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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 Commission file number 000-25141   METROCORP BANCSHARES, INC. )
 Texas
    
    76-0579161(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer 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) 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 þ No o. Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes o No þ. As
of May 10, 2004, the number of outstanding shares of Common Stock, par
value $1.00 per share, was 7,172,563.    1




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TABLE OF CONTENTS  PART I FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements.Item 3. Quantitative and Qualitative Disclosures about Market Risk.Item 4. Controls and ProceduresPART II OTHER INFORMATIONItem 1. Legal ProceedingsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationSIGNATURESEXHIBIT INDEXCertification of CEO pursuant to Rule 13a-14aCertification of CFO pursuant to Rule 13a-14aCertification of CEO pursuant to Section 906Certification of CFO pursuant to Section 906    Table of Contents  
 PART I FINANCIAL INFORMATION 
 Item 1.Condensed Consolidated Financial Statements. METROCORP BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited) March 31,2004
    

December 31,2003ASSETSCash and due from banks
    
    $
    24,710
    
    
    $
    26,347Federal funds sold and other investments
    
    
    3,978
    
    
    
    10,580Total cash and cash equivalents
    
    
    28,688
    
    
    
    36,927Securities available-for-sale, at fair value
    
    
    239,932
    
    
    
    257,064Other investments.
    
    
    5,754
    
    
    
    5,200Loans, held-for-investment (net of allowance for loan losses of $10,850
and $10,448, respectively)
    
    
    556,742
    
    
    
    537,305Loans, held-for-sale
    
    
    4,374
    
    
    
    6,030Accrued interest receivable
    
    
    3,208
    
    
    
    3,452Premises and equipment, net
    
    
    6,353
    
    
    
    5,674Customers liability on acceptances
    
    
    3,583
    
    
    
    3,352Foreclosed assets, net
    
    
    1,240
    
    
    
    2,585Other assets
    
    
    6,389
    
    
    
    7,184Total assets
    
    $
    856,263
    
    
    $
    864,773LIABILITIES AND SHAREHOLDERS EQUITYDeposits:Noninterest-bearing
    
    $
    175,390
    
    
    $
    169,097Interest-bearing
    
    
    533,403
    
    
    
    555,844Total deposits
    
    
    708,793
    
    
    
    724,941Other borrowings
    
    
    58,793
    
    
    
    54,173Accrued interest payable
    
    
    533
    
    
    
    567Acceptances outstanding
    
    
    3,583
    
    
    
    3,352Other liabilities
    
    
    5,212
    
    
    
    5,530Total liabilities
    
    
    776,914
    
    
    
    788,563Commitments and contingencies
    
    
    
    
    
    
    Shareholders equity:Preferred stock $1.00 par value, 2,000,000 shares authorized;
none of which are issued and outstanding
    
    
    
    
    
    
    Common stock, $1.00 par value, 20,000,000 shares authorized;
7,306,627 and 7,306,627 shares are issued and 7,162,990 and
7,156,689 shares are outstanding at March 31, 2004 and December 31, 2003,
respectively
    
    
    7,307
    
    
    
    7,307Additional
paid-in capital
    
    
    27,664
    
    
    
    27,620Retained earnings
    
    
    43,622
    
    
    
    41,942Accumulated other comprehensive income
    
    
    2,036
    
    
    
    671Treasury stock, at cost
    
    
    (1,280
    )
    
    
    (1,330
    )Total shareholders equity
    
    
    79,349
    
    
    
    76,210Total liabilities and shareholders equity
    
    $
    856,263
    
    
    $
    864,773
 See accompanying notes to condensed consolidated financial statements 2




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METROCORP BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share amounts)
(Unaudited) For the Three MonthsEnded March 31,2004
    
    2003Interest income:Loans
    
    $
    8,422
    
    
    $
    8,862Securities:Taxable
    
    
    2,187
    
    
    
    1,912Tax-exempt
    
    
    234
    
    
    
    262Federal funds sold and other temporary investments
    
    
    38
    
    
    
    55Total interest income
    
    
    10,881
    
    
    
    11,091Interest expense:Time deposits
    
    
    1,901
    
    
    
    2,361Demand and savings deposits
    
    
    296
    
    
    
    383Other borrowings
    
    
    436
    
    
    
    505Total interest expense
    
    
    2,633
    
    
    
    3,249Net interest income
    
    
    8,248
    
    
    
    7,842Provision for loan losses
    
    
    550
    
    
    
    800Net interest income after provision for loan losses
    
    
    7,698
    
    
    
    7,042Noninterest income:Service fees
    
    
    1,659
    
    
    
    1,542Other loan-related fees
    
    
    208
    
    
    
    306Letters of credit commissions and fees
    
    
    115
    
    
    
    134Gain on sale of securities, net
    
    
    
    
    
    
    163Gain on sale of loans
    
    
    55
    
    
    
    122Foreclosed assets, net
    
    
    663
    
    
    
    1Other noninterest income
    
    
    11
    
    
    
    27Total noninterest income
    
    
    2,711
    
    
    
    2,295Noninterest expense:Salaries and employee benefits
    
    
    4,138
    
    
    
    3,840Occupancy and equipment
    
    
    1,400
    
    
    
    1,282Other noninterest expense
    
    
    1,797
    
    
    
    1,399Total noninterest expense
    
    
    7,335
    
    
    
    6,521Income before provision for income taxes
    
    
    3,074
    
    
    
    2,816Provision for income taxes
    
    
    964
    
    
    
    907Net income
    
    $
    2,110
    
    
    $
    1,909Earnings per common share:Basic
    
    $
    0.29
    
    
    $
    0.27Diluted
    
    $
    0.29
    
    
    $
    0.27Weighted average shares outstanding:Basic
    
    
    7,161
    
    
    
    7,033Diluted
    
    
    7,254
    
    
    
    7,196Dividends per common share
    
    $
    0.06
    
    
    $
    0.06
 See accompanying notes to condensed consolidated financial statements 3




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METROCORP BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited) For the Three MonthsEnded March 31,2004
    
    2003Net income
    
    $
    2,110
    
    
    $
    1,909Other comprehensive income, net of tax:Unrealized gain (loss) on investment securities, net:Unrealized holding gain (loss) arising during the period
    
    
    1,365
    
    
    
    (258
    )Less: reclassification adjustment for gain included in net income
    
    
    
    
    
    
    106Other comprehensive income (loss)
    
    
    1,365
    
    
    
    (364
    )Total comprehensive income
    
    $
    3,475
    
    
    $
    1,545
 METROCORP BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
For the Three Months Ended March 31, 2004
(In thousands)
(Unaudited) AccumulatedCommon Stock
    
    AdditionalPaid-in
    
    Retained
    
    OtherComprehensive
    
    TreasuryStockShares
    
    At Par
    
    Capital
    
    Earnings
    
    Income
    
    At Cost
    
    TotalBalance at January 1, 2004
    
    
    7,157
    
    
    $
    7,307
    
    
    $
    27,620
    
    
    $
    41,942
    
    
    $
    671
    
    
    $
    (1,330
    )
    
    $
    76,210Re-issuance of treasury stock
    
    
    6
    
    
    
    
    
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    50
    
    
    
    94Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,110
    
    
    
    
    
    
    
    
    
    
    
    2,110Other comprehensive gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,365
    
    
    
    
    
    
    
    1,365Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (430
    )
    
    
    
    
    
    
    
    
    
    
    (430
    )Balance at March 31, 2004
    
    
    7,163
    
    
    $
    7,307
    
    
    $
    27,664
    
    
    $
    43,622
    
    
    $
    2,036
    
    
    $
    (1,280
    )
    
    $
    79,349
 See accompanying notes to condensed consolidated financial statements 4




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METROCORP BANCSHARES, INC
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) For the Three MonthsEnded March 31,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    2,110
    
    
    $
    1,909Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    328
    
    
    
    360Provision for loan losses
    
    
    550
    
    
    
    800Gain on sale of securities, net
    
    
    
    
    
    
    (163
    )Gain on sale of foreclosed assets
    
    
    (892
    )
    
    
    (14
    )Gain on sale of loans
    
    
    (55
    )
    
    
    (122
    )Amortization of premiums and discounts on securities
    
    
    166
    
    
    
    684Amortization of deferred loan fees and discounts
    
    
    56
    
    
    
    (19
    )Changes in:Loans held-for-sale
    
    
    1,710
    
    
    
    Accrued interest receivable
    
    
    244
    
    
    
    211Accrued interest payable
    
    
    (34
    )
    
    
    (37
    )Other liabilities
    
    
    (320
    )
    
    
    730Other assets
    
    
    92
    
    
    
    (1,071
    )Net cash provided by operating activities
    
    
    3,955
    
    
    
    3,268Cash flows from investing activities:Purchases of securities available-for-sale
    
    
    (6,818
    )
    
    
    (25,541
    )Proceeds from sales, maturities and principal paydowns of securities available for sale
    
    
    25,299
    
    
    
    48,895Net change in loans
    
    
    (20,505
    )
    
    
    (24,895
    )Proceeds from sale of foreclosed assets
    
    
    2,700
    
    
    
    362Purchases of premises and equipment
    
    
    (1,007
    )
    
    
    (331
    )Net cash used in investing activities
    
    
    (331
    )
    
    
    (1,510
    )Cash flows from financing activities:Net change in:Deposits
    
    
    (16,148
    )
    
    
    5,429Other borrowings
    
    
    4,620
    
    
    
    45Proceeds from issuance of common stock
    
    
    
    
    
    
    28Treasury stock sold
    
    
    94
    
    
    
    107Treasury stock purchased
    
    
    
    
    
    
    (212
    )Dividends paid
    
    
    (429
    )
    
    
    (422
    )Net cash provided by (used in) financing activities
    
    
    (11,863
    )
    
    
    4,975Net increase (decrease) in cash and cash equivalents
    
    
    (8,239
    )
    
    
    6,733Cash and cash equivalents at begining of period
    
    
    36,927
    
    
    
    38,186Cash and cash equivalents at end of period
    
    $
    28,688
    
    
    $
    44,919
 See accompanying notes to condensed consolidated financial statements 5




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METROCORP BANCSHARES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  1.
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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). The Bank was formed
in 1987 and is engaged in commercial banking activities through its fourteen
branches in Houston and Dallas, Texas. The Company considers itself one
reporting segment. 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 for a fair presentation of
the Companys financial position at March 31, 2004, results of operations for
the three months ended March 31, 2004 and 2003, and cash flows for the three
months ended March 31, 2004 and 2003. Interim period results are not
necessarily indicative of results for a full-year period. Certain amounts applicable to the prior periods have been reclassified to
conform to the classifications currently used. Such reclassifications had no
effect on net income, total assets or shareholders equity. 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, 2003. Stock Compensation The Company grants stock options under several stock-based incentive
compensation plans. The Company utilizes the intrinsic value method for its
stock compensation plans. No compensation cost is recognized for fixed stock
options in which the exercise price is equal to or greater than the estimated
market price on the date of grant. Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation,which, if fully
adopted by the Company, would change the method the Company applies in
recognizing the cost of the plans to the fair value method. Adoption of the
cost recognition provisions of SFAS No. 123 is optional and the Company has
decided to continue to follow the intrinsic value method. However, pro forma
disclosures as if the Company adopted the fair value method are required. If
the fair value based method of accounting under SFAS No. 123 had been applied,
the Companys net income available to common shareholders and earnings per
common share would have been reduced to the pro forma amounts indicated below
(assuming that the fair value of options granted during the year are amortized
over the vesting period) (in thousands except per share amounts): For the Three MonthsEnded March 31,2004
    
    2003Net income:As reported
    
    $
    2,110
    
    
    $
    1,909Pro forma
    
    $
    2,067
    
    
    $
    1,870Stock-based compensation cost, net of income taxes:As reported
    
    $
    
    
    
    $
    Pro forma
    
    $
    43
    
    
    $
    39Basic earnings per common share:As reported
    
    $
    0.29
    
    
    $
    0.27Pro forma
    
    $
    0.29
    
    
    $
    0.27Diluted earnings per common share:As reported
    
    $
    0.29
    
    
    $
    0.27Pro forma
    
    $
    0.28
    
    
    $
    0.26
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METROCORP BANCSHARES, INC. NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Stock Compensation (Continued) The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1995, and the Company anticipates making awards in the future under its
stock-based compensation plans. The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Companys employee stock options
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.  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 MonthsEnded March 31,2004
    
    2003(In thousands, except per share amounts)Net income available to common shareholders
    
    $
    2,110
    
    
    $
    1,909Weighted average common shares outstanding:Basic
    
    
    7,161
    
    
    
    7,033Shares issuable under stock option plans
    
    
    93
    
    
    
    163Diluted
    
    
    7,254
    
    
    
    7,196Earnings per common share:Basic
    
    $
    0.29
    
    
    $
    0.27Diluted
    
    $
    0.29
    
    
    $
    0.27
  3.
    LITIGATION In September 2003, Advantage Finance Corporation (AFC), a subsidiary of
the Company that is no longer active, was served in connection with a lawsuit
based on alleged malicious prosecution and conspiracy. Also included in
the lawsuit are BDO Seidman LLP and the CIT Group/Commercial Services, Inc.
The plaintiff has filed his case in both Federal and State courts. In December
2003, the case was dismissed from Federal; however, the plaintiff subsequently
filed an appeal. Management is unable to determine whether the outcome will
have a material impact on the Companys financial statements. The lawsuit does
not seek a specified amount.  4.
    GUARANTEES The
Bank enters into a stand-by letters of credit to guarantee performance
of a customer to a third party. These guarantees are primarily issued to
support public and private borrowing arrangements. The credit risk involved is
represented by the contractual amounts of those instruments. Under
the stand-by
letters of credit, the
Bank is required to make payments to the beneficiary of the letters of credit
upon request by the beneficiary so long as all performance criteria have been
met. Most guarantees extend up to one year. At March 31, 2004, the maximum
potential amount of future payments was $6.9 million. The Company has recorded
a liability of approximately $1,538 and $3,400 at March 31, 2004 and 2003,
respectively. 7




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METROCORP BANCSHARES, INC. NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)  5.
    NEW ACCOUNTING PRONOUNCEMENTS On December 16, 2003 the American Institute of Certified Public
Accountants issued Statement of Position 03-3 (SOP 03-3), Accounting for
Certain Loans or Debt Securities Acquired in a Transfer. SOP 03-3 provides
guidance on the accounting for differences between contractual and expected
cash flows from the purchasers initial investment in loans or debt securities
acquired in a transfer, if those differences are attributable, at least in
part, to credit quality. Among other things, SOP-03-3: (1) prohibits the
recognition of the excess of the contractual cash flows over expected cash
flows as an adjustment of yield, loss accrual, or valuation allowance at the
time of purchase; (2) requires that subsequent increases in expected cash flows
be recognized prospectively through an adjustment of yield; and (3) requires
the subsequent decreases in expected cash flows be recognized as an impairment.
In addition, SOP 03-3 prohibits the creation or carrying over of a valuation
allowance in the initial accounting of all loans within its scope that are
acquired in a transfer. SOP 03-3 becomes effective for loans or debt
securities acquired in fiscal years beginning after December 15, 2004. The
Company does not expect the requirements of SOP 03-3 to have a material impact
on its financial condition 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 The statements and financial discussion and analysis contained in this
Quarterly Report on Form 10-Q 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, which
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 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 the Companys 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. 8




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Overview For the three months ended March 31, 2004, the Company recorded net income
of $2.1 million, up approximately $201,000 from net income of $1.9 million for
the same quarter in 2003. The Companys diluted earnings per share (EPS) for the three months ended March 31, 2004 was $0.29,
up $0.02 per diluted share from diluted EPS of $0.27 for the same quarter in
2003. Total assets were $856.3 million at March 31, 2004, down approximately
$8.5 million or 1.0% from $864.8 million at December 31, 2003. Investment
securities at March 31, 2004 were $239.9 million, down approximately $17.2
million or 6.7% from $257.1 million at December 31, 2003. Net loans, both
held-for-investment and held-for-sale, at March 31, 2004 were $561.1 million,
up approximately $17.8 million or 3.3% from $543.3 million at December 31,
2003. Total deposits at March 31, 2004 were $708.8 million, down approximately
$16.1 million or 2.2% from $724.9 million at December 31, 2003. Other borrowings at March 31, 2004 were
$58.8 million, up approximately $4.6 million from other borrowings of $54.2
million at December 31, 2003. The Companys return on average assets (ROAA)
for the three months ended March 31, 2004 and 2003 was 0.99% and 0.93%,
respectively. Shareholders equity at March 31, 2004 was $79.3
million compared to $76.2 million at December 31, 2003, an increase of
approximately $3.1 million or 4.1%. The
Company made a capital contribution of $3.0 million to the Bank on April 20,
2004. Results of Operations Net
Interest Income and the Net Interest Margin.For the three months ended
March 31, 2004, net interest income, before the provision for loan losses, was
$8.2 million, up approximately $406,000 or 5.2% from $7.8 million for the same
quarter in 2003. The increase was primarily due to lower interest expense
resulting from lower interest rates paid on deposits and other interest-bearing
liabilities that was partially offset by lower interest income as a
result of lower yields on higher interest-earning assets. Average interest-earning assets for the three months ended March
31, 2004 were $820.3 million, up approximately $17.3 million or 2.2% from
$803.0 million for the same quarter in 2003. The weighted average yield on
interest-earning assets for the three months ended March 31,
2004 was 5.34%,
down 26 basis points from 5.60% for the same quarter in 2003. Average
interest-bearing liabilities for the three months ended March 31, 2004 were
$607.6 million, down approximately $5.5 million or 0.9% from $613.1 million for
the same quarter in 2003. The weighted average interest rate paid on
interest-bearing liabilities for the three months ended March 31, 2004 was
1.74%, down 41 basis points from 2.15% for the same quarter in 2003. The net interest margin for the three months ended March 31, 2004 was
4.04%, up 8 basis points from 3.96% for the same period in 2003. The increase
was primarily the result of a decrease in the cost of earning assets of 35
basis points that was partially offset by a decline in the yield on earning
assets of 27 basis points. The Companys net interest margin may experience
future pressure depending on the interest rate environment. Total Interest Income.Total interest income for the three months ended
March 31, 2004 was $10.9 million, down approximately $210,000 or 1.9% from
$11.1 million for the same quarter in 2003. The decrease was primarily the
result of lower yields on interest-earning assets. The yield on average
earning assets for the first quarter 2004 was 5.34% compared to 5.60% for the
first quarter of 2003, a decrease of 26 basis points. Interest Income from Loans.Interest income from loans for the three
months ended March 31, 2004 was $8.4 million, down approximately $440,000 or
5.0% from $8.9 million for the same quarter in 2003. The decrease was
primarily due to lower loan yields as a result of the current interest rate
environment that was partially offset by higher average total loans. Average
total loans for the three months ended March 31, 2004 were $561.6 million
compared to average total loans for the same quarter in 2003 of $540.3 million,
an increase of approximately $21.3 million or 3.9%. For the three months ended
March 31, 2004, the average yield on total loans was 6.03% compared to 6.65%
for the same quarter in 2003, a decrease of 62 basis points. Approximately $500.1 million or 86.3% of the loans in the loan portfolio
are variable rate loans that reprice as the prime rate moves and are therefore, sensitive to interest rate movement. At March 31, 2004, the average yield on
total loans was approximately 203 basis points above the prime
rate, which was supported by variable rate loans with interest rate floors that
consisted of approximately $386.7 million or 66.8% of the total
loan portfolio. At March 31, 2004, these loans carried a weighted
average interest rate of 5.78%. At March 31, 2003, these loans
represented 59.9% of the total loan portfolio and carried a weighted
average interest rate of 6.39%. Future increases in market interest 9




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##### Table of Contents



rates,
especially the prime rate, may not immediately impact the loan portfolio
yield because of the interest rate floors. Since some of the floor
rates are higher than prime, increases in the prime rate may not
immediately increase interest income on these loans. Other factors that have impacted
interest income from loans include refinancing pressures on existing loans and
new loans added to the portfolio at lower interest rates. Interest Income from Investments.Interest income from investments (which
includes investment securities, Federal funds sold, and other investments) for
the three months ended March 31, 2004 was $2.5 million, up approximately
$230,000 or 10.3% compared to $2.2 million for the same quarter in 2003,
primarily due to a higher yield on total investments. Average total
investments for the three months ended March 31, 2004, were $258.7 million
compared to average total investments for the same quarter in 2003 of $262.6
million, a decrease of approximately $3.9 million or 1.5%. For the three
months ended March 31, 2004, the average yield on total investments was 3.82%
compared to 3.44% for the same quarter in 2003, an increase of 38 basis points. Total Interest Expense.Total interest expense for the three months ended
March 31, 2004 was $2.6 million, down approximately $616,000 or 19.0% compared
to $3.2 million for the same quarter in 2003. The decrease was primarily the
result of lower interest rates paid on interest-bearing liabilities in addition
to lower average interest-bearing liabilities. Interest Expense on Deposits.Interest paid on interest-bearing deposits
for the three months ended March 31, 2004 was $2.2 million, down approximately
$547,000 or 19.9% compared to $2.7 million for the same period in 2003. The
decrease was primarily due to lower interest rates paid for interest-bearing
deposits. Average interest-bearing deposits for the three months ended March
31, 2004 were $546.9 million compared to average interest-bearing deposits for
the same quarter in 2003 of $544.7 million, an increase of $2.2 million or
0.4%. The average interest rate paid on interest-bearing deposits for the
three months ended March 31, 2004 was 1.62% compared to 2.04% for the same
quarter in 2003, a decrease of 42 basis points. Interest
Expense on Other Borrowings.Interest paid on other
borrowings for the three months ended March 31, 2004 was $436,000, down
approximately $69,000 compared to $505,000 for the same period in 2003. The
decrease was primarily due to lower borrowed funds and lower interest rates
paid for borrowed funds.Average borrowed funds for the three months ended
March 31, 2004 were $60.7 million compared to average borrowed funds for the
same quarter in 2003 of $68.4 million, a decrease of $7.7 million. The average
interest rate paid on borrowed funds for the three months ended March 31, 2004
was 2.89%, compared to 3.00% for the same quarter in 2003, a decrease of 11
basis points. 10




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##### Table of Contents



The following table presents the total dollar amount of interest income
from average interest-earning assets and the resultant yields, as well as the
interest expense on average interest-bearing liabilities, expressed both in
dollars and rates 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 table as loans having a zero yield. For the Three Months Ended March 31,2004
    
    2003Average
    
    Interest
    
    Average
    
    Average
    
    Interest
    
    AverageOutstanding
    
    Earned/
    
    Yield/
    
    Outstanding
    
    Earned/
    
    Yield/Balance
    
    Paid
    
    Rate(1)
    
    Balance
    
    Paid
    
    Rate(1)(Dollars in thousands)AssetsInterest-earning assets:Total loans
    
    $
    561,592
    
    
    $
    8,422
    
    
    
    6.03
    %
    
    $
    540,347
    
    
    $
    8,862
    
    
    
    6.65
    %Taxable securities
    
    
    230,661
    
    
    
    2,187
    
    
    
    3.81
    
    
    
    228,850
    
    
    
    1,912
    
    
    
    3.39Tax-exempt securities
    
    
    18,836
    
    
    
    234
    
    
    
    5.00
    
    
    
    21,166
    
    
    
    262
    
    
    
    5.02Federal funds sold and other
investments
    
    
    9,174
    
    
    
    38
    
    
    
    1.67
    
    
    
    12,607
    
    
    
    55
    
    
    
    1.77Total interest-earning assets
    
    
    820,263
    
    
    
    10,881
    
    
    
    5.34
    %
    
    
    802,970
    
    
    
    11,091
    
    
    
    5.60
    %Less allowance for loan losses
    
    
    (10,654
    )
    
    
    
    
    
    
    
    
    
    
    (10,467
    )Total interest-earning assets,
net of allowance for loan losses
    
    
    809,609
    
    
    
    
    
    
    
    
    
    
    
    792,503Noninterest-earning assets
    
    
    47,798
    
    
    
    
    
    
    
    
    
    
    
    43,863Total assets
    
    $
    857,407
    
    
    
    
    
    
    
    
    
    
    $
    836,366Liabilities and shareholders equityInterest-bearing liabilities:Interest-bearing demand deposits
    
    $
    72,141
    
    
    $
    99
    
    
    
    0.55
    %
    
    $
    74,284
    
    
    $
    134
    
    
    
    0.73
    %Savings and money market accounts
    
    
    117,574
    
    
    
    197
    
    
    
    0.67
    
    
    
    108,182
    
    
    
    249
    
    
    
    0.93Time deposits
    
    
    357,194
    
    
    
    1,901
    
    
    
    2.14
    
    
    
    362,276
    
    
    
    2,361
    
    
    
    2.64Other borrowings
    
    
    60,715
    
    
    
    436
    
    
    
    2.89
    
    
    
    68,354
    
    
    
    505
    
    
    
    3.00Total interest-bearing liabilities
    
    
    607,624
    
    
    
    2,633
    
    
    
    1.74
    %
    
    
    613,096
    
    
    
    3,249
    
    
    
    2.15
    %Noninterest-bearing liabilities:Noninterest-bearing demand deposits
    
    
    165,974
    
    
    
    
    
    
    
    
    
    
    
    141,334Other liabilities
    
    
    6,051
    
    
    
    
    
    
    
    
    
    
    
    6,516Total liabilities
    
    
    779,649
    
    
    
    
    
    
    
    
    
    
    
    760,946Shareholders equity
    
    
    77,758
    
    
    
    
    
    
    
    
    
    
    
    75,420Total liabilities and
shareholders equity
    
    $
    857,407
    
    
    
    
    
    
    
    
    
    
    $
    836,366Net interest income
    
    
    
    
    
    $
    8,248
    
    
    
    
    
    
    
    
    
    
    $
    7,842Net interest spread
    
    
    
    
    
    
    
    
    
    
    3.60
    %
    
    
    
    
    
    
    
    
    
    
    3.45
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.04
    %
    
    
    
    
    
    
    
    
    
    
    3.96
    %
   (1)
    
    Annualized. 11




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##### Table of Contents



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 changes in
outstanding balances and changes in interest rates for the three months ended
March 31, 2004 compared with the three months ended March 31, 2003. For
purposes of this table, changes attributable to both rate and volume have been
allocated to each accordingly. Changes related to the leap year in
2004 approximately $70,000 has been included in volume. Three Months Ended March 31,2004 vs 2003Increase (Decrease)Due toVolume
    
    Rate
    
    Total(Dollars in thousands)Interest-earning assets:Loans
    
    $
    425
    
    
    $
    (865
    )
    
    $
    (440
    )Taxable securities
    
    
    31
    
    
    
    244
    
    
    
    275Tax-exempt securities
    
    
    (27
    )
    
    
    (1
    )
    
    
    (28
    )Federal funds sold and other temporary investments
    
    
    (15
    )
    
    
    (2
    )
    
    
    (17
    )Total increase (decrease) in interest income
    
    
    414
    
    
    
    (624
    )
    
    
    (210
    )Interest-bearing liabilities:Interest-bearing demand deposits
    
    
    (3
    )
    
    
    (32
    )
    
    
    (35
    )Savings and money market accounts
    
    
    24
    
    
    
    (76
    )
    
    
    (52
    )Time deposits
    
    
    (14
    )
    
    
    (446
    )
    
    
    (460
    )Other borrowings
    
    
    (53
    )
    
    
    (16
    )
    
    
    (69
    )Total
decrease in interest expense
    
    
    (46
    )
    
    
    (570
    )
    
    
    (616
    )Increase (decrease) in net interest income
    
    $
    460
    
    
    $
    (54
    )
    
    $
    406
 Provision for Loan Losses.Provisions for loan losses are charged to
income to bring the Companys allowance for loan losses to a level which
management considers adequate to absorb probable losses inherent in the loan
portfolio. The provision for loan losses for the three months ended March 31,
2004 was $550,000 down approximately $250,000 compared to $800,000 for the same
quarter in 2003. The decrease was primarily the result of lower net
charge-offs during the period. The allowance for loan losses as a percent of total loans (net of
unearned interest, deferred fees, and discounts) at March 31, 2004 and 2003 was
1.90% and 1.94%, respectively. Noninterest Income.Noninterest income for the three months ended March
31, 2004 was $2.7 million, up approximately $416,000 or 18.1% compared to $2.3
million for the same quarter in 2003. The increase was primarily due
to an increase of $662,000 in net gains on sales of foreclosed assets that was
partially offset by a $163,000 decrease in the gain on sale of securities and a
$67,000 decrease in the gain on sale of loans. Service fees for the three
months ended March 31, 2004 were $1.7 million, up approximately $117,000
compared to $1.5 million for the same quarter in 2003, primarily
due to increased
nonsufficient funds (NSF) activity. Other loan-related fees and letters of
credit commissions and fees for the three months ended March 31, 2004 were $208,000 and
$115,000, respectively, down $98,000 and $19,000, respectively, compared to
$306,000 and $134,000, respectively, for the same quarter in 2003. Noninterest Expense.Total noninterest expense for the three months ended
March 31, 2004 was $7.3 million, up approximately $814,000 or 12.5% compared to
$6.5 million for the same quarter in 2003. Salaries and employee
benefits expense increased $298,000 primarily due to normal annual
salary increases
and higher employee benefits expense. Occupancy and equipment expense
increased $118,000 primarily due to additional leased office space at the corporate offices
and the opening of a new building for the Dulles branch in February 2004. Other noninterest expense
increased approximately $398,000 and primarily reflected a litigation accrual
of $200,000 and an increase in legal and professional fees of $162,000. 12




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##### Table of Contents



Financial Condition Loan
Portfolio.Net loans at March 31, 2004 were $561.1 million, up $17.8
million or 3.3% from $543.3
million at December 31, 2003, primarily due to new loan growth. Compared to the loan
level at December 31, 2003, commercial and industrial loans
increased $14.7
million and real estate loans increased $3.9 million during the three months
ended March 31, 2004. At March 31, 2004 and December 31, 2003, the ratio of
total loans to total deposits was 80.70%, and 76.39% respectively. At the same
dates, total loans represented 66.80% and 64.04% of total assets, respectively. The
following table summarizes the loan portfolio, including loans
held-for-sale, of the Company by type of loan: As of March 31, 2004
    
    As of December 31, 2003Amount
    
    Percent
    
    Amount
    
    Percent(Dollars in
thousands)Commercial and industrial
    
    $
    347,189
    
    
    
    60.03
    %
    
    $
    332,480
    
    
    
    59.36
    %Real estate mortgage:Residential
    
    
    14,453
    
    
    
    2.50
    
    
    
    14,315
    
    
    
    2.56Commercial
    
    
    177,824
    
    
    
    30.75
    
    
    
    178,290
    
    
    
    31.83Real estate construction:Residential
    
    
    13,401
    
    
    
    2.32
    
    
    
    12,652
    
    
    
    2.26Commercial
    
    
    15,384
    
    
    
    2.66
    
    
    
    11,906
    
    
    
    2.12Consumer and other
    
    
    10,060
    
    
    
    1.74
    
    
    
    10,447
    
    
    
    1.87Gross loans
    
    
    578,311
    
    
    
    100.00
    %
    
    
    560,090
    
    
    
    100.00
    %Less: unearned discounts, interest and deferred fees
    
    
    (6,345
    )
    
    
    
    
    
    
    (6,306
    )Total loans
    
    
    571,966
    
    
    
    
    
    
    
    553,784Less: allowance for loan losses
    
    
    (10,850
    )
    
    
    
    
    
    
    (10,448
    )Loans, net
    
    $
    561,116
    
    
    
    
    
    
    $
    543,336
 Nonperforming Assets.Net nonperforming assets at March 31, 2004 were
$23.5 million compared to $25.0 million at December 31, 2003, a decrease of
$1.5 million or 6.0%. Approximately $17.0 million or 73.7% of the
nonperforming loans at March 31, 2004 were loans collateralized by real estate.
While further deterioration in the loan portfolio is possible, management is
continuing its risk assessment and resolution program. In addition, management
is focusing its attention on minimizing the Banks credit risk through more
diversified business development. As of March 31, 2004, the Company had
approximately $64.6 million or 11.0% of its loan portfolio concentrated in the
hospitality industry, compared to $69.9 million or 12.0% of its loan portfolio
at December 31, 2003, and $90.0 million or 16.0% at March 31, 2003. The ratios for net nonperforming assets to total loans and other real
estate at March 31, 2004 and December 31, 2003 were 4.09% and 4.49%,
respectively. The ratios for net nonperforming assets to total assets were
2.74% and 2.89% for the same periods, respectively. These ratios take into
consideration guarantees from 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 $3.4 million at March
31, 2004 compared to $3.3 million at December 31, 2003. The Company is actively involved in the origination and sale of certain
federally guaranteed loans into the secondary market with servicing retained.
Under the terms of the SBA program, the Company is required to repurchase any
loan that may become nonperforming. As a result of this requirement, the
Companys nonperforming loans may increase during the period of time in which
any loan repurchased is either restored to an accrual status or the Company
files a claim with the SBA for the guaranteed portion of the loan. 13




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##### Table of Contents



The following table presents information regarding nonperforming assets at
the periods indicated: As of
    
    As ofMarch 31, 2004
    
    December 31, 2003(Dollars in
thousands)Nonaccrual loans
    
    $
    23,026
    
    
    $
    25,442Accruing loans 90 days or more past due
    
    
    2,595
    
    
    
    264Other real estate
    
    
    1,240
    
    
    
    2,585Other assets repossessed
    
    
    
    
    
    
    Total nonperforming assets
    
    
    26,861
    
    
    
    28,291Less:Nonperforming loans guaranteed by the SBA, Ex-Im Bank and OCCGF
    
    
    (3,407
    )
    
    
    (3,323
    )Total net nonperforming assets
    
    $
    23,454
    
    
    $
    24,968Total nonperforming assets to total assets
    
    
    3.14%
    
    
    
    3.27%Total nonperforming assets to total loans and other real estate
    
    
    4.69%
    
    
    
    5.08%Net nonperforming assets to total assets (1)
    
    
    2.74%
    
    
    
    2.89%Net nonperforming assets to total loans and other real estate (1)
    
    
    4.09%
    
    
    
    4.49%
   (1)
    
    Net nonperforming assets are net of the loan portions guaranteed by the
SBA, Ex-Im Bank and OCCGF. Allowance for Loan Losses.At March 31, 2004 and 2003, the allowance for
loan losses was $10.9 million and $10.7 million, respectively, or 1.90% and
1.94% of total loans, respectively. Net charge-offs for the three months ended
March 31, 2004 were $148,000 compared with $256,000 for the same period in
2003. The allowance for loan losses is established through a provision for loan
losses based on managements evaluation of known and inherent risk in the loan
portfolio. The allowance for loan losses is increased by provisions charged
against current earnings and is reduced by net charge-offs. Loans are charged
off when they are deemed to be uncollectable. Recoveries are recorded when
cash payments are received. The Company employs a systematic methodology for
determining the allowance for loan losses that includes a review of the changes
in the quality of the loan portfolio as determined by loan quality grades
assigned to each loan. The loan quality grades are administered by ongoing
reviews by loan officers, credit administration and the loan review department.
This includes an assessment of known problem loans, potential problem loans,
and other loans that exhibit weaknesses or deterioration. Specific review
factors include, but are not limited to, the general economic environment in
the Companys markets as well as the national economy, particularly the real
estate markets, value of the collateral securing loans, payment history, cash
flow analysis of borrowers and other historical information. After the
aforementioned assessment of the loan portfolio, the general economic
environment and other relevant factors, changes are implemented in the
allowance for loan losses. While this methodology is consistently followed,
future changes in circumstances, economic conditions or other factors could
cause management to reevaluate the level of the allowance for loan losses. 14




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##### Table of Contents



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 theThree Months Ended
    
    Three Months EndedMarch 31, 2004
    
    March 31, 2003(Dollars in
thousands)Average year-to-date total loans outstanding
    
    $
    561,592
    
    
    $
    540,437Total loans outstanding at end of period
    
    $
    571,966
    
    
    $
    552,539Allowance for loan losses at beginning of period
    
    $
    10,448
    
    
    $
    10,150Provision for loan losses
    
    
    550
    
    
    
    800Charge-offs:Commercial and industrial
    
    
    (342
    )
    
    
    (438
    )Real estate  mortgage
    
    
    
    
    
    
    (37
    )Real estate  construction
    
    
    
    
    
    
    Consumer and other
    
    
    (26
    )
    
    
    (56
    )Total charge-offs
    
    
    (368
    )
    
    
    (531
    )Recoveries:Commercial and industrial
    
    
    113
    
    
    
    222Real estate  mortgage
    
    
    97
    
    
    
    40Real estate  construction
    
    
    
    
    
    
    Consumer and other
    
    
    10
    
    
    
    13Total recoveries
    
    
    220
    
    
    
    275Net loan charge-offs
    
    
    (148
    )
    
    
    (256
    )Allowance for loan losses at end of period
    
    $
    10,850
    
    
    $
    10,694Ratio of allowance to end of period total loans
    
    
    1.90%
    
    
    
    1.94%Ratio of net loan charge-offs to end of period total loans
    
    
    0.03%
    
    
    
    0.05%Ratio of allowance to end of period total nonperforming loans (1)
    
    
    42.35%
    
    
    
    42.53%Ratio of allowance to end of period net nonperforming loans (2)
    
    
    48.84%
    
    
    
    51.63%
   (1)
    
    Total nonperforming loans are nonaccrual loans
plus loans over 90 days past due.(2)
    
    Net nonperforming loans are nonaccrual loans plus
loans over 90 days past due, and
less loan portion guaranteed by the SBA, Ex-Im Bank and OCCGF. Securities.At March 31, 2004, the securities portfolio was $239.9
million, a decrease of $17.2 million or 6.7% from $257.1 million at
December 31, 2003. The decrease was primarily due to prepayments in mortgage-backed securities
that exceeded portfolio reinvestment. The securities portfolio is primarily
comprised of mortgage-backed securities, collateralized mortgage obligations,
tax-free municipal bonds, U.S. government agency securities, and equity
securities. The securities portfolio has historically been funded primarily by
the liquidity created from deposit growth and loan prepayments in excess of
loan funding requirements. However, as of March 31, 2004 approximately $28.5
million in short-term borrowings from the FHLB have been utilized to fund
approximately the same amount of mortgage-backed securities to increase
interest-earning assets. Deposits. At March 31, 2004, total deposits were $708.8 million, down
$16.1 million or 2.2% from $724.9 million at December 31, 2003. However,
noninterest-bearing demand deposits at March 31, 2004 increased $6.3 million or
3.7% to $175.4 million from $169.1 million at December 31, 2003. The Companys
ratios of noninterest-bearing demand deposits to total deposits at March 31,
2004 and December 31, 2003 were 24.74% and 23.33%, respectively.
Interest-bearing deposits at March 31, 2004 were $533.4 million, down $22.4
million or 4.0% compared with $555.8 million at December 31, 2003. Other Borrowings.Other borrowings at March 31, 2004 were $58.8 million,
up approximately $4.6 million, or 8.5% compared to other borrowings of $54.2
million at December 31, 2003. The Company has two ten-year loans totaling
$25.0 million from the FHLB to diversify its funding sources. The ten-year
loans bear interest at an average rate of 5.00% per annum with a call option
until maturity at September 2008. The Company has several FHLB advances
totaling $33.5 million with weighted average fixed rates of 1.27%. Of these
advances, $31.0 million are scheduled to mature in the second quarter of 2004.
An advance in the amount of $2.5 million with a fixed rate of 2.74% is
scheduled to mature in the third quarter of 2004. These borrowings were part
of a strategic plan to continue the growth of interest-earning assets. The
funds 15




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##### Table of Contents



were invested primarily in mortgage-related instruments with durations of
approximately three years. Other short-term borrowings at March 31, 2004
consisted of approximately $293,000 in U.S. Treasury tax note option accounts. The following table provides an analysis of the Companys other
borrowings: As of and for the
    
    As of and for theThree Months Ended
    
    Twelve Months EndedMarch 31, 2004
    
    December 31, 2003(Dollars in thousands)Federal funds purchased:At end of period
    
    $
    
    
    
    $
    Average during the period
    
    
    
    
    
    
    55Maximum month-end balance during the period
    
    
    
    
    
    
    FHLB notes and advances:At end of period
    
    $
    58,500
    
    
    $
    53,300Average during the period
    
    
    59,980
    
    
    
    59,667Maximum month-end balance during the period
    
    
    70,300
    
    
    
    69,300Other short-term borrowings:At end of period
    
    $
    293
    
    
    $
    873Average during the period
    
    
    735
    
    
    
    587Maximum month-end balance during the period
    
    
    1,027
    
    
    
    873
 Liquidity.The Companys loan to deposit ratio at March 31, 2004 was
80.70%. As of this same date, the Company had commitments to fund loans in the
amount of $90.2 million. At March 31, 2004, the Company had stand-by letters
of credit of $3.0 million, of which, the Company has recorded a liability of
$1,538 at March 31, 2004. Available sources to fund these commitments and
other cash demands of the Company come from loan and investment securities
repayments, deposit inflows, and unsecured lines of credit. With its current
level of collateral, the Company has the ability to borrow an additional $157.7
million from the FHLB. Additionally, the Company had several unused, unsecured
lines of credit with correspondent banks totaling $15.0 million at both March
31, 2004 and December 31, 2003. Capital Resources.Shareholders equity at March 31, 2004 was $79.3
million compared to $76.2 million at December 31, 2003, an increase of
approximately $3.1 million. This increase was primarily the combined result of
$2.1 million in net income, an increase in accumulated other comprehensive
income of
$1.4 million, a decrease in treasury stock of $50,000, and an increase in
paid-in capital of $44,000 that reflected the effect of dividend reinvestment
that was partially offset by dividend payments of approximately $430,000. The
Company made a capital contribution of $3.0 million to the Bank on April 20,
2004. 16




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##### Table of Contents



The following table provides a comparison of the Companys and the Banks
leverage and risk-weighted capital ratios as of March 31, 2004 to the minimum
and well-capitalized regulatory standards: Minumum
    
    To Be WellRequired For
    
    Capitalized UnderCapital Adequacy
    
    Prompt Corrective
    
    Actual Ratio AtPurposes
    
    Action Provisions
    
    March 31, 2004The CompanyLeverage ratio
    
    
    4.00
    %(1)
    
    
    N/A
    %
    
    
    9.00
    %Tier 1 risk-based capital ratio
    
    
    4.00
    
    
    
    N/A
    
    
    
    12.51Risk-based capital ratio
    
    
    8.00
    
    
    
    N/A
    
    
    
    13.76The BankLeverage ratio
    
    
    4.00
    %(2)
    
    
    5.00
    %
    
    
    8.45
    %Tier 1 risk-based capital ratio
    
    
    4.00
    
    
    
    6.00
    
    
    
    11.75Risk-based capital ratio
    
    
    8.00
    
    
    
    10.00
    
    
    
    13.01
   (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. Critical Accounting Policies.The Company has established various
accounting policies which govern the application of accounting principles
generally accepted in the United States of America in the preparation of the
Companys financial statements. Certain accounting policies involve
significant judgments and assumptions by management which have a material
impact on the carrying value of certain assets and liabilities; management
considers such accounting policies to be critical accounting policies. The
judgments and assumptions used by management are based on historical experience
and other factors, which are believed to be reasonable under the circumstances.
Because of the nature of the judgments and assumptions made by management,
actual results could differ from these judgments and estimates which could have
a material impact on the carrying values of assets and liabilities and the
results of operations of the Company. The Company believes the allowance for loan losses is a critical
accounting policy that requires the most significant judgments and estimates
used in the preparation of its consolidated financial statements. In
estimating the allowance for loan losses, management reviews effect of changes
in the local real estate market on collateral values, the effect of current
economic indicators on the loan portfolio and their probable impact on
borrowers and increases or decreases in nonperforming and impaired loans.
Changes in these factors may cause managements estimate of the allowance to
increase or decrease and result in adjustments to the Companys provision for
loan losses. SeeFinancial Condition  Allowance for Loan Losses. The Company believes that loans held-for-sale and the related lower of
cost or market adjustment is also a critical accounting policy that requires
significant judgments and estimates in preparation of its consolidated
financial statements. In estimating the requirement for market adjustments,
management utilizes outside sources to determine the market value of the loans
held-for-sale through solicitation of market bids or indications of market
value. Decreases in market value will be reflected in the consolidated
statement of income under noninterest expense as Lower of Cost or Market
Adjustment. 
  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,
2003. 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. 
  Item 4.
    Controls and Procedures Evaluation of Disclosure Controls and Procedures.The Company carried out
an evaluation, under the supervision and with the participation of its
management, including its President and Chief Financial Officer, of the
effectiveness of the design and operation of the Companys disclosure controls
and procedures as of the end of the
period covered by this report. Based on this evaluation, the Companys
President and Chief Financial Officer concluded that the Companys disclosure
controls and procedures (as defined in Rules 13a-15(e) 17




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##### Table of Contents



and 15d-15(e) under the
Securities Exchange Act of 1934 (the Exchange Act)) are effective to ensure
that information required to be disclosed by the Company in reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported to the Companys management within the time periods specified in the
Securities and Exchange Commissions rules and forms. Changes in Internal Control over Financial Reporting.There were no
changes in the Companys internal control over financial reporting that
occurred during the Companys most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting. 18




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##### Table of Contents



PART II OTHER INFORMATION 
 Item 1.
    Legal Proceedings In September 2003, Advantage Finance Corporation (AFC), a subsidiary of
the Company that is no longer active, was served in connection with a lawsuit
based on alleged malicious prosecution and conspiracy. Also included in
the lawsuit are BDO Seidman LLP and the CIT Group/Commercial Services, Inc.
The plaintiff has filed his case in both Federal and State courts. In December
2003, the case was dismissed from Federal; however, the plaintiff subsequently
filed an appeal. Management is unable to determine whether the outcome will
have a material impact on the Companys financial statements. The lawsuit does
not seek a specified amount.  Item 2.
    Changes in Securities, Use of Proceeds and Issuer Repurchases of Equity Securities  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 6
    
    (a)
    
    Exhibits
 ExhibitNumber
    
    Identification of Exhibit11
    
    - Computation of Earnings Per Common Share, included as Note (2) to the unaudited Condensed Consolidated Financial
Statements on Page 7 of this Form 10-Q.31.1
    
    - Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.31.2
    
    - Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.32.1
    
    - Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    - Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
  (b)
    
    Reports on Form 8-K  The following reports on Form 8-K were filed during the quarter ended
March 31, 2004:(1)
    
    Current report on Form 8-K dated January 30, 2004 announcing the
release of the Companys earnings for the fourth quarter and year
ended December 31, 2003. 19




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##### Table of Contents



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/ Allen D. BrownDate:  May 13, 2004
    
    Allen D. BrownPresident
(principal executive officer)Date:  May 13, 2004
    By:
    /s/ David D. RinehartDavid D. RinehartExecutive Vice President and
Chief Financial Officer
(principal accounting officer and
principal financial officer) 20




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##### Table of Contents



EXHIBIT INDEX ExhibitNumber
    
    Identification of Exhibit11
    
    - Computation of Earnings Per Common Share, included as Note (2) to the unaudited Condensed Consolidated Financial
Statements on Page 7 of this Form 10-Q.31.1
    
    - Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.31.2
    
    - Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.32.1
    
    - Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    - Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 21