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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 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
    
    76-0579161(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 9600 Bellaire Boulevard, Suite 252
Houston, Texas 77036
(Address of principal executive offices including zip code) (713) 776-3876
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes þ No o. Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes
o No þ. As of August 16, 2004, the number of outstanding shares of Common Stock,
par value $1.00 per share, was 7,181,437.




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TABLE OF CONTENTS  PART IItem 1. Condensed Consolidated Financial Statements.Item 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures about Market Risk.Item 4. Controls and ProceduresPART II OTHER INFORMATIONItem 1. Legal ProceedingsItem 2. Changes in Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6 (a) ExhibitsSIGNATURESEXHIBIT INDEXCertification of CEO pursuant to Rule 13a-14aCertification of CFO pursuant to Rule 13a-14aCertification of CEO pursuant to Section 906Certification of CFO pursuant to Section 906    Table of Contents  
 PART I FINANCIAL INFORMATION 
 Item 1.Condensed Consolidated Financial Statements. METROCORP BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited) June 30,
    
    December 31,2004
    
    2003(Restated-Note 2)ASSETSCash and due from
banks
    
    $
    24,881
    
    
    $
    26,347Federal funds sold and other
investments
    
    
    4,790
    
    
    
    10,580Total cash and cash equivalents
    
    
    29,671
    
    
    
    36,927Securities available-for-sale, at fair
value
    
    
    280,010
    
    
    
    257,064Other
investments
    
    
    5,576
    
    
    
    5,200Loans, held-for-investment (net of allowance for loan losses of $11,033 and $10,448,
respectively)
    
    
    540,238
    
    
    
    540,658Loans,
held-for-sale
    
    
    2,892
    
    
    
    6,030Accrued interest
receivable
    
    
    3,317
    
    
    
    3,452Premises and equipment,
net
    
    
    6,458
    
    
    
    5,674Customers liability on
acceptances
    
    
    1,407
    
    
    
    3,352Foreclosed assets,
net
    
    
    1,065
    
    
    
    2,585Other
assets
    
    
    8,486
    
    
    
    6,074Total assets
    
    $
    879,120
    
    
    $
    867,016LIABILITIES AND SHAREHOLDERS EQUITYDeposits:Noninterest-bearing
    
    $
    175,007
    
    
    $
    169,097Interest-bearing
    
    
    541,978
    
    
    
    555,844Total
deposits
    
    
    716,985
    
    
    
    724,941Other
borrowings
    
    
    74,851
    
    
    
    54,173Accrued interest
payable
    
    
    536
    
    
    
    567Acceptances
outstanding
    
    
    1,407
    
    
    
    3,352Other
liabilities
    
    
    6,343
    
    
    
    5,610Total
liabilities
    
    
    800,122
    
    
    
    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 7,175,563 and
7,156,689 shares are outstanding at June 30, 2004 and December 31, 2003,
respectively
    
    
    7,313
    
    
    
    7,307Additional paid-in
capital
    
    
    27,750
    
    
    
    27,620Retained
earnings
    
    
    47,915
    
    
    
    44,105Accumulated other comprehensive income
(loss)
    
    
    (2,752
    )
    
    
    671Treasury stock, at
cost
    
    
    (1,228
    )
    
    
    (1,330
    )Total shareholders
equity
    
    
    78,998
    
    
    
    78,373Total liabilities and shareholders
equity
    
    $
    879,120
    
    
    $
    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 Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003(Restated-Note 2)
    
    
    
    
    
    (Restated-Note 2)Interest income:Loans
    
    $
    8,281
    
    
    $
    8,784
    
    
    $
    16,459
    
    
    $
    17,481Securities:Taxable
    
    
    2,124
    
    
    
    1,680
    
    
    
    4,311
    
    
    
    3,592Tax-exempt
    
    
    232
    
    
    
    252
    
    
    
    466
    
    
    
    514Federal funds sold and other temporary
investments
    
    
    52
    
    
    
    98
    
    
    
    90
    
    
    
    153Total interest
income
    
    
    10,689
    
    
    
    10,814
    
    
    
    21,326
    
    
    
    21,740Interest expense:Time
deposits
    
    
    1,850
    
    
    
    2,342
    
    
    
    3,751
    
    
    
    4,703Demand and savings
deposits
    
    
    294
    
    
    
    373
    
    
    
    590
    
    
    
    756Other
borrowings
    
    
    440
    
    
    
    474
    
    
    
    876
    
    
    
    979Total interest
expense
    
    
    2,584
    
    
    
    3,189
    
    
    
    5,217
    
    
    
    6,438Net interest
income
    
    
    8,105
    
    
    
    7,625
    
    
    
    16,109
    
    
    
    15,302Provision for loan
losses
    
    
    300
    
    
    
    4,015
    
    
    
    850
    
    
    
    4,815Net interest income after provision for
loan
losses
    
    
    7,805
    
    
    
    3,610
    
    
    
    15,259
    
    
    
    10,487Noninterest income:Service
fees
    
    
    1,627
    
    
    
    1,610
    
    
    
    3,286
    
    
    
    3,152Other loan-related
fees
    
    
    169
    
    
    
    261
    
    
    
    377
    
    
    
    567Letters of credit commissions and
fees
    
    
    124
    
    
    
    131
    
    
    
    239
    
    
    
    265Gain on sale of securities,
net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    163Gain on sale of
loans, net
    
    
    514
    
    
    
    141
    
    
    
    569
    
    
    
    263Foreclosed assets,
net
    
    
    251
    
    
    
    151
    
    
    
    914
    
    
    
    152Other noninterest
income
    
    
    11
    
    
    
    27
    
    
    
    22
    
    
    
    54Total noninterest
income
    
    
    2,696
    
    
    
    2,321
    
    
    
    5,407
    
    
    
    4,616Noninterest expense:Salaries and employee
benefits
    
    
    3,699
    
    
    
    3,485
    
    
    
    7,513
    
    
    
    7,055Occupancy and
equipment
    
    
    1,430
    
    
    
    1,317
    
    
    
    2,830
    
    
    
    2,599Other noninterest
expense
    
    
    1,730
    
    
    
    3,081
    
    
    
    3,527
    
    
    
    4,480Total noninterest
expense
    
    
    6,859
    
    
    
    7,883
    
    
    
    13,870
    
    
    
    14,134Income (loss) before provision for
income
taxes
    
    
    3,642
    
    
    
    (1,952
    )
    
    
    6,796
    
    
    
    969Provision (benefit) for income
taxes
    
    
    1,135
    
    
    
    (693
    )
    
    
    2,126
    
    
    
    250Net income
(loss)
    
    $
    2,507
    
    
    $
    (1,259
    )
    
    $
    4,670
    
    
    $
    719Earnings (loss) per common share:Basic
    
    $
    0.35
    
    
    $
    (0.18
    )
    
    $
    0.65
    
    
    $
    0.10Diluted
    
    $
    0.35
    
    
    $
    (0.18
    )
    
    $
    0.64
    
    
    $
    0.10Weighted average shares outstanding:Basic
    
    
    7,172
    
    
    
    7,037
    
    
    
    7,167
    
    
    
    7,035Diluted
    
    
    7,262
    
    
    
    7,198
    
    
    
    7,258
    
    
    
    7,197Dividends 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 Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003(Restated-Note 2)
    
    
    
    
    
    (Restated-Note 2)Net income
(loss)
    
    $
    2,507
    
    
    $
    (1,259
    )
    
    $
    4,670
    
    
    $
    719Other comprehensive income (loss), net of tax:Unrealized gain (loss) on investment securities, net:Unrealized holding gain (loss) arising during the period
    
    
    (4,788
    )
    
    
    (208
    )
    
    
    (3,423
    )
    
    
    (466
    )Less: reclassification adjustment for gain included in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    106Other comprehensive income (loss)
    
    
    (4,788
    )
    
    
    (208
    )
    
    
    (3,423
    )
    
    
    (572
    )Total comprehensive income (loss)
    
    $
    (2,281
    )
    
    $
    (1,467
    )
    
    $
    1,247
    
    
    $
    147
 METROCORP BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
For the Six Months Ended June 30, 2004
(In thousands)
(Unaudited) Common Stock
    
    AdditionalPaid-in
    
    Retained
    
    AccumulatedOtherComprehensive
    
    TreasuryStockShares
    
    At par
    
    Capital
    
    Earnings
    
    Income (Loss)
    
    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
    
    
    13
    
    
    
    
    
    
    
    86
    
    
    
    
    
    
    
    
    
    
    
    102
    
    
    
    188Net
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,670
    
    
    
    
    
    
    
    
    
    
    
    4,670Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,423
    )
    
    
    
    
    
    
    (3,423
    )Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (860
    )
    
    
    
    
    
    
    
    
    
    
    (860
    )Balance at June 30, 2004
    
    
    7,176
    
    
    $
    7,313
    
    
    $
    27,750
    
    
    $
    47,915
    
    
    $
    (2,752
    )
    
    $
    (1,228
    )
    
    $
    78,998
 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 Six Months Ended June 30,2004
    
    2003(Restated-Note 2)Cash flows from operating activities:Net income
    
    $
    4,670
    
    
    $
    719Adjustments
to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    664
    
    
    
    706Provision for loan losses
    
    
    850
    
    
    
    4,815Lower of cost or market adjustment-loans held-for-sale
    
    
    
    
    
    
    1,325Gain on sale
of securities, net
    
    
    
    
    
    
    (163
    )Gain on sale of foreclosed assets
    
    
    (1,130
    )
    
    
    (194
    )Gain on sale
of loans, net
    
    
    (569
    )
    
    
    (263
    )Amortization of premiums and discounts on securities
    
    
    1,490
    
    
    
    1,316Amortization of net deferred loan fees
    
    
    (326
    )
    
    
    (214
    )Changes in:Loans held-for-sale
    
    
    3,486
    
    
    
    Accrued interest receivable
    
    
    135
    
    
    
    763Accrued interest payable
    
    
    (31
    )
    
    
    (104
    )Other liabilities
    
    
    733
    
    
    
    (885
    )Other assets
    
    
    (650
    )
    
    
    (1,344
    )Net cash provided by operating activities
    
    
    9,322
    
    
    
    6,477Cash flows from investing activities:Purchases of securities available-for-sale
    
    
    (83,851
    )
    
    
    (88,297
    )Proceeds from sales, maturities and principal paydowns of
securities available-for-sale
    
    
    53,854
    
    
    
    91,974Net change in loans
    
    
    (346
    )
    
    
    (35,682
    )Proceeds from sale of foreclosed assets
    
    
    3,113
    
    
    
    1,891Purchases of premises and equipment
    
    
    (1,448
    )
    
    
    (506
    )Net cash used in investing activities
    
    
    (28,678
    )
    
    
    (30,620
    )Cash flows from financing activities:Net change in:Deposits
    
    
    (7,956
    )
    
    
    25,131Other borrowings
    
    
    20,678
    
    
    
    674Proceeds from issuance of common stock
    
    
    50
    
    
    
    337Treasury stock sold
    
    
    188
    
    
    
    213Treasury stock purchased
    
    
    
    
    
    
    (212
    )Dividends paid
    
    
    (860
    )
    
    
    (844
    )Net cash provided by financing activities
    
    
    12,100
    
    
    
    25,299Net increase (decrease) in cash and cash equivalents
    
    
    (7,256
    )
    
    
    1,156Cash and
cash equivalents at beginning of period
    
    
    36,927
    
    
    
    38,186Cash and cash equivalents at end of period
    
    $
    29,671
    
    
    $
    39,342
 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 June 30, 2004, results of operations for
the three and six months ended June 30, 2004 and 2003, and cash flows for the
six months ended June 30, 2004 and 2003. Interim period results are not
necessarily indicative of results for a full-year period. Certain amounts applicable to the prior periods have been reclassified to
conform to the classifications currently used. Such reclassifications had no
effect on net income, total assets or shareholders equity. These financial statements and the notes thereto should be read in
conjunction with 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 Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003(Restated-Note 2)
    
    
    
    
    
    (Restated-Note 2)Net income (loss):As
reported
    
    $
    2,507
    
    
    $
    (1,259
    )
    
    $
    4,670
    
    
    $
    719Pro
forma
    
    $
    2,464
    
    
    $
    (1,298
    )
    
    $
    4,584
    
    
    $
    641Stock-based compensation cost, net of income taxes:As
reported
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Pro
forma
    
    $
    43
    
    
    $
    39
    
    
    $
    86
    
    
    $
    78Basic earnings (loss) per common share:As
reported
    
    $
    0.35
    
    
    $
    (0.18
    )
    
    $
    0.65
    
    
    $
    0.10Pro
forma
    
    $
    0.34
    
    
    $
    (0.18
    )
    
    $
    0.64
    
    
    $
    0.09Diluted earnings (loss) per common share:As
reported
    
    $
    0.35
    
    
    $
    (0.18
    )
    
    $
    0.64
    
    
    $
    0.10Pro
forma
    
    $
    0.34
    
    
    $
    (0.18
    )
    
    $
    0.63
    
    
    $
    0.09
 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 June 30,
2003 and for the three and six months ended June 30, 2003 to correct the
amortization of deferred loan fees, net of costs, to interest income. The
restatement decreased net loss by $95,000 for the three months ended June 30,
2003, increased net income by $164,000 for six months ended June 30, 2003,
increased retained earnings by $1.9 million and
$2.2 million as of June 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 recently discovered
that $4.0 million of net deferred loan fees were not being amortized to
interest income. These net deferred fees were not entered into the Companys
loan system, and therefore, amortization was not calculated each period.
Accordingly, the restatement reflects the amortization of these net deferred
fees. Additionally, in connection with the restatement of net deferred 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 six months ended June 30, 2003 and as of December 31, 2003 and the restated
amounts. For the Three Months
    
    As of and for the Six Months
    
    As of December 31,Ended June 30, 2003
    
    Ended June 30, 2003
    
    2003Previously
    
    
    
    
    
    Previously
    
    
    
    
    
    PreviouslyReported
    
    Restated
    
    Reported
    
    Restated
    
    Reported
    
    Restated(In thousand, 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
    
    
    
    
    
    
    
    
    
    $
    39,647
    
    
    $
    41,572
    
    
    
    41,942
    
    
    
    44,105Total shareholders equity
    
    
    
    
    
    
    
    
    
    
    73,938
    
    
    
    75,863
    
    
    
    76,210
    
    
    
    78,373Total liabilities and shareholders equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    864,773
    
    
    
    867,016Statement of Income (Loss):Interest income  loans
    
    $
    8,936
    
    
    $
    8,784
    
    
    
    17,798
    
    
    
    17,481Total interest income
    
    
    10,966
    
    
    
    10,814
    
    
    
    22,057
    
    
    
    21,740Net interest income
    
    
    7,777
    
    
    
    7,625
    
    
    
    15,619
    
    
    
    15,302Total noninterest expense
    
    
    8,028
    
    
    
    7,883
    
    
    
    14,548
    
    
    
    14,134Income (loss) before provision
for income taxes
    
    
    (2,096
    )
    
    
    (1,952
    )
    
    
    720
    
    
    
    969Provision for income taxes
    
    
    (742
    )
    
    
    (693
    )
    
    
    165
    
    
    
    250Net income (loss)
    
    
    (1,354
    )
    
    
    (1,259
    )
    
    
    555
    
    
    
    719Earnings (loss) per common share:Basic
    
    
    (0.19
    )
    
    
    (0.18
    )
    
    
    0.08
    
    
    
    0.10Diluted
    
    
    (0.19
    )
    
    
    (0.18
    )
    
    
    0.08
    
    
    
    0.10Cash flow statement:Cash flows
from operating activities
    
    
    
    
    
    
    
    
    
    $
    6,725
    
    
    $
    9,322Cash flows from investing activities
    
    
    
    
    
    
    
    
    
    
    (30,868
    )
    
    
    (28,678
    )
 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 Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003(Restated-Note 2)
    
    
    
    
    
    (Restated-Note 2)(In thousands, except per share amounts)Net income (loss) available to common
shareholders
    
    $
    2,507
    
    
    $
    (1,259
    )
    
    $
    4,670
    
    
    $
    719Weighted average common shares outstanding:Basic
    
    
    7,172
    
    
    
    7,037
    
    
    
    7,167
    
    
    
    7,035Shares issuable under stock option
plans
    
    
    90
    
    
    
    161
    
    
    
    91
    
    
    
    162Diluted
    
    
    7,262
    
    
    
    7,198
    
    
    
    7,258
    
    
    
    7,197Earnings (loss) per common share:Basic
    
    $
    0.35
    
    
    $
    (0.18
    )
    
    $
    0.65
    
    
    $
    0.10Diluted
    
    $
    0.35
    
    
    $
    (0.18
    )
    
    $
    0.64
    
    
    $
    0.10
 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 June 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
    
    $
    5,030
    
    
    $
    1
    
    
    $
    (155
    )
    
    $
    4,876
    
    
    
    5,061
    
    
    $
    
    
    
    $
    (8
    )
    
    $
    5,053Mortgage back securities
    
    
    240,780
    
    
    
    374
    
    
    
    (4,792
    )
    
    
    236,362
    
    
    
    18,925
    
    
    
    1,249
    
    
    
    
    
    
    
    20,174Municipal securities
    
    
    18,742
    
    
    
    692
    
    
    
    (1
    )
    
    
    19,433
    
    
    
    200,685
    
    
    
    
    
    
    
    (121
    )
    
    
    200,564Federal Reserve Bank stock
    
    
    846
    
    
    
    
    
    
    
    
    
    
    
    846
    
    
    
    846
    
    
    
    
    
    
    
    
    
    
    
    846Federal Home Loan Bank stock
    
    
    4,730
    
    
    
    
    
    
    
    
    
    
    
    4,730
    
    
    
    4,354
    
    
    
    
    
    
    
    
    
    
    
    4,354Other securities
    
    
    2,665
    
    
    
    4
    
    
    
    (23
    )
    
    
    2,646
    
    
    
    9,638
    
    
    
    26
    
    
    
    
    
    
    
    9,664Investments in mutual funds
    
    
    16,962
    
    
    
    40
    
    
    
    (309
    )
    
    
    16,693
    
    
    
    21,739
    
    
    
    
    
    
    
    (130
    )
    
    
    21,609Total securities available for sale
    
    $
    289,755
    
    
    $
    1,111
    
    
    $
    (5,280
    )
    
    $
    285,586
    
    
    $
    261,248
    
    
    $
    1,275
    
    
    $
    (259
    )
    
    $
    262,264
 The following table displays the gross unrealized losses and fair value of
investments as of June 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
    
    $
    4,853
    
    
    $
    (155
    )
    
    $
    
    
    
    $
    
    
    
    $
    4,853
    
    
    $
    (155
    )Mortgage back securities
    
    
    204,765
    
    
    
    (4,792
    )
    
    
    
    
    
    
    
    
    
    
    204,765
    
    
    
    (4,792
    )Municipal securities
    
    
    382
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    382
    
    
    
    (1
    )Federal Reserve Bank stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Federal Home Loan Bank stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other securities
    
    
    2,148
    
    
    
    (23
    )
    
    
    
    
    
    
    
    
    
    
    2,148
    
    
    
    (23
    )Investments in mutual funds
    
    
    14,281
    
    
    
    (309
    )
    
    
    
    
    
    
    
    
    
    
    14,281
    
    
    
    (309
    )Total securities available for sale
    
    $
    226,429
    
    
    $
    (5,280
    )
    
    $
    
    
    
    $
    
    
    
    $
    226,429
    
    
    $
    (5,280
    )
 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 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. 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 June 30, 2004, the maximum 9




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##### Table of Contents



potential amount of future payments was $5.6
million. The Company has recorded a liability of approximately $13,224 at June
30, 2004 and $2,542 at December 31, 2003. 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. 
 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 are not historical
facts are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements, which describe the Companys future plans, strategies and
expectations, are based on assumptions and involve a number of risks and uncertainties, many of which are beyond the
Companys control. The important factors that could cause actual results to differ materially from the results,
performance or achievements expressed or implied by the forward-looking statements include, without limitation:  
    
    Changes in interest rates and market prices, which could reduce the
Companys net interest margins, asset valuations and expense
expectations;  
    
    Changes in the levels of loan prepayments and the resulting effects
on the value of the Companys loan portfolio;
    
    Changes in local economic and business conditions which adversely
affect the ability of the Companys customers to transact profitable
business with the Company, including the ability of borrowers to repay
their loans according to their terms or a change in the value of the
related collateral;  
    
    Increased competition for deposits and loans adversely affecting
rates and terms;  
    
    The timing, impact and other uncertainties of the Companys ability
to enter new markets successfully and capitalize on growth
opportunities;  
    
    Increased credit risk in the Companys assets and increased
operating risk caused by a material change in commercial, consumer
and/or real estate loans as a percentage of the total loan portfolio;  
    
    The failure of assumptions underlying the establishment of and
provisions made to the allowance for loan losses;  
    
    Changes in the availability of funds resulting in increased costs
or reduced liquidity;  
    
    Increased asset levels and changes in the composition of assets and
the resulting impact on the Companys capital levels and regulatory
capital ratios; 10




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
    
    The Companys ability to acquire, operate and maintain cost
effective and efficient systems without incurring unexpectedly
difficult or expensive but necessary technological changes;  
    
    The loss of senior management or operating personnel and the
potential inability to hire qualified personnel at reasonable
compensation levels; and  
    
    Changes in statutes and government regulations or their
interpretations applicable to bank holding companies and our present
and future banking and other subsidiaries, including changes in tax
requirements and tax rates. The Company undertakes no obligation to publicly update or otherwise
revise any forward-looking statements, unless the securities laws require the
Company to do so. All written or oral forward-looking statements attributable
to the Company are expressly qualified in their entirety by these cautionary
statements. Restatement of Financial Statements The
Company restated its condensed consolidated financial statements as of June 30,
2003 and for the three and six months ended June 30, 2003 to correct the
amortization of deferred loan fees, net of costs, to interest income. The
restatement decreased net loss by $95,000 for the three months ended June 30,
2003, and increased net income by $164,000 for six months ended June 30, 2003,
and increased retained earnings by $1.9 million and
$2.2 million as of
June 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 recently discovered
that $4.0 million of net deferred loan fees were not being amortized to
interest income. These net deferred fees were not entered into the Companys
loan system, and therefore, amortization was not calculated each period.
Accordingly, the restatement reflects the amortization of these net deferred
fees. Additionally, in connection with the restatement 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 June 30, 2004, the Company had net income of
$2.5 million, up approximately $3.8 million compared with a net loss of $1.3
million for the same quarter in 2003. The Companys diluted earning per share
was $0.35 for the three months ended June 30, 2004, versus diluted loss per
share of $0.18 for the same quarter in 2003. This increase in net income and
diluted earnings per share was primarily the result of a $4.0 million
provision for loan losses for the three months ended June 30, 2003 compared
with a $300,000 provision for loan losses for the same period in 2004. Net income for the six months ended June 30, 2004 was $4.7 million, up
approximately $4.0 million from $719,000 for the same period in 2003. The
Companys diluted earnings per share for the six months ended June 30, 2004 was
$0.64, up $0.54 from $0.10 for the same period in 2003. This increase
in net income and diluted earnings per share was
primarily the result of a $4.8 million provision for loan losses
for the six months ended June 30, 2003 compared with an $850,000 provision for loan losses
for the same period in 2004. At June 30, 2004, total assets were $879.1 million, up approximately $12.1
million or 1.4% from $867.0 million at December 31, 2003. The increase was
primarily the result of new securities purchased during the period with
borrowed funds from the Federal Home Loan Bank. Investment securities at June
30, 2004 were $280.0 million, up approximately $22.9 million or 8.9% from
$257.1 million at December 31, 2003. Net loans, both held-for-investment and
held-for-sale at June 30, 2004, were $543.1 million, down approximately $3.6
million or 0.7% from $546.7 million at December 31, 2003. Total deposits at
June 30, 2004 were $717.0 million, down approximately $8.0 million or 1.1% from
$724.9 million at December 31, 2003. Other borrowings at June 30, 2004 were
$74.9 million, up approximately $20.7 million from $54.2 million at December
31, 200. The Companys return on average assets (ROAA) for the three months
ended June 30, 2004 and 2003 was 1.17% and (0.60%), respectively. The
Companys ROAA for the six months ended June 30, 2004 and 2003 was 1.09% and
0.17%, respectively. 11




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##### Table of Contents



Shareholders equity at June 30, 2004 was $79.0 million compared with
$78.4 million at December 31, 2003, an increase of approximately $625,000.
The Companys return on average shareholders equity
(ROAE) for the three months ended June 30, 2004 and 2003 was 12.94% and
(6.56%), respectively. The Companys ROAE for the six months ended June 30,
2004 and 2003 was 11.98% and 1.88%, respectively. Results of Operations Net Interest Income and the Net Interest Margin.For the three months
ended June 30, 2004, net interest income, before the provision for loan losses,
was $8.1 million, up approximately $480,000 or 6.3% from $7.6 million for the
same quarter in 2003. The increase was primarily due to lower interest expense
as a result of lower interest-bearing liability balances that was partially
offset by lower interest income resulting from lower yield of higher
interest-earning asset balances. Average interest-earning asset balances for
the three months ended June 30, 2004 were $821.0 million, up approximately $3.8
million or 0.5% from $817.3 million for the same quarter in 2003. The weighted
average yield on interest-earning assets for the three months ended June 30,
2004 was 5.24%, down 7 basis points from 5.31% for the same quarter in 2003.
Average interest-bearing liability balances for the three months ended June 30,
2004 were $601.2 million, down approximately $17.5 million or 2.8% from $618.7
million for the same quarter in 2003. The weighted average rate paid on
interest-bearing liabilities for the three months ended June 30, 2004 was
1.73%, down 34 basis points from 2.07% for the same quarter in 2003. For the six months ended June 30, 2004, net interest income, before the
provision for loan losses, was $16.1 million, up approximately $807,000 or 5.3%
from $15.3 million for the same period in 2003. The increase was primarily due
to lower interest expense as a result of lower interest-bearing liability
balances that was partially offset by lower interest income resulting from
lower yield of higher interest-earning asset balances. Average
interest-earning asset balances for the six months ended June 30, 2004 were
$821.5 million, up approximately $10.6 million or 1.3% from $810.9 million for
the same period in 2003. The weighted average yield on interest-earning assets
for the six months ended June 30, 2004 was 5.22%, down 19 basis points from
5.41% for the same period in 2003. Average interest-bearing liability balances
for the six months ended June 30, 2004 were $604.4 million, down approximately
$11.5 million or 1.9% from $615.9 million for the same period in 2003. The
weighted average rate paid on interest-bearing liabilities for the six months
ended June 30, 2004 was 1.74%, down 37 basis points from 2.11% for the same
period in 2003. The net interest margin for the three months ended June 30, 2004 was
3.97%, up 23 basis points from 3.74% for the same quarter in 2003 and was
primarily the result of a decrease of the cost of interest-bearing liabilities
of 34 basis points that was partially offset by a decrease in the yield on
interest-earning assets of 7 basis points. The net interest margin for the six
months ended June 30, 2004 was 3.94%, up 13 basis points from 3.81% for the
same period in 2003 and was primarily the result of a decrease of the cost of
interest-bearing liabilities of 37 basis points that was partially offset by a decrease in
the yield on interest-earning assets of 19 basis points. The Companys net
interest margin may experience further pressure depending on the future
interest rate environment. Total Interest Income.Total interest income for the three months ended
June 30, 2004 was $10.7 million, down approximately $125,000 or 1.2% from $10.8
million for the same quarter in 2003. Total interest income for the six months
ended June 30, 2004 was $21.3 million, down approximately $414,000 or 1.9% from
$21.7 million for the same period in 2003. The lower interest income for both
periods in 2004, compared with 2003, was primarily the result of lower yields
on interest-earning assets that was partially offset by increases in average
interest-earning assets. Interest Income from Loans.Interest income from loans for the three
months ended June 30, 2004 was $8.3 million, down approximately $503,000 or
5.7% from $8.8 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 June 30, 2004 were $555.3 million compared to average total loans
for the same quarter in 2003 of $553.0 million, an increase of approximately
$2.3 million or 0.4%. For the three months ended June 30, 2004, the average
yield on total loans was 6.00%, compared to 6.37% for the same quarter in 2003,
a decrease of 37 basis points. Approximately $470.8 million or 87.9% 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 movement. At June 30, 2004, the average yield 12




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##### Table of Contents



on the total loan portfolio was approximately 144 basis points above the prime
rate, which was supported by variable rate loans with interest rate floors that
consisted of approximately $367.9 million or 68.7% of the total loan portfolio.
These loans carried a weighted average interest rate of 5.70% at June 30, 2004
compared to 61.6% of the total loan portfolio with a weighted average interest
rate of 6.16% at June 30, 2003. Future prime rate increases will not
immediately impact the entire loan portfolio because of the interest rate
floors. The prime rate may have to increase
several times for some loans to begin re-pricing because the prime-based
pricing may continue to be less than the floor rate. Interest income from loans for the six months ended June 30, 2004 was
$16.5 million, down approximately $1.0 million or 5.9% from $17.5 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 six months ended June 30, 2004 were
$559.3 million compared to average total loans for the same period in 2003 of
$547.4 million, an increase of approximately $11.8 million or 2.2%. For the
six months ended June 30, 2004, the average yield on total loans was 5.92%,
compared to 6.44% for the same period in 2003, a decrease of 52 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 June 30, 2004 was $2.4 million, up approximately
$378,000 or 18.6% 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 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. New purchase yields have
also been generally higher in 2004. Average total investments for the three
months ended June 30, 2004, were $265.7 million compared to average total
investments for the same quarter in 2003 of $264.3 million, and increase of
approximately $1.5 million or 0.6%. For the three months ended June 30, 2004,
the average yield on investments was 3.64% compared to 3.08% for the same
quarter in 2003, an increase of 56 basis points. Interest income from investments for the six months ended June 30, 2004
was $4.9 million, up approximately $608,000 or 14.3% compared to $4.3 million
for the same period in 2003, primarily due to the same reason discussed above.
Average total investments for the six months ended June 30, 2004, were $262.2
million compared to average total investments for the same period in 2003 of
$263.4 million, a decrease of approximately $1.2 million or 0.5%. For the six
months ended June 30, 2004, the average yield on investments was 3.73% compared
to 3.26% for the same period in 2003, an increase of 47 basis points. Total Interest Expense.Total interest expense for the three months ended
June 30, 2004 was $2.6 million, down approximately $605,000 or 19.0% compared
to $3.2 million for the same quarter in 2003. Total interest expense for the
six months ended June 30, 2004 was $5.2 million, down approximately $1.2
million or 19.0% from $6.4 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 decreased average interest-bearing
liabilities. Interest Expense on Deposits.Interest paid on interest-bearing deposits
for the three months ended June 30, 2004 was $2.1 million, down approximately
$571,000 or 21.0% compared to $2.7 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 June 30, 2004 were $537.6 million compared to average
interest-bearing deposits for the same quarter in 2003 of $557.1 million, a
decrease of $19.5 million or 3.5%. The average interest rate paid on
interest-bearing deposits for the three months ended June 30, 2004 was 1.60%
compared to 1.95% for the same quarter in 2003, a decrease of 35 basis points. Interest paid on interest-bearing deposits for the six months ended June
30, 2004 was $4.3 million, down approximately $1.1 million or 20.5% compared to
$5.5 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 six months ended
June 30, 2004 were $542.3 million compared to average interest-bearing deposits
for the same period in 2003 of $551.0 million, a decrease of $8.7 million or
1.6%. The average interest rate paid on interest-bearing deposits for the six
months ended June 30, 2004 was 1.61% compared to 2.00% for the same period in
2003, a decrease of 39 basis points. Interest Expense on Other Borrowed Funds.Interest paid on other
borrowed funds for the three months ended June 30, 2004 was $440,000, down
approximately $34,000 compared to $474,000 for the same period in 2003 and was
primarily due to lower interest rates paid for borrowed funds that were
partially offset by higher borrowed 13




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##### Table of Contents



funds balances. Average borrowed funds for
the three months ended June 30, 2004 were $63.6 million compared to average
borrowed funds for the same quarter in 2003 of $61.6 million, an increase of
$2.0 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 June 30, 2004 was 2.78%, compared to
3.09% for the same quarter in 2003, a decrease of 31 basis points. Interest paid on other borrowed funds for the six months ended June 30,
2004 was $876,000, down approximately $103,000 compared to $979,000 million for
the same period in 2003 and was primarily due to lower borrowed funds balances
and lower interest rates paid for borrowed funds.Average borrowed funds for
the six
months ended June 30, 2004 were $62.2 million compared to average borrowed
funds for the same period in 2003 of $64.9 million, a decrease of $2.8 million.
The average interest rate paid on borrowed funds for the six months ended June
30, 2004 was 2.83%, compared to 3.04% 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 June 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
    
    $
    555,274
    
    
    $
    8,281
    
    
    
    6.00
    %
    
    $
    553,020
    
    
    $
    8,784
    
    
    
    6.37
    %Taxable securities
    
    
    231,205
    
    
    
    2,124
    
    
    
    3.69
    
    
    
    216,970
    
    
    
    1,680
    
    
    
    3.11Tax-exempt securities
    
    
    18,742
    
    
    
    232
    
    
    
    4.98
    
    
    
    20,301
    
    
    
    252
    
    
    
    4.98Federal funds sold and other investments
    
    
    15,794
    
    
    
    52
    
    
    
    1.32
    
    
    
    26,986
    
    
    
    98
    
    
    
    1.46Total interest-earning assets
    
    
    821,015
    
    
    
    10,689
    
    
    
    5.24
    %
    
    
    817,277
    
    
    
    10,814
    
    
    
    5.31
    %Less allowance for loan losses
    
    
    (10,872
    )
    
    
    
    
    
    
    
    
    
    
    (10,745
    )Total interest-earning assets, net of
allowance for loan losses
    
    
    810,143
    
    
    
    
    
    
    
    
    
    
    
    806,532Noninterest-earning assets
    
    
    48,715
    
    
    
    
    
    
    
    
    
    
    
    44,255Total assets
    
    $
    858,858
    
    
    
    
    
    
    
    
    
    
    $
    850,787Liabilities and shareholders equityInterest-bearing liabilities:Interest-bearing demand deposits
    
    $
    75,915
    
    
    $
    119
    
    
    
    0.63
    %
    
    $
    72,524
    
    
    $
    129
    
    
    
    0.71
    %Savings and money market accounts
    
    
    106,850
    
    
    
    175
    
    
    
    0.66
    
    
    
    108,262
    
    
    
    244
    
    
    
    0.90Time deposits
    
    
    354,846
    
    
    
    1,850
    
    
    
    2.10
    
    
    
    376,333
    
    
    
    2,342
    
    
    
    2.50Other borrowings
    
    
    63,589
    
    
    
    440
    
    
    
    2.78
    
    
    
    61,575
    
    
    
    474
    
    
    
    3.09Total interest-bearing liabilities
    
    
    601,200
    
    
    
    2,584
    
    
    
    1.73
    %
    
    
    618,694
    
    
    
    3,189
    
    
    
    2.07
    %Noninterest-bearing liabilities:Noninterest-bearing demand deposits
    
    
    172,368
    
    
    
    
    
    
    
    
    
    
    
    146,362Other liabilities
    
    
    7,354
    
    
    
    
    
    
    
    
    
    
    
    8,503Total liabilities
    
    
    780,922
    
    
    
    
    
    
    
    
    
    
    
    773,559Shareholders equity
    
    
    77,936
    
    
    
    
    
    
    
    
    
    
    
    77,228Total liabilities and shareholders equity
    
    $
    858,858
    
    
    
    
    
    
    
    
    
    
    $
    850,787Net interest income
    
    
    
    
    
    $
    8,105
    
    
    
    
    
    
    
    
    
    
    $
    7,625Net interest spread
    
    
    
    
    
    
    
    
    
    
    3.51
    %
    
    
    
    
    
    
    
    
    
    
    3.24
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.97
    %
    
    
    
    
    
    
    
    
    
    
    3.74
    %
   (1)
    
    Annualized. 15




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##### Table of Contents



For The Six Months Ended June 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
    
    $
    559,292
    
    
    $
    16,459
    
    
    
    5.92
    %
    
    $
    547,444
    
    
    $
    17,481
    
    
    
    6.44
    %Taxable securities
    
    
    230,933
    
    
    
    4,311
    
    
    
    3.75
    
    
    
    222,877
    
    
    
    3,592
    
    
    
    3.25Tax-exempt securities
    
    
    18,789
    
    
    
    466
    
    
    
    4.99
    
    
    
    20,731
    
    
    
    514
    
    
    
    5.00Federal funds sold and other investments
    
    
    12,484
    
    
    
    90
    
    
    
    1.45
    
    
    
    19,836
    
    
    
    153
    
    
    
    1.56Total interest-earning assets
    
    
    821,498
    
    
    
    21,326
    
    
    
    5.22
    %
    
    
    810,888
    
    
    
    21,740
    
    
    
    5.41
    %Less allowance for loan losses
    
    
    (10,763
    )
    
    
    
    
    
    
    
    
    
    
    (10,607
    )Total interest-earning assets, net of
allowance for loan losses
    
    
    810,735
    
    
    
    
    
    
    
    
    
    
    
    800,281Noninterest-earning assets
    
    
    47,972
    
    
    
    
    
    
    
    
    
    
    
    43,820Total assets
    
    $
    858,707
    
    
    
    
    
    
    
    
    
    
    $
    844,101Liabilities and shareholders equityInterest-bearing liabilities:Interest-bearing demand deposits
    
    $
    74,028
    
    
    $
    218
    
    
    
    0.59
    %
    
    $
    73,399
    
    
    $
    263
    
    
    
    0.72
    %Savings and money market accounts
    
    
    112,212
    
    
    
    372
    
    
    
    0.67
    
    
    
    108,222
    
    
    
    493
    
    
    
    0.92Time deposits
    
    
    356,020
    
    
    
    3,751
    
    
    
    2.12
    
    
    
    369,343
    
    
    
    4,703
    
    
    
    2.57Other borrowings
    
    
    62,152
    
    
    
    876
    
    
    
    2.83
    
    
    
    64,946
    
    
    
    979
    
    
    
    3.04Total interest-bearing liabilities
    
    
    604,412
    
    
    
    5,217
    
    
    
    1.74
    %
    
    
    615,910
    
    
    
    6,438
    
    
    
    2.11
    %Noninterest-bearing liabilities:Noninterest-bearing demand deposits
    
    
    169,171
    
    
    
    
    
    
    
    
    
    
    
    143,862Other liabilities
    
    
    6,723
    
    
    
    
    
    
    
    
    
    
    
    7,531Total liabilities
    
    
    780,306
    
    
    
    
    
    
    
    
    
    
    
    767,303Shareholders equity
    
    
    78,401
    
    
    
    
    
    
    
    
    
    
    
    76,798Total liabilities and shareholders equity
    
    $
    858,707
    
    
    
    
    
    
    
    
    
    
    $
    844,101Net interest income
    
    
    
    
    
    $
    16,109
    
    
    
    
    
    
    
    
    
    
    $
    15,302Net interest spread
    
    
    
    
    
    
    
    
    
    
    3.48
    %
    
    
    
    
    
    
    
    
    
    
    3.30
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.94
    %
    
    
    
    
    
    
    
    
    
    
    3.81
    %
   (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 distinguishes between changes in
outstanding balances and changes in interest rates for the three and six months
ended June 30, 2004 compared with the three and six months ended June 30, 2003.
For purposes of this table, changes attributable to both rate and volume have
been allocated to each accordingly. Three Months Ended June 30,2004 vs 2003Increase(Decrease)Due toVolume
    
    Rate
    
    Total(Dollars in thousands)Interest-earning assets:Loans
    
    $
    12
    
    
    $
    (515
    )
    
    $
    (503
    )Taxable securities
    
    
    105
    
    
    
    339
    
    
    
    444Tax-exempt securities
    
    
    (20
    )
    
    
    
    
    
    
    (20
    )Federal funds sold and other investments
    
    
    (41
    )
    
    
    (5
    )
    
    
    (46
    )Total increase (decrease) in interest income
    
    
    56
    
    
    
    (181
    )
    
    
    (125
    )Interest-bearing liabilities:Interest-bearing demand deposits
    
    
    6
    
    
    
    (16
    )
    
    
    (10
    )Savings and money market accounts
    
    
    (4
    )
    
    
    (65
    )
    
    
    (69
    )Time deposits
    
    
    (140
    )
    
    
    (352
    )
    
    
    (492
    )Other borrowings
    
    
    14
    
    
    
    (48
    )
    
    
    (34
    )Total decrease in interest expense
    
    
    (124
    )
    
    
    (481
    )
    
    
    (605
    )Total increase in net interest income
    
    $
    180
    
    
    $
    300
    
    
    $
    480Six Months Ended June 30,2004 vs 2003Increase(Decrease)Due toVolume
    
    Rate
    
    Total(Dollars in thousands)Interest-earning assets:Loans
    
    $
    428
    
    
    $
    (1,450
    )
    
    $
    (1,022
    )Taxable securities
    
    
    140
    
    
    
    579
    
    
    
    719Tax-exempt securities
    
    
    (47
    )
    
    
    (1
    )
    
    
    (48
    )Federal funds sold and other investments
    
    
    (56
    )
    
    
    (7
    )
    
    
    (63
    )Total increase (decrease) in interest income
    
    
    465
    
    
    
    (879
    )
    
    
    (414
    )Interest-bearing liabilities:Interest-bearing demand deposits
    
    
    3
    
    
    
    (48
    )
    
    
    (45
    )Savings and money market accounts
    
    
    20
    
    
    
    (141
    )
    
    
    (121
    )Time deposits
    
    
    (157
    )
    
    
    (795
    )
    
    
    (952
    )Other borrowings
    
    
    (40
    )
    
    
    (63
    )
    
    
    (103
    )Total decrease in interest expense
    
    
    (174
    )
    
    
    (1,047
    )
    
    
    (1,221
    )Total increase in net interest income
    
    $
    639
    
    
    $
    168
    
    
    $
    807
 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 June 30,
2004 was $300,000 down approximately $3.7 million compared to $4.0 million for
the same quarter in 2003. This higher provision during the three months ended
June 30, 2003 was primarily due to deterioration in the hospitality loan
portfolio. 17




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##### Table of Contents



The provision for loan losses for the six months ended June 30, 2004 was
$850,000, down $4.0 million compared to $4.8 million for the same period in
2003. The higher provision during the six months ended June 30, 2003 was
primarily due to deterioration in the hospitality loan portfolio during 2003.
The allowance for loan losses as a percent of total loans (net of unearned
interest, net deferred fees, and discounts) at June 30, 2004 and December 31,
2003 was 1.99% and 1.84%, respectively. Noninterest Income.Noninterest income for the three months ended June
30, 2004 was $2.7 million, up approximately $375,000 or 16.2% compared to $2.3
million for the same period in 2003. Service fees for the three months ended
June 30, 2004 were $1.6 million, up approximately $17,000 compared to the same
period in 2003 primarily due to increase in net non-sufficient funds (NSF)
charges. Gain on sale of loans for the three months ended June 30, 2004 was
$514,000, up approximately $373,000 compared to $141,000 for the same period in
2003 due to the sale of hospitality loans held for sale. All other categories
of noninterest income for the three months ended June 30, 2004 were
approximately $555,000, down approximately $15,000 compared to $570,000 for the
same period in 2003 primarily due to a decrease in other loan-related fees,
letter of credit commissions and fees, and other noninterest income partially
offset by a gain on the sale of foreclosed assets. Noninterest income for the six months ended June 30, 2004 was $5.4
million, up approximately $791,000 or 17.1% compared to $4.6 million for the
same period in 2003. Service fees for the six months ended June 30, 2004 were
$3.3 million, up approximately $134,000 compared to $3.2 million for the same
period in 2003 primarily due to an increase in net NSF charges. Gain on sale
of loans for the six months ended June 30, 2003 was $569,000, up $306,000
compared to $263,000 for the same period in 2003. Foreclosed assets were
$914,000, up $762,000 compared to $152,000 for the same period in 2003
primarily due to a $900,000 gain from the sale of the other real estate. All
other categories of noninterest income for the six months ended June 30, 2004
were $638,000, down $411,000 compared to $1.0 million for the same period in
2003 primarily due to a decrease in other loan-related fees, letter of credit
commissions and fees, and other noninterest income. Noninterest Expense.Total noninterest expense for the three months ended
June 30, 2004 was $6.9 million, down approximately $1.0 million compared to
$7.9 million for the same quarter in 2003 primarily due to a $1.3 million
market adjustment on the loans held-for-sale in the prior year. All other
categories of noninterest expense including salaries and employee benefits, and
occupancy and equipment, for the second quarter in 2004 increased $327,000
compared to the same quarter in 2003. Noninterest expense for the six months ended June 30, 2004 was $13.9
million, down $264,000 compared to $14.1 million for the same period in 2003.
The decrease of total noninterest expense compared to the same period in the
prior year was primarily due to the $1.3 million market adjustment on the loans
held-for-sale in the prior year. Salaries and employee benefit, occupancy and
equipment for the six months ended June 30, 2004 increased $689,000 compared to
the same period in the prior year. Salaries and employee benefits for the six months ended June 30, 2004 were
$7.5 million, up approximately $458,000 compared to $7.1 million for the same
period in 2003 primarily due to annual salary increases and higher incentive
bonuses. At June 30, 2004, the Company had 286 full-time equivalent (FTE)
employees compared to 291 FTE employees at June 30, 2003, a decrease of 5 FTEs.
Although the number of FTE dropped, the increase of officer level employees
impacted the salaries and employee benefits for the six months ended June 30,
2004. Occupancy and equipment expense for the six months ended June 30, 2004,
was $2.8 million, up approximately $231,000 compared to $2.6 million for the
same period in 2003 primarily due to increased equipment service contracts and
higher contract security expenses. All other noninterest expense categories
for the six months ended June 30, 2004 were $3.5 million, down $953,000
compared to $4.5 million in other noninterest expense for the same period in
2003, primarily due to the market adjustment on the loans held-for-sale in the
prior year. The Companys efficiency ratio for the three months ended June 30, 2004
was 63.50%, a decrease from 79.26% for the same quarter in 2003 and was
primarily due to higher net interest income after the provision for loan losses
and lower noninterest expense. The Companys efficiency ratio for the six
months ended June 30, 2004 was
64.46%, a decrease from 70.96% for the same period in 2003. Income Taxes.Income tax expense for the six months ended June 30, 2004
was $2.1 million, compared with $250,000 for the same period in 2003. The
Companys effective tax rate was 31.28% and 25.80% for the six 18




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##### Table of Contents



months ended
June 30, 2004 and 2003, respectively. The effective tax rate is affected by
the amount of tax-exempt income in relation to taxable income. Financial Condition Loan Portfolio.Net loans at June 30, 2004 were $543.1 million, down $3.6
million or 0.7% from $546.7 million at December 31, 2003, primarily due to
prepayments and scheduled repayments that has exceeded new loan growth.
Compared to the loan level at December 31, 2003, during the six months ended
June 30, 2004 commercial and industrial loans decreased $84,000 and real estate
loans decreased $2.4 million. At June 30, 2004 and December 31, 2003, the
ratio of total loans to total deposits was 77.3% and 76.9%, respectively. At
the same dates, total loans represented 63.0% and 64.3% of total assets,
respectively. The following table summarizes the net loan portfolio of the Company by
type of loan: As of June 30, 2004
    
    As of December 31, 2003Amount
    
    Percent
    
    Amount
    
    Percent(Dollars in thousands)Commercial and industrial
    
    $
    332,396
    
    
    
    59.68
    %
    
    $
    332,480
    
    
    
    59.36
    %Real estate mortgage:Residential
    
    
    13,008
    
    
    
    2.34
    
    
    
    14,315
    
    
    
    2.56Commercial
    
    
    174,621
    
    
    
    31.35
    
    
    
    178,290
    
    
    
    31.83Real estate construction:Residential
    
    
    12,311
    
    
    
    2.21
    
    
    
    12,652
    
    
    
    2.26Commercial
    
    
    14,804
    
    
    
    2.65
    
    
    
    11,906
    
    
    
    2.12Consumer and other
    
    
    9,833
    
    
    
    1.77
    
    
    
    10,447
    
    
    
    1.87Gross loans
    
    
    556,973
    
    
    
    100.00
    %
    
    
    560,090
    
    
    
    100.00
    %Less: unearned discounts, interest and net deferred fees
    
    
    (2,810
    )
    
    
    
    
    
    
    (2,954
    )Total loans
    
    
    554,163
    
    
    
    
    
    
    
    557,136Less: allowance for loan losses
    
    
    (11,033
    )
    
    
    
    
    
    
    (10,448
    )Loans, net
    
    $
    543,130
    
    
    
    
    
    
    $
    546,688
 Nonperforming Assets.Net nonperforming assets at June 30, 2004 were
$18.8 million compared to $25.0 million at December 31, 2003, a decrease of
$6.2 million, and primarily reflected a $4.9 million
decrease in nonaccrual loans and a $1.5 million decrease in other
real estate. Approximately $15.0 million or 72.8% of the net nonperforming
assets at June 30, 2004 were loans collateralized by real estate. While
further deterioration in the loan portfolio is possible, management is
continuing its risk assessment and resolution program. In addition, management
is focusing its attention on minimizing the Banks credit risk through more
diversified business development. As of June 30, 2004, the Company had
approximately $59.6 million or 10.7% of the loan portfolio concentrated in the
hospitality industry, compared to $86.2 million or 15.0% of the loan portfolio
at June 30, 2003. The ratios of net nonperforming assets to total loans and other real
estate at June 30, 2004 and December 31, 2003 were 3.38% and 4.46%,
respectively. The ratios of net nonperforming assets to total assets were
2.14% 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 $3.0 million at June
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.
Under the terms of the SBA program, the Company is required to repurchase any
loan that may become nonperforming. As a result of this requirement, the
Companys nonperforming
loans may increase during the period of time in which any loan repurchased
is either restored to an accrual status or the Company files a claim with the
SBA for the guaranteed portion of the loan. 19




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##### Table of Contents



The following table presents information regarding nonperforming assets at
the periods indicated: As of
    
    As ofJune 30, 2004
    
    December 31, 2003(Dollars in thousands)Nonaccrual loans
    
    $
    20,591
    
    
    $
    25,442Accruing loans 90 days or more past due
    
    
    149
    
    
    
    264Other real estate
    
    
    1,065
    
    
    
    2,585Other assets repossessed
    
    
    
    
    
    
    Total nonperforming assets
    
    
    21,805
    
    
    
    28,291Less:Nonperforming loans guaranteed by the SBA, Ex-Im Bank
and OCCGF
    
    
    (3,024
    )
    
    
    (3,323
    )Total net nonperforming assets
    
    $
    18,781
    
    
    $
    24,968Total nonperforming assets to total assets
    
    
    2.48
    %
    
    
    3.26
    %Total nonperforming assets to total loans and other real estate
    
    
    3.93
    
    
    
    5.05Net nonperforming assets to total assets (1)
    
    
    2.14
    
    
    
    2.88Net nonperforming assets to total loans and other real estate (1)
    
    
    3.38
    
    
    
    4.46
   (1)
    
    Net nonperforming assets are net of the loan portions guaranteed by the SBA, Ex-Im Bank and
OCCGF. Allowance for Loan Losses.At June 30, 2004 and December 31, 2003, the
allowance for loan losses was $11.0 million and $10.4 million, respectively, or
1.99% and 1.88% of total loans, respectively. The allowance was impacted by a
decrease in non-performing assets and a decrease in charge-offs. Net
charge-offs for the six months ended June 30, 2004 were $265,000 compared with
$4.7 million for the same period in 2003 of which $330,000 were commercial and
industrial loans. The Company had net recoveries, for the same six months
period, of approximately $102,000 in real estate loans. 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 provisions charged
against current earnings and is reduced by net charge-offs. Loans are charged
off when they are deemed to be uncollectable. Recoveries are recorded when
cash payments are received. The Company employs a systematic methodology for
determining the allowance for loan losses that includes a review of the changes
in the quality of the loan portfolio as determined by loan quality grades
assigned to each loan. The loan quality grades are administered by ongoing
reviews by loan officers, credit administration and the loan review department.
This includes an assessment of known problem loans, potential problem loans,
and other loans that exhibit weaknesses or deterioration. Specific review
factors include, but are not limited to, the general economic environment in
the Companys markets as well as the national economy, particularly the real
estate markets, value of the collateral securing loans, payment history, cash
flow analysis of borrowers and other historical information. After the
aforementioned assessment of the loan portfolio, the general economic
environment and other relevant factors, changes are implemented in the
allowance for loan losses. While this methodology is consistently followed,
future changes in circumstances, economic conditions or other factors could
cause management to reevaluate the level of the allowance for loan losses. 20




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##### Table of Contents



The following table presents an analysis of the allowance for loan losses
and other related data: As of and for the
    
    As of and for theThree Months Ended
    
    Three Months EndedJune 30, 2004
    
    June 30, 2003(Dollars in thousands)Average year-to-date total loans outstanding
    
    $
    555,274
    
    
    $
    553,020Total loans outstanding at end of period
    
    $
    554,163
    
    
    $
    558,313Allowance for loan losses at beginning of period
    
    $
    10,850
    
    
    $
    10,694Provision for loan losses
    
    
    300
    
    
    
    4,015Charge-offs:Commercial and industrial
    
    
    (784
    )
    
    
    (3,787
    )Real estate  mortgage
    
    
    
    
    
    
    (718
    )Real estate  construction
    
    
    
    
    
    
    Consumer and other
    
    
    (23
    )
    
    
    (46
    )Total charge-offs
    
    
    (807
    )
    
    
    (4,551
    )Recoveries:Commercial and industrial
    
    
    683
    
    
    
    79Real estate  mortgage
    
    
    5
    
    
    
    Real estate  construction
    
    
    
    
    
    
    Consumer and other
    
    
    2
    
    
    
    13Total recoveries
    
    
    690
    
    
    
    92Net loan charge-offs
    
    
    (117
    )
    
    
    (4,459
    )Allowance for loan losses at end of period
    
    $
    11,033
    
    
    $
    10,250Ratio of allowance to end of period total loans
    
    
    1.99
    %
    
    
    1.84
    %Ratio of net loan charge-offs to end of period total loans
    
    
    0.02
    
    
    
    0.80Ratio of allowance to end of period total nonperforming loans (1)
    
    
    53.20
    
    
    
    43.25Ratio of allowance to end of period net nonperforming loans (2)
    
    
    62.28
    
    
    
    54.47
   (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. 21




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##### Table of Contents



As of and for the
    
    As of and for theSix Months Ended
    
    Six Months EndedJune 30, 2004
    
    June 30, 2003(Dollars in thousands)Average year-to-date total loans outstanding
    
    $
    559,292
    
    
    $
    547,444Total loans outstanding at end of period
    
    $
    554,163
    
    
    $
    558,313Allowance for loan losses at beginning of period
    
    $
    10,448
    
    
    $
    10,150Provision for loan losses
    
    
    850
    
    
    
    4,815Charge-offs:Commercial and industrial
    
    
    (1,126
    )
    
    
    (4,225
    )Real estate  mortgage
    
    
    
    
    
    
    (755
    )Real estate  construction
    
    
    
    
    
    
    Consumer and other
    
    
    (49
    )
    
    
    (102
    )Total charge-offs
    
    
    (1,175
    )
    
    
    (5,082
    )Recoveries:Commercial and industrial
    
    
    796
    
    
    
    301Real estate  mortgage
    
    
    102
    
    
    
    40Real estate  construction
    
    
    
    
    
    
    Consumer and other
    
    
    12
    
    
    
    26Total recoveries
    
    
    910
    
    
    
    367Net loan charge-offs
    
    
    (265
    )
    
    
    (4,715
    )Allowance for loan losses at end of period
    
    $
    11,033
    
    
    $
    10,250Ratio of allowance to end of period total loans
    
    
    1.99
    %
    
    
    1.84
    %Ratio of net loan charge-offs to end of period total loans
    
    
    0.05
    
    
    
    0.84Ratio of allowance to end of period total nonperforming loans (1)
    
    
    53.20
    
    
    
    43.25Ratio of allowance to end of period net nonperforming loans (2)
    
    
    62.28
    
    
    
    54.47
   (1)
    
    Total nonperforming loans are nonaccrual loans plus loans over 90 days past due.(2)
    
    Net nonperforming loans are nonaccrual loans plus loans over 90 days past due, and less loan portion
guaranteed by the SBA, Ex-Im Bank and OCCGF. Securities.At June 30, 2004, the securities portfolio was $280.0 million,
reflecting an increase of $22.9 million or 8.9% from $257.1 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 June 30,
2004 approximately $42.3 million in short-term borrowings obtained from the
FHLB have been utilized to fund mortgage-backed securities to increase
interest-earning assets. Deposits. At June 30, 2004, total deposits were $717.0 million, down $8.0
million or 1.1% from $724.9 million at December 31, 2003. Noninterest-bearing
demand deposits at June 30, 2004 increased $5.9 million or 3.5% to $175.0
million from $169.1 million at December 31, 2003. The Companys ratios of
noninterest-bearing demand deposits to total deposits at June 30, 2004 and
December 31, 2003 were 24.41% and 23.33%, respectively. Interest-bearing
deposits at June 30, 2004 decreased $13.9 million or 2.5%
to $542.0 million
from $555.8 million at December 31, 2003. Other Borrowings.Other borrowings at June 30, 2004 were $74.9 million,
up approximately $20.7 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
$49.3 million with weighted average fixed rates of 1.51%. All of these
advances are scheduled to mature in the third and fourth quarters of 2004.
These borrowings were part of a strategic plan to continue the growth of
interest-earning assets. The funds were invested primarily in mortgage-related
instruments with durations of approximately four years or less. Other
short-term borrowings at June 30, 2004 consisted of approximately $551,000 in
U.S. Treasury tax note option accounts. 22




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##### Table of Contents



The following table provides an analysis of the Companys other
borrowings: As of and for the
    
    As of and for theSix Months Ended
    
    Year EndedJune 30, 2004
    
    December 31, 2003(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
    
    $
    74,300
    
    
    $
    53,300Average during the period
    
    
    61,437
    
    
    
    59,667Maximum month-end balance during the period
    
    
    74,300
    
    
    
    69,300Other short-term borrowings:At end of period
    
    $
    551
    
    
    $
    873Average during the period
    
    
    715
    
    
    
    587Maximum month-end balance during the period
    
    
    1,057
    
    
    
    873
 Liquidity.The Companys loan to deposit ratio at June 30, 2004 was
77.29%. As of this same date, the Company had commitments to fund loans in the
amount of $105.5 million. At June 30, 2004, the Company had stand-by letters
of credit of $3.2 million, of which, the Company has recorded a liability of
$13,224 at June 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. With its current level of
collateral, the Company has the ability to borrow an additional $177.9 million
from the FHLB. Additionally, the Company had several unused, unsecured lines
of credit with correspondent banks totaling $15.0 million at June 30, 2004. Capital Resources.Shareholders equity at June 30, 2004 was $79.0
million compared to $78.4 million at December 31, 2003, an increase of
approximately $625,000 or 0.8%. This was primarily the result of net income
for the six months ended June 30, 2004 of $4.7 million and a net increase in
common and treasury stock of approximately $238,000, that was partially offset
by an unrealized loss in the market value of securities of $3.4 million and
dividends of $860,000. The following table provides a comparison of the Companys and the Banks
leverage and risk-weighted capital ratios as of June 30, 2004 to the minimum
and well-capitalized regulatory standards: Minimum
    
    To Be WellRequired For
    
    Capitalized UnderCapital Adequacy
    
    Prompt Corrective
    
    Actual Ratio AtPurposes
    
    Action Provisions
    
    June 30, 2004The CompanyLeverage ratio
    
    
    4.00
    %(1)
    
    
    N/A
    %
    
    
    9.47
    %Tier 1 risk-based capital ratio
    
    
    4.00
    
    
    
    N/A
    
    
    
    13.19Risk-based capital ratio
    
    
    8.00
    
    
    
    N/A
    
    
    
    14.45The BankLeverage ratio
    
    
    4.00
    %(2)
    
    
    5.00
    %
    
    
    9.25
    %Tier 1 risk-based capital ratio
    
    
    4.00
    
    
    
    6.00
    
    
    
    12.90Risk-based capital ratio
    
    
    8.00
    
    
    
    10.00
    
    
    
    14.15
   (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. 23




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##### Table of Contents



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 preparation of its consolidated
financial statements. In estimating the requirement for market adjustments,
management utilizes outside sources to determine the market value of the loans
held-for-sale through solicitation of market bids or indications of market
value. Decreases in market value will be reflected in the consolidated
statement of income under noninterest expense as Lower of Cost or Market
Adjustment. 
 Item 3.Quantitative and Qualitative Disclosures about Market Risk. There have been no material changes in the market risk information
previously disclosed in the Companys Form 10-K for the year ended December 31,
2003. See Form 10-K, Item 7 Managements Discussion and Analysis of Financial
Condition and Results of Operations  Financial Condition  Interest Rate
Sensitivity and Liquidity. 
 Item 4.Controls and Procedures Evaluation of Disclosure Controls and Procedures.The Company carried out
an evaluation, under the supervision and with the participation of its
management, including its 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 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, the Company's condensed
consolidated financial statements
were restated. See Note 2 to the condensed consolidated financial
statements. 24




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##### Table of Contents



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.Changes in Securities and Use of Proceeds Not applicable 
 Item 3.Defaults Upon Senior Securities Not applicable 
 Item 4.Submission of Matters to a Vote of Security Holders The
Companys 2004 Annual Meeting of Shareholders was held on April 23, 2004.
At the meeting, the shareholders of the Company considered and acted upon the
proposals listed below. 1. Tiong Loi Ang, Charles L. Roff and Joe Ting were elected as Class III
directors, Edward A. Monto was elected as a Class II director, and Daniel B.
Wright was elected as a
Class I director. The Class III directors were elected to serve until the
Companys 2007 annual meeting of shareholders, the Class II director was
elected to serve until the Companys 2006 annual meeting of shareholders and
the Class I director was elected to serve until the Companys 2005 annual
meeting of shareholders, and each until their successors are duly elected and
qualified. The votes cast with respect to each director were as follows: Director
    
    For
    
    WithheldTiong Loi Ang
    
    
    4,216,434
    
    
    
    685,766Tommy F. Chen
    
    
    4,656,536
    
    
    
    245,664Charles L. Roff
    
    
    4,656,586
    
    
    
    245,614Joe Ting
    
    
    4,656,586
    
    
    
    245,614Edward A. Monto
    
    
    4,656,586
    
    
    
    245,614Daniel B. Wright
    
    
    4,656,586
    
    
    
    245,614
 2. The shareholders ratified the appointment of PricewaterhouseCoopers LLP
as the independent registered public accounting firm of the financial
statements of the Company for the year ending December 31, 2004. A total of
4,899,100 shares were voted in favor of the proposal, 3,100 shares were voted
against the proposal and 1 share abstained from voting on the proposal. 
 Item 5.Other Information Not applicable 26




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##### Table of Contents



Item 6 (a)Exhibits ExhibitNumber
    
    Identification of Exhibit11
    -
    Computation of Earnings Per Common Share, included as Note (2) to the Condensed Consolidated Financial Statements on
Page 7 of this Form 10-Q.31.1
    -
    Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.31.2
    -
    Certification of the Acting Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.32.1
    -
    Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    -
    Certification of the Acting Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 (b)Reports on Form 8-K The following report on Form 8-K was furnished during the quarter ended
June 30, 2004:  (1)
    
    Current report on Form 8-K filed April 29, 2004 in connection
with the release of the Companys earnings for the first quarter of
2004. 27




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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:  August 27, 2004
    
    George M. LeeChief Executive Officer
(principal executive officer)Date:  August 27, 2004
    By:
    /s/ Kevin ShuKevin ShuActing Chief Financial Officer
(principal financial officer/
principal accounting officer) 28




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##### Table of Contents



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