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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q (Mark One) x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
 o
    
    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 x 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 x. As of November 10, 2004, the number of outstanding shares of Common Stock,
par value $1.00 per share, was 7,187,446.




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TABLE OF CONTENTS  PART I FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial StatementsCONDENSED CONSOLIDATED BALANCE SHEETSCONDENSED CONSOLIDATED STATEMENTS OF INCOMECONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)CONDENSED CONSOLIDATED 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 3. Quantitative and Qualitative Disclosures about Market RiskItem 4. Controls and ProceduresPART II OTHER INFORMATIONItem 1. Legal ProceedingsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6 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  
 PART I FINANCIAL INFORMATION 
 Item 1. Condensed
Consolidated Financial Statements. 
 METROCORP BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and share amounts)
(Unaudited) September 30,
    
    December 31,2004
    
    2003(Restated-Note 2)ASSETSCash and due from banks
    
    $
    23,612
    
    
    $
    26,347Federal funds sold and other investments
    
    
    9,518
    
    
    
    10,580Total cash and cash equivalents
    
    
    33,130
    
    
    
    36,927Securities available-for-sale and other investments
    
    
    288,336
    
    
    
    262,264Loans, held-for-investment (net of allowance for loan losses of $10,845
and $10,448, respectively)
    
    
    552,408
    
    
    
    540,658Loans, held-for-sale
    
    
    2,866
    
    
    
    6,030Accrued interest receivable
    
    
    3,076
    
    
    
    3,452Premises and equipment, net
    
    
    6,431
    
    
    
    5,674Customers liability on acceptances
    
    
    2,511
    
    
    
    3,352Foreclosed assets, net
    
    
    890
    
    
    
    2,585Other assets
    
    
    6,554
    
    
    
    6,074Total assets
    
    $
    896,202
    
    
    $
    867,016LIABILITIES AND SHAREHOLDERS EQUITYDeposits:Noninterest-bearing
    
    $
    168,412
    
    
    $
    169,097Interest-bearing
    
    
    573,459
    
    
    
    555,844Total deposits
    
    
    741,871
    
    
    
    724,941Other borrowings
    
    
    60,875
    
    
    
    54,173Accrued interest payable
    
    
    568
    
    
    
    567Acceptances outstanding
    
    
    2,511
    
    
    
    3,352Other liabilities
    
    
    6,683
    
    
    
    5,610Total liabilities
    
    
    812,508
    
    
    
    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;
7,312,627 and 7,306,627 shares are issued and 7,181,437 and 7,156,689
shares are outstanding at September 30, 2004 and December 31, 2003,
respectively
    
    
    7,313
    
    
    
    7,307Additional paid-in capital
    
    
    27,792
    
    
    
    27,620Retained earnings
    
    
    49,088
    
    
    
    44,105Accumulated other comprehensive income
    
    
    683
    
    
    
    671Treasury stock, at cost
    
    
    (1,182
    )
    
    
    (1,330
    )Total shareholders equity
    
    
    83,694
    
    
    
    78,373Total liabilities and shareholders equity
    
    $
    896,202
    
    
    $
    867,016
 See accompanying notes to condensed consolidated financial statements 2




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METROCORP BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited) For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003(Restated-Note 2)
    
    
    
    
    
    (Restated-Note 2)Interest income:Loans
    
    $
    8,649
    
    
    $
    8,894
    
    
    $
    25,108
    
    
    $
    26,375Securities:Taxable
    
    
    2,611
    
    
    
    1,650
    
    
    
    6,922
    
    
    
    5,242Tax-exempt
    
    
    227
    
    
    
    248
    
    
    
    693
    
    
    
    762Federal funds sold and other temporary investments
    
    
    62
    
    
    
    68
    
    
    
    152
    
    
    
    221Total interest income
    
    
    11,549
    
    
    
    10,860
    
    
    
    32,875
    
    
    
    32,600Interest expense:Time deposits
    
    
    2,087
    
    
    
    2,219
    
    
    
    5,838
    
    
    
    6,922Demand and savings deposits
    
    
    345
    
    
    
    299
    
    
    
    935
    
    
    
    1,055Other borrowings
    
    
    498
    
    
    
    438
    
    
    
    1,374
    
    
    
    1,417Total interest expense
    
    
    2,930
    
    
    
    2,956
    
    
    
    8,147
    
    
    
    9,394Net interest income
    
    
    8,619
    
    
    
    7,904
    
    
    
    24,728
    
    
    
    23,206Provision for loan losses
    
    
    215
    
    
    
    575
    
    
    
    1,065
    
    
    
    5,390Net interest income after provision for loan losses
    
    
    8,404
    
    
    
    7,329
    
    
    
    23,663
    
    
    
    17,816Noninterest income:Customer service fees
    
    
    1,795
    
    
    
    1,999
    
    
    
    5,697
    
    
    
    5,983Gain on sale of securities, net
    
    
    7
    
    
    
    2
    
    
    
    7
    
    
    
    165Gain on sale of loans, net
    
    
    18
    
    
    
    248
    
    
    
    587
    
    
    
    511Foreclosed assets, net
    
    
    (70
    )
    
    
    (155
    )
    
    
    844
    
    
    
    (3
    )Other noninterest income
    
    
    19
    
    
    
    15
    
    
    
    41
    
    
    
    69Total noninterest income
    
    
    1,769
    
    
    
    2,109
    
    
    
    7,176
    
    
    
    6,725Noninterest expense:Salaries and employee benefits
    
    
    4,800
    
    
    
    3,494
    
    
    
    12,313
    
    
    
    10,549Occupancy and equipment
    
    
    1,412
    
    
    
    1,370
    
    
    
    4,242
    
    
    
    3,969Lower of cost or market adjustment
    
    
    
    
    
    
    824
    
    
    
    
    
    
    
    2,149Other noninterest expense
    
    
    1,595
    
    
    
    1,713
    
    
    
    5,122
    
    
    
    4,868Total noninterest expense
    
    
    7,807
    
    
    
    7,401
    
    
    
    21,677
    
    
    
    21,535Income before provision for income taxes
    
    
    2,366
    
    
    
    2,037
    
    
    
    9,162
    
    
    
    3,006Provision for income taxes
    
    
    762
    
    
    
    568
    
    
    
    2,888
    
    
    
    818Net income
    
    $
    1,604
    
    
    $
    1,469
    
    
    $
    6,274
    
    
    $
    2,188Earnings per common share:Basic
    
    $
    0.22
    
    
    $
    0.21
    
    
    $
    0.87
    
    
    $
    0.31Diluted
    
    $
    0.22
    
    
    $
    0.20
    
    
    $
    0.87
    
    
    $
    0.30Weighted average shares outstanding:Basic
    
    
    7,180
    
    
    
    7,132
    
    
    
    7,171
    
    
    
    7,067Diluted
    
    
    7,235
    
    
    
    7,215
    
    
    
    7,250
    
    
    
    7,203Dividends per common share
    
    $
    0.06
    
    
    $
    0.06
    
    
    $
    0.06
    
    
    $
    0.06
 See accompanying notes to condensed consolidated financial statements 3




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METROCORP BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited) For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003(Restated-Note 2)
    
    
    
    
    
    (Restated-Note 2)Net income
    
    $
    1,604
    
    
    $
    1,469
    
    
    $
    6,274
    
    
    $
    2,188Other comprehensive income (loss), net of tax:Unrealized gain (loss) on investment securities, net:Unrealized holding gain (loss) arising during the period
    
    
    3,440
    
    
    
    (1,699
    )
    
    
    17
    
    
    
    (2,165
    )Less: reclassification adjustment for gain included in net income
    
    
    5
    
    
    
    1
    
    
    
    5
    
    
    
    107Other comprehensive income (loss)
    
    
    3,435
    
    
    
    (1,700
    )
    
    
    12
    
    
    
    (2,272
    )Total comprehensive income (loss)
    
    $
    5,039
    
    
    $
    (231
    )
    
    $
    6,286
    
    
    $
    (84
    )
 
 METROCORP BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
For the Nine Months Ended September 30, 2004
(In thousands)
(Unaudited) AccumulatedCommon Stock
    
    Additional
    
    
    
    
    
    Other
    
    TreasuryPaid-in
    
    Retained
    
    Comprehensive
    
    StockShares
    
    At par
    
    Capital
    
    Earnings
    
    Income
    
    At Cost
    
    TotalBalance at January 1, 2004 (restated-Note 2)
    
    
    7,157
    
    
    $
    7,307
    
    
    $
    27,620
    
    
    $
    44,105
    
    
    $
    671
    
    
    $
    (1,330
    )
    
    $
    78,373Issuance of common stock
    
    
    6
    
    
    
    6
    
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50Re-issuance of treasury stock
    
    
    19
    
    
    
    
    
    
    
    128
    
    
    
    
    
    
    
    
    
    
    
    148
    
    
    
    276Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,274
    
    
    
    
    
    
    
    
    
    
    
    6,274Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    12Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,291
    )
    
    
    
    
    
    
    
    
    
    
    (1,291
    )Balance at September 30, 2004
    
    
    7,182
    
    
    $
    7,313
    
    
    $
    27,792
    
    
    $
    49,088
    
    
    $
    683
    
    
    $
    (1,182
    )
    
    $
    83,694
 See accompanying notes to condensed consolidated financial statements 4




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METROCORP BANCSHARES, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) For the Nine Months EndedSeptember 30,2004
    
    2003(Restated-Note 2)Cash flows from operating activities:Net income
    
    $
    6,274
    
    
    $
    2,188Adjustments to reconcile net income to net cash provided by operating activies:Depreciation
    
    
    1,002
    
    
    
    1,024Provision for loan losses
    
    
    1,065
    
    
    
    5,390Lower of cost or market adjustment on loans held-for-sale
    
    
    
    
    
    
    2,149Gain on sale of securities, net
    
    
    (7
    )
    
    
    (165
    )Gain on sale of foreclosed assets
    
    
    (1,115
    )
    
    
    (194
    )Gain on sale of loans, net
    
    
    (587
    )
    
    
    (511
    )Amortization of premiums and discounts on securities
    
    
    1,874
    
    
    
    1,956Amortization of net deferred loan fees
    
    
    (955
    )
    
    
    (797
    )Changes in:Loans held-for-sale
    
    
    3,512
    
    
    
    (7,110
    )Accrued interest receivable
    
    
    376
    
    
    
    268Accrued interest payable
    
    
    1
    
    
    
    (167
    )Other liabilities
    
    
    1,071
    
    
    
    1,763Other assets
    
    
    (487
    )
    
    
    (664
    )Net cash provided by operating activities
    
    
    12,024
    
    
    
    5,130Cash flows from investing activities:Purchases of securities available-for-sale
    
    
    (100,564
    )
    
    
    (155,560
    )Proceeds from sales, maturities and principal paydowns of
securities available-for-sale
    
    
    72,644
    
    
    
    153,383Net change in loans
    
    
    (12,084
    )
    
    
    (31,731
    )Proceeds from sale of foreclosed assets
    
    
    3,273
    
    
    
    2,725Purchases of premises and equipment
    
    
    (1,759
    )
    
    
    (716
    )Net cash used in investing activities
    
    
    (38,490
    )
    
    
    (31,899
    )Cash flows from financing activities:Net change in:Deposits
    
    
    16,930
    
    
    
    35,582Other borrowings
    
    
    6,702
    
    
    
    (11,877
    )Proceeds from issuance of common stock
    
    
    50
    
    
    
    1,178Treasury stock re-issued
    
    
    276
    
    
    
    304Treasury stock purchased
    
    
    
    
    
    
    (212
    )Dividends paid
    
    
    (1,289
    )
    
    
    (1,268
    )Net cash provided by financing activities
    
    
    22,669
    
    
    
    23,707Net decrease in cash and cash equivalents
    
    
    (3,797
    )
    
    
    (3,062
    )Cash and cash equivalents at begining of period
    
    
    36,927
    
    
    
    38,186Cash and cash equivalents at end of period
    
    $
    33,130
    
    
    $
    35,124
 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 September 30, 2004, results of operations
for the three and nine months ended September 30, 2004 and 2003, and cash flows
for the nine months ended September 30, 2004 and 2003. Interim period results
are not necessarily indicative of results for a full-year period. The
Company corrected a $235,000 accounting error related to accrued late
charges on loans during the three months ended September 30,
2004. 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 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 regarding the
restatement of prior period financial statements. 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 Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003(Restated-Note 2)
    
    
    
    
    
    (Restated-Note 2)Net income:As reported
    
    $
    1,604
    
    
    $
    1,469
    
    
    $
    6,274
    
    
    $
    2,188Pro forma
    
    $
    1,561
    
    
    $
    1,430
    
    
    $
    6,145
    
    
    $
    2,071Stock-based compensation cost, net of income taxes:As reported
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Pro forma
    
    $
    43
    
    
    $
    39
    
    
    $
    129
    
    
    $
    117Basic earnings per common share:As reported
    
    $
    0.22
    
    
    $
    0.21
    
    
    $
    0.87
    
    
    $
    0.31Pro forma
    
    $
    0.22
    
    
    $
    0.20
    
    
    $
    0.86
    
    
    $
    0.29Diluted earnings per common share:As reported
    
    $
    0.22
    
    
    $
    0.20
    
    
    $
    0.87
    
    
    $
    0.30Pro forma
    
    $
    0.22
    
    
    $
    0.20
    
    
    $
    0.85
    
    
    $
    0.29
 6




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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
December 31, 2003 and September 30, 2003 and for the three and nine months
ended September 30, 2003 to correct the amortization of deferred loan fees, net
of costs, to interest income. The restatement increased net income by $124,000
and $288,000 for the three and nine months ended September 30, 2003, and
increased retained earnings by $2.0 million and $2.2 million as of September
30, 2003 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 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 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. 7




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METROCORP BANCSHARES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following table reflects the previously reported amounts for the three
and nine months ended September 30, 2003 and as of December 31, 2003 and the
restated amounts. As of and for the NineFor the Three Months
    
    Months Ended
    
    As of December 31,Ended September 30, 2003
    
    September 30, 2003
    
    2003Previously
    
    
    
    
    
    Previously
    
    
    
    
    
    PreviouslyReported
    
    Restated
    
    Reported
    
    Restated
    
    Reported
    
    Restated(In thousands, except per share amounts)Balance Sheet:Loans, net of allowance for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    537,305
    
    
    $
    540,658Deferred tax asset
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,774
    
    
    
    4,664Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    864,773
    
    
    
    867,016Other liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,530
    
    
    
    5,610Retained earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,942
    
    
    
    44,105Total shareholders equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76,210
    
    
    
    78,373Total liabilities and shareholders equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    864,773
    
    
    
    867,016Statement of income:Interest
income - loans
    
    $
    8,783
    
    
    $
    8,894
    
    
    $
    26,581
    
    
    $
    26,375Total interest income
    
    
    10,749
    
    
    
    10,860
    
    
    
    32,806
    
    
    
    32,600Net interest income
    
    
    7,793
    
    
    
    7,904
    
    
    
    23,412
    
    
    
    23,206Total noninterest expense
    
    
    7,798
    
    
    
    7,401
    
    
    
    22,346
    
    
    
    21,535Income before provision for income taxes
    
    
    1,849
    
    
    
    2,037
    
    
    
    2,569
    
    
    
    3,006Provision for income taxes
    
    
    504
    
    
    
    568
    
    
    
    669
    
    
    
    818Net income
    
    
    1,345
    
    
    
    1,469
    
    
    
    1,900
    
    
    
    2,188Earnings per common share:Basic
    
    $
    0.19
    
    
    $
    0.21
    
    
    $
    0.27
    
    
    $
    0.31Diluted
    
    
    0.19
    
    
    
    0.20
    
    
    
    0.26
    
    
    
    0.30Cash flow statement:Cash flows from operating activties
    
    
    
    
    
    
    
    
    
    $
    6,019
    
    
    $
    5,576Cash flows from investing activities
    
    
    
    
    
    
    
    
    
    
    (32,788
    )
    
    
    (32,345
    )
 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 Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003(Restated-Note 2)
    
    
    
    
    
    (Restated-Note 2)(In thousands, except per share amounts)Net income availabe to common shareholders
    
    $
    1,604
    
    
    $
    1,469
    
    
    $
    6,274
    
    
    $
    2,188Weighted average common shares outstanding:Basic
    
    
    7,180
    
    
    
    7,132
    
    
    
    7,171
    
    
    
    7,067Shares issuable under stock option plans
    
    
    55
    
    
    
    83
    
    
    
    79
    
    
    
    136Diluted
    
    
    7,235
    
    
    
    7,215
    
    
    
    7,250
    
    
    
    7,203Earnings per common share:Basic
    
    $
    0.22
    
    
    $
    0.21
    
    
    $
    0.87
    
    
    $
    0.31Diluted
    
    $
    0.22
    
    
    $
    0.20
    
    
    $
    0.87
    
    
    $
    0.30
 8




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##### Table of Contents



METROCORP BANCSHARES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4. SECURITIES AVAILABLE-FOR-SALE The amortized cost and approximate fair value of securities classified as
available-for-sale is as follows: As of September 30, 2004
    
    As of December 31, 2003Gross
    
    Gross
    
    
    
    
    
    
    
    
    
    Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    Fair
    
    Amortized
    
    Unrealized
    
    Unrealized
    
    FairCost
    
    Gain
    
    Loss
    
    Value
    
    Cost
    
    Gain
    
    Loss
    
    Value(In thousands)U.S. Government agency securities
    
    $
    5,004
    
    
    $
    3
    
    
    $
    
    
    
    $
    5,007
    
    
    
    5,061
    
    
    $
    3
    
    
    $
    (11
    )
    
    $
    5,053Mortgage backed securities
    
    
    239,088
    
    
    
    1,546
    
    
    
    (1,451
    )
    
    
    239,183
    
    
    
    200,685
    
    
    
    1,133
    
    
    
    (1,254
    )
    
    
    200,564Municipal securities
    
    
    18,104
    
    
    
    1,141
    
    
    
    
    
    
    
    19,245
    
    
    
    18,925
    
    
    
    1,249
    
    
    
    
    
    
    
    20,174Federal Reserve Bank stock
    
    
    936
    
    
    
    
    
    
    
    
    
    
    
    936
    
    
    
    846
    
    
    
    
    
    
    
    
    
    
    
    846Federal Home Loan Bank stock
    
    
    4,842
    
    
    
    
    
    
    
    
    
    
    
    4,842
    
    
    
    4,354
    
    
    
    
    
    
    
    
    
    
    
    4,354Other securities
    
    
    2,261
    
    
    
    22
    
    
    
    
    
    
    
    2,283
    
    
    
    9,638
    
    
    
    37
    
    
    
    (11
    )
    
    
    9,664Investments in mutual funds
    
    
    17,065
    
    
    
    96
    
    
    
    (321
    )
    
    
    16,840
    
    
    
    21,739
    
    
    
    73
    
    
    
    (203
    )
    
    
    21,609Total securities available for sale
    
    $
    287,300
    
    
    $
    2,808
    
    
    $
    (1,772
    )
    
    $
    288,336
    
    
    $
    261,248
    
    
    $
    2,495
    
    
    $
    (1,479
    )
    
    $
    262,264
 The following table displays the gross unrealized losses and fair value of
investments as of September 30, 2004 that were in a continuous unrealized loss
position for the periods indicated: Less Than 12 Months
    
    Greater Than 12 Months
    
    TotalGross
    
    
    
    
    
    Gross
    
    
    
    
    
    GrossUnrealized
    
    
    
    
    
    Unrealized
    
    
    
    
    
    UnrealizedFair Value
    
    Loss
    
    Fair Value
    
    Loss
    
    Fair Value
    
    Loss(In thousands)U.S. Government agency securities
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Mortgage backed securities
    
    
    55,752
    
    
    
    (679
    )
    
    
    40,345
    
    
    
    (772
    )
    
    
    96,097
    
    
    
    (1,451
    )Municipal securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Federal Reserve Bank stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Federal Home Loan Bank stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Investments in mutual funds
    
    
    
    
    
    
    
    
    
    
    14,351
    
    
    
    (321
    )
    
    
    14,351
    
    
    
    (321
    )Total securities available for sale
    
    $
    55,752
    
    
    $
    (679
    )
    
    $
    54,696
    
    
    $
    (1,093
    )
    
    $
    110,448
    
    
    $
    (1,772
    )
 Declines in the fair value of individual securities below their cost that
are other than temporary would result in write-downs, as a realized loss, of
the individual securities to their fair value. Management believes that based
upon the credit quality of the equity and debt securities and the Companys
intent and ability to hold the securities until their recovery, none of the
unrealized losses on securities should be considered other than temporary. 5. 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. 6. GUARANTEES The Bank enters into a stand-by letters of credit to guarantee performance
of a customer to a third party. 9




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##### Table of Contents



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 September 30, 2004, the maximum potential amount of future payments was
$4.3 million. The Company has recorded a liability of $17,524 at September 30,
2004 and $2,542 at December 31, 2003 for the fair value of their guarantees. 7. 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. On June 4, 2004, the Emerging Issues Task Force (EITF) issued EITF Issue
03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments. EITF 03-1 provides guidance for determining when an
investment is considered impaired, whether impairment is other-than-temporary,
and measurement of an impairment loss. An investment is considered impaired if
the fair value of the investment is less than its cost. Generally, an
impairment is considered other-than-temporary unless: (i) the investor has the
ability and intent to hold an investment for a reasonable period of time
sufficient for an anticipated recovery of fair value up to or beyond the cost
of the investment; and (ii) evidence indicating that the cost of the investment
is recoverable within a reasonable period of time outweighs evidence to the
contrary. If impairment is determined to be other-than-temporary, an
impairment loss should be recognized equal to the difference between the
investments cost and its fair value. Certain disclosure requirements of EITF
03-1 were adopted in 2003. The recognition and measurement provisions were
initially effective for other-than-temporary impairment evaluations in
reporting periods beginning after June 15, 2004. In September 2004 the
effective date of theses provisions was delayed until the finalization of a
FASB Staff Position (FSP) to provide additional implementation guidance.
Currently, the FASB expects to issue the FSP no later than December 2004. 10




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##### Table of Contents



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 and are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. The Company intends such forward-looking statements to be covered
by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act
of 1995 and are including this statement for purposes of invoking these safe harbor provisions. These forward-looking
statements include information about possible or assumed future results of the Companys operations or performance.
When the Company uses any of the words believe, expect, anticipate, estimate, continue, intend, may,
will, should, or similar expressions, identifies these forward-looking statements. Many possible factors or events
could affect the future financial results and performance of the Company and could cause those financial results or
performance to differ materially from those expressed in the forward-looking statement. These possible events or
factors 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. 11




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##### Table of Contents



Restatement of Financial Statements The Company restated its condensed consolidated financial statements as of
December 31, 2003 and September 30, 2003 and for the three and nine months
ended September 30, 2003 to correct the amortization of deferred loan fees, net
of costs, to interest income. The restatement increased net income by $124,000
and $288,000 for the three and nine months ended September 30, 2003, and
increased retained earnings by $2.0 million and $2.2 million as of September
30, 2003 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 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 for net deferred 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 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 September 30, 2004, the Company had net income
of $1.6 million, up approximately $135,000 compared with a net income of $1.5
million for the same quarter in 2003. The Companys diluted earnings per share
for the three months ended September 30, 2003 was $0.22, up $0.02 from $0.20
for the same quarter in 2003. This increase in net income was primarily the
result of improved net interest income and a lower provision for loan losses.
The Company recorded a higher provision in 2003 due to a higher level of
nonperforming loans. Net income for the nine months ended September 30, 2004 was $6.3 million,
up approximately $4.1 million from $2.2 million for the same period in 2003.
The Companys diluted earnings per share for the nine months ended September
30, 2004 was $0.87 up $0.57 from $0.30 for the same period in 2003. This
increase in net income and diluted earnings per share was primarily the result
of a lower provision for loan losses for the nine months ended September 30,
2004 compared with the same period in 2003. The Company recorded a higher
provision in 2003 due to a higher level of nonperforming loans. At September 30, 2004, total assets were $896.2 million, up approximately
$29.2 million or 3.4% from $867.0 million at December 31, 2003. Investment
securities at September 30, 2004 were $288.3 million, up
approximately $26.0
million or 9.9% from $262.3 million at December 31, 2003. Net loans, both
held-for-investment and held-for-sale at September 30, 2004, were $555.3
million, up approximately $8.6 million or 1.6% from $546.7 million at December
31, 2003. Total deposits at September 30, 2004 were $741.9 million, up
approximately $16.9 million or 2.3% from $724.9 million at December 31, 2003.
Other borrowings at September 30, 2004 were $60.9 million, up approximately
$6.7 million from $54.2 million at December 31, 2003. The Companys return on
average assets (ROAA) for the three months ended September 30, 2004 and 2003
was 0.71% and 0.68%, respectively. The Companys ROAA for the nine months
ended September 30, 2004 and 2003 was 0.96% and 0.34%, respectively. Shareholders equity at September 30, 2004 was $83.7 million compared with
$78.4 million at December 31, 2003, an increase of approximately $5.3 million.
The Companys return on average shareholders equity (ROAE) for the three
months ended September 30, 2004 and 2003 was 7.83% and 7.70%, respectively. The
Companys ROAE for the nine months ended September 30, 2004 and 2003 was 10.55%
and 3.81%, respectively. Results of Operations Net Interest Income and the Net Interest Margin.For the three months
ended September 30, 2004, net interest income, before the provision for loan
losses, was $8.6 million, up approximately $715,000 or 9.1% from $7.9 million
for the same quarter in 2003. Average interest-earning assets balance for the
three months ended September 30, 2004 were $859.1 million, up approximately
$31.7 million or 3.8% from $827.4 million for the same 12




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##### Table of Contents



quarter in 2003. The
weighted average yield on interest-earning assets for the three months ended
September 30, 2004 was 5.35%, up 14 basis points from 5.21% for the same
quarter in 2003. Average interest-bearing liabilities
balance for the three months ended September 30, 2004 was $636.8 million,
up approximately $9.1 million or 1.5% from $627.6 million for the same quarter
in 2003. The weighted average rate paid on interest-bearing liabilities for
the three months ended September 30, 2004 was 1.83%, down 4 basis points from
1.87% for the same quarter in 2003. For the nine months ended September 30, 2004, net interest income, before
the provision for loan losses, was $24.7 million, up approximately $1.5 million
or 6.6% from $23.2 million for the same period in 2003. Average
interest-earning asset balances for the nine months ended September 30, 2004
were $834.1 million, up approximately $17.7 million or 2.2% from $816.5 million
for the same period in 2003. The weighted average yield on interest-earning
assets for the nine months ended September 30, 2004 was 5.26%, down 8 basis
points from 5.34% for the same period in 2003. Average interest-bearing
liabilities balance for the nine months ended September 30, 2004 was $615.3
million, down approximately $4.6 million or 0.8% from $619.9 million for the
same period in 2003. The weighted average rate paid on interest-bearing
liabilities for the nine months ended September 30, 2004 was 1.77%, down 26
basis points from 2.03% for the same period in 2003. The net interest margin for the three months ended September 30, 2004 was
3.99%, up 20 basis points from 3.79% for the same quarter in 2003 and was
primarily the result of 14 basis points increase of the yield of
interest-earning assets. The net interest margin for the nine months ended
September 30, 2004 was 3.96%, up 16 basis points from 3.80% for the same period
in 2003 and was primarily the result of a decrease of the cost of
interest-earning assets of 24 basis points that was partially offset by a
decrease in the yield on interest-earning assets of 8 basis points. Total Interest Income.Total interest income for the three months ended
September 30, 2004 was $11.5 million, up approximately $689,000 or 6.3% from
$10.9 million for the same quarter in 2003. Total interest income for the nine
months ended September 30, 2004 was $32.9 million, up approximately $275,000 or
0.8% from $32.6 million for the same period in 2003. The higher interest
income for both periods in 2004, compared with 2003, was primarily the result
of higher volume and higher yields on investment securities. Interest Income from Loans.Interest income from loans for the three
months ended September 30, 2004 was $8.6 million, down approximately $245,000
or 2.8% from $8.9 million for the same quarter in 2003 primarily due to lower
loan yields as a result of the current interest rate environment that was
partially offset by higher average loan balances. Average total loans for the
three months ended September 30, 2004 were $559.7 million compared to average
total loans for the same quarter in 2003 of $557.4 million, an increase of
approximately $2.3 million or 0.4%. For the three months ended September 30,
2004, the average yield on total loans was 6.15% compared to 6.33% for the same
quarter in 2003, a decrease of 18 basis points. Approximately $480.9 million or 88.2% of the loans in the loan portfolio
are variable rate loans that reprice as the prime rate moves and therefore, are
sensitive to interest rate movements. At September 30, 2004, the average yield
on the total loan portfolio was approximately 131 basis points above the prime
rate of 4.75%. At September 30, 2004, $380.1 million or 69.7% of the total
loan portfolio were variable rate loans with interest rate floors. The
weighted average interest rate of these loans was 6.11% at September 30, 2004.
At September 30, 2003, 62.6% of the total loan portfolio with a weighted
average interest rate of 5.97% were variable rate loans with interest rate
floors. Interest income from loans for the nine months ended September 30, 2004
was $25.1 million, down approximately $1.3 million or 4.8% from $26.4 million
for the same period in 2003 primarily due to the lower loan yields as a result
of the interest rate environment that was partially offset by higher average
loan balances. Average total loans for the nine months ended September 30,
2004 were $559.4 million compared to $550.8 million for the same period in
2003, an increase of approximately $8.6 million or 1.6%. For the nine months
ended September 30, 2004, the average yield on total loans was 6.00% compared
to 6.40% for the same period in 2003, a decrease of 40 basis points. Interest Income from Investments.Interest income from investments (which
includes investment securities, Federal Funds sold, and other investments) for
the three months ended September 30, 2004 was $2.9 million, up approximately
$934,000 or 47.5% compared to $2.0 million for the same quarter in 2003,
primarily due to a more normalized premium amortization experienced in 2004
compared to 2003. The majority of the portfolio is invested 13




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##### Table of Contents



in mortgage-backed
securities and the record level of home refinancing in 2003 created
unprecedented levels of cash flows which, in turn, forced accelerated premium
amortization on securities purchased at a premium. Income from investments
also increased due to higher average balances and generally higher yields on
securities purchased in
2004. Average total investments for the three months ended September 30,
2004, were $299.4 million compared to $270.1 million for the same quarter in
2003, an increase of approximately $29.3 million or 10.9%. For the three
months ended September 30, 2004, the average yield on investments was 3.85%
compared to 2.89% for the same quarter in 2003, an increase of 96 basis points. Interest income from investments for the nine months ended September 30,
2004 was $7.8 million, up approximately $1.5 million or 24.8% compared to $6.2
million for the same period in 2003, primarily due to the same reason discussed
above. Average total investments for the nine months ended September 30, 2004,
were $274.7 million compared to $265.7 million for the same period in 2003, an
increase of approximately $9.0 million or 3.4%. For the nine months ended
September 30, 2004, the average yield on investments was 3.78% compared to
3.13% for the same period in 2003, an increase of 65 basis points. Total Interest Expense.Total interest expense for the three months ended
September 30, 2004 was $2.9 million, down approximately $26,000 or 0.9%
compared to $3.0 million for the same quarter in 2003. Total interest expense
for the nine months ended September 30, 2004 was $8.1 million, down
approximately $1.2 million or 13.3% from $9.4 million for the same period in
2003. The lower interest expense for both periods in 2004, compared to 2003,
was primarily the result of lower interest rates paid on average
interest-bearing liabilities. Interest Expense on Deposits.Interest paid on interest-bearing deposits
for the three months ended September 30, 2004 was $2.4 million, down
approximately $86,000 or 3.4% compared to $2.5 million for the same period in
2003 and was primarily due to lower interest rates paid for interest-bearing
deposits and lower interest-bearing deposit balances. Average interest-bearing
deposits for the three months ended September 30, 2004 were $567.0 million
compared to $570.9 million for the same quarter in 2003, a decrease of $3.9
million or 0.7%. The average interest rate paid on interest-bearing deposits
for the three months ended September 30, 2004 was 1.71% compared to 1.75% for
the same quarter in 2003, a decrease of 4 basis points. Interest paid on interest-bearing deposits for the nine months ended
September 30, 2004 was $6.8 million, down approximately $1.2 million or 15.1%
compared to $8.0 million for the same period in 2003 and was primarily due to
lower interest rates paid for interest-bearing deposits and lower
interest-bearing deposit balances. Average interest-bearing deposits for the
nine months ended September 30, 2004 were $550.6 million compared to $557.7
million for the same period in 2003, a decrease of $7.1 million or 1.3%. The
average interest rate paid on interest-bearing deposits for the nine months
ended September 30, 2004 was 1.64% compared to 1.91% for the same period in
2003, a decrease of 27 basis points. Interest Expense on Other Borrowed Funds.Interest paid on other
borrowed funds for the three months ended September 30, 2004 was $498,000, down
approximately $60,000 compared to $438,000 for the same period in 2003 and was
primarily due to an increase in lower rate borrowings. Average borrowed funds
for the three months ended September 30, 2004 were $69.8 million compared to
$56.7 million for the same quarter in 2003, an increase of $13.1 million. The
increase in borrowed funds reflected advances obtained from the Federal Home
Loan Bank (FHLB) to fund mortgage-related securities investments to increase
earning assets. The average interest rate paid on borrowed funds for the three
months ended September 30, 2004 was 2.84%, compared to 3.06% for the same
quarter in 2003, a decrease of 22 basis points. Interest paid on other borrowed funds for the nine months ended September
30, 2004 was $1.4 million, down approximately $43,000 compared to the same
period in 2003 and was due to an increase in lower rate borrowings. Average
borrowed funds for the nine months ended September 30, 2004 were $64.7 million
compared to $62.2 million for the same period in 2003, a decrease of $2.5
million. The average interest rate paid on borrowed funds for the nine months
ended September 30, 2004 was 2.84%, compared to 3.05% for the same period in
2003, a decrease of 21 basis points. 14




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##### Table of Contents



The following tables present the total dollar amount of interest income
from average interest-earning assets and the resultant yields, as well as the
interest expense on average interest-bearing liabilities, expressed both in
dollars and rates for the periods indicated. No tax-equivalent adjustments
were made and all average balances are daily average balances. Nonaccruing
loans have been included in the tables as loans having a zero yield. For The Three Months Ended September 30,2004
    
    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
    
    $
    559,703
    
    
    $
    8,649
    
    
    
    6.15
    %
    
    $
    557,385
    
    
    $
    8,894
    
    
    
    6.33
    %Taxable securities
    
    
    267,539
    
    
    
    2,611
    
    
    
    3.88
    
    
    
    229,625
    
    
    
    1,650
    
    
    
    2.85Tax-exempt securities
    
    
    18,351
    
    
    
    227
    
    
    
    4.92
    
    
    
    19,954
    
    
    
    248
    
    
    
    4.93Federal funds sold and other investments
    
    
    13,509
    
    
    
    62
    
    
    
    1.83
    
    
    
    20,471
    
    
    
    68
    
    
    
    1.32Total interest-earning
assets
    
    
    859,102
    
    
    
    11,549
    
    
    
    5.35
    %
    
    
    827,435
    
    
    
    10,860
    
    
    
    5.21
    %Less allowance for loan losses
    
    
    (11,183
    )
    
    
    
    
    
    
    
    
    
    
    (10,530
    )Total interest-earning assets, net of allowance for
loan losses
    
    
    847,919
    
    
    
    
    
    
    
    
    
    
    
    816,905Noninterest-earning
assets
    
    
    47,635
    
    
    
    
    
    
    
    
    
    
    
    47,279Total assets
    
    $
    895,554
    
    
    
    
    
    
    
    
    
    
    $
    864,184Liabilities and shareholders equityInterest-bearing liabilities:Interest-bearing demand deposits
    
    $
    81,122
    
    
    $
    146
    
    
    
    0.72
    %
    
    $
    74,933
    
    
    $
    99
    
    
    
    0.52
    %Savings and money market accounts
    
    
    110,926
    
    
    
    199
    
    
    
    0.71
    
    
    
    116,145
    
    
    
    200
    
    
    
    0.68Time deposits
    
    
    374,959
    
    
    
    2,087
    
    
    
    2.21
    
    
    
    379,859
    
    
    
    2,219
    
    
    
    2.32Other borrowings
    
    
    69,750
    
    
    
    498
    
    
    
    2.84
    
    
    
    56,697
    
    
    
    438
    
    
    
    3.06Total interest-bearing liabilities
    
    
    636,757
    
    
    
    2,930
    
    
    
    1.83
    %
    
    
    627,634
    
    
    
    2,956
    
    
    
    1.87
    %Noninterest-bearing liabilities:Noninterest-bearing demand deposits
    
    
    169,070
    
    
    
    
    
    
    
    
    
    
    
    153,435Other liabilities
    
    
    8,267
    
    
    
    
    
    
    
    
    
    
    
    7,451Total liabilities
    
    
    814,094
    
    
    
    
    
    
    
    
    
    
    
    788,520Shareholders
equity
    
    
    81,460
    
    
    
    
    
    
    
    
    
    
    
    75,664Total liabilities and shareholders equity
    
    $
    895,554
    
    
    
    
    
    
    
    
    
    
    $
    864,184Net interest income
    
    
    
    
    
    $
    8,619
    
    
    
    
    
    
    
    
    
    
    $
    7,904Net interest spread
    
    
    
    
    
    
    
    
    
    
    3.52
    %
    
    
    
    
    
    
    
    
    
    
    3.34
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.99
    %
    
    
    
    
    
    
    
    
    
    
    3.79
    %
   (1)
    
    Annualized. 15




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##### Table of Contents



For The Nine Months Ended September 30,2004
    
    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
    
    $
    559,430
    
    
    $
    25,108
    
    
    
    6.00
    %
    
    $
    550,794
    
    
    $
    26,375
    
    
    
    6.40
    %Taxable securities
    
    
    243,224
    
    
    
    6,922
    
    
    
    3.80
    
    
    
    225,151
    
    
    
    5,242
    
    
    
    3.11Tax-exempt securities
    
    
    18,642
    
    
    
    693
    
    
    
    4.97
    
    
    
    20,469
    
    
    
    762
    
    
    
    4.98Federal funds sold and other investments
    
    
    12,828
    
    
    
    152
    
    
    
    1.58
    
    
    
    20,050
    
    
    
    221
    
    
    
    1.47Total interest-earning
assets
    
    
    834,124
    
    
    
    32,875
    
    
    
    5.26
    %
    
    
    816,464
    
    
    
    32,600
    
    
    
    5.34
    %Less allowance for loan losses
    
    
    (10,904
    )
    
    
    
    
    
    
    
    
    
    
    (10,581
    )Total interest-earning assets, net of
allowance for loan losses
    
    
    823,220
    
    
    
    
    
    
    
    
    
    
    
    805,883Noninterest-earning
assets
    
    
    47,859
    
    
    
    
    
    
    
    
    
    
    
    44,986Total assets
    
    $
    871,079
    
    
    
    
    
    
    
    
    
    
    $
    850,869Liabilities and shareholders equityInterest-bearing liabilities:Interest-bearing demand deposits
    
    $
    76,410
    
    
    $
    364
    
    
    
    0.64
    %
    
    $
    73,916
    
    
    $
    362
    
    
    
    0.65
    %Savings and money market accounts
    
    
    111,780
    
    
    
    571
    
    
    
    0.68
    
    
    
    110,892
    
    
    
    693
    
    
    
    0.84Time deposits
    
    
    362,379
    
    
    
    5,838
    
    
    
    2.15
    
    
    
    372,887
    
    
    
    6,922
    
    
    
    2.48Other borrowings
    
    
    64,703
    
    
    
    1,374
    
    
    
    2.84
    
    
    
    62,166
    
    
    
    1,417
    
    
    
    3.05Total interest-bearing liabilities
    
    
    615,272
    
    
    
    8,147
    
    
    
    1.77
    %
    
    
    619,861
    
    
    
    9,394
    
    
    
    2.03
    %Noninterest-bearing liabilities:Noninterest-bearing demand deposits
    
    
    169,137
    
    
    
    
    
    
    
    
    
    
    
    147,088Other liabilities
    
    
    7,242
    
    
    
    
    
    
    
    
    
    
    
    7,504Total liabilities
    
    
    791,651
    
    
    
    
    
    
    
    
    
    
    
    774,453Shareholders
equity
    
    
    79,428
    
    
    
    
    
    
    
    
    
    
    
    76,416Total liabilities and shareholders equity
    
    $
    871,079
    
    
    
    
    
    
    
    
    
    
    $
    850,869Net interest income
    
    
    
    
    
    $
    24,728
    
    
    
    
    
    
    
    
    
    
    $
    23,206Net interest spread
    
    
    
    
    
    
    
    
    
    
    3.49
    %
    
    
    
    
    
    
    
    
    
    
    3.31
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.96
    %
    
    
    
    
    
    
    
    
    
    
    3.80
    %
   (1)
    
    Annualized. 16




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##### Table of Contents



The following tables present the dollar amount of changes in interest
income and interest expense for the major components of interest-earning assets
and interest-bearing liabilities and distinguish between changes in outstanding
balances and changes in interest rates for the three and nine months ended
September 30, 2004 compared with the three and nine months ended September 30,
2003. For purposes of this table, changes attributable to both rate and volume
have been allocated to each accordingly. Three Months Ended September 30,2004 vs 2003Increase(Decrease)Due toVolume
    
    Rate
    
    Total(Dollars in thousands)Interest-earning assets:Loans
    
    $
    13
    
    
    $
    (258
    )
    
    $
    (245
    )Taxable securities
    
    
    267
    
    
    
    694
    
    
    
    961Tax-exempt securities
    
    
    (21
    )
    
    
    
    
    
    
    (21
    )Federal funds sold and other investments
    
    
    (23
    )
    
    
    17
    
    
    
    (6
    )Total increase in interest income
    
    
    236
    
    
    
    453
    
    
    
    689Interest-bearing liabilities:Interest-bearing demand deposits
    
    
    8
    
    
    
    39
    
    
    
    47Savings and money market accounts
    
    
    (10
    )
    
    
    9
    
    
    
    (1
    )Time deposits
    
    
    (35
    )
    
    
    (97
    )
    
    
    (132
    )Other borrowings
    
    
    99
    
    
    
    (39
    )
    
    
    60Total increase (decrease) in interest expense
    
    
    62
    
    
    
    (88
    )
    
    
    (26
    )Total increase in net interest income
    
    $
    174
    
    
    $
    541
    
    
    $
    715
 Nine Months Ended September 30,2004 vs 2003Increase(Decrease)Due toVolume
    
    Rate
    
    Total(Dollars in thousands)Interest-earning assets:Loans
    
    $
    438
    
    
    $
    (1,705
    )
    
    $
    (1,267
    )Taxable securities
    
    
    426
    
    
    
    1,254
    
    
    
    1,680Tax-exempt securities
    
    
    (67
    )
    
    
    (2
    )
    
    
    (69
    )Federal funds sold and other investments
    
    
    (79
    )
    
    
    10
    
    
    
    (69
    )Total increase (decrease) in interest income
    
    
    718
    
    
    
    (443
    )
    
    
    275Interest-bearing liabilities:Interest-bearing demand deposits
    
    
    13
    
    
    
    (11
    )
    
    
    2Savings and money market accounts
    
    
    6
    
    
    
    (128
    )
    
    
    (122
    )Time deposits
    
    
    (189
    )
    
    
    (895
    )
    
    
    (1,084
    )Other borrowings
    
    
    59
    
    
    
    (102
    )
    
    
    (43
    )Total decrease in interest expense
    
    
    (111
    )
    
    
    (1,136
    )
    
    
    (1,247
    )Total increase in net interest income
    
    $
    829
    
    
    $
    693
    
    
    $
    1,522
 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 September
30, 2004 was $215,000, down approximately $360,000 compared to $575,000 for the
same quarter in 2003. This lower provision during the three months ended
September 30, 2004 was primarily due to lower nonperforming loans. 17




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##### Table of Contents



The provision for loan losses for the nine months ended September 30, 2004
was $1.1 million, down $4.3 million compared to $5.4 million for the same
period in 2003. The higher provision during the nine months ended September
30, 2003 was primarily due to higher level of nonperforming loans. The
allowance for loan losses as a percent of total loans (net of unearned
interest, net deferred fees, and discounts) at September 30, 2004 and December
31, 2003 was 1.92% and 1.88%, respectively. Noninterest Income.Noninterest income for the three months ended
September 30, 2004 was $1.8 million, down approximately $340,000 or 16.1%
compared to $2.1 million for the same period in 2003. Customer service fees
for the three months ended September 30, 2004 were $1.8 million, down
approximately $204,000 compared to the same period in 2003 primarily due to
charge offs of uncollectible late fees on loans. Gain on sale of loans for the three months
ended September 30, 2004 was $18,000, down approximately $230,000 compared to
$248,000 for the same period in 2003. Noninterest income for the nine months ended September 30, 2004 was $7.2
million, up approximately $451,000 or 6.7% compared to $6.7 million for the
same period in 2003. Customer service fees for the nine months ended September
30, 2004 were $5.7 million, down approximately $286,000 compared to $6.0
million for the same period in 2003, primarily due to charge offs of
uncollectible late fees on loans. Gain on sale of loans for the nine months ended September
30, 2004 was $587,000, up $76,000 compared to $511,000 for the same period in
2003 due to the sale of hospitality loans designated as held for sale. Income
from foreclosed assets was $844,000, up $847,000 compared to a loss of $3,000
for the same period in 2003 primarily due to gain from the sale of the other
real estate. Noninterest Expense.Noninterest expense for the three months ended
September 30, 2004 was $7.8 million, up approximately $406,000 compared to $7.4
million for the same quarter in 2003. This increase was primarily due to a $1.3 million increase
in salaries and employee benefits offset by an $824,000 lower of cost or market adjustment on
loans held for sale in 2003 and a $118,000 decrease in other noninterest expense. Occupancy expense increased $42,000 to
$1.4 million for the three months ended September 30, 2004 compared to the same
period in prior year. Noninterest expense for the nine months ended September 30, 2004 was $21.7
million, up $142,000 compared to $21.5 million for the same period in 2003.
The increase was primarily due to a $1.8 million increase in salaries and
employee benefits and a $273,000 increase in occupancy expense
partially offset by a $1.9 million decrease in other noninterest expense. Salaries and employee benefits for the nine months ended September 30,
2004 were $12.3 million, up approximately $1.8 million compared to $10.5
million for the same period in 2003, primarily due to $410,000 in incentive
bonuses paid to executives, an increase in officer-level employees and an
$800,000 severance payment to a senior executive. At September 30, 2004, the
Company had 285 full-time equivalent (FTE) employees compared to 295 FTE
employees at September 30, 2003, a decrease of 10 FTEs. Occupancy and equipment expense for the nine months ended September 30,
2004, was $4.2 million, up approximately $273,000 compared to $4.0 million for
the same period in 2003 primarily due to increased equipment service contracts,
higher contract security expenses, and increased building rental expenses due
to additional leased space. Other noninterest expense for the nine months
ended September 30, 2004 was $5.1 million, up $254,000 compared to $4.9 million
for the same period in 2003 and primarily related to a $200,000 litigation
accrual. In addition, the Company recorded a lower of cost or market
adjustment on loans held-for-sale in 2003 of $2.1 million. The Companys efficiency ratio for the three months ended September 30,
2004 was 75.15%, up from 73.91% for the same quarter in 2003 and was primarily
due to higher noninterest expenses. The Companys efficiency ratio for the nine
months ended September 30, 2004 was 67.94%, down from 71.95% for the same
period in 2003 primarily due a decrease in interest expense. Income Taxes.Income tax expense for the nine months ended September 30,
2004 was $2.9 million, compared with $818,000 for the same period in 2003. The
Companys effective tax rate was 31.5% and 27.2% for the nine months ended
September 30, 2004 and 2003, respectively. The effective tax rate is affected
by the amount of tax-exempt income in relation to taxable income. 18




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##### Table of Contents



Financial Condition Loan Portfolio.Net loans at September 30, 2004 were $555.3 million, up
$8.6 million or 1.6% from $546.7 million at December 31, 2003. Commercial and
industrial loans decreased $2.6 million and real estate loans increased $7.9
million from December 31, 2003. The ratio of total loans to total deposits was
76.3% and 76.9%, respectively, at September 30, 2004 and December 31, 2003. At
the same dates, total loans represented 63.2% and 64.3% of total assets,
respectively. The following table summarizes the net loan portfolio of the Company by
type of loan: As of September 30, 2004
    
    As of December 31, 2003Amount
    
    Percent
    
    Amount
    
    Percent(Dollars in thousands)Commercial and industrial
    
    $
    329,851
    
    
    
    57.99
    %
    
    $
    332,480
    
    
    
    59.36
    %Real estate mortgage:Residential
    
    
    12,256
    
    
    
    2.15
    
    
    
    14,315
    
    
    
    2.56Commercial
    
    
    179,626
    
    
    
    31.58
    
    
    
    178,290
    
    
    
    31.83Real estate construction:Residential
    
    
    10,445
    
    
    
    1.84
    
    
    
    12,652
    
    
    
    2.26Commercial
    
    
    22,735
    
    
    
    4.00
    
    
    
    11,906
    
    
    
    2.12Consumer and other
    
    
    13,903
    
    
    
    2.44
    
    
    
    10,447
    
    
    
    1.87Gross loans
    
    
    568,816
    
    
    
    100.00
    %
    
    
    560,090
    
    
    
    100.00
    %Less: unearned discounts, interest and net deferred fees
    
    
    (2,697
    )
    
    
    
    
    
    
    (2,954
    )Total loans
    
    
    566,119
    
    
    
    
    
    
    
    557,136Less: allowance for loan losses
    
    
    (10,845
    )
    
    
    
    
    
    
    (10,448
    )Loans, net
    
    $
    555,274
    
    
    
    
    
    
    $
    546,688
 Nonperforming Assets.Net nonperforming assets at September 30, 2004 were
$16.7 million compared to $25.0 million at December 31, 2003, a decrease of
$8.3 million, primarily due to a $6.8 million decrease in nonaccrual loans and
a $1.7 million decrease in other real estate. Approximately $12.0 million or
64.4% of the net nonperforming assets at September 30, 2004 were loans
collateralized by real estate. As of September 30, 2004, the Company had
approximately $56.5 million or 9.9% of the loan portfolio concentrated in the
hospitality industry, compared to $70.8 million or 13.0% of the loan portfolio
at September 30, 2003. Part of the decrease was due to the sale of loans with
the remainder due to pay-downs and pay-offs. Management has been focusing its
attention on minimizing the Banks credit risk through more diversified
business development. The ratios of net nonperforming assets to total loans and other real
estate at September 30, 2004 and December 31, 2003 were 2.94% and 4.46%,
respectively. The ratios of net nonperforming assets to total assets were
1.86% 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 $3.2 million at
September 30, 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.
In connection with the SBA program, the Company may purchase a nonperforming
loan to limit interest expense and the Banks exposure. As a result, the
Companys nonperforming loans may increase during the period of time in which
any loan purchased is either restored to an accrual status or the Company files
a claim with the SBA for the guaranteed portion of the loan. 19




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##### Table of Contents



The following table presents information regarding nonperforming assets at
the periods indicated: As of
    
    As ofSeptember 30, 2004
    
    December 31, 2003(Dollars in thousands)Nonaccrual loans
    
    $
    18,644
    
    
    $
    25,442Accruing loans 90 days or more past due
    
    
    330
    
    
    
    264Other real estate
    
    
    890
    
    
    
    2,585Other assets repossessed
    
    
    
    
    
    
    Total non performing assets
    
    
    19,864
    
    
    
    28,291Less:Non performing loans guaranteed by the SBA, Ex-ImBank
and OCCGF
    
    
    (3,187
    )
    
    
    (3,323
    )Total net nonperforming assets
    
    $
    16,677
    
    
    $
    24,968Total nonperforming assets to total assets
    
    
    2.21
    %
    
    
    3.26
    %Total nonperforming assets to total loans and other real estate
    
    
    3.50
    %
    
    
    5.05
    %Net nonperforming assets to total assets (1)
    
    
    1.86
    %
    
    
    2.88
    %Net nonperforming assets to total loans and other real estate (1)
    
    
    2.94
    %
    
    
    4.46
    %
   (1)
    
    Net nonperforming assets are net of the loan portions guaranteed by the SBA, Ex-Im Bank and OCCGF. A loan is considered impaired, based on current information and events, if
management believes that the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement. All amounts due
according to the contractual terms means that both the contractual interest
payments and the contractual principal payments of a loan will be collected as
scheduled in the loan agreement. An insignificant delay or insignificant
shortfall in the amount of payment does not require a loan to be considered
impaired. If the measure of the impaired loan is less than the recorded
investment in the loan, a specific reserve is established for the shortfall as
a component of the Banks allowance for loan loss methodology. The Company
considers all nonaccrual loans to be impaired. The following is a summary of loans considered to be impaired: September 30,
    
    December 31,2004
    
    2003(Dollars in thousands)Impaired loans with no SFAS No. 114 valuation reserve
    
    $
    6,241
    
    
    $
    14,967Impaired loans with a SFAS No. 114 valuation reserve
    
    
    15,205
    
    
    
    10,475Total recorded investment in impaired loans
    
    $
    21,446
    
    
    $
    25,442Valuation allowance related to impaired loans
    
    $
    3,384
    
    
    $
    2,525
 The average recorded investment in impaired loans during the nine months
ended September 30, 2004 and the year ended December 31, 2003 was $21.7 million
and $21.5 million, respectively. Interest income on impaired loans of $10,000
was recognized for cash payments received during the nine months ended
September 30, 2004. Allowance for Loan Losses.At September 30, 2004 and December 31, 2003,
the allowance for loan losses was $10.8 million and $10.4 million,
respectively, or 1.92% and 1.88% of total loans, respectively. Net charge-offs
for the nine months ended September 30, 2004 were $668,000 compared with $5.1
million for the same period in 2003. The Company seeks recovery of charge-offs
through all available channels. 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 20




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##### Table of Contents



provisions charged against current earnings and is
reduced by net charge-offs. Loans are charged off when they are deemed to be
uncollectible. Recoveries are recorded when cash payments are received. The
Company employs a systematic methodology for determining the allowance for loan
losses that includes specific reserves on individual credits, historical loss
analysis, and trends in portfolio composition, concentrations,
nonperforming assets, delinquencies, economic conditions, and movements in loan quality grades. 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. 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. 21




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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 Three Months
    
    As of and for the Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003(Dollars in thousands)Average year-to-date total loans outstanding
    
    $
    559,703
    
    
    $
    557,385
    
    
    $
    559,430
    
    
    $
    550,794Total loans outstanding at end of period
    
    $
    566,119
    
    
    $
    558,111
    
    
    $
    566,119
    
    
    $
    558,111Allowance for loan losses at beginning of period
    
    $
    11,033
    
    
    $
    10,250
    
    
    $
    10,448
    
    
    $
    10,150Provision for loan losses
    
    
    215
    
    
    
    575
    
    
    
    1,065
    
    
    
    5,390Charge-offs:Commercial and industrial
    
    
    (606
    )
    
    
    (556
    )
    
    
    (1,732
    )
    
    
    (4,781
    )Real estate - mortgage
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (755
    )Real estate - construction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer and other
    
    
    (18
    )
    
    
    (27
    )
    
    
    (67
    )
    
    
    (129
    )Total charge-offs
    
    
    (624
    )
    
    
    (583
    )
    
    
    (1,799
    )
    
    
    (5,665
    )Recoveries:Commercial and industrial
    
    
    170
    
    
    
    236
    
    
    
    966
    
    
    
    537Real estate - mortgage
    
    
    1
    
    
    
    4
    
    
    
    103
    
    
    
    44Real estate - construction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer and other
    
    
    50
    
    
    
    1
    
    
    
    62
    
    
    
    27Total recoveries
    
    
    221
    
    
    
    241
    
    
    
    1,131
    
    
    
    608Net loan charge-offs
    
    
    (403
    )
    
    
    (342
    )
    
    
    (668
    )
    
    
    (5,057
    )Allowance for loan losses at end of period
    
    $
    10,845
    
    
    $
    10,483
    
    
    $
    10,845
    
    
    $
    10,483Ratio of allowance to end of period total loans
    
    
    1.92
    %
    
    
    1.88
    %
    
    
    1.92
    %
    
    
    1.88
    %Ratio of net loan charge-offs to end of period total loans
    
    
    0.07
    
    
    
    0.06
    
    
    
    0.12
    
    
    
    0.91Ratio of
allowance to end of period total nonperforming loans (1)
    
    
    57.16
    
    
    
    60.01
    
    
    
    57.16
    
    
    
    60.01Ratio of allowance to end of period net nonperforming loans (2)
    
    
    68.70
    
    
    
    80.40
    
    
    
    68.70
    
    
    
    80.40
   (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. 22




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##### Table of Contents



Securities.At September 30, 2004, the securities portfolio was $288.3
million, reflecting an increase of $26.0 million or 9.9% from
$262.3 million at
December 31, 2003 primarily due to an increase in purchases of portfolio
investments. The securities portfolio is primarily comprised of
mortgage-backed securities, collateralized mortgage obligations, tax-free
municipal bonds, and U.S. government agency securities. The securities
portfolio has historically been funded primarily by the liquidity created from
deposit growth and loan prepayments in excess of loan funding requirements.
However, as of September 30, 2004 approximately $35.1 million in short-term
borrowings obtained from the FHLB have been utilized to fund mortgage-backed
securities to increase interest-earning assets. Deposits. At September 30, 2004, total deposits were $741.9 million, up
$16.9 million or 2.3% from $724.9 million at December 31, 2003.
Noninterest-bearing demand deposits at September 30, 2004 decreased $685,000 or
0.4% to $168.4 million from $169.1 million at December 31, 2003. The Companys
ratios of noninterest-bearing demand deposits to total deposits at September
30, 2004 and December 31, 2003 were 22.7% and 23.3%, respectively.
Interest-bearing deposits at September 30, 2004 increased $17.6 million or 3.2%
to $573.5 million from $555.8 million at December 31, 2003. Other Borrowings.Other borrowings at September 30, 2004 were $60.9
million, up approximately $6.7 million 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 $35.1 million with weighted average fixed rates of 1.79%. These
advances will mature in the fourth quarter of 2004. It is anticipated
that the Company will renew these advances. 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 four years or less. Other short-term borrowings at September 30,
2004 consisted of approximately $775,000 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 theNine Months Ended
    
    Year EndedSeptember 30, 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
    
    $
    60,100
    
    
    $
    53,300Average during the period
    
    
    63,987
    
    
    
    59,667Maximum month-end balance during the period
    
    
    74,300
    
    
    
    69,300Interest rate at end of period
    
    
    3.13
    %
    
    
    3.15
    %Interest rate during the period
    
    
    2.84
    
    
    
    3.05Other short-term borrowings:At end of period
    
    $
    775
    
    
    $
    873Average during the period
    
    
    715
    
    
    
    587Maximum month-end balance during the period
    
    
    1,057
    
    
    
    873
 Liquidity.The Companys loan to deposit ratio at September 30, 2004 was
76.31%. As of this same date, the Company had commitments to fund loans in the
amount of $113.5 million. At September 30, 2004, the Company had stand-by
letters of credit of $4.3 million, of which, the Company has recorded a
liability of $17,524 at September 30, 2004, for the fair value of the Companys
potential obligations. 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. At July 1, 2004,
the Federal Home Loan Bank increased the amount of available collateral
eligible to secure advances and letters of credit. The Bank may now pledge
small business, 23




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##### Table of Contents



small farm, agriculture, and other real estate-based loans, in addition to 1-4
family and multi-family mortgage loans, up to an aggregate collateral value of
300% of Tier 1 capital. With its current level of collateral, the Company has
the ability to borrow an additional $368.3 million from the FHLB. Capital Resources.Shareholders equity at September 30, 2004 was $83.7
million compared to $78.4 million at December 31, 2003, an increase of
approximately $5.3 million or 6.8%.
 This was primarily the result of net
income for the nine months ended September 30, 2004 of $6.3 million, partially
offset by dividends declared for the nine months ended September 30, 2004 of
$1.3 million. The following table provides a comparison of the Companys and the Banks
leverage and risk-weighted capital ratios as of September 30, 2004 to the
minimum and well-capitalized regulatory standards: Minumum
    
    To Be WellRequired For
    
    Capitalized UnderCapital Adequacy
    
    Prompt Corrective
    
    Actual Ratio AtPurposes
    
    Action Provisions
    
    September 30, 2004The CompanyLeverage ratio
    
    
    4.00
    %(1)
    
    
    N/A
    %
    
    
    9.25
    %Tier 1 risk-based capital ratio
    
    
    4.00
    
    
    
    N/A
    
    
    
    13.10Risk-based capital ratio
    
    
    8.00
    
    
    
    N/A
    
    
    
    14.35The BankLeverage ratio
    
    
    4.00
    %(2)
    
    
    5.00
    %
    
    
    9.04
    %Tier 1 risk-based capital ratio
    
    
    4.00
    
    
    
    6.00
    
    
    
    12.79Risk-based capital ratio
    
    
    8.00
    
    
    
    10.00
    
    
    
    14.05
   (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 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 the 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 are reflected in the consolidated statement
of income under noninterest expense. 
 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. 24




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##### Table of Contents



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.
Based on this 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. A material weakness in internal control was discovered in June 2004
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 loan system. No procedure was in place to
insure all relevant loan data was entered into the Companys loan system.
Additionally, a reconciliation of the net deferred loan fees entered in 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 to the Audit Committee. As a result of the material weakness identified with respect to net
deferred loans fees, the Companys condensed consolidated financial statements
were restated. See Note 2 to the condensed consolidated financial statements. A material weakness in internal control was discovered in October 2004
related to late charges accrued on loans with no procedure in place to ensure
the collectability of such charges. The lack of such preventative and
detective controls allowed a $235,000 accounting error to occur and escape detection.
Subsequently, procedures were put in place to review outstanding accrued late
charges to assure collectability.
The weakness in internal control related to late charges accrued on loans did not
result in a material misstatement of the Companys consolidated financial statements. Changes in Internal Controls 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. 25




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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.Unregistered Sales of Equity Securities and Use of Proceeds Not applicable 
 Item 3.Defaults Upon Senior Securities Not applicable 
 Item 4.Submission of Matters to a Vote of Security Holders Not applicable 
 Item 5.Other Information Not applicable 
 Item 6Exhibits ExhibitNumber
    
    
    
    Identification of Exhibit11
    
    -
    
    Computation of Earnings Per Common
Share, included as Note (3) to the Condensed Consolidated Financial Statements on
Page 8 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.
 26




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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/ George M. LeeDate:  November 15, 2004
    
    George M. LeeChief Executive Office
(principal executive officer) Date:  November 15, 2004
    By:
    /s/ David C. ChoiDavid C. ChoiChief Financial Officer
(principal financial officer/
principal accounting officer) 27




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##### Table of Contents



EXHIBIT INDEX ExhibitNumber
    
    
    
    Identification of Exhibit11
    
    -
    
    Computation of Earnings Per Common
Share, included as Note (3) to the Condensed Consolidated Financial Statements on Page 8 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.
 28