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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2000
OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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Commission file number: 0-25141
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MetroCorp Bancshares, Inc.
(Exact name of registrant as specified in its charter)
Texas 76-0579161
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9600 Bellaire Boulevard, Suite 252
Houston, Texas 77036
(Address of principal executive offices including zip code)
(713) 776-3876
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
(Title of class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of March 9, 2001, the number of outstanding shares of Common Stock was
6,981,484. As of such date, the aggregate market value of the shares of Common
Stock held by non-affiliates, based on the closing price of the Common Stock
on the Nasdaq National Market System on such date of $10.063 per share, was
approximately $70,254,673.
Documents Incorporated by Reference:
Portions of the Company's Proxy Statement for the 2001 Annual Meeting of
Shareholders, which will be filed within 120 days after December 31, 2000, are
incorporated by reference into Part III, Items 10-13 of this Form 10-K.
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PART I
Special Cautionary Notice Regarding Forward-Looking Statements
Statements and financial discussion and analysis contained in this Annual
Report on Form 10-K and documents incorporated herein by reference that are
not historical facts are forward-looking statements made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements describe the Company's future plans, strategies and
expectations, are based on assumptions and involve a number of risks and
uncertainties, many of which are beyond the Company's control. The important
factors that could cause actual results to differ materially from the results,
performance or achievements expressed or implied by the forward-looking
statements include, without limitation:
. changes in interest rates and market prices, which could reduce the
Company's net interest margins, asset valuations and expense
expectations;
. changes in the levels of loan prepayments and the resulting effects on
the value of the Company's loan portfolio;
. changes in local economic and business conditions which adversely
affect the ability of the Company's customers to transact profitable
business with the Company, including the ability of borrowers to repay
their loans according to their terms or a change in the value of the
related collateral;
. increased competition for deposits and loans adversely affecting rates
and terms;
. the Company's ability to identify suitable acquisition candidates;
. the timing, impact and other uncertainties of the Company's ability to
enter new markets successfully and capitalize on growth opportunities;
. increased credit risk in the Company's assets and increased operating
risk caused by a material change in commercial, consumer and/or real
estate loans as a percentage of the total loan portfolio;
. the failure of assumptions underlying the establishment of and
provisions made to the allowance for loan losses;
. changes in the availability of funds resulting in increased costs or
reduced liquidity;
. increased asset levels and changes in the composition of assets and the
resulting impact on our capital levels and regulatory capital ratios;
. the Company's ability to acquire, operate and maintain cost effective
and efficient systems without incurring unexpectedly difficult or
expensive but necessary technological changes;
. the loss of senior management or operating personnel and the potential
inability to hire qualified personnel at reasonable compensation
levels; and
. changes in statutes and government regulations or their interpretations
applicable to bank holding companies and our present and future banking
and other subsidiaries, including changes in tax requirements and tax
rates.
All written or oral forward-looking statements attributable to the Company
are expressly qualified in their entirety by these cautionary statements. The
Company undertakes no obligation to publicly update or otherwise revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
2
Item 1. Business
General
MetroCorp Bancshares, Inc. (the "Company") was incorporated as a business
corporation under the laws of the State of Texas in 1998 to serve as a holding
company for MetroBank, National Association (the "Bank"). The Company's
headquarters are located at 9600 Bellaire Boulevard, Suite 252, Houston, Texas
77036, and its telephone number is (713) 776-3876.
The Company's mission is to enhance shareholder value by maximizing
profitability and operating as the premier multi-ethnic bank in each community
that it serves. The Company operates in a niche market by providing
personalized, culturally sensitive service to the Asian and Hispanic
communities in Houston and Dallas. The Company has strategically opened each
of its 14 banking offices in an area with a large Asian or Hispanic community
and intends to pursue branch opportunities in multi-ethnic markets with
significant small and medium-sized business activity.
Management believes that both the Asian and Hispanic communities present
excellent opportunities for future growth. Based on data obtained from the
Greater Houston Partnership, the greater Houston metropolitan area is home to
an Asian population of approximately 245,900, with people of Vietnamese,
Chinese, Korean and Taiwanese ancestry comprising the four largest groups.
Houston's Hispanic population is approximately 1,146,300 and represents
approximately one-quarter of the city's population. The Asian and Hispanic
communities together comprise almost one-third of the total population of
Houston. Similarly, based on data obtained from the Dallas Chamber of
Commerce, the greater Dallas metropolitan area has a growing Asian community
of approximately 131,300 and a Hispanic population of approximately 572,300
which constitute, in the aggregate, approximately one-quarter of the total
population of Dallas.
While the Company believes many of its competitors either fail to recognize
the cultural distinctions among various ethnic groups or focus on only one
ethnic group, management of the Company is acutely aware of and understands
the unique cultural nuances of each community it serves. Multi-ethnic
customers require a special level of understanding from their banker, whether
it be the specific characteristics of the businesses they operate or the
native dialect in which they converse. In order to better serve its customers,
the Company recruits bilingual, multilingual and multicultural employees,
publishes Company literature in four languages (English, Spanish, Vietnamese,
and Chinese) and celebrates cultural holidays such as Chinese New Year and
Cinco de Mayo at its branches. In addition, the active involvement of
directors and officers in various ethnic civic organizations allows management
to better understand and respond to the needs of each community that it
serves. Management believes that each ethnic group has its own unique cultural
characteristics and tailors its products and services to best serve each
group. For example, the Company offers deposit products that appeal to the
unique saving philosophies of various ethnic groups. The Company believes that
this awareness, personalized service and a broad array of products gives it a
distinct competitive advantage in its chosen market areas.
The Bank was organized in 1987 by Don J. Wang, the Company's current
Chairman of the Board, President and Chief Executive Officer, and five other
Asian-American small business owners, four of whom currently serve as
directors of the Company and the Bank. The organizers perceived that the
financial needs of various ethnic groups in Houston were not being adequately
served and sought to provide modern banking products and services that
accommodated the cultures of the businesses operating in these communities. In
1989, the Company expanded its service philosophy to Houston's Hispanic
community by acquiring from the Federal Deposit Insurance Corporation (the
"FDIC") the assets and liabilities of a community bank located in a primarily
Hispanic section of Houston. This acquisition broadened the Company's market
and increased its assets from approximately $30.0 million to approximately
$100.0 million. Other than this acquisition, the Company has accomplished its
growth internally through the establishment of de novo branches in market
areas with large Asian and Hispanic communities. Since its formation in 1987,
the Company has established 11 branches in the greater Houston metropolitan
area. In 1996, the Company expanded into the Dallas market. The success of the
Dallas branch, whose deposits increased to $45.9 million from opening to
December 31, 2000, prompted the Company to establish a second branch in the
greater Dallas metropolitan area in 1998 and a third branch in 1999.
3
Business
In connection with the Company's multi-ethnic approach to community
banking, the Company offers products designed to appeal to its customers and
further enhance profitability. The Company believes that it has developed a
reputation as the premier provider of financial products and services to small
and medium-sized businesses and consumers located in the Asian and Hispanic
communities that it serves. Each of its product lines is an outgrowth of the
Company's expertise in meeting the particular needs of its customers. The
Company's principal lines of business are the following:
Commercial and Industrial Loans. The primary lending focus of the
Company is to small and medium-sized businesses in a variety of industries.
Its commercial lending emphasis includes loans to wholesalers,
manufacturers and business service companies. The Company makes available
to businesses a broad range of short and medium-term commercial lending
products for working capital (including inventory and accounts receivable),
purchases of equipment and machinery and business expansion (including
acquisitions of real estate and improvements). As of December 31, 2000, the
Company's commercial and industrial loan portfolio totaled $298.1 million
or 60.9% of the gross loan portfolio. At that date, the Company had a
concentration of loans in the hotel and motel industry of $79.0 million.
Hotel and motel lending was originally targeted by the Company because of
management's particular expertise in this industry and a perception that it
was an under-served market. More recently, the Company has broadened its
lending strategy in efforts to further diversify its portfolio to other
industries such as retail centers, restaurants, self-service gasoline and
convenience marts, apartment buildings, and various other small businesses.
Commercial Mortgage Loans. The Company makes commercial mortgage loans
to finance the purchase of real property, which generally consists of
developed real estate. The Company's commercial mortgage loans are secured
by first liens on real estate, typically have variable rates and amortize
over a 15 to 20 year period, with balloon payments due at the end of five
to seven years. As of December 31, 2000, the Company had a commercial
mortgage portfolio of $128.2 million.
Construction Loans. The Company makes loans to finance the construction
of residential and non-residential properties. The majority of the
Company's residential construction loans are for single-family dwellings,
which are under earnest money contracts. The Company also originates loans
to finance the construction of commercial properties such as multi-family,
office, industrial, warehouse and retail centers. As of December 31, 2000,
the Company had a real estate construction portfolio of $39.6 million, of
which $7.5 million was residential and $32.1 million was commercial.
Residential Mortgage Brokerage and Lending. The Company uses its
existing branch network to offer a complete line of single-family
residential mortgage products. The Company solicits and receives a fee to
process residential mortgage loans, which are underwritten and pre-sold to
third party mortgage companies. The Company does not fund or service the
loans underwritten by third party mortgage companies. The Company also
makes five to seven year balloon residential mortgage loans with a 15-year
amortization to its existing customers on a select basis, which loans are
retained in the Company's portfolio. At December 31, 2000, the residential
mortgage portfolio totaled $10.1 million.
Government Guaranteed Small Business Lending. The Company has developed
an expertise in several government guaranteed lending programs in order to
provide credit enhancement to its commercial and industrial and mortgage
portfolios. As a Preferred Lender under the United States Small Business
Administration (the "SBA") federally guaranteed lending program, the
Company's pre-approved status allows it to quickly respond to customers'
needs. Depending upon prevailing market conditions, the Company may sell
the guaranteed portion of these loans into the secondary market, yet retain
servicing of these loans. The Company specializes in SBA loans to minority-
owned businesses. As of December 31, 2000, the Company had $88.1 million in
the retained portion of its SBA loans, approximately $56.3 million of which
was guaranteed by the SBA. For each of the last six years, the Company has
been the second (1995 to 1999) and third (year 2000) largest SBA loan
originator in Houston in terms of dollar volume. Another source of
government guaranteed lending provided by the Company is Business and
Industrial loans ("B&I Loans") which are secured by the U.S. Department of
Agriculture (the "USDA") and are
4
available to borrowers in areas with a population of less than 50,000. As
of December 31, 2000, the Company's USDA portfolio totaled $5.3 million.
The Company also offers guaranteed loans through the Overseas Chinese
Credit Guaranty Fund ("OCCGF"), which is sponsored by the government of
Taiwan. These loans are for people of Chinese decent or origin, who are not
mainland Chinese by birth and who reside "overseas." As of December 31,
2000, the Company's OCCGF portfolio totaled $6.6 million.
Trade Finance. Since its inception in 1987, the Company has originated
trade finance loans and letters of credit to facilitate export and import
transactions for small and medium-sized businesses. In this capacity, the
Company has worked with the Export Import Bank of the United States (the
"Ex-Im Bank"), an agency of the U.S. Government which provides guarantees
for trade finance loans. In 1998, the Company was named Small Business Bank
of the Year by the Ex-Im Bank, and it was the largest Ex-Im Bank loan
producer in the State of Texas. At December 31, 2000, the Company's
aggregate trade finance portfolio commitments totaled approximately $11.3
million.
The Company offers a variety of loan and deposit products and services to
retail customers through its branch network in Houston and Dallas. Loans to
retail customers include residential mortgage loans, residential construction
loans, automobile loans, lines of credit and other personal loans. Retail
deposit products and services include checking and savings accounts, money
market accounts, time deposits, ATM cards, debit cards and online banking.
The Company's overall business strategy is to (i) continue to service its
small and medium-sized owner-operated businesses and retail customers,
especially in the Asian and Hispanic communities by providing individualized,
responsive, quality service, and (ii) expand its geographic reach either
through selective acquisitions of existing financial institutions or by
establishing de novo branches in multi-ethnic markets with significant small
and medium-sized business activity.
In 1994, the Bank established an accounts receivable factoring subsidiary,
Advantage Finance Corporation ("AFC"), to provide financing to small and
medium-sized businesses that have accounts receivables. In late May 2000, the
Company discovered AFC had been a victim of a fraudulent scheme by a long-time
customer of AFC which required a one-time charge-off of $5.3 million against
the Bank's loan loss reserve during the second quarter of 2000. During the
second quarter of 2000, the Bank added back to its loan loss reserve an amount
equal to the charge-off. In order to concentrate its efforts on core business
strategies and products, effective December 20, 2000, the Company sold AFC to
a third party. The sale consisted of $3.2 million in AFC's factored
receivables, $1.2 million in AFC's relationship loans originated by the Bank,
along with associated fixed assets and prepaid expenses, offset by accounts
payable and deferred loan fees, for an aggregate cash payment of $4.3 million.
All of AFC's employees were offered employment with the purchaser as part of
the transaction. In connection with the sale of AFC, the Bank closed its
branch located in the Galleria area of Houston. However, the Bank retained the
loan and deposit portfolios associated with the Galleria branch, which totaled
$18.3 million and $13.5 million, respectively, at December 31, 2000.
Competition
The banking business is highly competitive, and the profitability of the
Company depends principally on the Company's ability to compete in the market
areas in which its banking operations are located. The Company competes with
other commercial banks, savings banks, savings and loan associations, credit
unions, finance companies, mutual funds, insurance companies, brokerage and
investment banking firms, asset-based non-bank lenders and certain other non-
financial entities, including retail stores which may maintain their own
credit programs and certain governmental organizations which may offer more
favorable financing. The Company has been able to compete effectively with
other financial institutions by emphasizing customer service, technology and
responsive decision-making. Additionally, management believes the Company
remains competitive by establishing long-term customer relationships, building
customer loyalty and providing a broad line of products and services designed
to address the specific needs of its customers.
5
Under the Gramm-Leach-Bliley Act, effective March 11, 2000, securities
firms and insurance companies that elect to become financial holding companies
may acquire banks and other financial institutions. The Gramm-Leach-Bliley Act
may significantly change the competitive environment in which the Company and
its subsidiaries conduct business. See "--Supervision and Regulation--The
Company--Financial Modernization". The financial services industry is also
likely to become even more competitive as further technological advances
enable more companies to provide financial services. These technological
advances may diminish the importance of depository institutions and other
financial intermediaries in the transfer of funds between parties.
Employees
As of December 31, 2000, the Company had 319 full-time equivalent
employees, 31 of whom were officers of the Bank classified as Vice President
or above. The Company considers its relations with employees to be
satisfactory.
Supervision and Regulation
The supervision and regulation of bank holding companies and their
subsidiaries is intended primarily for the protection of depositors, the
deposit insurance funds of the FDIC and the banking system as a whole, and not
for the protection of the bank holding company shareholders or creditors. The
banking agencies have broad enforcement power over bank holding companies and
banks including the power to impose substantial fines and other penalties for
violations of laws and regulations.
The following description summarizes some of the laws to which the Company
and the Bank are subject. References herein to applicable statutes and
regulations are brief summaries thereof, do not purport to be complete, and
are qualified in their entirety by reference to such statutes and regulations.
The Company
The Company is a bank holding company registered under the Bank Holding
Company Act, as amended, (the "BHCA"), and it is subject to supervision,
regulation and examination by the Board of Governors of the Federal Reserve
System ("Federal Reserve Board"). The BHCA and other federal laws subject bank
holding companies to particular restrictions on the types of activities in
which they may engage, and to a range of supervisory requirements and
activities, including regulatory enforcement actions for violations of laws
and regulations.
Regulatory Restrictions on Dividends: Source of Strength. It is the policy
of the Federal Reserve Board that bank holding companies should pay cash
dividends on common stock only out of income available over the past year and
only if prospective earnings retention is consistent with the organization's
expected future needs and financial condition. The policy provides that bank
holding companies should not maintain a level of cash dividends that
undermines the bank holding company's ability to serve as a source of strength
to its banking subsidiaries.
Under Federal Reserve Board policy, a bank holding company is expected to
act as a source of financial strength to each of its banking subsidiaries and
commit resources to their support. Such support may be required at times when,
absent this Federal Reserve Board policy, a holding company may not be
inclined to provide it. As discussed below, a bank holding company in certain
circumstances could be required to guarantee the capital plan of an
undercapitalized banking subsidiary.
In the event of a bank holding company's bankruptcy under Chapter 11 of the
U.S. Bankruptcy Code, the trustee will be deemed to have assumed and is
required to cure immediately any deficit under any commitment by the debtor
holding company to any of the federal banking agencies to maintain the capital
of an insured depository institution, and any claim for breach of such
obligation will generally have priority over most other unsecured claims.
6
Financial Modernization. On November 12, 1999, President Clinton signed
into law the Gramm-Leach-Bliley Act that eliminated the barriers to
affiliations among banks, securities firms, insurance companies and other
financial service providers. The Gramm-Leach-Bliley Act, effective March 11,
2000, permits bank holding companies to become financial holding companies and
thereby affiliate with securities firms and insurance companies and engage in
other activities that are financial in nature. No regulatory approval will be
required for a financial holding company to acquire a company, other than a
bank or savings association, engaged in activities that are financial in
nature or incidental to activities that are financial in nature, as determined
by the Federal Reserve Board.
Under the Gramm-Leach-Bliley Act, a bank holding company may become a
financial holding company if each of its subsidiary banks is well capitalized
under the Federal Deposit Insurance Corporation Improvement Act ("FDICIA")
prompt corrective action provisions, is well managed, and has at least a
satisfactory rating under the Community Reinvestment Act of 1977 ("CRA") by
filing a declaration that the bank holding company wishes to become a
financial holding company. The Gramm-Leach-Bliley Act defines "financial in
nature" to include securities underwriting, dealing and market making;
sponsoring mutual funds and investment companies; insurance underwriting and
agency; merchant banking activities; and activities that the Federal Reserve
Board has determined to be closely related to banking. Subsidiary banks of a
financial holding company must remain well capitalized and well managed in
order to continue to engage in activities that are financial in nature without
regulatory actions or restrictions, which could include divestiture of the
financial in nature subsidiary or subsidiaries. In addition, a financial
holding company may not acquire a company that is engaged in activities that
are financial in nature unless each of its subsidiary banks has a CRA rating
of satisfactory or better.
While the Federal Reserve Board will serve as the "umbrella" regulator for
financial holding companies and has the power to examine banking organizations
engaged in new activities, regulation and supervision of activities which are
financial in nature or determined to be incidental to such financial
activities will be handled along functional lines. Accordingly, activities of
subsidiaries of a financial holding company will be regulated by the agency or
authorities with the most experience regulating that activity as it is
conducted in a financial holding company.
Safe and Sound Banking Practices. Bank holding companies are not permitted
to engage in unsafe and unsound banking practices. The Federal Reserve Board's
Regulation Y, for example, generally requires a holding company to give the
Federal Reserve Board prior notice of any redemption or repurchase of its own
equity securities, if the consideration to be paid, together with the
consideration paid for any repurchases or redemptions in the preceding year,
is equal to 10% or more of the company's consolidated net worth. The Federal
Reserve Board may oppose the transaction if it believes that the transaction
would constitute an unsafe or unsound practice or would violate any law or
regulation. Prior approval of the Federal Reserve Board would not be required
for the redemption or purchase of equity securities for a bank holding company
that would be well capitalized both before and after such transaction, well-
managed and not subject to unresolved supervisory issues.
The Federal Reserve Board has broad authority to prohibit activities of
bank holding companies and their non-banking subsidiaries which represent
unsafe and unsound banking practices or which constitute violations of laws or
regulations, and can assess civil money penalties for certain activities
conducted on a knowing and reckless basis, if those activities caused a
substantial loss to a depository institution. The penalties can be as high as
$1.0 million for each day the activity continues.
Anti-Tying Restrictions. Bank holding companies and their affiliates are
prohibited from tying the provision of certain services, such as extensions of
credit, to other services offered by a holding company or its affiliates.
Capital Adequacy Requirements. The Federal Reserve Board has adopted a
system using risk-based capital guidelines to evaluate the capital adequacy of
bank holding companies. Under the guidelines, specific categories of assets
are assigned different risk weights, based generally on the perceived credit
risk of the asset. These risk weights are multiplied by corresponding asset
balances to determine a "risk-weighted" asset base. The guidelines
7
require a minimum total risk-based capital ratio of 8.0% (of which at least
4.0% is required to consist of Tier 1 capital elements). Total capital is the
sum of Tier 1 and Tier 2 capital. As of December 31, 2000, the Company's ratio
of Tier 1 capital to total risk-weighted assets was 11.74% and its ratio of
total capital to total risk-weighted assets was 13.00%.
In addition to the risk-based capital guidelines, the Federal Reserve Board
uses a leverage ratio as an additional tool to evaluate the capital adequacy
of bank holding companies. The leverage ratio is a company's Tier 1 capital
divided by its average total consolidated assets. Certain highly rated bank
holding companies may maintain a minimum leverage ratio of 3.0%, but other
bank holding companies may be required to maintain a leverage ratio of at
least 4.0%. As of December 31, 2000, the Company's leverage ratio was 8.39%.
The federal banking agencies' risk-based and leverage ratios are minimum
supervisory ratios generally applicable to banking organizations that meet
certain specified criteria. The federal bank regulatory agencies may set
capital requirements for a particular banking organization that are higher
than the minimum ratios when circumstances warrant. Federal Reserve Board
guidelines also provide that banking organizations experiencing internal
growth or making acquisitions will be expected to maintain strong capital
positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets.
Imposition of Liability for Undercapitalized Subsidiaries. Bank regulators
are required to take "prompt corrective action" to resolve problems associated
with insured depository institutions whose capital declines below certain
levels. In the event an institution becomes "undercapitalized," it must submit
a capital restoration plan. The capital restoration plan will not be accepted
by the regulators unless each company having control of the undercapitalized
institution guarantees the subsidiary's compliance with the capital
restoration plan up to a certain specified amount. Any such guarantee from a
depository institution's holding company is entitled to a priority of payment
in bankruptcy.
The aggregate liability of the holding company of an undercapitalized bank
is limited to the lesser of 5% of the institution's assets at the time it
became undercapitalized or the amount necessary to cause the institution to be
"adequately capitalized." The bank regulators have greater power in situations
where an institution becomes "significantly" or "critically" undercapitalized
or fails to submit a capital restoration plan. For example, a bank holding
company controlling such an institution can be required to obtain prior
Federal Reserve Board approval of proposed dividends, or might be required to
consent to a consolidation or to divest the troubled institution or other
affiliates.
Acquisitions by Bank Holding Companies. The BHCA requires every bank
holding company to obtain the prior approval of the Federal Reserve Board
before it may acquire all or substantially all of the assets of any bank, or
ownership or control of any voting shares of any bank, if after such
acquisition it would own or control, directly or indirectly, more than 5% of
the voting shares of such bank. In approving bank acquisitions by bank holding
companies, the Federal Reserve Board is required to consider the financial and
managerial resources and future prospects of the bank holding company and the
banks concerned, the convenience and needs of the communities to be served,
and various competitive factors.
Control Acquisitions. The Change in Bank Control Act prohibits a person or
group of persons from acquiring "control" of a bank holding company unless the
Federal Reserve Board has been notified and has not objected to the
transaction. Under a rebuttable presumption established by the Federal Reserve
Board, the acquisition of 10% of more of a class of voting stock of a bank
holding company with a class of securities registered under Section 12 of the
Exchange Act, such as the Company, would, under the circumstances set forth in
the presumption, constitute acquisition of control of the Company.
In addition, any entity is required to obtain the approval of the Federal
Reserve Board under the BHCA before acquiring 25% (5% in the case of an
acquirer that is a bank holding company) or more of the outstanding Common
Stock of the Company, or otherwise obtaining control or a "controlling
influence" over the Company.
8
The Bank
The Bank is a nationally chartered banking association, the deposits of
which are insured by the Bank Insurance Fund ("BIF") of the FDIC. The Bank's
primary regulator is the Office of the Comptroller of the Currency (the
"OCC"). By virtue of the insurance of its deposits, however, the Bank is also
subject to supervision and regulation by the FDIC. Such supervision and
regulation subjects the Bank to special restrictions, requirements, potential
enforcement actions, and periodic examination by the OCC. Because the Federal
Reserve Board regulates the bank holding company parent of the Bank, the
Federal Reserve Board also has supervisory authority, which directly affects
the Bank.
Financial Modernization. Under the Gramm-Leach-Bliley Act, a national bank
may establish a financial subsidiary and engage, subject to limitations on
investment, in activities that are financial in nature, other than insurance
underwriting, insurance company portfolio investment, real estate development,
real estate investment, annuity issuance and merchant banking activities. To
do so, a bank must be well capitalized, well managed and have a CRA rating of
satisfactory or better. National banks with financial subsidiaries must remain
well capitalized and well managed in order to continue to engage in activities
that are financial in nature without regulatory actions or restrictions, which
could include divestiture of the financial in nature subsidiary or
subsidiaries. In addition, a bank may not acquire a company that is engaged in
activities that are financial in nature unless the bank has a CRA rating of
satisfactory or better.
Branching. The establishment of a branch must be approved by the OCC, which
considers a number of factors, including financial history, capital adequacy,
earnings prospects, character of management, needs of the community and
consistency with corporate powers.
Restrictions on Transactions with Affiliates and Insiders. Transactions
between the Bank and its non-banking affiliates, including the Company, are
subject to Section 23A of the Federal Reserve Act. An affiliate of a bank is
any company or entity that controls, is controlled by, or is under common
control with the bank. In general, Section 23A imposes limits on the amount of
such transactions, and also requires certain levels of collateral for loans to
affiliated parties. It also limits the amount of advances to third parties
which are collateralized by the securities or obligations of the Company or
its non-banking subsidiaries.
Affiliate transactions are also subject to Section 23B of the Federal
Reserve Act which generally requires that certain transactions between the
Bank and its affiliates be on terms substantially the same, or at least as
favorable to the Bank, as those prevailing at the time for comparable
transactions with or involving other nonaffiliated persons.
The restrictions on loans to directors, executive officers, principal
shareholders and their related interests (collectively referred to herein as
"insiders") contained in the Federal Reserve Act and Regulation O apply to all
insured depository institutions and their subsidiaries. These restrictions
include limits on loans to one borrower and conditions that must be met before
such a loan can be made. There is also an aggregate limitation on all loans to
insiders and their related interests. These loans cannot exceed the
institution's total unimpaired capital and surplus, and the OCC may determine
that a lesser amount is appropriate. Insiders are subject to enforcement
actions for knowingly accepting loans in violation of applicable restrictions.
Restrictions on Distribution of Subsidiary Bank Dividends and Assets.
Dividends paid by the Bank have provided a substantial part of the Company's
operating funds and for the foreseeable future it is anticipated that
dividends paid by the Bank to the Company will continue to be the Company's
principal source of operating funds. Capital adequacy requirements serve to
limit the amount of dividends that may be paid by the Bank. Until capital
surplus equals or exceeds capital stock, a national bank must transfer to
surplus 10% of its net income for the preceding four quarters in the case of
an annual dividend or 10% of its net income for the preceding two quarters in
the case of a quarterly or semiannual dividend. At December 31, 2000, the
Bank's capital surplus exceeded its capital stock. Without prior approval, a
national bank may not declare a dividend if the total amount of all dividends,
declared by the bank in any calendar year exceeds the total of the bank's
retained net income
9
for the current year and retained net income for the preceding two years.
Under federal law, the Bank cannot pay a dividend if, after paying the
dividend, the Bank will be "undercapitalized." The OCC may declare a dividend
payment to be unsafe and unsound even though the Bank would continue to meet
its capital requirements after the dividend.
Because the Company is a legal entity separate and distinct from its
subsidiaries, its right to participate in the distribution of assets of any
subsidiary upon the subsidiary's liquidation or reorganization will be subject
to the prior claims of the subsidiary's creditors. In the event of a
liquidation or other resolution of an insured depository institution, the
claims of depositors and other general or subordinated creditors are entitled
to a priority of payment over the claims of holders of any obligation of the
institution to its shareholders, arising as a result of their status as
shareholders, including any depository institution holding company (such as
the Company) or any shareholder or creditor thereof.
Examinations. The OCC periodically examines and evaluates insured banks.
Based upon such an evaluation, the OCC may revalue the assets of the
institution and require that it establish specific reserves to compensate for
the difference between the OCC-determined value and the book value of such
assets.
Audit Reports. Insured institutions with total assets of $500 million or
more must submit annual audit reports prepared by independent auditors to
federal regulators. In some instances, the audit report of the institution's
holding company can be used to satisfy this requirement. Auditors must receive
examination reports, supervisory agreements, and reports of enforcement
actions. In addition, financial statements prepared in accordance with
accounting principles generally accepted in the U.S., management's
certifications concerning responsibility for the financial statements,
internal controls and compliance with legal requirements designated by the
OCC, and an attestation by the auditor regarding the statements of management
relating to the internal controls must be submitted. For institutions with
total assets of more than $3 billion, independent auditors may be required to
review quarterly financial statements. The Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") requires that independent audit
committees be formed, consisting of outside directors only. The committees of
such institutions must include members with experience in banking or financial
management, must have access to outside counsel, and must not include
representatives of large customers.
Capital Adequacy Requirements. Similar to the Federal Reserve Board's
requirements for bank holding companies, the OCC has adopted regulations
establishing minimum requirements for the capital adequacy of national banks.
The OCC may establish higher minimum requirements if, for example, a bank has
previously received special attention or has a high susceptibility to interest
rate risk.
The OCC's risk-based capital guidelines generally require national banks to
have a minimum ratio of Tier 1 capital to total risk-weighted assets of 4.0%
and a ratio of total capital to total risk-weighted assets of 8.0%. As of
December 31, 2000, the Bank's ratio of Tier 1 capital to total risk-weighted
assets was 11.21% and its ratio of total capital to total risk-weighted assets
was 12.47%.
The OCC's leverage guidelines require national banks to maintain Tier 1
capital of no less than 4.0% of average total assets, except in the case of
certain highly rated banks for which the requirement is 3.0% of average total
assets unless a higher leverage capital ratio is warranted by the particular
circumstances or risk profile of the depository institution. As of December
31, 2000, the Bank's ratio of Tier 1 capital to average total assets (leverage
ratio) was 8.01%.
Corrective Measures for Capital Deficiencies. The federal banking
regulators are required to take "prompt corrective action" with respect to
capital-deficient institutions. Agency regulations define, for each capital
category, the levels at which institutions are "well capitalized," "adequately
capitalized," "under capitalized," "significantly under capitalized" and
"critically under capitalized." A "well capitalized" bank has a total risk-
based capital ratio of 10.0% or higher; a Tier 1 risk-based capital ratio of
6.0% or higher; a leverage ratio of 5.0% or higher; and is not subject to any
written agreement, order or directive requiring it to maintain a specific
capital level for any capital measure. An "adequately capitalized" bank has a
total risk-based capital ratio of
10
8.0% or higher; a Tier 1 risk-based capital ratio of 4.0% or higher; a
leverage ratio of 4.0% or higher (3.0% or higher if the bank was rated a
composite 1 in its most recent examination report and is not experiencing
significant growth); and does not meet the criteria for a well capitalized
bank. A bank is "under capitalized" if it fails to meet any one of the ratios
required to be adequately capitalized.
In addition to requiring undercapitalized institutions to submit a capital
restoration plan, agency regulations authorize broad restrictions on certain
activities of undercapitalized institutions including asset growth,
acquisitions, branch establishment, and expansion into new lines of business.
With certain exceptions, an insured depository institution is prohibited from
making capital distributions, including dividends, and is prohibited from
paying management fees to control persons if the institution would be
undercapitalized after any such distribution or payment.
As an institution's capital decreases, the OCC's enforcement powers become
more severe. A significantly undercapitalized institution is subject to
mandated capital raising activities, restrictions on interest rates paid and
transactions with affiliates, removal of management, and other restrictions.
The OCC has only very limited discretion in dealing with a critically
undercapitalized institution and is virtually required to appoint a receiver
or conservator.
Banks with risk-based capital and leverage ratios below the required
minimums may also be subject to certain administrative actions, including the
termination of deposit insurance upon notice and hearing, or a temporary
suspension of insurance without a hearing in the event the institution has no
tangible capital.
Deposit Insurance Assessments. The Bank must pay assessments to the FDIC
for federal deposit insurance protection. The FDIC has adopted a risk-based
assessment system as required by FDICIA. Under this system, FDIC-insured
depository institutions pay insurance premiums at rates based on their risk
classification. Institutions assigned to higher-risk classifications (that is,
institutions that pose a greater risk of loss to their respective deposit
insurance funds) pay assessments at higher rates than institutions that pose a
lower risk. An institution's risk classification is assigned based on its
capital levels and the level of supervisory concern the institution poses to
the regulators. In addition, the FDIC can impose special assessments in
certain instances. The current range of BIF assessments is between 0% and
0.27% of deposits.
The FDIC established a process for raising or lowering all rates for
insured institutions semi-annually if conditions warrant a change. Under this
new system, the FDIC has the flexibility to adjust the assessment rate
schedule twice a year without seeking prior public comment, but only within a
range of five cents per $100 above or below the assessment schedule adopted.
Changes in the rate schedule outside the five-cent range above or below the
current schedule can be made by the FDIC only after a full rulemaking with
opportunity for public comment.
On September 30, 1996, President Clinton signed into law an act that
contained a comprehensive approach to recapitalizing the Savings Association
Insurance Fund ("SAIF") and to assure the payment of the Financing
Corporation's ("FICO") bond obligations. Under this act, banks insured under
the BIF are required to pay a portion of the interest due on bonds that were
issued by FICO to help shore up the ailing Federal Savings and Loan Insurance
Corporation in 1987. The BIF rate was required to equal one-fifth of the SAIF
rate through year-end 1999, or until the insurance funds were merged,
whichever occurred first. Thereafter, BIF and SAIF payers will be assessed pro
rata for the FICO bond obligations. With regard to the assessment for the FICO
obligation, for the fourth quarter of 2000, the BIF and SAIF rates were
.02120% of deposits.
Enforcement Powers. The FDIC and the other federal banking agencies have
broad enforcement powers, including the power to terminate deposit insurance,
impose substantial fines and other civil and criminal penalties, and appoint a
conservator or receiver. Failure to comply with applicable laws, regulations
and supervisory agreements could subject the Company or its banking
subsidiaries, as well as officers, directors and other institution-affiliated
parties of these organizations, to administrative sanctions and potentially
substantial civil money penalties. The appropriate federal banking agency may
appoint the FDIC as conservator or receiver
11
for a banking institution (or the FDIC may appoint itself, under certain
circumstances) if any one or more of a number of circumstances exist,
including, without limitation, the fact that the banking institution is
undercapitalized and has no reasonable prospect of becoming adequately
capitalized; fails to become adequately capitalized when required to do so;
fails to submit a timely and acceptable capital restoration plan; or
materially fails to implement an accepted capital restoration plan.
Brokered Deposit Restrictions. Adequately capitalized institutions (as
defined for purposes of the prompt corrective action rules described above)
cannot accept, renew or roll over brokered deposits except with a waiver from
the FDIC, and are subject to restrictions on the interest rates that can be
paid on such deposits. Undercapitalized institutions may not accept, renew, or
roll over brokered deposits.
Cross-Guarantee Provisions. The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") contains a "cross-guarantee" provision
which generally makes commonly controlled insured depository institutions
liable to the FDIC for any losses incurred in connection with the failure of a
commonly controlled depository institution.
Community Reinvestment Act. The CRA and the regulations issued thereunder
are intended to encourage banks to help meet the credit needs of their service
area, including low and moderate-income neighborhoods, consistent with the
safe and sound operations of the banks. These regulations also provide for
regulatory assessment of a bank's record in meeting the needs of its service
area when considering applications to establish branches, merger applications
and applications to acquire the assets and assume the liabilities of another
bank. FIRREA requires federal banking agencies to make public a rating of a
bank's performance under the CRA. In the case of a bank holding company, the
CRA performance record of the banks involved in the transaction are reviewed
in connection with the filing of an application to acquire ownership or
control of shares or assets of a bank or to merge with any other bank holding
company. An unsatisfactory record can substantially delay or block the
transaction.
Consumer Laws and Regulations. In addition to the laws and regulations
discussed herein, the Bank is also subject to certain consumer laws and
regulations that are designed to protect consumers in transactions with banks.
While the list set forth herein is not exhaustive, these laws and regulations
include the Truth in Lending Act, the Truth in Savings Act, the Electronic
Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit
Opportunity Act, and the Fair Housing Act, among others. These laws and
regulations mandate certain disclosure requirements and regulate the manner in
which financial institutions must deal with customers when taking deposits or
making loans to such customers. The Bank must comply with the applicable
provisions of these consumer protection laws and regulations as part of their
ongoing customer relations.
Instability of Regulatory Structure
Various legislation, such as the Gramm-Leach-Bliley Act which expanded the
powers of banking institutions and bank holding companies, and proposals to
overhaul the bank regulatory system and limit the investments that a
depository institution may make with insured funds, is from time to time
introduced in Congress. Such legislation may change banking statutes and the
operating environment of the Company and its banking subsidiaries in
substantial and unpredictable ways. The Company cannot determine the ultimate
effect that the Gramm-Leach-Bliley Act will have or the effect that potential
legislation, if enacted, or implementing regulations with respect thereto,
would have upon the financial condition or results of operations of the
Company or its subsidiaries.
Expanding Enforcement Authority
One of the major additional burdens imposed on the banking industry by
FDICIA is the increased ability of banking regulators to monitor the
activities of banks and their holding companies. In addition, the Federal
Reserve Board and OCC possess extensive authority to police unsafe or unsound
practices and violations of applicable laws and regulations by depository
institutions and their holding companies. For example, the FDIC
12
may terminate the deposit insurance of any institution which it determines has
engaged in an unsafe or unsound practice. The agencies can also assess civil
money penalties, issue cease and desist or removal orders, seek injunctions,
and publicly disclose such actions. FDICIA, FIRREA and other laws have
expanded the agencies' authority in recent years, and the agencies have not
yet fully tested the limits of their powers.
Effect on Economic Environment
The policies of regulatory authorities, including the monetary policy of
the Federal Reserve Board, have a significant effect on the operating results
of bank holding companies and their subsidiaries. Among the means available to
the Federal Reserve Board to affect the money supply are open market
operations in U.S. Government securities, changes in the discount rate or
federal funds rate on member bank borrowings, and changes in reserve
requirements against member bank deposits. These means are used in varying
combinations to influence overall growth and distribution of bank loans,
investments and deposits, and their use may affect interest rates charged on
loans or paid for deposits.
Federal Reserve Board monetary policies have materially affected the
operating results of commercial banks in the past and are expected to continue
to do so in the future. The nature of future monetary policies and the effect
of such policies on the business and earnings of the Company and its
subsidiaries cannot be predicted.
13
Item 2. Properties
Facilities
The Company conducts business at 15 locations, 11 of which are leased.
Included are 14 full-service banking locations and the Company's corporate
offices. The following table sets forth specific information on each such
location. The Company's headquarters are located at 9600 Bellaire Boulevard,
Suite 252, Houston, Texas. The lease for the Company's corporate headquarters
will expire in December 2005.
Deposits at
Sq. December 31,
Location Owned/Leased Ft. 2000
-------- ------------ ------ --------------
(in thousands)
Houston Area:
Bellaire Boulevard........................... Leased 7,002 $290,668
9600 Bellaire Boulevard, Suite 100
East......................................... Owned 16,400 85,288
6730 Capitol at Wayside
Chinatown.................................... Leased 2,500 23,370
1005 Saint Emanuel
Sugar Land................................... Owned 5,665 37,218
15144 Southwest Freeway
Harwin....................................... Leased 2,463 26,163
10000 Harwin Drive
Clear Lake................................... Owned 1,986 30,552
2424 Bay Area Boulevard
Veterans Memorial............................ Owned 5,571 23,369
13480 Veterans Memorial Boulevard
Milam........................................ Leased 2,546 11,220
2808 Milam Street
Corporate Offices............................ Leased 25,127 N/A
9600 Bellaire Boulevard, Suite 252
Boone Road................................... Leased 905 5,360
11205 Bellaire Boulevard, Suite B-9
Dulles....................................... Leased 479 12,085
4635 Highway 6
Long Point................................... Leased 3,000 12,876
1426 Blalock
Dallas Area:
Richardson................................... Leased 4,948 48,297
275 West Campbell Road
Dallas (Harry Hines)......................... Leased 3,000 13,447
2527 Royal Lane
Garland...................................... Leased 2,400 5,993
3500 West Walnut Street
14
Item 3. Legal Proceedings
Legal Proceedings
The Company and the Bank are from time to time parties to or otherwise
involved in legal proceedings arising in the normal course of business.
Management does not believe that there is any pending or threatened proceeding
against the Company or the Bank which, if determined adversely, would have a
material effect on the Company's or the Bank's business, financial condition,
results of operation or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of 2000.
PART II
Item 5. Market for Registrant's Common Equity and Related Share Matters
The Company's Common Stock is listed on the Nasdaq National Market System
("Nasdaq NMS") under the symbol "MCBI." As of March 9, 2001, there were
6,981,484 shares outstanding and 168 shareholders of record. The number of
beneficial owners is unknown to the Company at this time.
The following table presents the high and low sales prices for the Common
Stock reported on the Nasdaq NMS during the two years ended December 31, 2000:
2000 High Low
---- ------- ------
Fourth quarter................................................ $10.000 $7.875
Third quarter................................................. 9.750 6.500
Second quarter................................................ 8.125 6.250
First quarter................................................. 8.313 6.500
1999
----
Fourth quarter................................................ 9.875 7.750
Third quarter................................................. 10.188 8.375
Second quarter................................................ 10.000 8.375
First quarter................................................. 11.125 9.688
Dividends
Holders of Common Stock are entitled to receive dividends when, and if
declared by the Company's Board of Directors, out of funds legally available.
While the Company has declared and paid quarterly dividends since fourth
quarter 1998, there is no assurance that the Company will pay dividends in the
future.
The cash dividends paid per share by quarter for the Company's last two
fiscal years were as follows:
2000 1999
----- -----
Fourth quarter................................................... $0.06 $0.06
Third quarter.................................................... 0.06 0.06
Second quarter................................................... 0.06 0.06
First quarter.................................................... 0.06 0.06
The principal source of cash revenues to the Company is dividends paid by
the Bank with respect to the Bank's capital stock. There are certain
restrictions on the payment of such dividends imposed by federal banking laws,
regulations and authorities. Until capital surplus equals or exceeds capital,
a national bank must transfer to surplus 10% of its net income for the
preceding four quarters in the case of an annual dividend or 10% of its net
income for the preceding two quarters in the case of a quarterly or semiannual
dividend. As of December 31,
15
2000, the Bank's capital surplus exceeded its capital stock. Without prior
approval, a national bank may not declare a dividend if the total amount of
all dividends, declared by the bank in any calendar year exceeds the total of
the bank's retained net income for the current year and retained net income
for the preceding two years. As of December 31, 2000, an aggregate of
approximately $17.4 million was available for payment of dividends by the Bank
to the Company under applicable restrictions, without regulatory approval.
Regulatory authorities could impose administratively stricter limitations on
the ability of the Bank to pay dividends to the Company if such limits were
deemed appropriate to preserve certain capital adequacy requirements.
In the future, the declaration and payment of dividends on the Common Stock
will depend upon the earnings and financial condition of the Company,
liquidity and capital requirements, the general economic and regulatory
climate, the Company's ability to service any equity or debt obligations
senior to the Common Stock and other factors deemed relevant by the Company's
Board of Directors.
Recent Sales of Unregistered Securities
Not applicable.
16
Item 6. Selected Consolidated Financial Data
The following Selected Consolidated Financial Data of the Company should be
read in conjunction with the consolidated financial statements of the Company,
and the notes thereto, appearing elsewhere in this Annual Report on Form 10-K,
and the information contained in "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations." The selected historical
consolidated financial data as of and for each of the five years in the period
ended December 31, 2000 are derived from the Company's Consolidated Financial
Statements which have been audited by independent auditors. Certain prior year
amounts have been reclassified to conform with the 2000 presentation.
Years Ended December 31,
------------------------------------------------
2000 1999 1998 1997(1) 1996(1)
-------- -------- -------- -------- --------
(Dollars in thousands)
Income Statement Data:
Interest income.............. $ 63,466 $ 53,668 $ 47,696 $ 41,155 $ 31,523
Interest expense............. 27,276 21,026 20,052 18,138 13,927
-------- -------- -------- -------- --------
Net interest income........ 36,190 32,642 27,644 23,017 17,596
Provision for loan losses.... 7,508 5,550 3,377 3,350 2,118
-------- -------- -------- -------- --------
Net interest income after
provision for loan
losses.................... 28,682 27,092 24,267 19,667 15,478
Noninterest income after
provision for loan losses... 7,032 6,088 5,609 4,391 3,446
Noninterest expense.......... 27,230 22,412 20,980 18,096 16,102
-------- -------- -------- -------- --------
Income before provision for
income taxes.............. 8,484 10,768 8,896 5,962 2,822
Provision for income taxes... 3,001 3,638 2,777 1,794 809
-------- -------- -------- -------- --------
Net income................... $ 5,483 $ 7,130 $ 6,119 $ 4,168 $ 2,013
======== ======== ======== ======== ========
Per Share Data:
Net income:
Basic...................... $ 0.79 $ 1.00 $ 1.08 $ 0.75 $ 0.38
Diluted.................... 0.79 1.00 1.06 0.74 0.37
Book value................... 8.42 7.38 7.14 5.49 4.73
Tangible book value.......... 8.42 7.38 7.14 5.49 4.73
Cash dividends declared...... 0.24 0.24 0.06 -- --
Weighted average shares
outstanding (in thousands):
Basic...................... 6,972 7,114 5,691 5,581 5,364
Diluted.................... 6,973 7,114 5,749 5,616 5,444
Balance Sheet Data at period
end:
Total assets................. $736,757 $660,589 $587,308 $505,051 $426,987
Securities................... 143,759 110,065 123,190 112,624 103,680
Total loans.................. 483,738 495,669 417,686 348,910 280,597
Allowance for loan losses.... 9,271 7,537 6,119 3,569 2,141
Total deposits............... 625,906 544,436 479,506 445,859 381,289
Other borrowings............. 25,573 55,636 50,043 21,611 14,566
Total shareholders' equity... 58,701 52,580 50,024 30,506 25,398
Average Balance Sheet Data:
Total assets................. $698,209 $620,646 $532,751 $469,097 $373,697
Securities................... 127,865 119,952 114,248 113,250 115,224
Total loans.................. 486,549 456,653 368,394 310,781 223,514
Allowance for loan losses.... 8,589 6,720 5,049 2,722 1,869
Deposits..................... 590,217 501,808 477,793 416,895 333,355
Total shareholders' equity... 53,462 53,010 33,992 28,369 24,090
Performance Ratios:
Return on average assets..... 0.79% 1.16% 1.15% 0.89% 0.54%
Return on average equity..... 10.26 13.52 18.00 14.69 8.36
Net interest margin.......... 5.57 5.56 5.50 5.22 5.02
Efficiency ratio(2).......... 62.98 57.92 63.48 66.48 76.73
17
Years Ended December 31,
----------------------------------------
2000 1999 1998 1997(1) 1996(1)
------ ------ ------ ------- -------
(Dollars in thousands)
Asset Quality Ratios:
Nonperforming assets to total loans
and other real estate............... 0.62% 1.42% 1.26% 0.94% 0.82%
Nonperforming assets to total
assets.............................. 0.40 1.07 0.90 0.65 0.54
Net loan charge-offs to average
loans............................... 1.19 0.90 0.22 0.62 0.71
Allowance for loan losses to total
loans............................... 1.92 1.52 1.46 1.02 0.76
Allowance for loan losses to
nonperforming loans(3).............. 416.67 115.03 132.44 134.02 135.42
Capital Ratios(4):
Leverage ratio(5).................... 8.39% 8.48% 8.83% 5.92% 6.04%
Average shareholders' equity to
average total assets................ 7.66 8.54 6.38 6.05 6.45
Tier-1 risk-based capital ratio--
period end.......................... 11.74 10.76 11.73 8.45 8.69
Total risk-based capital ratio--
period end.......................... 13.00 12.01 12.98 9.46 9.44
- --------
(1) Financial data prior to December 31, 1998 has been adjusted to reflect the
four-for-one exchange for the Bank stock.
(2) Calculated by dividing total noninterest expense by net interest income
plus noninterest income, excluding net securities gains and losses.
(3) Nonperforming assets consist of nonaccrual loans, loans contractually past
due 90 days or more and restructured loans.
(4) Capital ratios prior to 1998 are those of MetroBank, N.A.
(5) The leverage ratio is calculated by dividing Tier 1 capital at December 31
by full year average assets.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company analyzes the major elements of the Company's balance
sheets and statements of income. This section should be read in conjunction
with the Company's Consolidated Financial Statements and accompanying notes
and other detailed information appearing elsewhere in this document.
For the Years Ended December 31, 2000, 1999 and 1998
Overview
From December 31, 1998 to December 31, 2000, the Company experienced
consistent growth as assets increased from $587.3 million at December 31, 1998
to $736.8 million at December 31, 2000, an increase of $149.4 million or
25.4%. The increase was primarily due to the expansion of the branch network
and an increase in deposits that funded loan and investment growth. The
Company opened six branches during this period. Loans and investment
securities accounted for the majority of the Company's asset growth,
increasing from $417.7 million and $123.2 million to $483.7 million and $143.8
million over the three-year period ending December 31, 2000, respectively.
Supporting this growth was an increase in deposits, which rose from $479.5
million to $625.9 million, representing a 30.5% increase during the period.
Including the net proceeds from the initial public offering of Common Stock in
December 1998, shareholders' equity increased to $58.7 million at December 31,
2000, an increase of $8.7 million or 17.3% compared with $50.0 million at
December 31, 1998.
Net income available to shareholders was $5.5 million, $7.1 million and
$6.1 million for the years ended December 31, 2000, 1999 and 1998,
respectively, and diluted net income per common share was $0.79, $1.00 and
$1.06 for these same periods. The Company posted returns on average assets of
0.79%, 1.16% and 1.15% and returns on average equity of 10.26%, 13.52% and
18.00% for the years ended December 31, 2000, 1999 and 1998, respectively. The
decreases in return on average assets and return on average equity were
primarily due to net charge-offs of $5.8 million in 2000 and $4.1 million in
1999.
18
Results of Operations
Net Interest Income
Net interest income represents the amount by which interest income on
interest-earning assets, including securities and loans, exceeds interest
expense incurred on interest-bearing liabilities, including deposits and other
borrowed funds. Net interest income is the principal source of the Company's
earnings. Interest rate fluctuations, as well as changes in the amount and
type of earning assets and liabilities, combine to affect net interest income.
2000 versus 1999. Net interest income totaled $36.2 million in 2000
compared with $32.6 million in 1999, an increase of $3.6 million or 11.0%. The
increase resulted primarily from a $9.8 million or 18.3% increase in interest
income on loans and investments largely due to four prime rate increases,
totaling 125 basis points, commencing in the fourth quarter of 1999 and
continuing into the second quarter of 2000. Interest expense increased by $6.3
million or 29.7% due to an increase in interest-bearing deposits coupled with
increases in the rates paid for those deposits. The increase in the loan and
investment portfolios, together with higher yields in these portfolios, was
offset by increased interest-bearing deposits earning higher rates, resulting
in slightly improved net interest margins of 5.57% in 2000 and 5.56% in 1999.
The net interest spread narrowed four basis points to 4.62% for 2000 from
4.66% in 1999.
Interest income increased to $63.5 million in 2000 from $53.7 million in
1999. The increase was driven by growth in the average loan portfolio of $30.0
million or 6.5% and growth in the average investment portfolio of $32.9
million or 25.3%. Interest income was also affected by an increase in the
yield on average earning assets (both loans and investments) to 9.77% in 2000
from 9.15% in 1999 as a result of the four prime rate increases. During 2000,
the increase in the investment portfolio was a result of liquidity created by
deposit growth.
Interest expense increased by $6.3 million to $27.3 million at December 31,
2000 compared with $21.0 million at December 31, 1999. The increase was
primarily due to growth in average interest-bearing deposits of $77.4 million
coupled with an increase of 66 basis points in rates paid on interest-bearing
liabilities from 4.49% at December 31, 1999 to 5.15% at December 31, 2000.
1999 versus 1998. Net interest income totaled $32.6 million in 1999
compared with $27.6 million in 1998, an increase of $5.0 million or 18.1%. The
increase resulted primarily from a $5.9 million or 12.5% increase in interest
income on loans primarily due to a $41.8 million or 16.0% increase in
commercial and industrial loans. Interest expense increased by $1.0 million or
4.9% due to an increase in the level of other borrowings, which consisted
primarily of $35.0 million from the Federal Home Loan Bank ("FHLB"). The
increase in the loan portfolio, together with higher yields in this portfolio,
resulted in an improved net interest margin of 5.56% from 5.50% for 1999 and
1998, respectively. The decrease in the securities portfolio from $123.2
million at December 31, 1998 to $110.1 million at December 31, 1999 was due to
portfolio repositioning as interest rates moved upward. This repositioning
necessitated sales of lower yielding holdings during the latter part of 1999.
The net interest spread increased four basis points to 4.66% for 1999 from
4.62% in 1998.
Interest income increased to $53.7 million in 1999 from $47.7 million in
1998. The increase was driven by growth in the average loan portfolio of $88.3
million or 23.9% while the Company experienced a decrease in the yield on
average loans to 9.92% in 1999 from 10.65% in 1998. The average securities
portfolio increased by $5.7 million or 5.0%, while its yield rose 6 basis
points from 6.37% in 1998 to 6.43% in 1999 as a result of continued portfolio
shifting to higher yielding issues.
Interest expense increased by $1.0 million to $21.0 million at December 31,
1999 compared with $20.0 million at December 31, 1998. The increase was
primarily due to growth in average FHLB borrowings and other borrowings of
$43.9 million during 1999. The Company viewed these funds as stable and a less
costly source of funding than time deposits. This decision lowered the
Company's cost of funds from 4.87% in 1998 to 4.49% in 1999.
19
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the
resulting yields, as well as the interest expense on average interest-bearing
liabilities, expressed both in dollars and rates. No tax-equivalent
adjustments were made and all average balances are yearly average balances.
Non-accruing loans have been included in the tables as loans carrying a zero
yield.
Years Ended December 31,
--------------------------------------------------------------------------------------
2000 1999 1998
---------------------------- ---------------------------- ----------------------------
Average Interest Average Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
----------- -------- ------- ----------- -------- ------- ----------- -------- -------
(Dollars in thousands)
Assets
Interest-earning assets:
Total loans............ $486,549 $52,280 10.75% $456,653 $45,322 9.92% $368,394 $39,219 10.65%
Taxable securities..... 106,902 7,668 7.17% 98,838 6,624 6.70% 96,518 6,312 6.54%
Tax-exempt securities.. 20,963 1,046 4.99% 21,114 1,091 5.17% 17,730 964 5.44%
Federal funds sold and
other temporary
investments........... 34,948 2,472 7.07% 9,959 631 6.34% 19,565 1,201 6.14%
-------- ------- -------- ------- -------- -------
Total interest-earning
assets................ 649,362 63,466 9.77% 586,564 53,668 9.15% 502,207 47,696 9.50%
Less allowance for loan
losses................. (8,589) (6,720) (5,049)
Total interest-earning
assets, net of
allowance for loan
losses................. 640,773 579,844 497,158
Noninterest-earning
assets................. 57,436 40,802 35,593
-------- -------- --------
Total assets........... $698,209 $620,646 $532,751
======== ======== ========
Liabilities and
shareholders' equity
Interest-bearing
liabilities:
Interest-bearing demand
deposits.............. $ 42,888 $ 1,283 2.99% $ 37,011 $ 1,039 2.81% $ 30,109 $ 783 2.60%
Saving and money market
accounts.............. 96,520 3,231 3.35% 97,629 3,020 3.09% 90,328 3,258 3.61%
Time deposits.......... 348,265 20,444 5.87% 275,663 14,032 5.09% 276,904 15,267 5.51%
Federal funds purchased
and securities sold
under repurchase
agreements............ 14,957 941 6.29% 24,774 1,301 5.25% 926 54 5.83%
Other borrowings....... 27,268 1,377 5.05% 33,264 1,634 4.91% 13,160 690 5.24%
Total interest-bearing
liabilities........... 529,898 27,276 5.15% 468,341 21,026 4.49% 411,427 20,052 4.87%
Noninterest-bearing
liabilities:
Non-interest bearing
demand deposits....... 102,544 91,505 80,452
Other liabilities...... 12,305 7,790 6,880
-------- -------- --------
Total liabilities...... 644,747 567,636 498,759
Shareholders' equity.... 53,462 53,010 33,992
-------- -------- --------
Total liabilities and
shareholders' equity.. $698,209 $620,646 $532,751
======== ======== ========
Net interest income..... $36,190 $32,642 $27,644
======= ======= =======
Net interest spread..... 4.62% 4.66% 4.62%
Net interest margin..... 5.57% 5.56% 5.50%
20
The following table presents the dollar amount of changes in interest
income and interest expense for the major components of interest-earning
assets and interest-bearing liabilities and distinguishes between the increase
related to higher outstanding balances and changes in interest rates. For
purposes of this table, changes attributable to both rate and volume have been
allocated to rate.
Years Ended December 31,
----------------------------------------------
2000 vs 1999 1999 vs 1998
--------------------- -----------------------
Increase Increase
(Decrease) (Decrease)
Due to Due to
-------------- ---------------
Volume Rate Total Volume Rate Total
------ ------ ------ ------ ------- ------
(Dollars in thousands)
Interest-earning assets:
Loans..................... $2,967 $3,991 $6,958 $9,396 $(3,293) $6,103
Securities................ 625 374 999 567 (128) 439
Federal funds sold and
other temporary
investments.............. 1,583 258 1,841 (590) 20 (570)
------ ------ ------ ------ ------- ------
Total increase (decrease)
in interest income...... 5,175 4,623 9,798 9,374 (3,402) 5,972
Interest-bearing
liabilities:
Interest-bearing demand
deposits................. 165 79 244 179 77 256
Saving and money market
accounts................. (34) 245 211 263 (501) (238)
Time deposits............. 3,696 2,716 6,412 (68) (1,166) (1,235)
Fed funds purchased....... (515) 156 (360) 1,391 (144) 1,247
Other borrowings.......... (295) 37 (257) 1,054 (110) 944
------ ------ ------ ------ ------- ------
Total increase (decrease)
in interest expense..... 3,017 3,233 6,250 2,818 (1,843) 974
------ ------ ------ ------ ------- ------
Increase (decrease) in net
interest income............ $2,158 $1,390 $3,548 $6,556 $(1,558) $4,998
====== ====== ====== ====== ======= ======
Provision for Loan Losses
Provisions for loan losses are charged to income to bring the Company's
allowance for loan losses to a level deemed appropriate by management based on
the factors discussed under "--Financial Condition--Allowance for Loan
Losses."
The 2000 provision for loan losses increased by $2.0 million or 35.28% to
$7.5 million. The increase in 2000 was primarily due to the replenishment of
the allowance for loan losses based on the loss in factoring receivables, net
charge-offs and an additional provision to bring the allowance for loan losses
to a level which management considers adequate to absorb probable losses
inherent in the loan portfolio. The ratio of the allowance for loan losses to
total loans in 2000 was 1.92% compared with 1.52% and 1.46% in 1999 and 1998,
respectively. The 1999 provision for loan losses increased by $2.1 million or
61.7% to $5.6 million from $3.4 million in 1998 due to an additional provision
made in the fourth quarter of 1999 based on loan losses which had occurred.
21
Noninterest Income
Noninterest income for the years ended December 31, 2000, 1999 and 1998 was
$7.0 million, $6.1 million and $5.6 million, respectively. The majority of the
growth in noninterest income occurred in the other loan related fees and other
noninterest income categories due to increases in SBA servicing and packaging
fees. The growth in service charges on deposit accounts is attributable to the
growth experienced in the deposit portfolios. The following table presents the
major categories of noninterest income:
Years Ended December
31,
---------------------
2000 1999 1998
------ ------ ------
(Dollars in
thousands)
Service charges on deposit accounts................... $3,883 $3,313 $3,364
Other loan-related fees............................... 1,697 1,658 1,371
Letters of credit commissions and fees................ 583 471 392
Gain (loss) on sale of investment securities, net..... 2 (14) 202
Other noninterest income.............................. 867 660 280
------ ------ ------
Total noninterest income............................ $7,032 $6,088 $5,609
====== ====== ======
Noninterest Expense
For the years ended December 31, 2000, 1999 and 1998, noninterest expense
totaled $27.2 million, $22.4 million and $21.0 million, respectively. The $4.8
million or 21.5% increase from 1999 to 2000 was primarily due to one-time
expenses, including expenses related to legal, forensic and special accounting
projects, the implementation of new software for analysis and online/internet
banking and operation systems improvements. The $1.4 million or 6.8% increase
from 1998 to 1999 was primarily due to increases in employee compensation and
benefits, occupancy expenses and outside legal and professional services. The
Company's efficiency ratios were 62.98%, 57.92% and 63.48% in 2000, 1999 and
1998, respectively. The softening of the efficiency ratio in 2000 was
primarily due to the one-time expenses mentioned above. The Company's
efficiency ratio in 2000, while softer than in 1999, and improved from 1998
and reflects the Company's continued efforts to control operating expenses and
gain other efficiencies through such means as upgraded centralized computer
and financial reporting systems. The following table presents the major
categories of noninterest expense:
Years Ended December
31,
------------------------
2000 1999 1998
------- ------- -------
(Dollars in thousands)
Employee compensation and benefits................. $12,381 $11,140 $ 9,898
Non-staff expenses:
Occupancy........................................ 5,790 5,117 4,907
Other real estate, net........................... (50) 83 374
Data processing.................................. 154 327 584
Advertising...................................... 436 459 392
Legal and professional fees...................... 3,197 1,656 1,021
Director compensation............................ 137 355 157
Printing and supplies............................ 410 502 432
Telecommunications............................... 580 504 414
Other noninterest expense........................ 4,195 2,269 2,801
------- ------- -------
Total non-staff expenses....................... 14,849 11,272 11,082
------- ------- -------
Total noninterest expense...................... $27,230 $22,412 $20,980
======= ======= =======
Employee compensation and benefits expense for the years ended December 31,
2000, 1999 and 1998 was $12.4 million, $11.1 million and $9.9 million,
respectively, reflecting increases of $1.2 million during each
22
period. The increases in 2000 and 1999 resulted primarily from the full-year
cost of the four new branches opened in 1999: the three Houston area branches,
Dulles, Long Point and Boone Road, opened in March, April and November 1999,
respectively, and the Garland (Dallas) branch opened in November 1999. The
increase in 1998 resulted primarily from expenses related to the opening of
two new branches: the Milam branch (Houston) that opened in January 1998 and
the Harry Hines branch (Dallas) that opened in June 1998. Total full-time
equivalent employees ("FTE") at December 31, 2000, 1999 and 1998 were 319,
283, and 280, respectively. Historically, part-time and temporary staff
members have not been included in the calculations for FTE; although, their
compensation and benefits have been included in noninterest expense in the
employee compensation and benefits category. For the year ended December 31,
2000, the part-time and temporary FTE are included in the calculation for FTE.
The adjusted number of FTE for 1999 and 1998, calculated to include the part-
time and temporary FTE was 300 and 292, respectively.
Non-staff expenses for 2000, 1999 and 1998 were $14.8 million, $11.3
million and $11.1 million, respectively, reflecting an increase of $3.6
million or 31.7% in 2000 compared with 1999 and an increase of $190,000 or
1.7%, in 1999 compared with 1998, respectively. The increase in 2000 was
primarily due to one-time expenses as previously mentioned. The operations and
system improvements include the implementation of a risk management system,
pricing and new product committees, and a formal strategic planning and
budgeting process. Additionally, during 2000, director compensation decreased
by $218,000 as there were no director stock bonus payments issued, and data
processing expense declined by $173,000 due to the full effect of moving the
Company's processing systems in-house from a third party provider. The
increase in 1999 was primarily due to legal and professional fees related to
problem loans.
Income Taxes
Income tax expense includes the regular federal income tax at the statutory
rate plus the income tax component of the Texas franchise tax. The amount of
federal income tax expense is influenced by the amount of taxable income, the
amount of tax-exempt income, the amount of non-deductible interest expense and
the amount of other non-deductible expenses. Taxable income for the income tax
component of the Texas franchise tax is the federal pre-tax income, plus
certain officers' salaries, less interest income on federal securities.
Income tax expense is influenced by the level and mix of taxable and tax-
exempt income and the amount of non-deductible interest and other expenses. In
2000, income tax expense was $3.0 million, a $637,000 or 17.5% decrease from
income tax expense of $3.6 million in 1999. Income tax expense for 1999 was up
31.0% over the 1998 income tax expense of $2.8 million. The Texas franchise
tax was $298,600, $209,900, and $193,000 in 2000, 1999, and 1998,
respectively. The effective tax rates in 2000, 1999 and 1998, respectively,
were 35.4%, 33.8%, and 31.2%.
Impact of Inflation
The effects of inflation on the local economy and on the Company's
operating results have been relatively modest for the past several years.
Since substantially all of the Company's assets and liabilities are monetary
in nature, such as cash, securities, loans and deposits, their values are less
sensitive to the effects of inflation than to changing interest rates, which
do not necessarily change in accordance with inflation rates. The Company
tries to control the impact of interest rate fluctuations by managing the
relationship between its interest rate sensitive assets and liabilities. See
"--Financial Condition--Interest Rate Sensitivity and Liquidity."
Financial Condition
Loan Portfolio
At December 31, 2000, total loans decreased by $11.9 million or 2.4% to
$483.7 million from $495.7 million at December 31, 1999. The decrease was due
to the $5.3 million factoring receivables charge-off in May 2000, a $13.0
million sale of SBA loans in July 2000 and was offset by net loan fundings of
approximately $6.4
23
million. At December 31, 1999, total loans were $495.7 million, an increase of
$78.0 million or 18.7% compared to total loans at December 31, 1998. Total
loans at December 31, 1998 were $417.7 million. The growth in loans over the
past five years reflected the healthy local economy, the opening of new
branches and the Company's investment in loan production capacity.
For the years ended December 31, 2000, 1999 and 1998, the ratios of total
loans to total deposits were 77.3%, 91.0% and 87.1%, respectively. For the
same periods, total loans represented 65.7%, 75.0% and 71.1% of total assets,
respectively.
The following table summarizes the loan portfolio of the Company by type of
loan:
As of December 31,
---------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------- ----------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)
Commercial and
industrial............. $298,134 60.92% $298,150 59.55% $256,311 60.73% $193,355 54.77% $133,564 47.05%
Real estate mortgage:
Residential............ 10,141 2.07 10,934 2.18 11,795 2.79 11,797 3.34 8,703 3.07
Commercial............. 128,242 26.20 126,363 25.24 103,677 24.57 110,860 31.40 104,425 36.78
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
138,383 28.27 137,297 27.42 115,472 27.36 122,657 34.75 113,128 39.85
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Real estate
construction:
Residential............ 7,542 1.54 11,348 2.27 10,842 2.57 9,859 2.79 1,543 0.54
Commercial............. 32,059 6.55 28,661 5.72 17,769 4.21 11,750 3.33 16,096 5.67
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
39,601 8.09 40,009 7.99 28,611 6.78 21,609 6.12 17,639 6.21
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Consumer and other...... 11,986 2.45 11,550 2.31 12,117 2.87 10,147 2.87 13,343 4.70
Factored receivables.... 1,297 0.26 13,700 2.74 9,506 2.25 5,249 1.49 6,217 2.19
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Gross loans............. 489,401 100.00% 500,706 100.00% 422,017 100.00% 353,017 100.00% 283,891 100.00%
====== ====== ====== ====== ======
Less: unearned
discounts, interest and
deferred fees.......... (5,663) (5,037) (4,331) (4,107) (3,294)
-------- -------- -------- -------- --------
Total loans............. $483,738 $495,669 $417,686 $348,910 $280,597
======== ======== ======== ======== ========
Each of the following principal product lines is an outgrowth of the
Company's expertise in meeting the particular needs of the small and medium-
sized businesses and consumers in the Asian and Hispanic communities:
Commercial and Industrial Loans. The primary lending focus of the Company
is to small and medium-sized businesses in a wide variety of industries. The
Company's commercial lending emphasis includes loans to wholesalers,
manufacturers and business service companies. A broad range of short and
medium-term commercial lending products are made available to businesses for
working capital (including inventory and accounts receivable), purchases of
equipment and machinery and business expansion (including acquisitions of real
estate and improvements). Generally, the Company's commercial loans are
underwritten on the basis of the borrower's ability to service such debt as
reflected by cash flow projections. Commercial loans are generally secured by
business assets, which may include accounts receivable and inventory,
certificates of deposit, securities, real estate, guarantees or other
collateral. The Company also generally obtains personal guarantees from the
principals of the business. Working capital loans are primarily collateralized
by short-term assets, whereas term loans are primarily collateralized by long-
term assets. As a result, commercial loans involve additional complexities,
variables and risks and require more thorough underwriting and servicing than
other types of loans. Indigenous to individuals in the Asian business
community is the desire to own the building and land which houses their
businesses. Accordingly, while a loan may be principally driven and classified
by the type of business operated, real estate is frequently the primary source
of collateral. As of December 31, 2000, approximately $186.2 million or 62.4%
of the commercial and industrial loan portfolio was secured by real estate.
The Company continually monitors real estate value trends and takes into
consideration changes in market
24
trends in its underwriting standards. Commercial loans are generally for
amounts between $10,000 and $250,000, and as of December 31, 2000, the average
commercial loan amount was $166,000. As of December 31, 2000, the Company's
commercial and industrial loan portfolio totaled $298.1 million or 60.9% of
the gross loan portfolio.
Commercial Mortgage Loans. In addition to commercial loans, the Company
makes commercial mortgage loans to finance the purchase of real property,
which generally consists of developed real estate. The Company's commercial
mortgage loans are secured by first liens on real estate, typically have
variable rates and amortize over a 15 to 20 year period with balloon payments
due at the end of five to seven years. Payments on loans secured by such
properties are dependent on the successful operation or management of the
properties. Accordingly, repayment of these loans may be subject to adverse
conditions in the real estate market or the economy to a greater extent than
other types of loans. In underwriting commercial mortgage loans, consideration
is given to the property's historical cash flow, current and projected
occupancy, location and physical condition. The underwriting analysis also
includes credit checks, appraisals, environmental impact reports and a review
of the financial condition of the borrower. As of December 31, 2000, the
Company had a commercial mortgage portfolio of $128.2 million.
Construction Loans. The Company makes loans to finance the construction of
residential and non-residential properties. The substantial majority of the
Company's residential construction loans are for single-family dwellings which
are pre-sold or are under earnest money contracts.
The Company also originates loans to finance the construction of commercial
properties such as multi-family, office, industrial, warehouse and retail
centers. Construction loans involve additional risks attributable to the fact
that loan funds are advanced upon the security of a project under
construction, and the project is of uncertain value prior to its completion.
Because of uncertainties inherent in estimating construction costs, the market
value of the completed project and the effects of governmental regulation on
real property, it can be difficult to accurately evaluate the total funds
required to complete a project and the related loan to value ratio. As a
result of these uncertainties, construction lending often involves the
disbursement of substantial funds with repayment dependent, in part, on the
success of the ultimate project rather than the ability of a borrower or
guarantor to repay the loan. If the Company is forced to foreclose on a
project prior to completion, there is no assurance that the Company will be
able to recover all of the unpaid portion of the loan. In addition, the
Company may be required to fund additional amounts to complete a project and
may have to hold the property for an indeterminable period of time. While the
Company has underwriting procedures designed to identify what it believes to
be acceptable levels of risks in construction lending, no assurance can be
given that these procedures will prevent losses from the risks described
above. As of December 31, 2000, the Company had a real estate construction
portfolio of $39.6 million, of which $7.5 million was residential and $32.1
million was commercial.
Residential Mortgage Brokerage and Lending. The Company uses its existing
branch network to offer a complete line of single-family residential mortgage
products through third party mortgage companies. The Company specializes in
mortgages that conform with government sponsored programs, such as those
offered by the Federal National Mortgage Association ("FNMA"). The Company
solicits and receives a fee to process these residential mortgage loans, which
are then underwritten and pre-sold to third party mortgage companies. The
Company does not fund or service these loans. The volume of residential
mortgage loans processed by the Company and pre-sold to third party mortgage
companies in 2000 was $10.8 million. Since the Company does not fund these
loans, there is no risk of nonpayment to the Company. The Company also makes
five to seven year balloon residential mortgage loans primarily secured by
non-owner occupied residential properties, which are retained in the Company's
residential mortgage portfolio. At December 31, 2000, the Company's
residential mortgage portfolio totaled $10.1 million. In 2000, the Bank
originated thirteen FNMA loans and two portfolio loans totaling $1.2 million.
Government Guaranteed Small Business Lending. The Company has developed an
expertise in several government guaranteed lending programs in order to
provide credit enhancement to its commercial and industrial
25
and mortgage portfolio. As a Preferred Lender under the federally guaranteed
SBA lending program, the Company's pre-approved status allows it to quickly
respond to customers' needs. Under this program, the Company originates and
funds SBA 7-A and 504 chapter loans qualifying for federal guarantees of 75%
to 90% of principal and accrued interest. Depending upon prevailing market
conditions, the Company may sell the guaranteed portion of these loans into
the secondary market with servicing retained. The Company specializes in SBA
loans to minority-owned businesses. Over the last eight years, the Company has
originated over $154.1 million in SBA guaranteed loans. As of December 31,
2000, the Company had $88.1 million in the retained portion of SBA loans,
approximately $56.3 million of which was guaranteed by the SBA. For each of
the last six years, the Company has been the second largest SBA loan
originator in Houston in terms of dollar volume and in 2000 was the third
largest SBA originator. SBA loan originations were $24.1 million and $27.9
million for the years ended December 31, 2000 and 1999, respectively. Another
source of government guaranteed lending is B&I Loans which are secured by the
U.S. Department of Agriculture and are available to borrowers in areas with a
population of less than 50,000. The Company also offers guaranteed loans
through the OCCGF, which is sponsored by the government of Taiwan. These loans
are for people of Chinese decent or origin, who are not mainland Chinese by
birth and reside "overseas." As of December 31, 2000, the Company's OCCGF
portfolio totaled $6.6 million.
Trade Finance. Since 1987, the Company has originated trade finance loans
and letters of credit to facilitate export and import transactions for small
and medium-sized businesses. In this capacity, the Company has worked with the
Ex-Im Bank, an agency of the U.S. Government which provides guarantees for
trade finance loans. In 1998, the Company was named Small Business Bank of the
Year by the Ex-Im Bank, and it was the largest Ex-Im Bank producer in the
State of Texas. Trade finance credit facilities rely heavily on the quality of
the business customer's accounts receivable and the ability to perform the
underlying transaction which, if monitored and controlled properly, limits the
financial risks to the Company associated with this short-term financing. To
mitigate the risk of nonpayment, the Company generally obtains a governmental
guaranty or credit insurance from a governmental agency such as the Ex-Im
Bank. At December 31, 2000, the Company's aggregate trade finance portfolio
commitments totaled approximately $11.3 million.
The Company offers a wide variety of loan products to retail customers
through its branch network in Houston and Dallas. Loans to retail customers
include residential mortgage loans, residential construction loans, automobile
loans, lines of credit and other personal loans. The terms of these loans
typically range from 12 to 60 months depending on the nature of the collateral
and the size of the loan.
The Company selectively extends credit for the purpose of establishing
long-term relationships with its customers. The Company mitigates the risks
inherent in lending by focusing on businesses and individuals with
demonstrated payment history, historically favorable profitability trends and
stable cash flows. In addition to these primary sources of repayment, the
Company looks to tangible collateral and personal guarantees as secondary
sources of repayment. Lending officers are provided with detailed underwriting
policies covering all lending activities in which the Company is engaged and
that require all lenders to obtain appropriate approvals for the extension of
credit. The Company also maintains documentation requirements and extensive
credit quality assurance practices in order to identify credit portfolio
weaknesses as early as possible so any exposures that are discovered may be
reduced.
Inherent in all lending is the risk of nonpayment. The types of collateral
required, the terms of the loans and the underwriting practices discussed
under each category above are all designed to minimize the risk of nonpayment.
In addition, as further risk protection, the Company rarely makes loans at its
legal lending limit. Although the Company's legal loan limit is $9.8 million,
the Company generally does not make loans larger than $4.0 million. Loans are
approved by lending officers and the Directors Credit Committee pursuant to a
lending authorization schedule delegated by the Directors Credit Committee
which is based on each loan officer's credit experience and portfolio. Control
systems and procedures are in place to ensure all loans are approved in
accordance with credit policies. The Company's policies and procedures
designed to minimize the risk of nonpayment with respect to outstanding loans
are discussed under "--Nonperforming Assets."
26
At December 31, 2000, 1999 and 1998, (except for the 1998 concentrations in
the convenience/gasoline stations and grocery store industries and the 2000
concentration in the apartment building industry) the Company had gross loan
concentrations (greater than 25% of capital) in the following industries:
As of December 31,
-----------------------
2000 1999 1998
------- ------- -------
(in thousands)
Hotels/motels....................................... $79,007 $74,070 $57,885
Retail centers...................................... 85,177 61,087 50,274
Restaurants......................................... 24,967 25,805 17,474
Apartment buildings................................. 8,391 14,526 15,994
Convenience/gasoline stations....................... 19,585 20,746 11,364
Grocery stores...................................... -- -- 2,066
The contractual maturity ranges of the commercial and industrial and real
estate portfolio and the amount of such loans with predetermined interest
rates and floating rates in each maturity range as of December 31, 2000 are
summarized in the following table:
As of December 31, 2000
----------------------------------
After
One
One Through After
Year or Five Five
Less Years Years Total
------- -------- -------- --------
(Dollars in thousands)
Commercial and industrial............... $75,298 $140,641 $ 82,195 $298,134
Real estate mortgage:
Residential........................... 352 19,946 11,761 32,059
Commercial............................ 7,033 509 -- 7,542
Real estate construction:
Residential........................... 9,814 100,048 18,380 128,242
Commercial............................ 1,907 3,751 4,483 10,141
------- -------- -------- --------
Total................................. $94,404 $264,895 $116,819 $476,118
======= ======== ======== ========
Loans with a predetermined interest
rate................................... $19,794 $ 77,553 $ 27,196 $124,543
Loans with a floating interest rate..... 74,610 187,342 89,623 351,575
------- -------- -------- --------
Total................................. $94,404 $264,895 $116,819 $476,118
======= ======== ======== ========
Effective January 1, 1995, the Company adopted SFAS 114, Accounting for
Creditors for Impairment of a Loan, as amended by SFAS 118, Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures. Under
SFAS 114, as amended, a loan is considered impaired based on current
information and events, if it is probable that the Company will be unable to
collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. The measurement of impaired loans
is based on the present value of expected future cash flows discounted at the
loan's effective interest rate or the loan's observable market price or based
on the fair value of the collateral if the loan is collateral-dependent. The
implementation of SFAS 114 did not have a material adverse affect on the
Company's financial statements.
Nonperforming Assets
The Company believes that it has procedures in place to maintain a high
quality loan portfolio. These procedures include the approval of lending
policies and underwriting guidelines by the Board of Directors, review by an
independent internal loan review department, quarterly review by an
independent outside loan review company, approval from the Directors Credit
Committee for large credit relationships and loan documentation procedures.
The loan review department reports credit risk grade changes on a monthly
basis to management and the Board of Directors. The Company performs monthly
and quarterly concentration analyses based on industries, collateral types,
business lines, large credit sizes and officer portfolio loads. There can be
no assurance, however, that the Company's loan portfolio will not become
subject to increasing pressures from deteriorating borrower credit due to
general economic conditions.
27
The Company generally places a loan on nonaccrual status and ceases
accruing interest when, in the opinion of management, full payment of loan
principal or interest is in doubt. All loans past due 90 days are placed on
nonaccrual status unless the loan is both well secured and in the process of
collection. Cash payments received while a loan is classified as nonaccrual
are recorded as a reduction of principal as long as significant doubt exists
as to collection of the principal. Otherwise, interest is recognized on a cash
basis. In addition to nonaccrual loans, the Company evaluates on an ongoing
basis additional loans which are potential problem loans as to risk exposure
in determining the adequacy of the allowance for loan losses.
The Company updates appraisals on loans secured by real estate when loans
are renewed, prior to foreclosure and at other times as necessary,
particularly in problem loan situations. In instances where updated appraisals
reflect reduced collateral values, an evaluation of the borrower's overall
financial condition is made to determine the need, if any, for possible write
downs or appropriate additions to the allowance for loan losses. The Company
records other real estate at fair value at the time of acquisition less
estimated costs to sell.
2000 versus 1999. Nonperforming assets at December 31, 2000 and 1999 were
$3.0 million and $7.0 million, respectively. The decrease was primarily due to
improvements in asset quality. Included in the nonperforming assets are the
portions guaranteed by the SBA, OCCGF and Ex-Im Bank, which totaled $1.0
million and $1.8 million for December 31, 2000 and 1999, respectively.
Nonperforming assets for the year ended December 31, 2000 decreased by $4.0
million or 57.0% due to efforts to improve asset quality. Nonperforming
assets, net of their guaranteed portions, were $1.9 million and $5.2 million
at December 31, 2000 and 1999, respectively. The ratios for net nonperforming
assets to total loans and other real estate were 0.40% and 1.05%, for December
31, 2000 and 1999, respectively. The ratios for net nonperforming assets to
total assets were 0.26% and 0.79%, for the same periods, respectively.
1999 versus 1998. Nonperforming assets at December 31, 1999 and 1998 were
$7.0 million and $5.3 million, respectively. Included in the nonperforming
assets are the portions guaranteed by the SBA, OCCGF and Ex-Im Bank, which
totaled $1.8 million for 1999. Nonperforming assets for the year ended
December 31, 1999 increased by $1.7 million or 33.0%. The increase was due to
the addition of eight loans to nonaccrual status because they were either 90
days or more past due.
The following table presents information regarding nonperforming assets at
the periods indicated:
As of December 31,
--------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(Dollars in thousands)
Nonaccrual loans................... $2,225 $6,552 $3,329 $2,663 $3,329
Accruing loans 90 days or more past
due............................... -- -- 1,291 -- 1,291
Other real estate and other assets
repossessed....................... 757 490 654 606 654
------ ------ ------ ------ ------
Total nonperforming assets....... $2,982 $7,042 $5,274 $3,269 $5,274
====== ====== ====== ====== ======
Nonperforming assets to total loans
and other real estate............. 0.62% 1.42% 1.26% 0.94% 0.82%
Nonperforming assets to total
assets............................ 0.40% 1.07% 0.90% 0.65% 0.54%
28
Allowance for Loan Losses
The allowance for loan losses is established through charges to earnings in
the form of a provision for loan losses. Management has established an
allowance for loan losses, which it believes, is adequate for estimated losses
inherent in the Company's loan portfolio. Based on an evaluation of the loan
portfolio, management presents a quarterly review of the allowance for loan
losses to the Company's Board of Directors, indicating any change in the
allowance since the last review and any recommendations as to adjustments in
the allowance. In making its evaluation, management considers the
diversification by industry of the Company's commercial loan portfolio, the
effect of changes in the local real estate market on collateral values, the
results of recent regulatory examinations, the effects on the loan portfolio
of current economic indicators and their probable impact on borrowers, the
amount of charge-offs for the period, the amount of nonperforming loans and
related collateral security and the evaluation of its loan portfolio by the
independent third party loan re