##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q / A Amendment No. 1
 (Mark One)x
    
    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
(State or other jurisdiction of
incorporation or organization)
    
    76-0579161
(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
o No x. Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes o No x. As of May 10, 2004, the number of outstanding shares of Common Stock, par
value $1.00 per share, was 7,172,563.




---



TABLE OF CONTENTS  PART IItem 1. Condensed Consolidated Financial Statements.CONDENSED CONSOLIDATED BALANCE SHEETSCONDENSED CONSOLIDATED STATEMENTS OF INCOMECONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMECONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITYCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 4. Controls and ProceduresPART IIItem 6. (a) ExhibitsSIGNATURESEXHIBIT 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  EXPLANATORY NOTE The purpose of this Amendment No. 1 to the Quarterly Report on Form 10-Q
of MetroCorp Bancshares, Inc. (the Company) for the quarter ended March 31,
2004 (the Original Form 10-Q) is to restate the Companys interim condensed
consolidated financial statements as of March 31, 2004 and for the three months
ended March 31, 2004 and 2003 and to revise related disclosures in the Original
Form 10-Q. This restatement is described in detail in Note 2 to the interim
condensed consolidated financial statements. The
Company restated its condensed consolidated financial statements as of March 31,
2004 and for the three months ended March 31, 2004 and 2003 to correct the
amortization of deferred loan fees, net of costs, to interest income. The
restatement increased net income by $53,000 and $69,000 for the three months
ended March 31, 2004 and 2003, respectively, and increased retained earnings by
$2.2 million and $2.2 million as of March 31, 2004 and December 31, 2003,
respectively. The restatement resulted from a review of the Companys application of
FASB Statement No. 91, Accounting for Nonrefundable Fees and Costs Associated
with Originating or Acquiring Loans and Initial Direct Costs of Leases. Loan
fees net of the associated costs should be recognized over the life of
the related loan as an adjustment to yield. The Company recently discovered
that $4.0 million of net deferred loan fees were not being amortized to
interest income. These net deferred fees were not entered into the Companys
loan system, and therefore, amortization was not calculated each period.
Accordingly, the restatement reflects the amortization of these net deferred
fees. Additionally, in connection with the restatement of net
deferred loan fees, the Company adjusted accruals of other
noninterest expense previously deemed immaterial which resulted in an
increase to retained earnings at
December 31, 2003 of $63,000. As a result of the restatement, the Company has determined it to be
necessary to amend the Original Form 10-Q to reflect the amortization of such
net deferred loan fees. This Amendment No. 1 amends and restates in its
entirety Part I, Items 1, 2 and 4 and Part II, Item 6 of the Original Form
10-Q. This Amendment No. 1 continues to reflect circumstances as of the date
of the filing of the Original Form 10-Q and does not reflect events occurring
after the filing of the Original Form 10-Q, or modify or update those
disclosures in any way, except as required to reflect the effects of the
restatement as described in Note 2 to the accompanying condensed
consolidated financial statements. 2




---



##### 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,
    
    December 31,2004
    
    2003(Restated-Note 2)ASSETSCash 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)
    
    
    560,177
    
    
    
    540,658Loans, 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
    
    
    5,252
    
    
    
    6,074Total assets
    
    $
    858,561
    
    
    $
    867,016LIABILITIES 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
    
    
    5,294
    
    
    
    5,610Total liabilities
    
    
    776,996
    
    
    
    788,643Commitments 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
    
    
    45,838
    
    
    
    44,105Accumulated other comprehensive income
    
    
    2,036
    
    
    
    671Treasury stock, at cost
    
    
    (1,280
    )
    
    
    (1,330
    )Total shareholders equity
    
    
    81,565
    
    
    
    78,373Total liabilities and shareholders equity
    
    $
    858,561
    
    
    $
    867,016
 See accompanying notes to condensed consolidated financial statements 3




---



##### Table of Contents



METROCORP BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited) For the Three MonthsEnded March 31,2004
    
    2003(Restated-Note 2)Interest income:Loans
    
    $
    8,178
    
    
    $
    8,697Securities:Taxable
    
    
    2,187
    
    
    
    1,912Tax-exempt
    
    
    234
    
    
    
    262Federal funds sold and other temporary investments
    
    
    38
    
    
    
    55Total interest income
    
    
    10,637
    
    
    
    10,926Interest expense:Time deposits
    
    
    1,901
    
    
    
    2,361Demand and savings deposits
    
    
    296
    
    
    
    383Other borrowings
    
    
    436
    
    
    
    505Total interest expense
    
    
    2,633
    
    
    
    3,249Net interest income
    
    
    8,004
    
    
    
    7,677Provision for loan losses
    
    
    550
    
    
    
    800Net interest income after provision for loan losses
    
    
    7,454
    
    
    
    6,877Noninterest 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
    
    
    3,814
    
    
    
    3,570Occupancy and equipment
    
    
    1,400
    
    
    
    1,282Other noninterest expense
    
    
    1,797
    
    
    
    1,399Total noninterest expense
    
    
    7,011
    
    
    
    6,251Income before provision for income taxes
    
    
    3,154
    
    
    
    2,921Provision for income taxes
    
    
    991
    
    
    
    943Net income
    
    $
    2,163
    
    
    $
    1,978Earnings per common share:Basic
    
    $
    0.30
    
    
    $
    0.28Diluted
    
    $
    0.30
    
    
    $
    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 4




---



##### Table of Contents



METROCORP BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands,)
(Unaudited) For the Three MonthsEnded March 31,2004
    
    2003(Restated-Note 2)Net income
    
    $
    2,163
    
    
    $
    1,978Other 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
    
    $
    3,528
    
    
    $
    1,614
 
 METROCORP BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
For the Three Months Ended March 31, 2004
(In Thousands)
(Unaudited) AccumulatedAdditional
    
    
    
    
    
    Other
    
    TreasuryCommon Stock
    
    Paid-in
    
    Retained
    
    Comprehensive
    
    StockShares
    
    At Par
    
    Capital
    
    Earnings
    
    Income
    
    At Cost
    
    TotalBalance at
December 31, 2003 (previously reported)
    
    
    7,157
    
    
    $
    7,307
    
    
    $
    27,620
    
    
    $
    41,942
    
    
    $
    671
    
    
    $
    (1,330
    )
    
    $
    76,210Restatement (Note 2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,163
    
    
    
    
    
    
    
    
    
    
    
    2,163Balance at December 31, 2003 (restated)
    
    
    7,157
    
    
    
    7,307
    
    
    
    27,620
    
    
    
    44,105
    
    
    
    671
    
    
    
    (1,330
    )
    
    
    78,373Re-issuance of treasury stock
    
    
    6
    
    
    
    
    
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    50
    
    
    
    94Net income
(restated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,163
    
    
    
    
    
    
    
    
    
    
    
    2,163Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,365
    
    
    
    
    
    
    
    1,365Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (430
    )
    
    
    
    
    
    
    
    
    
    
    (430
    )Balance at March 31, 2004
    
    
    7,163
    
    
    $
    7,307
    
    
    $
    27,664
    
    
    $
    45,838
    
    
    $
    2,036
    
    
    $
    (1,280
    )
    
    $
    81,565
 See accompanying notes to condensed consolidated financial statements 5




---



##### Table of Contents



METROCORP BANCSHARES, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited) For the Three MonthsEnded March 31,2004
    
    2003(Restated-Note 2)Cash flows from operating activities:Net income
    
    $
    2,163
    
    
    $
    1,978Adjustments 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 net deferred loan fees
    
    
    (109
    )
    
    
    (87
    )Changes in:Loans held-for-sale
    
    
    1,710
    
    
    
    Accrued interest receivable
    
    
    244
    
    
    
    211Accrued interest payable
    
    
    (34
    )
    
    
    (37
    )Other liabilities
    
    
    (317
    )
    
    
    732Other assets
    
    
    118
    
    
    
    (1,034
    )Net cash provided by operating activities
    
    
    3,872
    
    
    
    3,308Cash 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
    
    
    (20,422
    )
    

    
    (24,935
    )Proceeds from sale of foreclosed assets
    
    
    2,700
    
    
    
    362Purchases of premises and equipment
    
    
    (1,007
    )
    
    
    (331
    )Net cash used in investing activities
    
    
    (248
    )
    
    
    (1,550
    )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 beginning 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 6




---



##### Table of Contents



METROCORP BANCSHARES, INC. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The restated 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 restated 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 restated financial statements and the notes thereto should be read
in conjunction with Amendment No. 1 to the Companys Annual Report on Form
10-K/A for the year ended December 31, 2003. See Note 2 for information about
the restatement. 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
    
    2003(Restated-Note 2)Net income:As reported
    
    $
    2,163
    
    
    $
    1,978Pro forma
    
    $
    2,120
    

    
    $
    1,939Stock-based compensation cost, net of income taxes:As reported
    
    $
    
    
    
    $
    Pro forma
    
    $
    43
    
    
    $
    39Basic earnings per common share:As reported
    
    $
    0.30
    
    
    $
    0.28Pro forma
    
    $
    0.30
    
    
    $
    0.28Diluted earnings per common share:As reported
    
    $
    0.30
    
    
    $
    0.27Pro forma
    
    $
    0.29
    
    
    $
    0.27
 7




---



##### Table of Contents



METROCORP BANCSHARES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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.
    
    RESTATEMENT The
Company restated its condensed consolidated financial statements as of March 31,
2004 and for the three months ended March 31, 2004 and 2003 to correct the
amortization of deferred loan fees, net of costs, to interest income. The
restatement increased net income by $53,000 and $69,000 for the three months
ended March 31, 2004 and 2003, respectively, and increased retained earnings by
$2.2 million and $2.2 million as of March 31, 2004 and December 31, 2003,
respectively. The restatement resulted from a review of the Companys application of
FASB Statement No. 91, Accounting for Nonrefundable Fees and Costs Associated
with Originating or Acquiring Loans and Initial Direct Costs of Leases. Loan
fees net of the associated costs should be recognized over the life of
the related loan as an adjustment to yield. The Company recently discovered
that $4.0 million of net deferred loan fees were not being amortized to
interest income. These net deferred fees were not entered into the Companys
loan system, and therefore, amortization was not calculated each period.
Accordingly, the restatement reflects the amortization of these net deferred
fees. Additionally, in connection with the restatement of net
deferred loan fees, the Company adjusted accruals of other
noninterest expense previously deemed immaterial which resulted in an
increase to retained earnings at
December 31, 2003 of $63,000. 8




---



##### Table of Contents



METROCORP BANCSHARES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following table reflects the previously reported amounts for the three
months ended March 31, 2004 and 2003 and as of March 31,
2004 and December 31, 2003 and the restated amounts. As of and for the Three Months Ended March 31,
    
    As of December 31,2004
    
    2003
    
    2003Previously
    
    
    
    
    
    Previously
    
    
    
    
    
    PreviouslyReported
    
    Restated
    
    Reported
    
    Restated
    
    Reported
    
    Restated(In thousands, except
per share amounts)Balance Sheet:Loans, net of allowance for loan losses
    
    $
    561,116
    
    
    $
    560,177
    
    
    
    
    
    
    
    
    
    
    $
    537,305
    
    
    $
    540,658Deferred tax asset
    
    
    6,389
    
    
    
    5,224
    
    
    
    
    
    
    
    
    
    
    
    5,774
    
    
    
    4,664Total assets
    
    
    856,263
    
    
    
    858,561
    
    
    
    
    
    
    
    
    
    
    
    864,773
    
    
    
    867,016Other liabilities
    
    
    5,212
    
    
    
    5,294
    
    
    
    
    
    
    
    
    
    
    
    5,530
    
    
    
    5,610Retained earnings
    
    
    43,622
    
    
    
    45,838
    
    
    $
    41,425
    
    
    $
    43,255
    
    
    
    41,942
    
    
    
    44,105Total shareholders equity
    
    
    79,349
    
    
    
    81,565
    
    
    
    75,509
    
    
    
    77,339
    
    
    
    76,210
    
    
    
    78,373Total liabilities and shareholders equity
    
    
    856,263
    
    
    
    858,561
    
    
    
    
    
    
    
    
    
    
    
    864,773
    
    
    
    867,016Statement of Income:Interest income  loans
    
    
    8,422
    
    
    
    8,178
    
    
    
    8,862
    
    
    
    8,697Total interest income
    
    
    10,881
    
    
    
    10,637
    
    
    
    11,091
    
    
    
    10,926Net interest income
    
    
    8,248
    
    
    
    8,004
    
    
    
    7,842
    
    
    
    7,677Other noninterest expense
    
    
    7,335
    
    
    
    7,011
    
    
    
    6,521
    
    
    
    6,251Income before provision for income taxes
    
    
    3,074
    
    
    
    3,154
    
    
    
    2,816
    
    
    
    2,921Provision for income taxes
    
    
    964
    
    
    
    991
    
    
    
    907
    
    
    
    943Net income
    
    
    2,110
    
    
    
    2,163
    
    
    
    1,909
    
    
    
    1,978Earnings per common share:Basic
    
    
    0.29
    
    
    
    0.30
    
    
    
    0.27
    
    
    
    0.28Diluted
    
    
    0.29
    
    
    
    0.30
    
    
    
    0.27
    
    
    
    0.27Cash flow statement:Cash flows
from operating activities
    
    $
    3,955
    
    
    $
    3,872
    
    
    $
    3,268
    
    
    $
    3,308Cash flows from investing activities
    
    
    (311
    )
    
    
    (248
    )
    
    
    (1,510
    )
    
    
    (1,550
    )
  3.
    
    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(Restated-Note 2)(In thousands, except per share amounts)Net income available to common shareholders
    
    $
    2,163
    
    
    $
    1,978Weighted average common shares outstanding:Basic
    
    
    7,161
    
    
    
    7,033Shares issuable under stock option plans
    
    
    93
    
    
    
    163Diluted
    
    
    7,254
    
    
    
    7,196Earnings per common share:Basic
    
    $
    0.30
    
    
    $
    0.28Diluted
    
    $
    0.30
    
    
    $
    0.27
 9




---



##### Table of Contents



METROCORP BANCSHARES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  4.
    
    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 court; 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.  5.
    
    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.  6.
    
    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; 10




---



##### Table of Contents




    
    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. Restatement of Financial Statements The
Company restated its condensed consolidated financial statements as of March 31,
2004 and for the three months ended March 31, 2004 and 2003 to correct the
amortization of deferred loan fees, net of costs, to interest income and
accruals of other noninterest expense. The restatement increased net income by
$53,000 and $69,000 for the three months ended March 31, 2004 and 2003,
respectively, and increased retained earnings by $2.2 million and $2.2 million
as of March 31, 2004 and December 31, 2003, respectively. The restatement resulted from a review of the Companys application of
FASB Statement No. 91, Accounting for Nonrefundable Fees and Costs Associated
with Originating or Acquiring Loans and Initial Direct Costs of Leases. Loan
fees net of the associated costs should be recognized over the life of
the related loan as an adjustment to yield. The Company recently discovered
that $4.0 million of net deferred loan fees were not being amortized to
interest income. These net deferred fees were not entered into the Companys
loan system, and therefore, amortization was not calculated each period.
Accordingly, the restatement reflects the amortization of these net deferred
fees. Additionally, in connection with the restatement of net
deferred loan fees, the Company adjusted accruals of other
noninterest expense previously deemed immaterial which resulted in an
increase to retained earnings at
December 31, 2003 of $63,000. See Note 2 to the condensed
consolidated financial statements. As a result, all amounts
disclosed herein impacted by the restatement have been restated
accordingly. Overview For the three months ended March 31, 2004, the Company recorded net income
of $2.2 million, up approximately $185,000 from net income of $2.0 million for
the same quarter in 2003. The Companys diluted earnings per share (EPS) for
the three months ended March 31, 2004 was $0.30, up $0.03 per diluted share
from diluted EPS of $0.27 for the same quarter in 2003. 11




---



##### Table of Contents



Total assets were $858.6 million at March 31, 2004, down approximately
$8.5 million or 1.0% from $867.0 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 was $564.6 million, up
approximately $17.9 million or 3.3% from $546.7 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
1.01% and 0.96%, respectively. Shareholders equity at March 31, 2004 was $81.6 million compared to $78.4
million at December 31, 2003, an increase of approximately $3.2 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 $8.0 million, up approximately $327,000 or 4.3% from $7.7 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 $822.0
million, up approximately $17.6 million or 2.2% from $804.4 million for the
same quarter in 2003. The weighted average yield on interest-earning assets
for the three months ended March 31, 2004 was 5.20%, down 31 basis points from
5.51% 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
3.92%, up 5 basis points from 3.87% for the same period in 2003. The increase
was primarily the result of a decrease in the cost of earning assets of 36
basis points that was partially offset by a decline in the yield on earning
assets of 31 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 $10.6 million, down approximately $289,000 or 2.6% from
$10.9 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 5.20% compared to 5.51% for the
first quarter of 2003, a decrease of 31 basis points. Interest Income from Loans.Interest income from loans for the three
months ended March 31, 2004 was $8.2 million, down approximately $519,000 or
6.0% from $8.7 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 $563.3 million
compared to average total loans for the same quarter in 2003 of $541.8 million,
an increase of approximately $21.5 million or 4.0%. For the three months ended
March 31, 2004, the average yield on total loans was 5.84% compared to 6.51%
for the same quarter in 2003, a decrease of 67 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
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. 12




---



##### Table of Contents



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. 13




---



##### 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
    
    $
    563,309
    
    
    $
    8,178
    
    
    
    5.84
    %
    
    $
    541,807
    
    
    $
    8,697
    
    
    
    6.51
    %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
    
    
    821,980
    
    
    
    10,637
    
    
    
    5.20
    %
    
    
    804,430
    
    
    
    10,926
    
    
    
    5.51
    %Less allowance for loan
losses
    
    
    (10,654
    )
    
    
    
    
    
    
    
    
    
    
    (10,467
    )Total interest-earning
assets, net of allowance
for loan
losses
    
    
    811,326
    
    
    
    
    
    
    
    
    
    
    
    793,963Noninterest-earning
assets
    
    
    47,230
    
    
    
    
    
    
    
    
    
    
    
    43,379Total
assets
    
    $
    858,556
    
    
    
    
    
    
    
    
    
    
    $
    837,342Liabilities 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
    
    
    6,092
    
    
    
    
    
    
    
    
    
    
    
    6,548Total
liabilities
    
    
    779,690
    
    
    
    
    
    
    
    
    
    
    
    760,978Shareholders
equity
    
    
    78,866
    
    
    
    
    
    
    
    
    
    
    
    76,364Total liabilities and
shareholders equity
    
    $
    858,556
    
    
    
    
    
    
    
    
    
    
    $
    837,342Net interest income
    
    
    
    
    
    $
    8,004
    
    
    
    
    
    
    
    
    
    
    $
    7,677Net interest spread
    
    
    
    
    
    
    
    
    
    
    3.46
    %
    
    
    
    
    
    
    
    
    
    
    3.36
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.92
    %
    
    
    
    
    
    
    
    
    
    
    3.87
    %
   (1)
    
    Annualized. 14




---



##### 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
    
    $
    421
    
    
    $
    (940
    )
    
    $
    (519
    )Taxable securities
    
    
    31
    
    
    
    244
    
    
    
    275Tax-exempt securities
    
    
    (27
    )
    
    
    (1
    )
    
    
    (28
    )Federal funds sold and other investments
    
    
    (15
    )
    
    
    (2
    )
    
    
    (17
    )Total increase (decrease) in interest income
    
    
    410
    
    
    
    (699
    )
    
    
    (289
    )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 increase (decrease) in interest expense
    
    
    (46
    )
    
    
    (570
    )
    
    
    (616
    )Increase (decrease) in net interest income
    
    $
    456
    
    
    $
    (129
    )
    
    $
    327
 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 1.89% and 1.93%, 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 $7.0 million, up approximately $760,000 or 12.2% compared to
$6.3 million for the same quarter in 2003. Salaries and employee benefits
expense increased $244,000 primarily due to normal annual salary increases and
higher employee benefits expense. Occupancy and equipment expenses increased
$118,000 primarily due to additional leased office space at the corporate
offices and the opening of a new building of 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. 15




---



##### Table of Contents



Financial Condition Loan Portfolio.Net loans at March 31, 2004 were $564.6 million, up
$17.9 million or 3.3% from $546.7 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
81.18%, and 76.85% respectively. At the same dates, total loans represented
67.02% and 64.26% 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
    
    
    (2,910
    )
    
    
    
    
    
    
    (2,954
    )Total loans
    
    
    575,401
    
    
    
    
    
    
    
    557,136Less: allowance for loan losses
    
    
    (10,850
    )
    
    
    
    
    
    
    (10,448
    )Loans, net
    
    $
    564,551
    
    
    
    
    
    
    $
    546,688
 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 4.07% and 4.46%,
respectively. The ratios for net nonperforming assets to total assets were
2.73% and 2.88% 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. 16




---



##### 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
    
    
    3.13
    %
    
    
    3.26
    %Total nonperforming assets to total loans and other real estate
    
    
    4.66
    %
    
    
    5.05
    %Net nonperforming assets to total assets (1)
    
    
    2.73
    %
    
    
    2.88
    %Net nonperforming assets to total loans and other real estate (1)
    
    
    4.07
    %
    
    
    4.46
    %
   (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 1.89% and
1.93% 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. 17




---



##### 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
    
    $
    563,309
    
    
    $
    541,807Total loans outstanding at end of period
    
    $
    575,401
    
    
    $
    555,459Allowance 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
    
    
    1.89
    %
    
    
    1.93
    %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 18




---



##### Table of Contents



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 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
    
    Year 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
81.18%. 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 $81.6
million compared to $78.4 million at December 31, 2003, an increase of
approximately $3.2 million. This increase was primarily the combined result of
$2.2 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. 19




---



##### 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: Minimum
    
    To Be WellRequired For
    
    Capitalized UnderCapital Adequacy
    
    Prompt Corrective
    
    Actual Ratio AtPurposes
    
    Action Provisions
    
    March 31, 2004The CompanyLeverage
ratio
    
    
    4.00
    %(1)
    
    
    N/A
    
    
    
    9.24
    %Tier 1 risk-based
capital
ratio
    
    
    4.00
    
    
    
    N/A
    
    
    
    12.82Risk-based capital
ratio
    
    
    8.00
    
    
    
    N/A
    
    
    
    14.07The BankLeverage
ratio
    
    
    4.00
    %(2)
    
    
    5.00
    %
    
    
    8.70
    %Tier 1 risk-based
capital
ratio
    
    
    4.00
    
    
    
    6.00
    
    
    
    12.06Risk-based capital
ratio
    
    
    8.00
    
    
    
    10.00
    
    
    
    13.32
   (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 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 Chief Executive Officer 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 and as of August 26, 2004. Based on the most recent
evaluation, the Companys Chief Executive Officer and
Chief Financial Officer concluded that the Companys disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the Exchange Act)) are not
effective (solely due to the material weakness discussed in the
paragraph below) 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. 20




---



##### Table of Contents



A material weakness in internal control was discovered related to net
deferred loan fees. Approximately $4.0 million of net deferred loan fees were
not being amortized to interest income because not all net deferred fees were
entered into the Companys loan system. No procedure was in place to ensure
all relevant loan data was entered into the Companys loan system.
Additionally, a reconciliation of the net deferred loan fees entered into the
loan system compared to the general ledger balance was not being performed. The lack of
such preventative and detective controls allowed this accounting error to occur
and escape detection. Procedures and controls that have subsequently been
implemented are: (a) closing officers and loan processors have been instructed
to ensure the net deferred loan fees are entered to the
Companys on-line loan
system to facilitate the automated amortization of the net deferred
loan fees over the life of
the loan; (b) daily reconciliation of general ledger accounts with the loan
system are performed by a processor in the loan servicing department and monitored
by the department supervisor; and (c) the internal audit department will include an
annual examination of this specific function and report the results to the Audit Committee. As a result of the material weakness identified, the financial statements
were restated. See Note 2 to the condensed consolidated financial statements. Changes
in Internal Control over Financial Reporting.Other than the
procedures and controls identified above, 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. 21




---



##### Table of Contents



PART II OTHER INFORMATION 
 Item 6. (a)Exhibits ExhibitNumber
    
    
    
    Identification of Exhibit11
    
    -
    
    Computation of Earnings Per Common Share, included as Note (3) to the unaudited Condensed Consolidated Financial
Statements on Page 7 of this Form 10-Q/A.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 Acting 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 Acting 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 report on Form 8-K was furnished during the quarter ended
March 31, 2004:  (1)
    
    Current report on Form 8-K dated January 30, 2004 in connection
with the release of the Companys earnings for the fourth quarter and
year ended December 31, 2003. 22




---



##### 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/ George M. LeeDate: August 27, 2004
    
    George M. LeeChief Executive Officer
(principal executive officer) Date: August 27, 2004
    By:
    /s/ Kevin ShuKevin ShuActing Chief Financial Officer
(principal financial officer/
principal accounting officer) 23




---



##### Table of Contents



EXHIBIT INDEX ExhibitNumber
    
    
    
    Identification of Exhibit11
    
    -
    
    Computation of Earnings Per Common Share, included as Note (3) to the unaudited Condensed Consolidated Financial
Statements on Page 7 of this Form 10-Q/A.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 Acting 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 Acting Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.