================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-25141
________________________
METROCORP BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 76-0579161
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
9600 BELLAIRE BOULEVARD, SUITE 252
HOUSTON, TEXAS 77036
(Address of principal executive offices including zip code)
(713) 776-3876
(Registrant's telephone number, including area code)
________________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $1.00 per share
(Title of class)
________________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ].
As of October 31, 2001, the number of outstanding shares of Common Stock,
par value $1.00 per share, was 7,017,823.
================================================================================
PART I
FINANCIAL INFORMATION
Item 1. Condensed Financial Statements.
METROCORP BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(Unaudited)
ASSETS
Cash and cash equivalents:
Cash and due from banks............................................. $ 27,601 $ 42,573
Federal funds sold and other temporary investments.................. 46,418 49,653
-------- --------
Total cash and cash equivalents.................................... 74,019 92,226
Investment securities available-for-sale, at fair value.............. 164,657 112,016
Investment securities held-to-maturity, at amortized cost............ - 31,743
Loans, net........................................................... 467,128 474,467
Premises and equipment, net.......................................... 5,749 6,575
Accrued interest receivable.......................................... 3,460 4,271
Deferred income taxes................................................ 4,906 5,797
Due from customers on acceptances.................................... 5,012 3,322
Other real estate and repossessed assets, net........................ 1,577 757
Other assets......................................................... 5,646 5,583
-------- --------
Total assets....................................................... $732,154 $736,757
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing................................................. $113,143 $107,924
Interest-bearing.................................................... 513,357 517,982
-------- --------
Total deposits..................................................... 626,500 625,906
Other borrowings..................................................... 25,538 25,573
Accrued interest payable............................................. 976 1,816
Income taxes payable................................................. 1,388 671
Acceptances outstanding.............................................. 5,012 3,322
Other liabilities.................................................... 6,528 20,768
-------- --------
Total liabilities.................................................. 665,942 678,056
Shareholders' equity:
Preferred stock, $1.00 par value, 2,000,000 shares authorized;
none of which are issued and outstanding........................... - -
Common stock, $1.00 par value, 20,000,000 shares authorized;
7,187,423 shares and 7,180,030 shares are issued and 7,007,647
and 6,979,530 shares are outstanding at September 30, 2001
(unaudited) and December 31, 2000, respectively.................... 7,187 7,180
Additional paid-in-capital.......................................... 26,123 26,033
Retained earnings................................................... 32,190 26,936
Accumulated other comprehensive income.............................. 2,108 121
Treasury stock, at cost............................................. (1,396) (1,569)
-------- --------
Total shareholders' equity......................................... 66,212 58,701
-------- --------
Total liabilities and shareholders' equity......................... $732,154 $736,757
======== ========
See accompanying notes to condensed consolidated financial statements
1
METROCORP BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Interest income:
Loans........................................................ $10,573 $13,089 $33,799 $39,010
Investment securities:
Taxable..................................................... 2,043 2,133 6,377 5,425
Tax-exempt.................................................. 305 267 865 803
Federal funds sold and other temporary investments........... 504 927 1,643 1,876
-------- -------- -------- --------
Total interest income..................................... 13,425 16,416 42,684 47,114
-------- -------- -------- --------
Interest expense:
Time deposits................................................ 4,408 5,599 15,219 14,590
Demand and savings deposits.................................. 822 1,208 2,951 3,342
Other borrowings............................................. 319 582 946 1,999
-------- -------- -------- --------
Total interest expense.................................... 5,549 7,389 19,116 19,931
-------- -------- -------- --------
Net interest income........................................... 7,876 9,027 23,568 27,183
Provision for loan losses..................................... 407 499 1,190 6,778
-------- -------- -------- --------
Net interest income after provision for loan losses........... 7,469 8,528 22,378 20,405
-------- -------- -------- --------
Noninterest income:
Service charges.............................................. 1,595 1,221 4,737 3,442
Other loan-related fees...................................... 236 236 735 640
Letters of credit commissions and fees....................... 149 147 498 424
Gain on sale of investment securities, net................... 13 - 189 -
Other noninterest income..................................... 119 228 395 713
-------- -------- -------- --------
Total noninterest income.................................. 2,112 1,832 6,554 5,219
-------- -------- -------- --------
Noninterest expense:
Employee compensation and benefits........................... 3,410 3,508 10,746 10,394
Occupancy.................................................... 1,126 1,236 3,392 3,786
Other real estate, net....................................... 88 (45) 85 (61)
Data processing.............................................. 15 42 53 128
Professional fees............................................ 238 1,042 1,002 2,568
Advertising.................................................. 69 79 287 325
Other noninterest expense.................................... 1,224 857 3,664 3,333
-------- -------- -------- --------
Total noninterest expense................................. 6,170 6,719 19,229 20,473
-------- -------- -------- --------
Income before provision for income taxes...................... 3,411 3,641 9,703 5,151
Provision for income taxes.................................... 1,103 1,324 3,191 1,850
-------- -------- -------- --------
Net income.................................................... $ 2,308 $ 2,317 $ 6,512 $ 3,301
======== ======== ======== ========
Earnings per common share:
Basic........................................................ $0.33 $0.33 $0.93 $0.47
Diluted...................................................... $0.33 $0.33 $0.93 $0.47
Weighted average shares outstanding:
Basic........................................................ 7,003 6,956 6,992 6,971
Diluted...................................................... 7,081 6,956 7,037 6,971
See accompanying notes to condensed consolidated financial statements
2
METROCORP BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ----------------------
2001 2000 2001 2000
------- -------- ------- ------
Net income.......................................................... $2,308 $2,317 $6,512 $3,301
Other comprehensive income, net of tax:
Unrealized gain on investment securities, net of tax:
Other comprehensive income........................................ 1,501 693 2,108 1,261
------ ------ ------ ------
Total comprehensive income........................................ $3,809 $3,010 $8,620 $4,562
====== ====== ====== ======
METROCORP BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the nine months ended September 30, 2001 and 2000
(In thousands)
(Unaudited)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TREASURY
------------------ PAID-IN RETAINED COMPREHENSIVE STOCK
SHARES AT PAR CAPITAL EARNINGS INCOME (LOSS) AT COST TOTAL
------- ------ ------- -------- ------------- -------- --------
Balance at January 1, 2000............ 7,102 $7,122 $25,646 $23,124 $(3,145) $ (167) $52,580
Issuance of common stock.............. 40 40 245 - - - 285
Repurchase of common stock............ (181) - - - - (1,402) (1,402)
Other comprehensive income............ - - - - 1,261 - 1,261
Net income............................ - - - 3,301 - - 3,301
Dividend payment...................... - - - (1,252) - - (1,252)
------- ------ ------- ------- ------- ------- -------
Balance at September 30, 2000......... 6,961 $7,162 $25,891 $25,173 $(1,884) $(1,569) $54,773
======= ====== ======= ======= ======= ======= =======
Balance at January 1, 2001............ 7,180 $7,180 $26,033 $26,936 $ 121 $(1,569) $58,701
Issuance of common stock.............. 7 7 52 - - - 59
Re-issuance of treasury stock......... - - 38 - - 173 211
Other comprehensive income............ - - - - 1,987 - 1,987
Net income............................ - - - 6,512 - - 6,512
Dividend payment...................... - - - (1,258) - - (1,258)
------- ------ ------- ------- ------- ------- -------
Balance at September 30, 2001......... 7,187 $7,187 $26,123 $32,190 $2,108 $(1,396) $66,212
======= ====== ======= ======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements
3
METROCORP BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------
2001 2000
--------- --------
Cash flow from operating activities:
Net income................................................ $ 6,512 $ 3,301
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation .......................................... 1,265 1,609
Provision for loan losses.............................. 1,190 6,778
Gain on securities sales............................... (189) -
Loss (gain) on sale of other real estate............... 34 (45)
Deferred loan fees..................................... 382 625
Deferred income taxes.................................. (132) (720)
Changes in:
Accrued interest receivable........................... 811 (154)
Accrued interest payable.............................. (840) (230)
Income taxes payable.................................. 717 -
Other liabilities..................................... (14,813) 1,587
Other assets.......................................... (63) 1,417
-------- --------
Net cash (used in) provided by operating activities. (5,126) 14,168
-------- --------
Cash flows from investing activities:
Purchases of securities available-for-sale................ (71,499) (42,937)
Proceeds from sales, maturities and principal paydowns of
securities available-for-sale.......................... 53,800 6,558
Proceeds from maturities and principal paydowns of
securities held-to-maturity............................ - 2,258
Net change in loans....................................... 4,326 (825)
Proceeds from sale of other real estate................... 587 1,624
Purchases of premises and equipment....................... (439) (558)
-------- --------
Net cash used in investing activities............... (13,225) (33,880)
-------- --------
Cash flows from financing activities:
Net change in:
Deposits............................................... 594 67,926
Other borrowings....................................... 538 (30,099)
Proceeds from issuance of common stock.................... 59 285
Treasury stock sold (purchased), net...................... 211 (1,402)
Dividends paid............................................ (1,258) (2,095)
-------- --------
Net cash provided by financing activities........... 144 34,615
-------- --------
Net (decrease) increase in cash and cash equivalents........ (18,207) 14,903
Cash and cash equivalents at beginning of period............ 92,226 36,416
-------- --------
Cash and cash equivalents at end of period.................. $ 74,019 $ 51,319
======== ========
See accompanying notes to condensed consolidated financial statements
4
METROCORP BANCSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements include the
accounts of MetroCorp Bancshares, Inc. (the "Company") and its wholly-owned
subsidiary MetroBank, National Association (the "Bank"). All material
intercompany accounts and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements
were prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions for Form 10-Q. In the opinion of management, the unaudited
condensed consolidated financial statements reflect all adjustments, consisting
only of normal and recurring adjustments, necessary to present fairly the
Company's consolidated financial position at September 30, 2001, the Company's
consolidated results of operations for the three and nine months ended September
30, 2001 and 2000, consolidated cash flows for the nine months ended September
30, 2001 and 2000, and consolidated changes in shareholders' equity for the nine
months ended September 30, 2001 and 2000. Interim period results are not
necessarily indicative of results of operations or cash flows for a full-year
period.
Certain amounts applicable to the prior periods have been reclassified to
conform to the classifications currently followed. Such reclassifications do
not affect earnings.
These financial statements and the notes thereto should be read in
conjunction with the Company's annual report on Form 10-K for the year ended
December 31, 2000.
2. EARNINGS PER COMMON SHARE
Basic earnings per share ("EPS") is computed by dividing net income
available to common shareholders by the weighted-average number of common shares
outstanding during the period. Diluted EPS is computed by dividing net income
available to common shareholders by the weighted-average number of common shares
and potentially dilutive common shares outstanding during the period.
Potentially dilutive common shares are computed using the treasury stock method.
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- ------------------------
2001 2000 2001 2000
----------- ----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income available to common
shareholders............................... $2,308 $2,317 $6,512 $3,301
=========== =========== =========== ==========
Weighted-average common shares outstanding:
Basic..................................... 7,003 6,956 6,992 6,971
Diluted................................... 7,081 6,956 7,037 6,971
Earnings per common share:
Basic..................................... $ 0.33 $ 0.33 $ 0.93 $ 0.47
Diluted................................... $ 0.33 $ 0.33 $ 0.93 $ 0.47
3. SIGNIFICANT ACCOUNTING PRONOUNCEMENTS
In September 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting
for Derivative Instruments and Hedging Activities. SFAS 133, as amended, became
effective for reporting periods beginning after September 15, 2000, and was not
to be applied retroactively. In September 1999, FASB issued SFAS 137 that
deferred the effective date of adoption of
5
SFAS 133 for one year. This was followed in September 2000 by the issuance of
SFAS 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities, which amended SFAS 133. SFAS 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. Under the
standard, all derivatives must be measured at fair value and recognized as
either assets or liabilities in the statement of financial condition. In
addition, hedge accounting should only be provided for transactions that meet
certain specified criteria. The accounting for changes in fair value (gains or
losses) of a derivative is dependent on the intended use of the derivative and
its designation. Derivatives may be used to: 1) hedge exposure to changes in the
fair value of a recognized asset or liability or from a commitment, referred to
as a fair value hedge, 2) hedge exposure to variable cash flow of forecasted
transactions, referred to as a cash flow hedge, or 3) hedge foreign currency
exposure. The implementation of this pronouncement on January 1, 2001 did not
have a material effect on the Company's financial statements, nor does
management expect SFAS 133 to have a significant impact on future operations.
In September 2000, FASB issued SFAS 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, which replaces
SFAS 125. The statement revises the standards for accounting for the
securitization and other transfers of financial assets and collateral, and
requires certain disclosures, but carries over most of SFAS 125's provisions
without reconsideration. SFAS 140 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001. Management believes that adopting these components of SFAS 140 will not
have a material impact on the Company's financial position or results of
operations. SFAS 140 must be applied prospectively.
In July 2001, FASB issued SFAS 141, Business Combinations. The statement
improves the transparency of the accounting and reporting for business
combinations by requiring that all business combinations be accounted for under
a single method - the purchase method. Use of the pooling-of-interests method is
no longer permitted. SFAS 141 requires that the purchase method be used for
business combinations initiated after June 30, 2001. Management believes
adopting this statement will not have a material impact on the Company's
financial position or results of operations.
In July 2001, FASB issued SFAS 142, Goodwill and Other Intangible Assets.
The statement requires that goodwill no longer be amortized to earnings, but
instead be reviewed for impairment. This change provides investors with greater
transparency regarding the economic value of goodwill and its impact on
earnings. The amortization of goodwill ceases upon adoption of the statement,
which for most companies, will be January 1, 2002. Management believes adopting
this statement will not have a material impact on the Company's financial
position or results of operations.
In July 2001, FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. The statement requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. The standard is
effective for fiscal years beginning after September 15, 2002, with earlier
application encouraged. Management believes adopting this statement will not
have a material impact on the Company's financial position or results of
operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Statements and financial discussion and analysis contained in this
Quarterly Report on Form 10-Q 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, that 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;
6
. 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.
The Company undertakes no obligation to publicly update or otherwise revise
any forward-looking statements, unless the securities laws require the Company
to do so. All written or oral forward-looking statements attributable to the
Company are expressly qualified in their entirety by these cautionary
statements.
HIRING AND APPOINTMENT OF CHIEF FINANCIAL OFFICER OF THE COMPANY. On
November 8, 2001, the Company announced the hiring and appointment of David D.
Rinehart as Executive Vice President and Chief Financial Officer. Mr. Rinehart
assumed his duties on November 13, 2001. Mr. Rinehart has over 26 years of
banking and financial services experience. Prior to joining the Company, in 2000
and 2001, Mr. Rinehart served as President and Chief Executive Officer at First
Federal Savings in Bryan/College Station, Texas where he was responsible for
lending and business planning operations. Prior to First Federal, in 1999 and
2000, Mr. Rinehart was Senior Vice President of Strategic Planning at AEGIS
Mortgage Corporation in Houston, Texas. From 1988 until their 1999 merger with
Southwest Bank of Texas, Mr. Rinehart served as Chief Financial Officer and
Executive Vice President for Fort Bend Holding Corporation in Rosenberg, Texas
where he had financial and accounting responsibilities that included SEC
reporting, treasury, strategic planning, audit and compliance, branch
operations, information technology and human resources. Additionally, Mr.
Rinehart managed the investment securities portfolio and assisted in acquisition
analysis.
HIRING AND APPOINTMENT OF CHIEF CREDIT OFFICER OF THE BANK. On
September 26, 2001, the Company announced the hiring and appointment of Terry J.
Tangen as Executive Vice President and Chief Credit Officer of the Bank. Mr.
Tangen assumed his duties on October 9, 2001 bringing with him over 26 years of
commercial
7
banking experience in credit and lending. Since 1997, Mr. Tangen served as
Senior Vice President and Credit Officer at Bank One, Texas in Houston where he
was responsible for credit approval on commercial loans generated in the
Houston, Austin, and San Antonio middle markets. Prior to Bank One, Mr. Tangen
served at Wells Fargo Bank Houston as a loan supervisor over commercial and
energy credit approval. From 1992 to 1996 he was the Senior Credit Officer for
the South Texas market of First Interstate Bank Houston, until their 1996 merger
with Wells Fargo. Previously, Mr. Tangen served for 15 years as a lender,
manager and vice president in credit administration for two Denver banks.
GENERAL. Net income for the three months ended September 30, 2001 was $2.3
million, relatively flat compared with the quarter ended September 30, 2000. Net
income for the nine months ended September 30, 2001 was $6.5 million, an
increase of $3.2 million or 97.3% from net income of $3.3 million for the same
nine month period in 2000. The Company's basic and diluted EPS for the three
months ended September 30, 2001 was $0.33, which was the same as reported for
the third quarter in 2000, but was up $0.03 or 8.7% from $0.30 reported for the
second quarter in 2001. The Company's basic and diluted EPS for the nine months
ended September 30, 2001 was $0.93, compared with $0.47 for the same nine month
period in 2000. The Company's return on average assets ("ROAA") for the three
and nine months ended September 30, 2001 was 1.25% and 1.20%, down from 1.28%
and up from 0.64%, respectively, for the same three and nine month periods in
2000. The decrease in ROAA for the three months ended September 30, 2001
compared to the same three month period in 2000 was primarily the result of
relatively flat earnings over an increase in average assets of $12.1 million.
The return on average shareholders' equity ("ROAE") for the three and nine
months ended September 30, 2001 was 14.23% and 13.97%, down from 17.29% and up
from 8.30%, respectively, for the same three and nine month periods in 2000. The
decrease in ROAE for the three months ended September 30, 2001 compared to the
same three month period in 2000 was the result of relatively flat earnings over
an increase in average equity of $11.2 million. Earnings and the associated
performance ratios for the nine months ended September 30, 2000 were adversely
impacted by a one-time factoring receivables charge-off of $5.3 million in the
second quarter of 2000.
The Board of Governors of the Federal Reserve System lowered interest
rates eight times for a total of 350 basis points during the nine months ended
September 30, 2001. A ninth decrease was announced on October 2, 2001 of 50
basis points. These decreases reduced the "prime" rate from 9.50% at December
31, 2000 to 6.00% at September 30, 2001. As a result of the lowered interest
rates, net interest income decreased as approximately seventy-five percent of
the Company's loan portfolio is priced at floating rates tied to the prime rate.
However, interest rate floors within about half of the loan portfolio have
partially mitigated the decline in loan yields. The decreased net interest
income was also partially offset by decreased total interest expense.
At September 30, 2001, total assets and net loans were $732.2 million and
$467.1 million, respectively, compared with $736.8 million and $474.5 million,
respectively, at December 31, 2000. The $4.6 million or 0.6% decrease in total
assets at September 30, 2001 compared to December 31, 2000 was primarily
attributable to decreased net loan balances of $7.3 million, decreased cash and
cash equivalents of $18.2 million, offset by increased investment securities and
other assets of $20.9 million. The decrease in net loans was due to the
combination of loan prepayments that have exceeded new loan funding, a softened
loan demand, and more conservative credit standards. The liquidity created from
increased deposit volumes and net loan prepayments was used to purchase
investment securities. Total liabilities and total deposits at September 30,
2001 were $665.9 million and $626.5 million, respectively, compared with $678.1
million and $625.9 million, respectively, at December 31, 2000.
Shareholders' equity at September 30, 2001 was $66.2 million compared with
$58.7 million at December 31, 2000, an increase of $7.5 million or 12.8%. The
increase in shareholders' equity for the nine months ended September 30, 2001
was attributed to a combination of $6.5 million in net income and an increase in
accumulated other comprehensive income of $2.0 million, offset by $1.0 million
in dividend payments.
RESULTS OF OPERATIONS
NET INTEREST INCOME. For the three months ended September 30, 2001, net
interest income, before the provision for loan losses, decreased by $1.2 million
or 12.8% to $7.8 million compared with $9.0 million for the same three month
period in 2000. For the quarter ended September 30, 2001 compared with the same
quarter in 2000, the net interest margin narrowed 79 basis points to 4.56% from
5.35%. For the nine months ended September 30, 2001, net interest income,
before the provision for loan losses, decreased by $3.6 million or 13.3% to
$23.6
8
million compared with $27.2 million for the same nine month period in 2000. For
the nine months ended September 30, 2001 compared with the same period in 2000,
the net interest margin narrowed 99 basis points to 4.65% from 5.64%. The
decrease in net interest income and the net interest margin over the three and
nine month periods in 2001 compared with the same periods in 2000, was primarily
due to lower market interest rates in 2001. Partially softening the declines in
interest income and the net interest margin, was that during the second and
third quarters of 2001, approximately 90% of the Company's interest-bearing
contractual time deposits issued in 2000 at higher market interest rates matured
and renewed for shorter terms at lower interest rates which reduced the
associated interest expense. In addition, the Company repaid a $25.0 million
Federal Home Loan Bank ("FHLB") loan in September 2000, which decreased the net
borrowing volume for the three and nine month periods ended September 30, 2001,
further reducing interest expense.
Total interest income for the three months ended September 30, 2001
decreased by $3.0 million or 18.2% to $13.4 million from $16.4 million for the
same period in 2000. Total interest income for the nine months ended September
30, 2001 decreased by $4.4 million or 9.4% to $42.7 million from $47.1 million
for the same period in 2000. The decrease was primarily due to lower market
interest rates that reduced the yields on earning assets tied to such rates.
The loan portfolio is weighted toward variable rate loans that reprice as the
market "prime" rate moves, and therefore, is sensitive to interest rate
movement. Partially softening the decline in loan yield is that approximately
half of the loan portfolio has interest rate floors that averaged 8.20% as of
September 30, 2001. Additionally, during 2001 as loan volume decreased the
Company purchased additional investment securities. Because the yields on loans
are generally higher than the yields on investments, this contributed to the
decrease in interest income.
Interest income from loans for the three and nine month periods ended
September 30, 2001 was $10.6 million and $33.8 million, down $2.5 million or
19.2% and down $5.2 million or 13.4%, respectively, from $13.1 million and $39.0
million, respectively, for the same periods in 2000. For the three months ended
September 30, 2001, the average yield on average total loans of $472.1 million
was 8.89%, compared to the same period in 2000 with an average yield on average
total loans of $478.3 million at 10.89%, a volume decrease of $6.2 million and a
yield decrease of 200 basis points. For the nine months ended September 30,
2001, the average yield on average total loans of $472.4 million was 9.57%,
compared to the same period in 2000 with an average yield on average total loans
of $486.0 million at 10.72%, a volume decrease of $13.6 million and a yield
decrease of 115 basis points.
Interest income from investments for the three and nine months ended
September 30, 2001 was $2.9 million and $8.9 million, down $475,000 or 14.3% and
up $781,000 or 9.6%, respectively, from $3.3 million and $8.1 million,
respectively, for the same periods in 2000, primarily due to increased
investment volumes offset by lower yields in 2001. The yields on investments
were affected by prepayments of mortgage-backed securities and calls of agency
securities that were reinvested in shorter termed mortgage-backed securities and
collateralized mortgage obligations at lower market interest rates. For the
three months ended September 30, 2001, the average yield on average total
investments (securities, Federal funds sold and other temporary investments) of
$212.7 million was 5.32% compared to the same period in 2000 with average total
investments of $192.6 million at 6.87%, an increase in volume of $20.1 million
and a decrease in yield of 115 basis points. For the nine months ended September
30, 2001, the average yield on average total investments of $204.8 million was
5.80% compared to the same period in 2000 with average total investments of
$158.2 million at 6.84%, an increase in volume of $46.6 million and a decrease
in yield of 104 basis points.
For the three and nine months ended September 30, 2001, total earning
assets averaged $684.8 million and $677.1 million with average yields of 7.78%
and 8.43%, respectively, compared to $670.9 million and $644.2 million with
average yields of 9.73% and 9.77%, respectively, for the same periods in 2000.
For the three and nine months ended September 30, 2001 compared with the same
periods in 2000 this represented an increase in total average earning asset
volumes of $13.9 million and $32.9 million, respectively, and a decrease in
total average earning asset yields of 195 and 134 basis points, respectively.
Total interest expense for the three months ended September 30, 2001
decreased by $1.8 million or 24.9% to $5.6 million compared with $7.4 million
for the same period in 2000. Total interest expense for the nine months ended
September 30, 2001 decreased by $815,000 or 4.1% to $19.1 million compared with
$19.9 million for
9
the same period in 2000. The decrease in total interest expense for the three
and nine months ended September 30, 2001 compared to the same periods in 2000
was primarily the result of decreased interest rates paid for interest-bearing
deposits and borrowed funds as market interest rates fell in 2001, while the
Company's borrowing volume was reduced and interest-bearing deposit volumes
grew.
Interest paid on interest-bearing deposits for the three and nine months
ended September 30, 2001 was $5.2 million and $18.1 million, respectively,
compared to $6.8 million and $17.9 million, respectively, for the same periods
in 2000, a decrease of $1.6 million or 23.5% and an increase of $238,000 or
1.3%, respectively. The increase in interest expense for the nine month period
ended September 30, 2001 compared to the same period in 2000 was primarily due
to higher interest rates paid for interest-bearing deposits particularly in the
first quarter of 2001. Although market interest rates decreased during this
nine month period, a significant portion of the Company's time deposits had been
contracted and priced based on higher interest rates in effect during 2000.
Approximately 90% of these time deposits matured and renewed for shorter terms
at lower rates during the second and third quarters of 2001. Additionally, a
significant portion of these deposits have matured and renewed a second time in
2001 at even lower rates.
Average interest-bearing deposits for the three and nine months ended
September 30, 2001 were $514.7 million and $517.7 million, respectively,
compared with average interest-bearing deposits for the same periods in 2000 of
$508.5 million and $477.8 million, respectively, average increases of $6.2
million or 1.2% and $39.9 million or 8.4%, respectively. While interest-bearing
deposit volumes grew, the average rates paid on interest-bearing deposits for
the three and nine months ended September 30, 2001 declined and were 4.03% and
4.69%, respectively, compared to the three and nine months ended September 30,
2000 at 5.31% and 5.01%, respectively, decreases of 128 and 32 basis points,
respectively. Management believes, based on its historical experience, that a
significant amount of the Company's large time deposits have core-type
characteristics and anticipates that this source of funding will continue to
sustain a substantial portion of the Company's asset growth in the future.
Interest paid on borrowed funds for the three and nine months ended
September 30, 2001 was $319,000 and $946,000, respectively, compared to $582,000
and $2.0 million, respectively, for the same periods in 2000, decreases of
$263,000 or 45.2% and $1.1 million or 52.7%, respectively. Average borrowed
funds for the three and nine months ended September 30, 2001 were $25.5 million
and $25.6 million, respectively, compared with average borrowed funds for the
same periods in 2000 of $41.8 million and $48.6 million, respectively, average
decreases of $16.3 million or 39.0% and $23.0 million or 47.3%. The decrease in
borrowed funds was due to the repayment of a $25.0 million Federal Home Loan
Bank ("FHLB") loan in September 2000. The average rates paid on borrowed funds
for the three and nine months ended September 30, 2001 were 4.96% and 4.94%,
respectively, compared to the three and nine months ended September 30, 2000 at
5.54% and 5.50%, respectively, decreases of 58 and 56 basis points,
respectively.
10
The following tables present the total dollar amount of interest income
from average interest-earning assets and the resultant yields, as well as the
interest expense on average interest-bearing liabilities, expressed both in
dollars and rates for the periods indicated. No tax-equivalent adjustments were
made and all average balances are daily average balances. Nonaccruing loans
have been included in the tables as loans having a zero yield.
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------
2001 2000
----------------------------------- -----------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE (1) BALANCE PAID RATE (1)
----------- -------- -------- ----------- -------- --------
(DOLLARS IN THOUSANDS)
ASSETS
- ------
Interest-earning assets:
Total loans........................................... $472,111 $10,573 8.89% $478,302 $13,089 10.89%
Taxable securities.................................... 127,917 2,043 6.34 118,980 2,133 7.13
Tax-exempt securities................................. 24,542 305 4.93 21,248 267 5.00
Federal funds sold and other temporary investments.... 60,269 504 3.32 52,405 927 7.04
-------- ------- -------- -------
Total interest-earning assets...................... 684,839 13,425 7.78% 670,935 16,416 9.73%
Less allowance for loan losses........................ (9,332) (8,775)
-------- --------
Total interest-earning assets, net of allowance for
loan losses........................................... 675,507 662,160
Noninterest-earning assets............................. 54,456 55,711
-------- --------
Total assets......................................... $729,963 $717,871
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Interest-bearing liabilities:
Interest-bearing demand deposits...................... $ 56,059 282 2.00% $ 43,704 325 2.96%
Saving and money market accounts...................... 104,018 540 2.06 96,830 883 3.63
Time deposits......................................... 354,672 4,408 4.93 367,958 5,599 6.03
Other borrowings...................................... 25,540 319 4.96 41,807 582 5.54
-------- ------- -------- -------
Total interest-bearing liabilities.................. 540,289 5,549 4.07% 550,299 7,389 5.34%
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits................... 113,251 108,639
Other liabilities..................................... 12,067 5,775
-------- --------
Total liabilities................................... 665,607 664,713
Shareholders' equity................................... 64,356 53,158
-------- --------
Total liabilities and shareholders' equity.......... $729,963 $717,871
======== ========
Net interest income.................................... $ 7,876 $ 9,027
======= ========
Net interest spread.................................... 3.71% 4.39%
Net interest margin.................................... 4.56% 5.35%
- ------------------------
(1) Annualized.
11
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------
2001 2000
----------------------------------- -----------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE (1) BALANCE PAID RATE (1)
----------- -------- -------- ----------- -------- --------
(DOLLARS IN THOUSANDS)
ASSETS
- ------
Interest-earning assets:
Total loans........................................... $472,355 $33,799 9.57% $485,973 $39,010 10.72%
Taxable securities.................................... 129,426 6,377 6.59 100,555 5,425 7.21
Tax-exempt securities................................. 22,958 865 5.04 21,518 803 4.98
Federal funds sold and other temporary investments.... 52,404 1,643 4.19 36,136 1,876 6.93
-------- ------- -------- -------
Total interest-earning assets...................... 677,143 42,684 8.43% 644,182 47,114 9.77%
Less allowance for loan losses........................ (9,297) (8,401)
-------- --------
Total interest-earning assets, net of allowance for
loan losses.......................................... 667,846 635,781
Noninterest-earning assets............................. 55,859 55,920
-------- --------
Total assets......................................... $723,705 $691,701
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Interest-bearing liabilities:
Interest-bearing demand deposits...................... $ 52,575 974 2.48% $ 42,366 949 2.99%
Saving and money market accounts...................... 100,479 1,977 2.63 95,991 2,393 3.33
Time deposits......................................... 364,654 15,219 5.58 339,415 14,590 5.74
Federal funds purchased and securities sold under
repurchase agreements................................. - - - 16 1 -
Other borrowings...................................... 25,611 946 4.94 48,537 1,998 5.50
-------- ------- -------- -------
Total interest-bearing liabilities.................. 543,319 19,116 4.70% 526,325 19,931 5.06%
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits................... 106,523 105,425
Other liabilities...................................... 11,543 6,983
-------- --------
Total liabilities................................... 661,385 638,733
Shareholders' equity................................... 62,320 52,968
-------- --------
Total liabilities and shareholders' equity.......... $723,705 $691,701
======== ========
Net interest income.................................... $23,568 $27,183
======= =======
Net interest spread.................................... 3.73% 4.71%
Net interest margin.................................... 4.65% 5.64%
- -------------------------
(1) Annualized.
12
The following tables present 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
(decrease) related to outstanding balances and changes in interest rates for the
three and nine month periods ended September 30, 2001 compared with the three
and nine month periods ended September 30, 2000. For purposes of these tables,
changes attributable to both rate and volume have been allocated to rate.
THREE MONTHS ENDED SEPTEMBER 30,
2001 vs 2000
---------------------------------
INCREASE (DECREASE)
DUE TO
------------------- ----------
VOLUME RATE TOTAL
------- -------- ----------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans...................................................... $ 6,950 $ (9,466) $(2,516)
Securities................................................. 1,264 (1,316) (52)
Federal funds sold and other temporary investments......... 1,820 (2,243) (423)
------- -------- -------
Total increase (decrease) in interest income.............. 10,034 (13,025) (2,991)
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits........................... 498 (541) (43)
Saving and money market accounts........................... 1,291 (1,634) (343)
Time deposits.............................................. 2,708 (3,899) (1,191)
Other borrowings........................................... (114) (149) (263)
------- -------- -------
Total increase (decrease) in interest expense............. 4,383 (6,223) (1,840)
------- -------- -------
Increase (decrease) in net interest income.................. $ 5,651 $ (6,802) $(1,151)
======= ======== =======
NINE MONTHS ENDED SEPTEMBER 30,
2001 vs 2000
---------------------------------
INCREASE (DECREASE)
DUE TO
------------------- ----------
VOLUME RATE TOTAL
------- -------- ----------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans...................................................... $ 236 $ (5,447) $(5,211)
Securities................................................. 1,875 (861) 1,014
Federal funds sold and other temporary investments......... 1,202 (1,435) (233)
------- -------- -------
Total increase (decrease) in interest income.............. 3,313 (7,743) (4,430)
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits........................... 295 (270) 25
Saving and money market accounts........................... 287 (703) (416)
Time deposits.............................................. 1,212 (583) 629
Federal funds purchased.................................... (1) - (1)
Other borrowings........................................... (908) (144) (1,052)
------- -------- -------
Total increase (decrease) in interest expense............. 885 (1,700) (815)
------- -------- -------
Increase (decrease) in net interest income.................. $ 2,428 $ (6,043) $(3,615)
======= ======== =======
13
PROVISION FOR LOAN LOSSES. Provisions for loan losses are charged to income
to maintain the Company's allowance for loan losses at a level which management
considers adequate to absorb probable losses inherent in the loan portfolio. For
the three months ended September 30, 2001, the provision for loan losses was
$407,000 compared with $499,000 for the three months ended September 30, 2000,
down $92,000 or 18.4%. For the nine months ended September 30, 2001, the
provision for loan losses was $1.2 million compared with $6.8 million for the
nine months ended September 30, 2000, down $5.6 million or 82.4%, primarily due
to less charge-off volume in 2001. The higher provision made in 2000 was
necessary to replenish the allowance for loan losses as a result of the $5.3
million factoring receivables charge-off. The allowance for loan losses at
September 30, 2001 was $9.3 million, compared with $9.0 million at September 30,
2000. At September 30, 2001, the ratio of the allowance for loan losses to total
loans (net of unearned interest, deferred fees, and discounts) was 1.96%
compared with 1.85% at September 30, 2000.
NONINTEREST INCOME. Total noninterest income for the three and nine
months ended September 30, 2001 was $2.1 million and $6.5 million, respectively,
up $280,000 or 15.3% and $1.3 million or 25.6%, respectively, from $1.8 million
and $5.2 million, respectively, for the same three and nine month periods in
2000. These increases were primarily the result of service charges (including
nonsufficient funds fees) and other banking service fees more broadly applied on
a higher deposit base and an increase in fee income through sales of traditional
nonlending bank services such as trade finance, mortgage loan services, and
funds transfer services.
For the three and nine months ended September 30, 2001, service charges on
deposit accounts were $1.6 million and $4.7 million, and represented 75.5% and
72.3% of total noninterest income, respectively, compared to the same periods in
2000 when service charges on deposit accounts represented 66.6% and 65.9% of
total noninterest income, respectively. Fees from deposit related services such
as check cashing, wire transfer fees, official check fees, and printed check
fees were reclassified in 2001 to the service charges category from the other
noninterest income category as they are more reflective of traditional
nonlending bank services charges. The 2000 figures for noninterest income were
adjusted to reflect the 2001 reclassification. Remaining in the other
noninterest income category for 2001 were all other miscellaneous fees such as
checkcard fees, capital markets and credit life commissions, automated
clearing-house fees, merchant credit card clearing fees, and gains/losses on
sale of SBA loans. For the three and nine months ended September 30, 2001,
compared to the same three and nine month periods in 2000, other noninterest
income was down primarily due to gains on sales of SBA loans realized in 2000 of
$127,000 and $415,000, respectively, and no similar sales of SBA loans in 2001.
In addition, net gains on sales of investment securities for the three and nine
months ended September 30, 2001 of $13,000 and $189,000 were primarily due to
calls on agency securities that were originally purchased at discounts and
subsequently called at par as a result of the decline in market interest rates.
The following table presents, for the periods indicated, the major
categories of noninterest income:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2001 2000 2001 2000
------ ------ ------ ------
(DOLLARS IN THOUSANDS)
Service charges............................... $1,595 $1,221 $4,737 $3,442
Other loan-related fees....................... 236 236 735 640
Letters of credit commissions and fees........ 149 147 498 424
Gain on sale of investment securities, net.... 13 - 189 -
Other noninterest income...................... 119 228 395 713
------ ------ ------ ------
Total noninterest income................... $2,112 $1,832 $6,554 $5,219
====== ====== ====== ======
NONINTEREST EXPENSE. Total noninterest expense for the three and nine
months ended September 30, 2001 was $6.1 million and $19.2 million,
respectively, down $549,000 or 8.1% and $1.2 million or 6.1%, respectively, from
$6.7 million and $20.5 million, respectively, for the same three and nine month
periods in 2000. The decreases in total noninterest expense for the three and
nine months ended September 30, 2001 were primarily due to decreased non-staff
expense of $451,000 million or 14.0% and $1.6 million or 15.8%, respectively.
The decreases in non-staff expense were primarily due to the Galleria branch
closing in November 2000 and less legal and audit/consulting fees that were
partially offset
14
by increased fees to directors, and increased miscellaneous other operating
expenses. Professional fees were higher in 2000 as a result of the factoring
receivables charge-off and various systems-related improvements. The Company's
quarterly average for noninterest expense in the year 2000 was $6.8 million
compared with the quarterly average for 2001 of $6.4 million, an average
quarterly reduction through the first three quarters of 2001 of approximately
$400,000.
The Company's efficiency ratio improved over the three months ended
September 30, 2001 by 10 basis points to 61.77% compared with the same three
month period in 2000 at 61.87%. This was primarily the result of a combination
of higher noninterest income and lower noninterest expense, partially offset
by lower net interest income. The efficiency ratio for the three months ended
September 30, 2001 improved 366 basis points from the ratio reported for the
second quarter 2001 of 65.43%. The Company's efficiency ratio for the nine
months ended September 30, 2001 softened 66 basis points to 63.84% compared with
the same period in 2000 at 63.18% and was primarily the result of lower interest
income due to lower market interest rates.
The following table presents, for the periods indicated, the major
categories of noninterest expense:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2001 2000 2001 2000
------ ------ ------ ------
(DOLLARS IN THOUSANDS)
Employee compensation and benefits............. $3,410 $ 3,508 $10,746 $10,394
Non-staff expenses:
Occupancy................................... 1,126 1,236 3,392 3,786
Other real estate, net...................... 88 (45) 85 (61)
Data processing............................. 15 42 53 128
Professional fees........................... 238 1,042 1,002 2,568
Advertising................................. 69 79 287 325
Director compensation....................... 113 65 324 254
Printing and supplies....................... 118 116 369 337
Telecommunications.......................... 140 124 453 415
Other noninterest expense................... 853 552 2,518 2,327
------ ------ ------- -------
Total non-staff expenses.................. 2,760 3,211 8,483 10,079
Total noninterest income.................. $6,170 $6,719 $19,229 $20,473
====== ====== ======= =======
Employee compensation and benefits expense of $3.4 million for the three
months ended September 30, 2001 represented 55.3% of total noninterest expense,
and was down from the same three month period in 2000 by $98,000 or 2.8%.
Employee compensation and benefits expense of $10.7 million for the nine months
ended September 30, 2001 represented 55.9% of total noninterest expense and was
up from the same nine month period in 2000 by $352,000 or 3.4%. The increased
employee compensation and benefits expense was primarily due to annual salary
increases, additions to officer and senior officer level employees, and various
incentive program payments. Full-time equivalent ("FTE") employees at September
30, 2001 were 310.06 compared with FTE of 326.41 at September 30, 2000, a
decrease of 16.35 FTE. The full-time equivalent calculation includes all full-
time, part-time, temporary, contract, and security guard staff based on total
hours worked.
15
FINANCIAL CONDITION
LOAN PORTFOLIO. Total loans decreased by $7.3 million or 1.5%, from
$483.7 million at December 31, 2000 to $476.5 million at September 30, 2001. The
decrease was primarily due to a combination of large loan prepayments that
exceeded new loan funding in 2001, softer loan demand and the Company's more
conservative credit standards. In response to a weakened national economy,
management recognizes that potential deterioration in asset quality could arise
and is proactively reviewing and evaluating all credits. This includes increased
contact with borrowers, more frequent field visits, and more conservative credit
evaluations. As a result, the Company has revised its loan growth expectations
for 2001 to flat or slightly down from the amount of loans at December 31, 2000.
At September 30, 2001 and December 31, 2000, the ratio of total loans to total
deposits was 76.1% and 77.3%, respectively. At the same dates, total loans
represented 65.1% and 65.7% of total assets, respectively.
The following table summarizes the loan portfolio of the Company by type of
loan:
AS OF SEPTEMBER 30, 2001 AS OF DECEMBER 31, 2000
------------------------ -----------------------
AMOUNT PERCENT AMOUNT PERCENT
--------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
Commercial and industrial.................... $305,738 63.37% $298,134 60.92%
Real estate mortgage:
Residential................................ 8,073 1.67 10,141 2.07
Commercial................................. 123,066 25.51 128,242 26.20
Real estate construction:
Residential................................ 6,017 1.25 7,542 1.54
Commercial................................. 28,097 5.82 32,059 6.55
Consumer and other........................... 11,501 2.38 11,986 2.45
Factored receivables......................... - - 1,297 0.27
--------- ---------- ---------- ---------
Gross loans.................................. 482,492 100.00% 489,401 100.00%
========== =========
Less: unearned discounts, interest
and deferred fees........................ (6,025) (5,663)
--------- ----------
Total loans.................................. 476,467 483,738
Less: allowance for loan losses............ (9,339) (9,271)
--------- ----------
Loans, net................................... $467,128 $474,467
========= ==========
NONPERFORMING ASSETS. Net nonperforming assets at September 30, 2001 were
$4.9 million, an increase of $3.0 million from net nonperforming assets of $1.9
million at December 31, 2000, but were down $785,000 from the $5.7 million
reported as of June 30, 2001. The increase from December 31, 2000 was primarily
due to the Company's conservative credit evaluations, a softer national economy,
and certain borrowers who were impacted by the weather related problems
experienced in Houston during the second quarter of 2001. In addition, in the
second quarter 2001, the Company amended its loan servicing practices to allow
for certain loans to remain on accrual status when reaching 90 days or more past
due. These loans include those that are in workout and are close to the end of
the resolution process to bring their payment schedules current. Historically,
the Company's loan servicing practices had been to automatically place loans on
nonaccrual status upon reaching 91 days past due. Loans accruing 90 days or more
past due at September 30, 2001 were $974,000, down $594,000 or 37.9% from the
$1.6 million reported as of June 30, 2001. The ratios for net nonperforming
assets to total loans and other real estate were 1.02% and 0.40% at September
30, 2001 and December 31, 2000, respectively. The ratios for net nonperforming
assets to total assets were 0.67% and 0.26% for the same periods, respectively.
These figures are net of the loan portions guaranteed by the United States
Department of Commerce's Small Business Administration (the "SBA"), the Export
Import Bank of the United States (the "Ex-Im Bank"), an independent agency of
the United States Government, and the Overseas Chinese Community Guaranty Fund
("OCCGF"), an agency sponsored by the government of Taiwan, which were $1.4
million at September 30, 2001 and $1.0 million at December 31, 2000.
Prior to 2001, the Company was actively involved in the origination and
sale of certain federally guaranteed loans into the secondary market with
servicing retained. Under the terms of these programs, the Company is required
to repurchase any loans which may become nonperforming. As a result of this
requirement, the Company's nonperforming loans may increase during the period of
time prior to which any loan repurchased is either restored to an accrual status
or the Company claims on the guarantee.
16
The following table presents information regarding nonperforming assets at
the periods indicated:
AS OF AS OF
SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------- ------------------
(DOLLARS IN THOUSANDS)
Nonaccrual loans ................................................... $ 3,747 $ 2,225
Accruing loans 90 days or more past due ............................ 974 -
Other real estate................................................... 1,523 696
Other assets repossessed............................................ 54 61
-------- --------
Total nonperforming assets ........................................ 6,298 2,982
Less:
Nonperforming loans guaranteed by the SBA, Ex-Im Bank
and OCCGF......................................................... 1,414 1,049
-------- --------
Total net nonperforming assets..................................... $ 4,884 $ 1,933
======== ========
Nonperforming assets to total assets................................ 0.86% 0.40%
Nonperforming assets to total loans and other real estate........... 1.32% 0.62%
Net nonperforming assets to total assets (1)........................ 0.67% 0.26%
Net nonperforming assets to total loans and other real estate (1)... 1.02% 0.40%
- ------------------
(1) Net nonperforming assets are net of the loan portions guaranteed by the
SBA, Ex-Im Bank and OCCGF.
ALLOWANCE FOR LOAN LOSSES. For the nine months ended September 30, 2001,
net loan charge-offs were $1.1 million or 0.24% of average total loans
outstanding, a decrease of $4.7 million or 81.0% compared with $5.8 million or
1.19% of average total loans outstanding for the year ended December 31, 2000.
The Company seeks recovery of charge-offs through all available channels. The
Company continues working to further strengthen its credit administration
systems, policies, and loan review procedures. At both September 30, 2001 and
December 31, 2000, the allowance for loan losses aggregated $9.3 million or
1.96% and 1.92% of average total loans, respectively.
The following table presents an analysis of the allowance for loan losses
and other related data:
AS OF AND FOR THE AS OF AND FOR THE
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------ -----------------
(DOLLARS IN THOUSANDS)
Average year-to-date total loans outstanding......................... $472,355 $486,549
======== ========
Total loans outstanding at end of period ............................ $476,467 $483,738
======== ========
Allowance for loan losses at beginning of period..................... $ 9,271 $ 7,537
Provision for loan losses ........................................... 1,190 7,508
Charge-offs:
Commercial and industrial .......................................... (1,043) (1,479)
Real estate - mortgage ............................................. - (23)
Consumer and other ................................................. (172) (5,524)
-------- --------
Total charge-offs ................................................ (1,215) (7,026)
-------- --------
Recoveries:
Commercial and industrial .......................................... 42 901
Real estate - mortgage ............................................. 11 8
Consumer and other ................................................. 40 343
-------- --------
Total recoveries ................................................. 93 1,252
-------- --------
Net loan charge-offs ................................................ (1,122) (5,774)
-------- --------
Allowance for loan losses at end of period .......................... $ 9,339 $ 9,271
======== ========
Ratio of allowance to end of period total loans ..................... 1.96% 1.92%
Ratio of net loan charge-offs to average total loans ................ 0.24% 1.19%
Ratio of allowance to end of period nonperforming loans.............. 160.63% 416.67%
Ratio of allowance to end of period net nonperforming loans.......... 230.93% 788.35%
17
SECURITIES. At September 30, 2001, the securities portfolio totaled
$164.7 million, reflecting an increase of $20.9 million or 14.5% from $143.8
million at December 31, 2000. The securities portfolio is primarily comprised
of mortgage-backed securities, collateralized mortgage obligations, tax-free
municipal bonds, and U.S. government agency securities. The securities
portfolio has been funded by the liquidity created from deposit growth and loan
prepayments in excess of loan funding requirements. Effective January 1, 2001,
the Company adopted SFAS 133, which allowed for a one-time transfer of
investment securities between the held-to-maturity and available-for-sale
categories. In January 2001, the Company reclassified its "held-to-maturity"
investment portfolio to the "available-for-sale" category which has provided
greater flexibility in the ongoing management of the Company's liquidity.
DEPOSITS. At September 30, 2001, total deposits were $626.5 million, up
$594,000 or 0.09% from $625.9 million at December 31, 2000. Noninterest-bearing
deposits at September 30, 2001 increased by $5.2 million or 4.8% to $113.1
million from $107.9 million at December 31, 2000. Interest-bearing deposits at
September 30, 2001 decreased by $4.6 million or 0.9% to $513.4 million from
$518.0 million at December 31, 2000. The Company's ratios of noninterest-
bearing demand deposits to total deposits at September 30, 2001 and December 31,
2000 were 18.1% and 17.2%, respectively. The $4.6 million decrease in interest-
bearing deposits between December 31, 2000 and September 30, 2001 was the net
effect of an increase of approximately $15.4 million in new deposits offset by a
reduction of $20.0 million in CD's tied to two interest rate swap contracts
which were called in the first quarter of 2001 due to the decline in market
interest rates.
OTHER BORROWINGS. The Company has two ten-year loans totaling $25.0 million
from the FHLB to further leverage its balance sheet and diversify its funding
sources. The Company has an additional unused, unsecured line of credit with the
FHLB totaling $50.0 million. The two ten-year loans bear interest at an average
rate of 4.99% per annum until the fifth year anniversary of the loans, September
2003, at which time the loans may be repaid or the interest rate may be
renegotiated. Other short-term borrowings principally consist of U.S. Treasury
tax note option accounts having a maturity of 14 days or less. Additionally, the
Company had several unused, unsecured lines of credit with correspondent banks
totaling $15.0 million at September 30, 2001 and $5.0 million at December 31,
2000.
CAPITAL RESOURCES. Shareholders' equity at September 30, 2001 increased by
$7.5 million or 12.8% to $66.2 million from $58.7 million at December 31, 2000.
The increase for the nine months ended September 30, 2001 was primarily due to
net income of $6.5 million and an increase in other comprehensive income and the
unrealized gains on investment securities of $2.0 million. The increase in
sharholders' equity was partially offset by dividend payments of $1.0 million.
The following table provides a comparison of the Company's and the Bank's
leverage and risk-weighted capital ratios as of September 30, 2001 to the
minimum and well-capitalized regulatory standards:
MINIMUM TO BE WELL
REQUIRED FOR CAPITALIZED UNDER
CAPITAL ADEQUACY PROMPT CORRECTIVE ACTUAL RATIO AT
PURPOSES ACTION PROVISIONS SEPTEMBER 30, 2001
---------------- ----------------- ------------------
THE COMPANY
Leverage ratio........................ 4.00%(1) N/A 8.78%
Tier 1 risk-based capital ratio....... 4.00 N/A 12.71
Risk-based capital ratio.............. 8.00 N/A 13.97
THE BANK
Leverage ratio........................ 4.00%(2) 5.00% 8.38%
Tier 1 risk-based capital ratio....... 4.00 8.00 12.14
Risk-based capital ratio.............. 8.00 10.00 13.39
------------------------
(1) The Federal Reserve Board may require the Company to maintain a leverage
ratio above the required minimum.
(2) The OCC may require the Bank to maintain a leverage ratio above the
required minimum.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes in the market risk information
previously disclosed in the Company's Form 10-K for the year ended December 31,
2000. See Form 10-K, Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Financial Condition - Interest Rate
Sensitivity and Liquidity."
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6A. EXHIBITS
EXHIBIT IDENTIFICATION
NUMBER OF EXHIBIT
11 -- Computation of Earnings Per Common Share, included as Note (2)
to the Condensed Consolidated Financial Statements on Page 5 of
this Form 10-Q.
ITEM 6B. REPORTS ON FORM 8-K
None.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
METROCORP BANCSHARES, INC.
By: /S/ Don J. Wang
-----------------------------------
Date: November 13, 2001 Don J. Wang
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
By: /S/ Allen D. Brown
-----------------------------------
Date: November 13, 2001 Allen D. Brown
President
(Principal Financial and Accounting Officer)
20