding Common Stock of the
Company, or otherwise obtaining control or a "controlling influence" over the
Company.
THE BANK
The Bank is a nationally chartered banking association, the deposits of
which are insured by the Bank Insurance Fund ("BIF") of the FDIC. The Bank's
primary regulator is the Office of the Comptroller of the Currency (the
"OCC"). By virtue of the insurance of its deposits, however, the Bank is also
subject to supervision and regulation by the FDIC. Such supervision and
regulation subjects the Bank to special restrictions, requirements, potential
enforcement actions, and periodic examination by the OCC. Because the Federal
Reserve Board regulates the bank holding company parent of the Bank, the Federal
Reserve Board also has supervisory authority which directly affects the Bank.
FINANCIAL MODERNIZATION. Under the Gramm-Leach-Bliley Act, a national bank
may establish a financial subsidiary and engage, subject to limitations on
investment, in activities that are financial in nature, other than insurance
underwriting, insurance company portfolio investment, real estate development,
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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
EXAMINATIONS. The OCC periodically examines and evaluates insured banks.
Based upon such an evaluation, the OCC may revalue the assets of the institution
and require that it establish specific reserves to compensate for the difference
between the OCC-determined value and the book value of such assets.
AUDIT REPORTS. Insured institutions with total assets of $500 million or
more must submit annual audit reports prepared by independent auditors to
federal regulators. In some instances, the audit report of the institution's
holding company can be used to satisfy this requirement. Auditors must receive
examination reports, supervisory agreements, and reports of enforcement actions.
In addition, financial statements prepared in accordance with generally accepted
accounting principles, management's certifications concerning responsibility for
the financial statements, internal controls and compliance with legal
requirements designated by the OCC, and an attestation by the auditor regarding
the statements of management relating to the internal controls must be
submitted. For institutions with total assets of more than $3 billion,
independent auditors may be required to review quarterly financial statements.
FDICIA requires that independent audit committees be formed, consisting of
outside directors only. The committees of such institutions must include members
with experience in banking or financial management, must have access to outside
counsel, and must not include representatives of large customers.
CAPITAL ADEQUACY REQUIREMENTS. Similar to the Federal Reserve Board's
requirements for bank holding companies, the OCC has adopted regulations
establishing minimum requirements for the capital adequacy of national banks.
The OCC may establish higher minimum requirements if, for example, a bank has
previously received special attention or has a high susceptibility to interest
rate risk.
The OCC's risk-based capital guidelines generally require national banks to
have a minimum ratio of Tier 1 capital to total risk-weighted assets of 4.0% and
a ratio of total capital to total risk-weighted assets of 8.0%. As of December
31, 1999, the Bank's ratio of Tier 1 capital to total risk-weighted assets was
9.86% and its ratio of total capital to total risk-weighted assets was 11.12%.
The OCC's leverage guidelines require national banks to maintain Tier 1
capital of no less than 4.0% of average total assets, except in the case of
certain highly rated banks for which the requirement is 3.0% of average total
assets unless a higher leverage capital ratio is warranted by the particular
circumstances or risk profile of the depository institution. As of December 31,
1999, the Bank's ratio of Tier 1 capital to average total assets (leverage
ratio) was 7.78%.
CORRECTIVE MEASURES FOR CAPITAL DEFICIENCIES. The federal banking
regulators are required to take "prompt corrective action" with respect to
capital-deficient institutions. Agency regulations define, for each capital
category, the levels at which institutions are "well capitalized,"
"adequately capitalized," "under capitalized," "significantly under
capitalized" and "critically under capitalized." A "well capitalized" bank
has a total risk-based capital ratio of 10.0% or higher; a Tier 1 risk-based
capital ratio of 6.0% or higher; a leverage ratio of 5.0% or higher; and is not
subject to any written agreement, order or directive requiring it to maintain a
specific capital level for any capital measure. An "adequately capitalized"
bank has a total risk-based capital ratio of 8.0% or higher; a Tier 1 risk-based
capital ratio of 4.0% or higher; a leverage ratio of 4.0% or higher (3.0% or
higher if the bank was rated a composite 1 in its most recent examination report
and is not experiencing significant growth); and does not meet the criteria for
a well capitalized bank. A bank is "under capitalized" if it fails to meet any
one of the ratios required to be adequately capitalized.
In addition to requiring undercapitalized institutions to submit a capital
restoration plan, agency regulations authorize broad restrictions on certain
activities of undercapitalized institutions including asset growth,
acquisitions, branch establishment, and expansion into new lines of business.
With certain exceptions, an insured depository institution is prohibited from
making capital distributions, including dividends, and is prohibited from paying
management fees to control persons if the institution would be undercapitalized
after any such distribution or payment.
As an institution's capital decreases, the OCC's enforcement powers become
more severe. A significantly undercapitalized institution is subject to mandated
capital raising activities, restrictions on interest rates paid and transactions
with affiliates, removal of management, and other restrictions. The OCC has only
very limited discretion in dealing with a critically undercapitalized
institution and is virtually required to appoint a receiver or conservator.
9
Banks with risk-based capital and leverage ratios below the required
minimums may also be subject to certain administrative actions, including the
termination of deposit insurance upon notice and hearing, or a temporary
suspension of insurance without a hearing in the event the institution has no
tangible capital.
DEPOSIT INSURANCE ASSESSMENTS. The Bank must pay assessments to the FDIC
for federal deposit insurance protection. The FDIC has adopted a risk-based
assessment system as required by FDICIA. Under this system, FDIC-insured
depository institutions pay insurance premiums at rates based on their risk
classification. Institutions assigned to higher-risk classifications (that is,
institutions that pose a greater risk of loss to their respective deposit
insurance funds) pay assessments at higher rates than institutions that pose a
lower risk. An institution's risk classification is assigned based on its
capital levels and the level of supervisory concern the institution poses to the
regulators. In addition, the FDIC can impose special assessments in certain
instances. The current range of BIF assessments is between 0% and 0.27% of
deposits.
The FDIC established a process for raising or lowering all rates for
insured institutions semi-annually if conditions warrant a change. Under this
new system, the FDIC has the flexibility to adjust the assessment rate schedule
twice a year without seeking prior public comment, but only within a range of
five cents per $100 above or below the assessment schedule adopted. Changes in
the rate schedule outside the five-cent range above or below the current
schedule can be made by the FDIC only after a full rulemaking with opportunity
for public comment.
On September 30, 1996, President Clinton signed into law an act that
contained a comprehensive approach to recapitalizing the Savings Association
Insurance Fund ("SAIF") and to assure the payment of the Financing
Corporation's ("FICO") bond obligations. Under this act, banks insured under
the BIF are required to pay a portion of the interest due on bonds that were
issued by FICO to help shore up the ailing Federal Savings and Loan Insurance
Corporation in 1987. The BIF rate was required to equal one-fifth of the SAIF
rate through year-end 1999, or until the insurance funds were merged, whichever
occurred first. Thereafter, BIF and SAIF payers will be assessed pro rata for
the FICO bond obligations. With regard to the assessment for the FICO
obligation, for the fourth quarter of 1999, the BIF rate was .01184% of deposits
and the SAIF rate was .05920% of deposits, and for the first quarter of 2000,
both the BIF and SAIF rates are .02120% of deposits.
ENFORCEMENT POWERS. The FDIC and the other federal banking agencies have
broad enforcement powers, including the power to terminate deposit insurance,
impose substantial fines and other civil and criminal penalties, and appoint a
conservator or receiver. Failure to comply with applicable laws, regulations and
supervisory agreements could subject the Company or its banking subsidiaries, as
well as officers, directors and other institution-affiliated parties of these
organizations, to administrative sanctions and potentially substantial civil
money penalties. The appropriate federal banking agency may appoint the FDIC as
conservator or receiver for a banking institution (or the FDIC may appoint
itself, under certain circumstances) if any one or more of a number of
circumstances exist, including, without limitation, the fact that the banking
institution is undercapitalized and has no reasonable prospect of becoming
adequately capitalized; fails to become adequately capitalized when required to
do so; fails to submit a timely and acceptable capital restoration plan; or
materially fails to implement an accepted capital restoration plan.
BROKERED DEPOSIT RESTRICTIONS. Adequately capitalized institutions (as
defined for purposes of the prompt corrective action rules described above)
cannot accept, renew or roll over brokered deposits except with a waiver from
the FDIC, and are subject to restrictions on the interest rates that can be paid
on such deposits. Undercapitalized institutions may not accept, renew, or roll
over brokered deposits.
CROSS-GUARANTEE PROVISIONS. The Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA") contains a "cross-guarantee"
provision which generally makes commonly controlled insured depository
institutions liable to the FDIC for any losses incurred in connection with the
failure of a commonly controlled depository institution.
COMMUNITY REINVESTMENT ACT. The CRA and the regulations issued thereunder
are intended to encourage banks to help meet the credit needs of their service
area, including low and moderate-income neighborhoods, consistent with the safe
and sound operations of the banks. These regulations also provide for regulatory
assessment of a bank's record in meeting the needs of its service area when
considering
10
applications to establish branches, merger applications and applications to
acquire the assets and assume the liabilities of another bank. FIRREA requires
federal banking agencies to make public a rating of a bank's performance under
the CRA. In the case of a bank holding company, the CRA performance record of
the banks involved in the transaction are reviewed in connection with the filing
of an application to acquire ownership or control of shares or assets of a bank
or to merge with any other bank holding company. An unsatisfactory record can
substantially delay or block the transaction.
CONSUMER LAWS AND REGULATIONS. In addition to the laws and regulations
discussed herein, the Bank is also subject to certain consumer laws and
regulations that are designed to protect consumers in transactions with banks.
While the list set forth herein is not exhaustive, these laws and regulations
include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds
Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity
Act, and the Fair Housing Act, among others. These laws and regulations mandate
certain disclosure requirements and regulate the manner in which financial
institutions must deal with customers when taking deposits or making loans to
such customers. The Bank must comply with the applicable provisions of these
consumer protection laws and regulations as part of their ongoing customer
relations.
INSTABILITY OF REGULATORY STRUCTURE
Various legislation, such as the Gramm-Leach-Bliley Act which expanded the
powers of banking institutions and bank holding companies, and proposals to
overhaul the bank regulatory system and limit the investments that a depository
institution may make with insured funds, is from time to time introduced in
Congress. Such legislation may change banking statutes and the operating
environment of the Company and its banking subsidiaries in substantial and
unpredictable ways. The Company cannot determine the ultimate effect that the
Gramm-Leach-Bliley Act will have or the effect that potential legislation, if
enacted, or implementing regulations with respect thereto, would have upon the
financial condition or results of operations of the Company or its subsidiaries.
EXPANDING ENFORCEMENT AUTHORITY
One of the major additional burdens imposed on the banking industry by
FDICIA is the increased ability of banking regulators to monitor the activities
of banks and their holding companies. In addition, the Federal Reserve Board and
OCC possess extensive authority to police unsafe or unsound practices and
violations of applicable laws and regulations by depository institutions and
their holding companies. For example, the FDIC may terminate the deposit
insurance of any institution which it determines has engaged in an unsafe or
unsound practice. The agencies can also assess civil money penalties, issue
cease and desist or removal orders, seek injunctions, and publicly disclose such
actions. FDICIA, FIRREA and other laws have expanded the agencies' authority in
recent years, and the agencies have not yet fully tested the limits of their
powers.
EFFECT ON ECONOMIC ENVIRONMENT
The policies of regulatory authorities, including the monetary policy of
the Federal Reserve Board, have a significant effect on the operating results of
bank holding companies and their subsidiaries. Among the means available to the
Federal Reserve Board to affect the money supply are open market operations in
U.S. Government securities, changes in the discount rate on member bank
borrowings, and changes in reserve requirements against member bank deposits.
These means are used in varying combinations to influence overall growth and
distribution of bank loans, investments and deposits, and their use may affect
interest rates charged on loans or paid for deposits.
Federal Reserve Board monetary policies have materially affected the
operating results of commercial banks in the past and are expected to continue
to do so in the future. The nature of future monetary policies and the effect of
such policies on the business and earnings of the Company and its subsidiaries
cannot be predicted.
11
ITEM 2. PROPERTIES
FACILITIES
The Company conducts business at 16 locations, 12 of which are leased.
Included are 15 full-service banking locations and the Company's corporate
offices. The following table sets forth specific information on each such
location. The Company's headquarters are located at 9600 Bellaire Boulevard,
Suite 252, Houston, Texas. The lease for the Company's corporate headquarters
will expire in March of 2003. The Company is evaluating the possibility of
relocating its corporate offices to another facility.
DEPOSITS
OWNED/ AT
LOCATION LEASED SQ. FT. DECEMBER 31, 1999
- - ------------------------------------- -------- ------- ----------------------
(DOLLARS IN THOUSANDS)
HOUSTON AREA:
Bellaire Blvd........................ Leased 7,002 $256,809
9600 Bellaire Boulevard, Suite 100
East................................. Owned 16,400 79,598
6730 Capitol at Wayside
Galleria............................. Leased 6,384 16,764
5065 Westheimer, Suite 1111
Chinatown............................ Leased 2,500 22,420
1005 St. Emanuel
Sugar Land........................... Owned 5,665 34,320
15144 Southwest Freeway
Harwin............................... Leased 2,463 22,851
10000 Harwin Dr.
Clear Lake........................... Owned 1,986 20,293
2424 Bay Area Boulevard
Veterans Memorial.................... Owned 5,571 17,351
13480 Veterans Memorial Blvd.
Milam................................ Leased 2,546 11,615
2808 Milam St.
Corporate............................ Leased 25,127 N/A
9600 Bellaire Boulevard, Suite 252
Boone Road(1)........................ Leased 905 279
11205 Bellaire Boulevard, Suite B-9
Dulles(2)............................ Leased 479 6,553
4635 Highway 6
Long Point(3)........................ Leased 3,000 5,450
1426 Blalock
DALLAS AREA:
Richardson........................... Leased 4,948 45,886
275 West Campbell Rd.
Dallas (Harry Hines)................. Leased 3,000 8,569
2527 Royal Lane
Garland(4)........................... Leased 2,400 1,177
3500 West Walnut Street
- - ------------
(1) Opened for business on November 26, 1999.
(2) Opened for business on March 30, 1999.
(3) Opened for business on April 15, 1999.
(4) Opened for business on November 12, 1999.
12
ITEM 3. LEGAL PROCEEDINGS
LEGAL PROCEEDINGS.
The Company and the Bank are from time to time parties to or otherwise
involved in legal proceedings arising in the normal course of business.
Management does not believe that there is any pending or threatened proceeding
against the Company or the Bank which, if determined adversely, would have a
material effect on the Company's or the Bank's business, financial condition or
results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the Nasdaq National Market System
("Nasdaq NMS") under the symbol "MCBI." As of March 13, 2000, there were
6,959,748 shares outstanding and 147 shareholders of record. The number of
beneficial owners is unknown to the Company at this time.
The Common Stock was first listed on the Nasdaq NMS on December 16, 1998.
Prior to that date, there was no established trading market for the Common
Stock. Since the Common Stock began trading on the Nasdaq NMS, the high and low
closing prices were as follows:
HIGH LOW
---------- ---------
1999
- - -------------------------------------
Fourth quarter....................... $ 9.875 $ 7.750
Third quarter........................ 10.1875 8.375
Second quarter....................... 10.00 8.375
First quarter........................ 11.125 9.6875
1998
- - -------------------------------------
Fourth quarter (since December 16,
1998).............................. 11.750 9.750
Third quarter........................ N/A N/A
Second quarter....................... N/A N/A
First quarter........................ N/A N/A
DIVIDENDS
Holders of Common Stock are entitled to receive dividends when, as and if
declared by the Company's Board of Directors out of funds legally available
therefor. While the Company has declared and paid quarterly dividends since
fourth quarter 1998, there is no assurance that the Company will pay dividends
in the future. The cash dividends paid per share by quarter were as follows:
1999 1998
--------- ---------
Fourth quarter....................... $ 0.06 $ 0.06
Third quarter........................ 0.06 --
Second quarter....................... 0.06 --
First quarter........................ 0.06 --
The principal source of cash revenues to the Company is dividends paid by
the Bank with respect to the Bank's capital stock. There are certain
restrictions on the payment of such dividends imposed by federal banking laws,
regulations and authorities. Until capital surplus equals or exceeds capital, a
national bank must transfer to surplus 10% of its net income for the preceding
four quarters in the case of an annual dividend or 10% of its net income for the
preceding two quarters in the case of a quarterly or semiannual dividend. As of
December 31, 1999, the Bank's capital surplus exceeded its capital stock.
Without prior approval, a national bank may not declare a dividend if the total
amount of all dividends, declared by the bank in any calendar year exceeds the
total of the bank's retained net income for the current year and retained net
income for the preceding two years. As of December 31, 1999, an aggregate of
approximately $15.8 million was available for payment of dividends by the Bank
to the Company under applicable restrictions, without regulatory approval.
Regulatory authorities could impose administratively stricter limitations on the
ability of the Bank to pay dividends to the Company if such limits were deemed
appropriate to preserve certain capital adequacy requirements.
In the future, the declaration and payment of dividends on the Common Stock
will depend upon the earnings and financial condition of the Company, liquidity
and capital requirements, the general economic and regulatory climate, the
Company's ability to service any equity or debt obligations senior to the Common
Stock and other factors deemed relevant by the Company's Board of Directors.
RECENT SALES OF UNREGISTERED SECURITIES
Not applicable.
14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following Selected Consolidated Financial Data of the Company should be
read in conjunction with the consolidated financial statements of the Company,
and the notes thereto, appearing elsewhere in this Annual Report on Form 10-K,
and the information contained in "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations." The selected historical
consolidated financial data as of and for each of the five years in the period
ended December 31, 1999 are derived from the Company's Consolidated Financial
Statements which have been audited by independent accountants. Certain prior
year amounts have been reclassified to conform with the 1999 presentation.
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA:
Interest income...................... $ 53,668 $ 47,696 $ 41,155 $ 31,523 $ 23,065
Interest expense..................... 21,026 20,052 18,138 13,927 9,640
--------- --------- --------- --------- ---------
Net interest income.............. 32,642 27,644 23,017 17,596 13,425
Provision for loan losses............ 5,550 3,377 3,350 2,118 792
--------- --------- --------- --------- ---------
Net interest income after
provision for loan losses...... 27,092 24,267 19,667 15,478 12,633
Noninterest income................... 6,088 5,609 4,391 3,446 2,903
Noninterest expense.................. 22,412 20,980 18,096 16,102 11,845
--------- --------- --------- --------- ---------
Income before provision for
income taxes................... 10,768 8,896 5,962 2,822 3,691
Provision for income taxes........... 3,638 2,777 1,794 809 1,091
--------- --------- --------- --------- ---------
Net income....................... $ 7,130 $ 6,119 $ 4,168 $ 2,013 $ 2,600
========= ========= ========= ========= =========
PER SHARE DATA(1):
Net income:
Basic............................ $ 1.00 $ 1.08 $ 0.75 $ 0.38 $ 0.52
Diluted.......................... 1.00 1.06 0.74 0.37 0.51
Book value........................... 7.38 7.14 5.49 4.73 4.38
Tangible book value.................. 7.38 7.14 5.49 4.73 4.38
Cash dividends....................... 0.24 0.06 -- -- --
Weighted average shares outstanding
(in thousands):
Basic............................ 7,114 5,691 5,581 5,364 5,015
Diluted.......................... 7,114 5,749 5,616 5,444 5,104
BALANCE SHEET DATA:
Total assets......................... $ 660,589 $ 587,308 $ 505,051 $ 426,987 $ 322,799
Securities........................... 110,065 123,190 112,624 103,680 110,761
Total loans.......................... 495,669 417,686 348,910 280,597 177,206
Allowance for loan losses............ 7,537 6,119 3,569 2,141 1,612
Total deposits....................... 544,436 479,506 445,859 381,289 285,153
Other borrowings..................... 55,636 50,043 21,611 14,566 9,273
Total shareholders' equity........... 52,580 50,024 30,506 25,398 23,519
AVERAGE BALANCE SHEET DATA:
Total assets......................... $ 620,646 $ 532,751 $ 469,097 $ 373,697 $ 271,087
Securities........................... 119,952 114,248 113,250 115,224 99,398
Total loans.......................... 456,653 368,394 310,781 223,514 146,210
Allowance for loan losses............ 6,720 5,049 2,722 1,869 1,442
Total deposits....................... 501,808 477,793 416,895 333,355 233,749
Total shareholders' equity........... 53,010 33,992 28,369 24,090 21,561
PERFORMANCE RATIOS:
Return on average assets............. 1.16% 1.15% 0.89% 0.54% 0.96%
Return on average equity............. 13.52 18.00 14.69 8.36 12.06
Net interest margin.................. 5.55 5.50 5.22 5.02 5.27
Efficiency ratio(2).................. 57.92 63.48 66.48 76.73 72.82
ASSET QUALITY RATIOS:
Nonperforming assets to total loans
and other real estate.............. 1.42% 1.26% 0.94% 0.82% 1.11%
Nonperforming assets to total
assets............................. 1.07 0.90 0.65 0.54 0.61
Net loan charge-offs to average
loans.............................. 0.90 0.22 0.62 0.71 0.30
Allowance for loan losses to total
loans.............................. 1.52 1.46 1.02 0.76 0.91
Allowance for loan losses to
nonperforming loans(3)............. 115.03 132.44 134.02 135.42 111.48
CAPITAL RATIOS(4):
Leverage ratio....................... 8.48% 8.83% 5.90% 6.04% 7.30%
Average shareholders' equity to
average total assets 8.54 6.38 6.05 6.45 7.95
Tier 1 risk-based capital ratio...... 10.76 11.73 8.40 8.69 10.65
Total risk-based capital ratio....... 12.01 12.98 9.50 9.44 11.39
- - -------------------------------------------
(1) Financial data dated prior to December 31, 1998 has been adjusted to reflect
the four-for-one exchange for the Bank stock.
(2) Calculated by dividing total noninterest expense by net interest income plus
noninterest income, excluding net securities gains and losses.
(3) Nonperforming loans consist of nonaccrual loans, loans contractually past
due 90 days or more and restructured loans.
(4) Capital ratios prior to 1998 are those of MetroBank, N.A.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company analyzes the major elements of the Company's balance
sheets and statements of operations. This section should be read in conjunction
with the Company's Consolidated Financial Statements and accompanying notes and
other detailed information appearing elsewhere in this document.
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
OVERVIEW
From December 31, 1996 to December 31, 1999, the Company experienced
consistent growth as assets increased from $427.0 million at December 31, 1996
to $660.6 million at December 31, 1999, an increase of $233.6 million or 54.7%.
The increase was primarily due to the expansion of the branch network and an
increase in the number of products and services available to customers. The
Company opened seven branches during this period. Loans accounted for the
majority of the Company's asset growth, increasing from $280.6 million to $495.7
million over the three-year period ending December 31, 1999. Supporting this
substantial expansion was an increase in deposits, which rose from $381.3
million to $544.4 million, representing a 42.7% increase during the period.
Including the net proceeds from the initial public offering of Common Stock in
December 1998, shareholders' equity increased to $52.6 million, an increase of
$27.2 million or 107% at December 31, 1999, compared with $25.4 million as of
December 31, 1996.
Net income available to shareholders was $7.1 million, $6.1 million and
$4.2 million for the years ended December 31, 1999, 1998 and 1997, respectively,
and diluted net income per common share was $1.00, $1.06 and $0.74, for these
same periods. Earnings growth from 1997 to 1999 resulted primarily from a
combination of loan growth, an increase in net interest margin and a decrease in
expenses, reflected in an improved efficiency ratio. The Company posted returns
on average assets of 1.16%, 1.15% and 0.89% and returns on average equity of
13.52%, 18.00% and 14.69% for the years ended December 31, 1999, 1998 and 1997,
respectively.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income represents the amount by which interest income on
interest-earning assets, including securities and loans, exceeds interest
expense incurred on interest-bearing liabilities, including deposits and other
borrowed funds. Net interest income is the principal source of the Company's
earnings. Interest rate fluctuations, as well as changes in the amount and type
of earning assets and liabilities, combine to affect net interest income.
1999 VERSUS 1998. Net interest income totaled $32.6 million in 1999
compared with $27.6 million in 1998, an increase of $5.0 million or 18.1%. The
increase resulted primarily from a $5.9 million or 12.5% increase in interest
income on loans primarily due to a $41.8 million or 16.0% increase in commercial
and industrial loans. Interest expense increased by $1.0 million or 4.9% due to
an increase in the level of other borrowings, which consists primarily of $35.0
million from the Federal Home Loan Bank ("FHLB"). The increase in the loan
portfolio, together with higher margins in this portfolio, resulted in an
improved net interest margin of 5.55% from 5.50% for 1999 and 1998,
respectively. The decrease in the securities portfolio from December 31, 1998 of
$123.2 million to $110.1 million at December 31, 1999 is due to portfolio
repositioning as interest rates moved upward. This repositioning necessitated
sales of lower yielding holdings during the latter part of 1999. The net
interest spread increased four basis points to 4.66% for 1999 from 4.62% for
1998.
Interest income increased to $53.7 million in 1999 from $47.7 million in
1998. The increase was driven by growth in the average loan portfolio of $88.3
million or 23.9% while the Company experienced a decrease in the yield on
average loans to 9.92% in 1999 from 10.65% in 1998. The average securities
portfolio increased by $5.7 million or 5.0%, while its yield rose 6 basis points
from 6.37% in 1998 to 6.43% in 1999 as a result of continued portfolio shifting
to higher yielding issues.
16
Interest expense increased by $1.0 million to $21.0 million at December 31,
1999 compared with $20.0 million at December 31, 1998. The increase was
primarily due to growth in average FHLB borrowings and other borrowings of $43.9
million during 1999. The Company views these funds as stable and a less costly
source of funding than time deposits. This decision has lowered the Company's
cost of funds from 4.87% for 1998 to 4.49% for 1999. The Company anticipates
that this source of funding will continue to sustain a portion of the Company's
asset growth in the future.
1998 VERSUS 1997. Net interest income totaled $27.6 million in 1998,
compared with $23.0 million in 1997, an increase of $4.6 million or 20.1%. The
increase resulted primarily from a $6.2 million or 18.8% increase in interest
income on loans primarily due to a $63.0 million or 32.6% increase in commercial
and industrial loans. Interest expense increased $1.9 million or 10.6% due to a
$23.7 million increase in the level of interest-bearing deposits. The increase
in the loan and securities portfolios, coupled with higher margins on such
portfolios, resulted in improved net interest margins and net interest spreads.
Net interest margins were 5.50% and 5.22% and net interest spreads were 4.62%
and 4.43% for 1998 and 1997, respectively.
Interest income increased to $47.7 million in 1998 from $41.2 million in
1997. The increase was driven by growth in the average loan portfolio of $57.6
million or 18.5% while the Company experienced an increase in the yield on
average loans to 10.65% in 1998 from 10.63% in 1997. As a result of strong loan
growth, the average securities portfolio increased by $1.0 million or 0.9%,
while its yield rose eight basis points from 6.29% in 1997 to 6.37% in 1998 as a
result of a change in the mix of the investment portfolio from agency securities
into mortgage-backed securities.
Interest expense increased to $20.0 million in 1998 from $18.1 million in
1997. This increase was primarily the result of $28.5 million of growth in
average time deposits during 1998. The higher level of time deposits was the
primary funding source of the Company's loan growth.
17
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resulting
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax-equivalent adjustments were made and
all average balances are yearly average balances. Non-accruing loans have been
included in the tables as loans carrying a zero yield.
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1999 1998 1997
----------------------------------- ----------------------------------- ------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING
BALANCE PAID RATE BALANCE PAID RATE BALANCE
------------ --------- -------- ------------ --------- -------- ------------
(DOLLARS IN THOUSANDS)
ASSETS
Interest-earning assets:
Total loans...................... $456,653 $45,322 9.92% $368,394 $39,219 10.65% $310,781
Taxable securities............... 98,838 6,624 6.70 96,518 6,312 6.54 95,680
Tax-exempt securities............ 21,114 1,091 5.17 17,730 964 5.44 17,570
Federal funds sold and other
temporary investments.............. 9,959 631 6.34 19,565 1,201 6.14 16,926
------------ --------- ------------ --------- ------------
Total interest-earning assets.... 586,564 53,668 9.15% 502,207 47,696 9.50% 440,957
--------- ---------
Less allowance for loan losses....... (6,720) (5,049) (2,722)
------------ ------------ ------------
Total interest-earning assets, net of
allowance for loan losses.......... 579,844 497,158 438,235
Noninterest-earning assets........... 40,802 35,593 30,862
------------ ------------ ------------
Total assets................... $620,646 $532,751 $469,097
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand
deposits....................... $ 37,011 1,039 2.81% $ 30,109 783 2.60% $ 26,765
Savings and money market
accounts....................... 97,629 3,020 3.09 90,328 3,258 3.61 76,799
Time deposits.................... 275,663 14,032 5.09 276,904 15,267 5.51 248,447
Federal funds purchased and
securities sold under repurchase
agreements......................... 24,774 1,301 5.25 926 54 5.83 1,804
Other borrowings................. 33,264 1,634 4.91 13,160 690 5.24 16,084
------------ --------- ------------ --------- ------------
Total interest-bearing liabilities... 468,341 21,026 4.49% 411,427 20,052 4.87% 369,899
--------- ---------
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits....................... 91,505 80,452 64,884
Other liabilities................ 7,790 6,880 5,945
Total liabilities 567,636 498,759 440,728
------------ ------------ ------------
Shareholders' equity................. 53,010 33,992 28,369
------------ ------------ ------------
Total liabilities and shareholders'
equity............................. $620,646 $532,751 $469,097
============ ============ ============
Net interest income.................. $32,642 $27,644
========= =========
Net interest spread.................. 4.66% 4.62%
Net interest margin.................. 5.56% 5.50%
INTEREST AVERAGE
EARNED/ YIELD/
PAID RATE
--------- --------
ASSETS
Interest-earning assets:
Total loans...................... $33,028 10.63%
Taxable securities............... 6,161 6.44
Tax-exempt securities............ 968 5.51
Federal funds sold and other
temporary investments.............. 998 5.90
---------
Total interest-earning assets.... 41,155 9.33%
---------
Less allowance for loan losses.......
Total interest-earning assets, net of
allowance for loan losses..........
Noninterest-earning assets...........
Total assets...................
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand
deposits....................... 697 2.60%
Savings and money market
accounts....................... 2,733 3.56
Time deposits.................... 13,685 5.51
Federal funds purchased and
securities sold under repurchase
agreements......................... 100 5.54
Other borrowings................. 923 5.74
---------
Total interest-bearing liabilities... 18,138 4.90%
---------
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits.......................
Other liabilities................
Total liabilities
Shareholders' equity.................
Total liabilities and shareholders'
equity.............................
Net interest income.................. $23,017
=========
Net interest spread.................. 4.43%
Net interest margin.................. 5.22%
18
The following table presents the dollar amount of changes in interest
income and interest expense for the major components of interest-earning assets
and interest-bearing liabilities and distinguishes between the increase related
to higher outstanding balances and changes in interest rates. For purposes of
this table, changes attributable to both rate and volume have been allocated to
rate.
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1999 VS. 1998 1998 VS. 1997
---------------------------- ------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO DUE TO
----------------- --------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ------- ------- ------ ---- ------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Total loans...................... $9,396 $(3,293) $ 6,103 $6,123 $ 68 $6,191
Securities....................... 567 (128) 439 115 32 147
Federal funds sold and other
temporary investments.......... (590) 20 (570) 156 47 203
------ ------- ------- ------ ---- ------
Total increase (decrease) in
interest income........... 9,374 (3,402) 5,972 6,394 147 6,541
INTEREST-BEARING LIABILITIES:
Interest-bearing demand
deposits....................... 179 77 256 87 (1) 86
Savings and money market
accounts....................... 263 (501) (238) 481 44 525
Time deposits.................... (68) (1,166) (1,235) 1,567 15 1,582
Federal funds purchased.......... 1,391 (144) 1,247 (49) 3 (46)
Other borrowings................. 1,054 (110) 944 (168) (65) (233)
------ ------- ------- ------ ---- ------
Total increase (decrease)in
interest expense.......... 2,818 (1,843) 974 1,918 (4) 1,914
------ ------- ------- ------ ---- ------
Increase (decrease) in net interest
income............................. $6,556 $(1,558) $ 4,998 $4,476 $151 $4,627
====== ======= ======= ====== ==== ======
PROVISION FOR LOAN LOSSES
Provisions for loan losses are charged to income to bring the Company's
allowance for loan losses to a level deemed appropriate by management based on
the factors discussed under "-- Allowance for Loan Losses."
The 1999 provision for loan losses increased by $2.2 million, or 64.3%, to
$5.6 million primarily due to an additional provision of $2.1 million made in
the fourth quarter of 1999. The additional provision was made as a result of
significant charge-offs totaling $1.83 million related to four borrowing
relationships and to reflect loan growth of 18.6%. The 1998 provision for loan
losses increased by $27,000, or 1.0% to $3.4 million from $3.4 million in 1997.
The increased provision for 1998 reflects loan growth of 19.7%. In 1997, the
provision was impacted by a significant charge-off totaling $700,000 related to
one borrower in the food service industry.
NONINTEREST INCOME
Noninterest income for the years ended December 31, 1999, 1998 and 1997,
was $6.1 million, $5.6 million and $4.4 million, respectively. The majority of
the growth in noninterest income occurred in the other loan related fees and
other noninterest income categories due to increases in SBA servicing and
packaging fees. The following table presents the major categories of noninterest
income:
YEARS ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Service charges on deposit
accounts........................... $ 3,313 $ 3,364 $ 2,248
Other loan-related fees.............. 1,658 1,371 1,440
Letters of credit commissions and
fees............................... 471 392 357
Gain (loss) on sale of investment
securities, net.................... (14) 202 189
Other noninterest income............. 660 280 157
--------- --------- ---------
Total noninterest income........ $ 6,088 $ 5,609 $ 4,391
========= ========= =========
19
NONINTEREST EXPENSE
For the years ended 1999, 1998 and 1997, noninterest expense totaled $22.4
million, $21.0 million and $18.1 million, respectively. The $1.4 million or 6.8%
increase in 1999 was primarily due to employee compensation and benefits,
occupancy expenses and outside legal and professional services. The increase in
1998 of $2.9 million or 16.0% was primarily due to higher employee compensation
and benefits and occupancy expense related to the new branches opened during the
year. The Company's efficiency ratios were 57.92%, 63.48% and 66.48% in 1999,
1998 and 1997, respectively. The improvement in the efficiency ratio in 1999 and
1998 reflects the Company's continued efforts to control operating expenses and
gain other efficiencies through such means as upgrading centralized computer
systems. The following table presents the major categories of noninterest
expense:
YEARS ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Employee compensation and benefits... $ 11,140 $ 9,898 $ 8,940
Non-staff expenses:
Occupancy....................... 5,117 4,907 3,843
Other real estate, net.......... 83 374 474
Data processing................. 327 584 465
Legal and professional fees..... 1,656 1,021 1,083
Advertising..................... 459 392 332
Director compensation........... 355 157 360
Printing and supplies........... 502 432 369
Telecommunications.............. 504 414 349
Other noninterest expense....... 2,269 2,801 1,881
--------- --------- ---------
Total non-staff expenses... 11,272 11,082 9,156
--------- --------- ---------
Total noninterest
expense................. $ 22,412 $ 20,980 $ 18,096
========= ========= =========
Employee compensation and benefits expense for the years ended December 31,
1999, 1998 and 1997, was $11.1 million, $9.9 million and $8.9 million,
respectively, reflecting increases of $1.2 million, $1.0 million and $892,000
during the same periods. The increase in 1999 resulted primarily from expenses
related to the opening of the Company's four new branches. The three Houston
area branches, Dulles, Long Point and Boone Road, opened in March, April and
November 1999, respectively. The Garland (Dallas) branch opened in November
1999. The increase in 1998 resulted primarily from the costs associated with
establishment of the Milam (Houston) branch which opened in early January of
1998. The increase in 1997 resulted principally from the effects of a full year
of expenses for the four branches opened in 1996, and the addition of the
Veterans Memorial (Houston) branch which opened in April of 1997. Additionally,
staff was added to support the residential mortgage division and the factoring
subsidiary. Total full-time equivalent employees at December 31, 1999, 1998 and
1997 were 283, 280 and 225, respectively.
Non-staff expenses for 1999, 1998 and 1997 were $11.3 million, $11.1
million and $9.2 million, respectively, reflecting increases of $190,000 or
2.0%, $1.9 million or 20.7% and $1.1 million or 13.6%, respectively. The
increase in 1999 was primarily due to legal and professional fees related to
problem loans. The increase in 1998 was primarily due to the opening of two
branches. The increase in 1997 was the result of a full year of higher occupancy
expense from the increased number of operating branches as well as the cost of
technology upgrades. Additionally, during 1999 and 1998 other real estate
expenses decreased by $291,000 and $100,000, respectively, due to reduced
foreclosed property expenses, while in 1997 other real estate expenses increased
approximately $275,000 in connection with the maintenance of an asset acquired
by foreclosure in the second quarter until its sale in December of 1997.
INCOME TAXES
Income tax expense includes the regular federal income tax at the statutory
rate plus the income tax component of the Texas franchise tax. The amount of
federal income tax expense is influenced by the amount of taxable income, the
amount of tax-exempt income, the amount of non-deductible interest expense
20
and the amount of other non-deductible expenses. Taxable income for the income
tax component of the Texas franchise tax is the federal pre-tax income, plus
certain officers' salaries, less interest income on federal securities.
Income tax expense is influenced by the level and mix of taxable and
tax-exempt income and the amount of non-deductible interest and other expenses.
In 1999, income tax expense was $3.6 million, an $800,000 or 28.6% increase from
income tax expense of $2.8 million in 1998. Income tax expense for 1998 was up
55.6% over the 1997 income tax expense of $1.8 million. The income tax component
of the Texas franchise tax was $209,900, $193,000 and $132,000, in 1999, 1998
and 1997, respectively. The effective tax rates in 1999, 1998 and 1997,
respectively, were 33.8% 31.2% and 30.1%.
IMPACT OF INFLATION
The effects of inflation on the local economy and on the Company's
operating results have been relatively modest for the past several years. Since
substantially all of the Company's assets and liabilities are monetary in
nature, such as cash, securities, loans and deposits, their values are less
sensitive to the effects of inflation than to changing interest rates, which do
not necessarily change in accordance with inflation rates. The Company tries to
control the impact of interest rate fluctuations by managing the relationship
between its interest rate sensitive assets and liabilities.
FINANCIAL CONDITION
LOAN PORTFOLIO
Total loans increased by $78.0 million or 18.6% to $495.7 million at
December 31, 1999. Total loans were $417.7 million at December 31, 1998, an
increase of $68.8 million or 19.7% from total loans of $348.9 million at
December 31, 1997. The growth in loans for both years reflected the improving
local economy, the opening of new branches and the Company's investment in loan
production capacity.
For the years ended December 31, 1999, 1998 and 1997, the ratio of total
loans to total deposits was 91.0%, 87.1% and 78.3%, respectively. For the same
periods, total loans represented 75.0%, 71.1% and 69.1% of total assets,
respectively.
The following table summarizes the loan portfolio of the Company by type of
loan:
AS OF DECEMBER 31,
-------------------------------------------------------------------------------------
1999 1998 1997 1996
------------------- ------------------- ------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Commercial and industrial............ $298,150 59.54% $256,311 60.73% $193,355 54.77% $133,564 47.05%
Real estate mortgage
Residential...................... 10,934 2.18 11,795 2.80 11,797 3.35 8,703 3.07
Commercial....................... 126,363 25.24 103,677 24.57 110,860 31.40 104,425 36.78
-------- -------- -------- -------- -------- -------- -------- --------
137,297 27.42 115,472 27.37 122,657 34.75 113,128 39.85
-------- -------- -------- -------- -------- -------- -------- --------
Real estate construction
Residential...................... 11,348 2.27 10,842 2.57 9,859 2.79 1,543 0.54
Commercial....................... 28,661 5.72 17,769 4.21 11,750 3.33 16,096 5.67
-------- -------- -------- -------- -------- -------- -------- --------
40,009 7.99 28,611 6.78 21,609 6.12 17,639 6.21
-------- -------- -------- -------- -------- -------- -------- --------
Consumer and other................... 11,550 2.31 12,117 2.87 10,147 2.87 13,343 4.70
Factored receivables................. 13,700 2.74 9,506 2.25 5,249 1.49 6,217 2.19
-------- -------- -------- -------- -------- -------- -------- --------
Gross loans.......................... 500,706 100.00% 422,017 100.00% 353,017 100.00% 283,891 100.00%
======== ======== ======== ========
Less: unearned discounts, interest
and deferred fees.................. (5,037) (4,331) (4,107) (3,294)
-------- -------- -------- --------
Total loans.......................... $495,669 $417,686 $348,910 $280,597
======== ======== ======== ========
1995(1)
-------------------
AMOUNT PERCENT
-------- --------
Commercial and industrial............ $53,850 29.88%
Real estate mortgage
Residential...................... -- --
Commercial....................... -- --
-------- --------
94,411 52.38
-------- --------
Real estate construction
Residential...................... -- --
Commercial....................... -- --
-------- --------
11,772 6.53
-------- --------
Consumer and other................... 18,065 10.02
Factored receivables................. 2,147 1.19
-------- --------
Gross loans.......................... 180,245 100.00%
========
Less: unearned discounts, interest
and deferred fees.................. (3,039)
--------
Total loans.......................... $177,206
========
- - ------------
(1) The Company's loan portfolio records were historically categorized by
collateral codes. In 1998, the Company recoded its loan portfolio to reflect
the business purpose of the loans. Detailed information prior to 1996 is
unavailable due to a system conversion in 1995.
21
Each of the following principal product lines is an outgrowth of the
Company's expertise in meeting the particular needs of the small and
medium-sized businesses and consumers in the Asian and Hispanic communities:
COMMERCIAL AND INDUSTRIAL LOANS. The primary lending focus of the Company
is to small and medium-sized businesses in a wide variety of industries. The
Company's commercial lending emphasis includes loans to wholesalers,
manufacturers and business service companies. A broad range of short and
medium-term commercial lending products are made available to businesses for
working capital (including inventory and accounts receivable), purchases of
equipment and machinery and business expansion (including acquisitions of real
estate and improvements). Generally, the Company's commercial loans are
underwritten on the basis of the borrower's ability to service such debt as
reflected by cash flow projections. Commercial loans are generally secured by
business assets, which may include accounts receivable and inventory,
certificates of deposit, securities, real estate, guarantees or other
collateral. The Company also generally obtains personal guarantees from the
principals of the business. Working capital loans are primarily collateralized
by short-term assets, whereas term loans are primarily collateralized by
long-term assets. As a result, commercial loans involve additional complexities,
variables and risks and require more thorough underwriting and servicing than
other types of loans. Indigenous to individuals in the Asian business community
is the desire to own the building and land which houses their businesses.
Accordingly, while a loan may be principally driven and classified by the type
of business operated, real estate is frequently the primary source of
collateral. As of December 31, 1999, approximately $176.1 million or 59.0% of
the commercial and industrial loan portfolio was secured by real estate. The
Company continually monitors real estate value trends and takes into
consideration changes in market trends in its underwriting standards. Commercial
loans are generally for amounts between $10,000 and $250,000, and as of December
31, 1999, the average commercial loan amount was $121,500. As of December 31,
1999, the Company's commercial and industrial loan portfolio totaled $298.1
million or 59.5% of the gross loan portfolio. At that date, the Company had a
concentration of loans to hotels and motels of $74 million. Hotel and motel
lending was originally targeted by the Company because of management's
particular expertise in this industry and a perception that it was an
under-served market. More recently, the Company has decreased its emphasis in
hotel and motel lending in order to further diversify its portfolio.
COMMERCIAL MORTGAGE LOANS. In addition to commercial loans, the Company
makes commercial mortgage loans to finance the purchase of real property, which
generally consists of developed real estate. The Company's commercial mortgage
loans are secured by first liens on real estate, typically have variable rates
and amortize over a 15 to 20 year period with balloon payments due at the end of
five to seven years. Payments on loans secured by such properties are dependent
on the successful operation or management of the properties. Accordingly,
repayment of these loans may be subject to adverse conditions in the real estate
market or the economy to a greater extent than other types of loans. In
underwriting commercial mortgage loans, consideration is given to the property's
historical cash flow, current and projected occupancy, location and physical
condition. The underwriting analysis also includes credit checks, appraisals,
environmental impact reports and a review of the financial condition of the
borrower. As of December 31, 1999, the Company had a commercial mortgage
portfolio of $126.4 million.
CONSTRUCTION LOANS. The Company makes loans to finance the construction of
residential and non-residential properties. The substantial majority of the
Company's residential construction loans are for single-family dwellings which
are pre-sold or are under earnest money contract.
The Company also originates loans to finance the construction of commercial
properties such as multi-family, office, industrial, warehouse and retail
centers. Construction loans involve additional risks attributable to the fact
that loan funds are advanced upon the security of a project under construction,
and the project is of uncertain value prior to its completion. Because of
uncertainties inherent in estimating construction costs, the market value of the
completed project and the effects of governmental regulation on real property,
it can be difficult to accurately evaluate the total funds required to complete
a project and the related loan to value ratio. As a result of these
uncertainties, construction lending often involves the disbursement of
substantial funds with repayment dependent, in part, on the success of the
ultimate project rather than the ability of a borrower or guarantor to repay the
loan. If the Company is forced to foreclose on
22
a project prior to completion, there is no assurance that the Company will be
able to recover all of the unpaid portion of the loan. In addition, the Company
may be required to fund additional amounts to complete a project and may have to
hold the property for an indeterminable period of time. While the Company has
underwriting procedures designed to identify what it believes to be acceptable
levels of risks in construction lending, no assurance can be given that these
procedures will prevent losses from the risks described above. As of December
31, 1999, the Company had a real estate construction portfolio of $40.0 million,
of which $11.3 million was residential and $28.7 million was commercial.
RESIDENTIAL MORTGAGE BROKERAGE AND LENDING. The Company uses its existing
branch network to offer a complete line of single-family residential mortgage
products through third party mortgage companies. The Company specializes in
mortgages that conform with government sponsored programs, such as those offered
by the Federal National Mortgage Association ("FNMA") and the Houston Housing
Partnership. The residential mortgage products generally amortize over five to
15 years and usually have a maximum term of five years. The Company solicits and
receives a fee to process these residential mortgage loans, which are then
pre-sold to and underwritten by third party mortgage companies. The Company does
not fund or service these loans. The volume of residential mortgage loans
processed by the Company and presold to third party mortgage companies increased
from $11.8 million in 1998 to $16.0 million at December 31, 1999. Since the
Company does not fund these loans, there is no risk of nonpayment to the
Company. The Company also makes five to seven year balloon residential mortgage
loans with a 15 year amortization to its existing customers on a select basis,
which are retained in the Company's portfolio. Residential mortgage collections
are dependent on the borrower's continuing financial stability, and thus are
more likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy. At December 31, 1999, the Company's residential mortgage portfolio
totaled $10.9 million.
GOVERNMENT GUARANTEED SMALL BUSINESS LENDING. The Company has developed an
expertise in several government guaranteed lending programs in order to provide
credit enhancement to its commercial and industrial and mortgage portfolio. As a
Preferred Lender under the federally guaranteed SBA lending program, the
Company's preapproved status allows it to quickly respond to customers' needs.
Under this program, the Company originates and funds SBA 7-A and 504 chapter
loans qualifying for federal guarantees of 75% to 90% of principal and accrued
interest. Depending upon prevailing market conditions, the Company may sell the
guaranteed portion of these loans into the secondary market with servicing
retained. The Company specializes in SBA loans to minority-owned businesses.
Over the last seven years, the Company has originated over $130 million in SBA
guaranteed loans. As of December 31, 1999, the Company had $57.1 million in the
retained portion of SBA loans, approximately $35.1 million of which was
guaranteed by the SBA. For each of the last six years, the Company has been the
second largest SBA loan originator in Houston in terms of dollar volume. SBA
loan originations were $27.9 million and $28.6 million for the years ended
December 31, 1999 and 1998, respectively. Another source of government
guaranteed lending is B&I Loans which are secured by the U.S. Department of
Agriculture and are available to borrowers in areas with a population of less
than 50,000. The Company also offers guaranteed loans through the OCCGF, which
is sponsored by the government of Taiwan. These loans are for people of Chinese
decent or origin, who are not mainland Chinese by birth and reside "overseas."
As of December 31, 1999, the Company's OCCGF portfolio totaled $6.1 million.
FACTORING. In 1994, the Company established an accounts receivable
factoring subsidiary, Advantage, to provide financing to small and medium-sized
businesses that have accounts receivable from predominantly Fortune 1,000
companies. In factoring receivables, Advantage relies heavily on the quality of
the client's accounts receivable and the financial strength of the client's
customers, who typically make their payments directly to a lockbox controlled by
Advantage. As a result, these transactions are subject to risks relating to
disputes between the Company's client and its customers in instances where the
customer refuses to make payment. Advantage's clients are typically businesses
that are experiencing rapid growth and have an increased demand for working
capital, usually with annual sales between $1.0 million and $25.0 million.
Advantage's volume of purchases has grown steadily since 1995, its first full
year of operations, from $14.5 million in short-term (usually 30 day) accounts
receivable to $86.6 million during 1999. At December 31, 1999, factored
receivables outstanding totaled $13.7 million, compared with $9.5
23
million at December 31, 1998. In addition to enhancing profitability, many of
the customers obtained through these efforts have also established more
traditional banking relationships with the Company.
TRADE FINANCE. Since its inception in 1987, the Company has originated
trade finance loans and letters of credit to facilitate export and import
transactions for small and medium-sized businesses. In this capacity, the
Company has worked with the Ex-Im Bank, an agency of the U.S. government which
provides guarantees for trade finance loans. In 1998, the Company was named
Small Business Bank of the Year by the Ex-Im Bank, and it was the largest Ex-Im
Bank producer in the State of Texas. Trade finance credit facilities rely
heavily on the quality of the business customer's accounts receivable and the
ability to perform the underlying transaction which, if monitored and controlled
properly, limits the financial risks to the Company associated with this
short-term financing. To mitigate the risk of nonpayment, the Company generally
obtains a governmental guaranty or credit insurance from a governmental agency
such as the Ex-Im Bank. At December 31, 1999, the Company's aggregate trade
finance portfolio commitments totaled approximately $10.5 million.
The Company offers a wide variety of loan products to retail customers
through its branch network in Houston and Dallas. Loans to retail customers
include residential mortgage loans, residential construction loans, automobile
loans, lines of credit and other personal loans. The terms and size of these
loans typically range from 12 to 60 months depending on the nature of the
collateral and the size of the loan.
The Company selectively extends credit for the purpose of establishing
long-term relationships with its customers. The Company mitigates the risks
inherent in lending by focusing on businesses and individuals with demonstrated
payment history, historically favorable profitability trends and stable cash
flows. In addition to these primary sources of repayment, the Company looks to
tangible collateral and personal guarantees as secondary sources of repayment.
Lending officers are provided with detailed underwriting policies covering all
lending activities in which the Company is engaged and that require all lenders
to obtain appropriate approvals for the extension of credit. The Company also
maintains documentation requirements and extensive credit quality assurance
practices in order to identify credit portfolio weaknesses as early as possible
so any exposures that are discovered may be reduced.
Inherent in all lending is the risk of nonpayment. The types of collateral
required, the terms of the loans and the underwriting practices discussed under
each category above are all designed to minimize the risk of nonpayment. In
addition, as further risk protection, the Company rarely makes loans at its
legal lending limit. Although the Company's legal loan limit is $7.8 million,
the Company generally does not make loans larger than $3.0 million. Loans are
approved by lending officers and the Directors Credit Committee pursuant to a
lending authorization schedule delegated by the Directors Credit Committee which
is based on each loan officer's credit experience and portfolio. Control systems
and procedures are in place to ensure all loans are approved in accordance with
credit policies. The Company's policies and procedures designed to minimize the
risk of nonpayment with respect to outstanding loans are discussed under "--
Nonperforming Assets."
At year end December 31, 1999 and 1998, the Company had gross loan
concentrations (greater than 25% of capital) in the following industries:
AS OF
DECEMBER 31,
--------------------
1999 1998
--------- ---------
(DOLLARS IN
THOUSANDS)
Hotels/motels........................ $ 74,070 $ 57,885
Retail centers....................... 61,087 50,274
Restaurants.......................... 25,805 17,474
Convenience/gasoline stations........ 20,746 11,364
Apartment buildings.................. 14,526 15,994
Grocery stores....................... -- 2,066
24
The contractual maturity ranges of the commercial and industrial and real
estate portfolio and the amount of such loans with predetermined interest rates
and floating rates in each maturity range as of December 31, 1999 are summarized
in the following table:
AS OF DECEMBER 31, 1999
-------------------------------------------------------
AFTER
ONE YEAR ONE THROUGH AFTER
OR LESS FIVE YEARS FIVE YEARS TOTAL
-------- ----------- ---------- --------
(DOLLARS IN THOUSANDS)
Commercial and industrial............ $72,286 $ 149,516 $ 76,348 $298,150
Real estate mortgage:
Residential..................... 464 5,622 4,848 10,934
Commercial...................... 15,154 83,870 27,339 126,363
Real estate construction
Residential..................... 9,502 1,846 -- 11,348
Commercial...................... 24 16,465 12,172 28,661
-------- ----------- ---------- --------
Total...................... $97,430 $ 257,319 $ 120,707 $475,456
======== =========== ========== ========
Loans with a predetermined interest
rate............................... $31,036 $ 82,064 $ 32,496 $145,596
Loans with a floating interest
rate............................... 66,394 175,255 88,211 329,860
-------- ----------- ---------- --------
Total...................... $97,430 $ 257,319 $ 120,707 $475,456
======== =========== ========== ========
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, ACCOUNTING FOR CREDITORS FOR IMPAIRMENT OF A LOAN,
as amended by Statement of Financial Accounting Standards No. 118, ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN-INCOME RECOGNITION AND DISCLOSURES. Under
Statement No. 114, as amended, a loan is considered impaired based on current
information and events, if it is probable that the Company will be unable to
collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. The measurement of impaired loans
is based on the present value of expected future cash flows discounted at the
loan's effective interest rate or the loan's observable market price or based on
the fair value of the collateral if the loan is collateral-dependent. The
implementation of Statement No. 114 did not have a material adverse affect on
the Company's financial statements.
NONPERFORMING ASSETS
The Company believes that it has procedures in place to maintain a high
quality loan portfolio. These procedures include the approval of lending
policies and underwriting guidelines by the Board of Directors, review by an
independent internal loan review department, quarterly review by an independent
outside loan review company, Directors Credit Committee approval for large
credit relationships and loan documentation procedures. The loan review
department reports credit risk grade changes on a monthly basis to management
and the Board of Directors. The Company performs monthly and quarterly
concentration analyses based on industries, collateral types, business lines,
large credit sizes and officer portfolio loads. There can be no assurance,
however, that the Company's loan portfolio will not become subject to increasing
pressures from deteriorating borrower credit due to general economic conditions.
The Company generally places a loan on nonaccrual status and ceases
accruing interest when, in the opinion of management, full payment of loan
principal or interest is in doubt. All loans past due 90 days are placed on
nonaccrual status unless the loan is both well-secured and in the process of