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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-K

x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2002

OR

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934



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Commission file number: 0-25141



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MetroCorp Bancshares, Inc.

(Exact name of registrant as specified in its charter)


|                                                                     |  |                                                
|-------------------------------------------------------------------- |  | -----------------------------------------------
|Texas
(State or other jurisdiction of
incorporation or organization) |  | 76-0579161
(I.R.S. Employer
Identification No.)

9600 Bellaire Boulevard, Suite 252
Houston, Texas 77036
(Address of principal executive offices including zip code)

(713) 776-3876
(Registrants telephone number, including area code)



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Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
(Title of class)



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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes  x    No  o

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes  oNo  x

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o

As of March 21, 2003, the number of outstanding shares of Common Stock was
7,026,222.

The aggregate market value of the shares of Common Stock held by
non-affiliates, based on the closing price of the Common Stock on the Nasdaq
National Market System on June 28, 2002, the last business day of the
registrants most recently completed second quarter, of $12.50 per share, was
approximately $63,389,525.

Documents Incorporated by Reference:

Portions of the Companys Proxy Statement for the 2003 Annual Meeting of
Shareholders, which will be filed within 120 days after December 31, 2002, are
incorporated by reference into Part III, Items 10-13 of this Form 10-K.



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TABLE OF CONTENTS



|                                                   |                                                                                                         |  |  |  |  |  |  | 
|-------------------------------------------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                            
|                                                   | Item 1. Business                                                                                       
|                                                   | Item 2. Properties                                                                                     
|                                                   | Item 3. Legal Proceedings                                                                              
|                                                   | Item 4. Submission of Matters to a Vote of Security Holders                                            
|PART II                                           
|                                                   | Item 5. Market for Registrants Common Equity and Related Shareholder Matters                          
|                                                   | Item 6. Selected Consolidated Financial Data                                                           
|                                                   | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|                                                   | Item 7A. Quantitative and Qualitative Disclosure About Market Risk                                     
|                                                   | Item 8. Financial Statements and Supplementary Data                                                    
|                                                   | Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure           
|PART III                                          
|                                                   | Item 10. Directors and Executive Officers of the Company                                               
|                                                   | Item 11. Executive Compensation                                                                        
|                                                   | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|                                                   | Item 13. Certain Relationships and Related Transactions                                                
|                                                   | Item 14. Controls and Procedures                                                                       
|PART IV                                           
|                                                   | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 10-K                             
|SIGNATURES                                        
|CERTIFICATIONS                                    
|Index to Exhibits                                 
|Consent of PricewaterhouseCoopers LLP             
|Consent of Deloitte Touche L.L.P.                 
|Certification of President Pursuant to Section 906
|Certification of CFO Pursuant to Section 906      



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PART I

Special Cautionary Notice Regarding Forward-Looking Statements

Statements and financial discussion and analysis contained in this Annual
Report on Form 10-K and documents incorporated herein by reference that are not
historical facts are forward-looking statements made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements 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 Companys ability to identify suitable acquisition candidates;                                                                                                                                                                                                                                    
|
| |  |  | the timing, impact and other uncertainties of the Companys ability
to enter new markets successfully and capitalize on growth
opportunities;                                                                                                                                                         
|
| |  |  | increased credit risk in the Companys assets and increased
operating risk caused by a material change in commercial, consumer
and/or real estate loans as a percentage of the total loan portfolio;                                                                                                  
|
| |  |  | the failure of assumptions underlying the establishment of and
provisions made to the allowance for loan losses;                                                                                                                                                                                      
|
| |  |  | changes in the availability of funds resulting in increased costs
or reduced liquidity;                                                                                                                                                                                                               
|
| |  |  | increased asset levels and changes in the composition of assets and
the resulting impact on our capital levels and regulatory capital
ratios;                                                                                                                                                         
|
| |  |  | the Companys ability to acquire, operate and maintain cost
effective and efficient systems without incurring unexpectedly
difficult or expensive but necessary technological changes;                                                                                                                
|
| |  |  | the loss of senior management or operating personnel and the
potential inability to hire qualified personnel at reasonable
compensation levels; and                                                                                                                                                   
|
| |  |  | changes in statutes and government regulations or their
interpretations applicable to bank holding companies and our present
and future banking and other subsidiaries, including changes in tax
requirements and tax rates.                                                                          

All written or oral forward-looking statements attributable to the Company
are expressly qualified in their entirety by these cautionary statements. The
Company undertakes no obligation to publicly update or otherwise revise any
forward-looking statements, whether as a result of new information, future
events or otherwise, unless the securities laws require it to do so.

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Item 1.Business

General

MetroCorp Bancshares, Inc. (the Company) was incorporated as a business
corporation under the laws of the State of Texas in 1998 to serve as a holding
company for MetroBank, National Association (the Bank). The Companys
headquarters are located at 9600 Bellaire Boulevard, Suite 252, Houston, Texas
77036, and its telephone number is (713) 776-3876. The
Companys internet website address is www.metrobank-na.com. The Company
makes available, free of charge, on or through its website its annual
report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and all amendments to those reports
as soon as reasonably practicable after such material is filed with
or furnished to the Securities and Exchange Commission. The
information found on the Companys website is not a part of this
or any other report.

The Companys mission is to enhance shareholder value by maximizing
profitability and operating as the premier commercial bank in each community
that it serves. The Company operates in a niche market by providing
personalized, culturally sensitive service to the communities in Houston and
Dallas. In the past, the Company has strategically opened each of its 14
banking offices in an area with large multicultural concentrations and intends
to pursue branch opportunities in multicultural markets with significant small
and medium-sized business activity.

Quality products and services, cross-selling initiatives, relationship
building, and outstanding customer service are all key elements to a successful
retail banking endeavor. The Company intends to focus more attention on its
retail banking initiatives in 2003. To achieve its goals, the Company has
recently added an experienced senior officer to its management team to
implement strategies throughout the 14-branch network. Specific goals include
but are not limited to: (1) building solid customer relationships through
cross-selling products and services, (2) targeting new main stream markets to
diversify the customer base, (3) insure that delivery systems for the Banks
products and services are effective and will produce the desired results, (4)
review the Banks product mix to insure that customer needs and demands are
being met with existing products, and (5) study the effectiveness of the Banks
customer service activities and implement enhancements, where applicable, to
make certain that customer inquiries are being addressed timely and
effectively.

The Bank was organized in 1987 by Don J. Wang, the Companys current
Chairman of the Board, and five other Asian-American small business owners,
four of whom currently serve as directors of the Company and the Bank. The
organizers perceived that the financial needs of various ethnic groups in
Houston were not being adequately served and sought to provide modern banking
products and services that accommodated the cultures of the businesses
operating in these communities. In 1989, the Company expanded its service
philosophy to Houstons Hispanic community by acquiring from the Federal
Deposit Insurance Corporation (the FDIC) the assets and liabilities of a
community bank located in a primarily Hispanic section of Houston. This
acquisition broadened the Companys market and increased its assets from
approximately $30.0 million to approximately $100.0 million. Other than this
acquisition, the Company has accomplished its growth internally through the
establishment of de novo branches in various market areas. Since the Banks
formation in 1987, it has established 11 branches in the greater Houston
metropolitan area. In 1996, the Bank expanded into the Dallas metropolitan
area, and with the success of the first Dallas area branch, opened two
additional branch offices in 1998 and 1999, respectively.

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Business

In connection with the Companys approach to community banking, the
Company offers products designed to appeal to its customers and further enhance
profitability. The Company believes that it has developed a reputation as the
premier provider of financial products and services to small and medium-sized
businesses and consumers located in the communities that it serves. Each of
its product lines is an outgrowth of the Companys expertise in meeting the
particular needs of its customers. The Companys principal lines of business
are the following:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Commercial and Industrial Loans.The primary lending focus of the
Company is to small and medium-sized businesses in a variety of
industries. Its commercial lending emphasis includes loans to
wholesalers, manufacturers and business service companies. The Company
makes available to businesses a broad range of short and medium-term
commercial lending products for working capital (including inventory and
accounts receivable), purchases of equipment and machinery and business
expansion (including acquisitions of real estate and improvements). As
of December 31, 2002, the Companys commercial and industrial loan
portfolio totaled $325.4 million or 60.9% of the gross loan portfolio.
At that date, the Company had a concentration of loans in the hotel and
motel industry of $82.0 million. Hotel and motel lending was originally
targeted by the Company because of managements particular expertise in
this industry and a perception that it was an under-served market. More
recently, the Company has broadened its lending strategy in efforts to
further diversify its portfolio to other industries.                                                                                                                                                                                                                                                                  
|
| | Commercial Mortgage Loans.The Company originates commercial
mortgage loans to finance the purchase of real property, which generally
consists of developed real estate. The Companys commercial mortgage
loans are collateralized by first liens on real estate, typically have
variable rates and amortize over a 15 to 20 year period, with balloon
payments due at the end of five to seven years. As of December 31, 2002,
the Company had a commercial mortgage portfolio of $165.6 million or
31.0% of the gross loan portfolio.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | Construction Loans.The Company originates loans to finance the
construction of residential and non-residential properties. The majority
of the Companys residential construction loans are for single-family
dwellings, which are under earnest money contracts. The Company also
originates loans to finance the construction of commercial properties
such as multi-family, office, industrial, warehouse and retail centers.
As of December 31, 2002, the Company had a real estate construction
portfolio of $25.4 million or 4.8% of the gross loan portfolio, of which,
$10.6 million was residential and $14.8 million was commercial.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | Residential Mortgage Brokerage and Lending.The Company uses its
existing branch network to offer a complete line of single-family
residential mortgage products. The Company solicits and receives a fee
to process residential mortgage loans, which are underwritten and
pre-sold to third party mortgage companies. The Company does not fund or
service the loans underwritten by third party mortgage companies. The
Company also originates five to seven year balloon residential mortgage
loans with a 15-year amortization to its existing customers on a select
basis, which loans are retained in the Companys portfolio. As of
December 31, 2002, the residential mortgage portfolio totaled $7.3
million or 1.4% of the gross loan portfolio.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | Government Guaranteed Small Business Lending.The Company has
developed an expertise in several government guaranteed lending programs
in order to provide credit enhancement to its commercial and industrial
and mortgage portfolios. As a Preferred Lender under the United States
Small Business Administration (the SBA) federally guaranteed lending
program, the Companys pre-approved status allows it to quickly respond
to customers needs. Depending upon prevailing market conditions, the
Company may sell the guaranteed portion of these loans into the secondary
market, yet retain servicing of these loans. The Company specializes in
SBA loans to minority-owned businesses. As of December 31, 2002, the
Company had $98.0 million in the retained portion of its SBA loans,
approximately $65.0 million of which was guaranteed by the SBA. For the
SBAs fiscal year ended September 30, 2002, the Company was ranked as the
third largest SBA loan originator in the 32-county Houston SBA District
in terms of dollar volume produced. Another source of government
guaranteed lending provided by the Company is Business and Industrial
loans (B&I Loans) which are collateralized by the U.S. Department of
Agriculture (the USDA) and are available to borrowers in areas with a
population of less than 50,000. As of December 31, 2002, the Companys
USDA portfolio

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | totaled $3.1 million. The Company also offers guaranteed loans
through the Overseas Chinese Credit Guaranty Fund (OCCGF), which is
sponsored by the government of Taiwan. These loans are for people of
Chinese decent or origin, who are not mainland Chinese by birth and who
reside overseas. As of December 31, 2002, the Companys OCCGF
portfolio totaled $4.2 million.                                                                                                                                          
|
| | Trade Finance.Since its inception in 1987, the Company has
originated trade finance loans and letters of credit to facilitate export
and import transactions for small and medium-sized businesses. In this
capacity, the Company has worked with the Export Import Bank of the
United States (the Ex-Im Bank), an agency of the U.S. Government which
provides guarantees for trade finance loans. At December 31, 2002, the
Companys aggregate trade finance portfolio commitments totaled
approximately $8.1 million.

The Company offers a variety of loan and deposit products and services to
retail customers through its branch network in Houston and Dallas. Loans to
retail customers include residential mortgage loans, residential construction
loans, automobile loans, lines of credit and other personal loans. Retail
deposit products and services include checking and savings accounts, money
market accounts, time deposits, ATM cards, debit cards and online banking.

On December 20, 2001, in collaboration with the Mexican Consulate of
Houston, the Company introduced the Matricula Checking account as a service to
the Hispanic community in the greater Houston metropolitan area. Using an
official Matricula card issued by the consulate as identification, a Mexican
national can open this account. Matricula Checking was the first account of
this type in the Houston area. It addresses a significant social issue:
Immigrants are typically unable to obtain acceptable identification and lack
basic banking services. With this account, customers have a safe and secure
place to keep their money, eliminating the need to carry or hide large sums of
cash. The account allows the holder to write checks, execute transactions and
make affordable wire transfers. Account holders can also designate individuals
in Mexico to have limited ATM access to their account. As of December 31,
2002, the Companys aggregate Matricula Checking portfolio totaled
approximately $1.3 million.

The Companys overall business strategy is to (i) continue to service its
small and medium-sized owner-operated businesses and retail customers, by
providing individualized, responsive, quality service, and (ii) expand its
geographic reach either through selective acquisitions of existing financial
institutions or by establishing de novo branches in markets with significant
small and medium-sized business activity.

Competition

The banking business is highly competitive, and the profitability of the
Company depends principally on the Companys ability to compete in the market
areas in which its banking operations are located. The Company competes with
other commercial banks, savings banks, savings and loan associations, credit
unions, finance companies, mutual funds, insurance companies, brokerage and
investment banking firms, asset-based non-bank lenders and certain other
non-financial entities, including retail stores which may maintain their own
credit programs and certain governmental organizations which may offer more
favorable financing. The Company has been able to compete effectively with
other financial institutions by emphasizing customer service, technology and
responsive decision-making. Additionally, management believes the Company
remains competitive by establishing long-term customer relationships, building
customer loyalty and providing a broad line of products and services designed
to address the specific needs of its customers.

In addition, the enactment of the Gramm-Leach-Bliley Act, which breaks
down the barriers between financial institutions, securities firms and
insurance companies, may significantly change the competitive environment in
which the Company and the Bank conduct business. See   Supervision and
Regulation  The Company  Financial Modernization.

Employees

As of December 31, 2002, the Company had 309 full-time equivalent
employees, 46 of whom were officers of the Bank classified as Vice President or
above. The Company considers its relations with employees to be satisfactory.

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Supervision and Regulation

The supervision and regulation of bank holding companies and their
subsidiaries is intended primarily for the protection of depositors, the
deposit insurance funds of the FDIC and the banking system as a whole, and not
for the protection of the bank holding company shareholders or creditors. The
banking agencies have broad enforcement power over bank holding companies and
banks including the power to impose substantial fines and other penalties for
violations of laws and regulations.

The following description summarizes some of the laws to which the Company
and the Bank are subject. References herein to applicable statutes and
regulations are brief summaries thereof, do not purport to be complete, and are
qualified in their entirety by reference to such statutes and regulations.

The Company

The Company is a bank holding company registered under the Bank Holding
Company Act, as amended, (the BHCA), and it is subject to supervision,
regulation and examination by the Board of Governors of the Federal Reserve
System (Federal Reserve Board). The BHCA and other federal laws subject bank
holding companies to particular restrictions on the types of activities in
which they may engage, and to a range of supervisory requirements and
activities, including regulatory enforcement actions for violations of laws and
regulations.

Regulatory Restrictions on Dividends; Source of Strength.It is the
policy of the Federal Reserve Board that bank holding companies should pay cash
dividends on common stock only out of income available over the past year and
only if prospective earnings retention is consistent with the organizations
expected future needs and financial condition. The policy provides that bank
holding companies should not maintain a level of cash dividends that undermines
the bank holding companys ability to serve as a source of strength to its
banking subsidiaries.

Under Federal Reserve Board policy, a bank holding company is expected to
act as a source of financial strength to each of its banking subsidiaries and
commit resources to their support. Such support may be required at times when,
absent this Federal Reserve Board policy, a holding company may not be inclined
to provide it. As discussed below, a bank holding company in certain
circumstances could be required to guarantee the capital plan of an
undercapitalized banking subsidiary.

In the event of a bank holding companys bankruptcy under Chapter 11 of
the U.S. Bankruptcy Code, the trustee will be deemed to have assumed and is
required to cure immediately any deficit under any commitment by the debtor
holding company to any of the federal banking agencies to maintain the capital
of an insured depository institution, and any claim for breach of such
obligation will generally have priority over most other uncollateralized
claims.

Scope of Permissible Activities. Except as provided below, the Company is
prohibited from acquiring a direct or indirect interest in or control of more
than 5% of the voting shares of any company which is not a bank or bank holding
company and from engaging directly or indirectly in activities other than those
of banking, managing or controlling banks or furnishing services to its
subsidiary banks, except the Company may engage in and may own shares of
companies engaged in certain activities found by the Federal Reserve to be so
closely related to banking or managing and controlling banks as to be a proper
incident thereto. These activities include, among others, operating a
mortgage, finance, credit card or factoring company; performing certain data
processing operations; providing investment and financial advice; acting as an
insurance agent for certain types of credit-related insurance; leasing personal
property on a full-payout, non-operating basis; and providing certain stock
brokerage and investment advisory services. In approving acquisitions or the
addition of activities, the Federal Reserve considers whether the acquisition
or the additional activities can reasonably be expected to produce benefits to
the public, such as greater convenience, increased competition, or gains in
efficiency, that outweigh such possible adverse effects as undue concentration
of resources, decreased or unfair competition, conflicts of interest or unsound
banking practices.

However, the Gramm-Leach-Bliley Act, effective in 2000, amended the BHC
Act and granted certain expanded powers to bank holding companies. The
Gramm-Leach-Bliley Act permits bank holding companies to become financial
holding companies and thereby affiliate with securities firms and insurance
companies and engage in other activities that are financial in nature. The
Gramm-Leach-Bliley Act defines financial in nature to include securities
underwriting, dealing and market making; sponsoring mutual funds and investment
companies; insurance underwriting and agency; merchant banking activities; and
activities that the Federal Reserve has determined to be closely related to
banking. No regulatory approval will be required for a financial

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holding company to acquire a company, other than a bank or savings
association, engaged in activities that are financial in nature or incidental
to activities that are financial in nature, as determined by the Federal
Reserve

Under the Gramm-Leach-Bliley Act, a bank holding company may become a
financial holding company if each of its subsidiary banks is well capitalized
under the Federal Deposit Insurance Corporation Improvement Act (FDICIA)
prompt corrective action provisions, is well managed, and has at least a
satisfactory rating under the Community Reinvestment Act of 1977 (CRA) by
filing a declaration that the bank holding company wishes to become a financial
holding company. The Gramm-Leach-Bliley Act defines financial in nature to
include securities underwriting, dealing and market making; sponsoring mutual
funds and investment companies; insurance underwriting and agency; merchant
banking activities; and activities that the Federal Reserve Board has
determined to be closely related to banking. Subsidiary banks of a financial
holding company must remain well capitalized and well managed in order to
continue to engage in activities that are financial in nature without
regulatory actions or restrictions, which could include divestiture of the
financial in nature subsidiary or subsidiaries. In addition, a financial
holding company may not acquire a company that is engaged in activities that
are financial in nature unless each of its subsidiary banks has a CRA rating of
satisfactory or better. Presently, the Company has no plans to become a
financial holding company.

While the Federal Reserve Board will serve as the umbrella regulator for
financial holding companies and has the power to examine banking organizations
engaged in new activities, regulation and supervision of activities which are
financial in nature or determined to be incidental to such financial activities
will be handled along functional lines. Accordingly, activities of
subsidiaries of a financial holding company will be regulated by the agency or
authorities with the most experience regulating that activity as it is
conducted in a financial holding company.

Safe and Sound Banking Practices.Bank holding companies are not
permitted to engage in unsafe and unsound banking practices. The Federal
Reserve Boards Regulation Y, for example, generally requires a holding company
to give the Federal Reserve Board prior notice of any redemption or repurchase
of its own equity securities, if the consideration to be paid, together with
the consideration paid for any repurchases or redemptions in the preceding
year, is equal to 10% or more of the companys consolidated net worth. The
Federal Reserve Board may oppose the transaction if it believes that the
transaction would constitute an unsafe or unsound practice or would violate any
law or regulation. Prior approval of the Federal Reserve Board would not be
required for the redemption or purchase of equity securities for a bank holding
company that would be well capitalized both before and after such transaction,
well-managed and not subject to unresolved supervisory issues.

The Federal Reserve Board has broad authority to prohibit activities of
bank holding companies and their non-banking subsidiaries which represent
unsafe and unsound banking practices or which constitute violations of laws or
regulations, and can assess civil money penalties for certain activities
conducted on a knowing and reckless basis, if those activities caused a
substantial loss to a depository institution. The penalties can be as high as
$1.0 million for each day the activity continues.

Anti-Tying Restrictions.Bank holding companies and their affiliates are
prohibited from tying the provision of certain services, such as extensions of
credit, to other services offered by a holding company or its affiliates.

Capital Adequacy Requirements.The Federal Reserve Board has adopted a
system using risk-based capital guidelines to evaluate the capital adequacy of
bank holding companies. Under the guidelines, specific categories of assets
are assigned different risk weights, based generally on the perceived credit
risk of the asset. These risk weights are multiplied by corresponding asset
balances to determine a risk-weighted asset base. The guidelines require a
minimum total risk-based capital ratio of 8.0% (of which at least 4.0% is
required to consist of Tier 1 capital elements). Total capital is the sum of
Tier 1 and Tier 2 capital. As of December 31, 2002, the Companys ratio of
Tier 1 capital to total risk-weighted assets was 12.71% and its ratio of total
capital to total risk-weighted assets was 13.97%.

In addition to the risk-based capital guidelines, the Federal Reserve
Board uses a leverage ratio as an additional tool to evaluate the capital
adequacy of bank holding companies. The leverage ratio is a companys Tier 1
capital divided by its average total consolidated assets. Certain highly rated
bank holding companies may maintain a minimum leverage ratio of 3.0%, but other
bank holding companies may be required to maintain a leverage ratio of at least
4.0%. As of December 31, 2002, the Companys leverage ratio was 8.58%.

The federal banking agencies risk-based and leverage ratios are minimum
supervisory ratios generally applicable to banking organizations that meet
certain specified criteria. The federal bank regulatory agencies

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may set capital requirements for a particular banking organization that
are higher than the minimum ratios when circumstances warrant. Federal Reserve
Board guidelines also provide that banking organizations experiencing internal
growth or making acquisitions will be expected to maintain strong capital
positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets.

Imposition of Liability for Undercapitalized Subsidiaries.Bank
regulators are required to take prompt corrective action to resolve problems
associated with insured depository institutions whose capital declines below
certain levels. In the event an institution becomes undercapitalized, it
must submit a capital restoration plan. The capital restoration plan will not
be accepted by the regulators unless each company having control of the
undercapitalized institution guarantees the subsidiarys compliance with the
capital restoration plan up to a certain specified amount. Any such guarantee
from a depository institutions holding company is entitled to a priority of
payment in bankruptcy.

The aggregate liability of the holding company of an undercapitalized bank
is limited to the lesser of 5% of the institutions assets at the time it
became undercapitalized or the amount necessary to cause the institution to be
adequately capitalized. The bank regulators have greater power in situations
where an institution becomes significantly or critically undercapitalized
or fails to submit a capital restoration plan. For example, a bank holding
company controlling such an institution can be required to obtain prior Federal
Reserve Board approval of proposed dividends, or might be required to consent
to a consolidation or to divest the troubled institution or other affiliates.

Acquisitions by Bank Holding Companies.The BHCA requires every bank
holding company to obtain the prior approval of the Federal Reserve Board
before it may acquire all or substantially all of the assets of any bank, or
ownership or control of any voting shares of any bank, if after such
acquisition it would own or control, directly or indirectly, more than 5% of
the voting shares of such bank. In approving bank acquisitions by bank holding
companies, the Federal Reserve Board is required to consider the financial and
managerial resources and future prospects of the bank holding company and the
banks concerned, the convenience and needs of the communities to be served, and
various competitive factors.

Control Acquisitions.The Change in Bank Control Act prohibits a person
or group of persons from acquiring control of a bank holding company unless
the Federal Reserve Board has been notified and has not objected to the
transaction. Under a rebuttable presumption established by the Federal Reserve
Board, the acquisition of 10% of more of a class of voting stock of a bank
holding company with a class of securities registered under Section 12 of the
Exchange Act, such as the Company, would, under the circumstances set forth in
the presumption, constitute acquisition of control of the Company.

In addition, any entity is required to obtain the approval of the Federal
Reserve Board under the BHCA before acquiring 25% (5% in the case of an
acquirer that is a bank holding company) or more of the outstanding Common
Stock of the Company, or otherwise obtaining control or a controlling
influence over the Company.

The Bank

The Bank is a nationally chartered banking association, the deposits of
which are insured by the Bank Insurance Fund (BIF) of the FDIC. The Banks
primary regulator is the Office of the Comptroller of the Currency (the OCC).
By virtue of the insurance of its deposits, however, the Bank is also subject
to supervision and regulation by the FDIC. Such supervision and regulation
subjects the Bank to special restrictions, requirements, potential enforcement
actions, and periodic examination by the OCC. Because the Federal Reserve
Board regulates the bank holding company parent of the Bank, the Federal
Reserve Board also has supervisory authority, which directly affects the Bank.

Financial Modernization.Under the Gramm-Leach-Bliley Act, a national
bank may establish a financial subsidiary and engage, subject to limitations on
investment, in activities that are financial in nature, other than insurance
underwriting, insurance company portfolio investment, real estate development,
real estate investment, annuity issuance and merchant banking activities. To
do so, a bank must be well capitalized, well managed and have a CRA rating of
satisfactory or better. National banks with financial subsidiaries must remain
well capitalized and well managed in order to continue to engage in activities
that are financial in nature without regulatory actions or restrictions, which
could include divestiture of the financial in nature subsidiary or
subsidiaries. In addition, a bank may not acquire a company that is engaged in
activities that are financial in nature unless the bank has a CRA rating of
satisfactory or better.

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Branching.The establishment of a branch must be approved by the OCC,
which considers a number of factors, including financial history, capital
adequacy, earnings prospects, character of management, needs of the community
and consistency with corporate powers.

Restrictions on Transactions with Affiliates and Insiders.Transactions
between the Bank and its non-banking affiliates, including the Company, are
subject to Section 23A of the Federal Reserve Act. An affiliate of a bank is
any company or entity that controls, is controlled by, or is under common
control with the bank. In general, Section 23A imposes limits on the amount of
such transactions, and also requires certain levels of collateral for loans to
affiliated parties. It also limits the amount of advances to third parties
which are collateralized by the securities or obligations of the Company or its
non-banking subsidiaries.

Affiliate transactions are also subject to Section 23B of the Federal
Reserve Act which generally requires that certain transactions between the Bank
and its affiliates be on terms substantially the same, or at least as favorable
to the Bank, as those prevailing at the time for comparable transactions with
or involving other nonaffiliated persons.

The restrictions on loans to directors, executive officers, principal
shareholders and their related interests (collectively referred to herein as
insiders) contained in the Federal Reserve Act and Regulation O apply to all
insured depository institutions and their subsidiaries. These restrictions
include limits on loans to one borrower and conditions that must be met before
such a loan can be made. There is also an aggregate limitation on all loans to
insiders and their related interests. These loans cannot exceed the
institutions total unimpaired capital and surplus, and the OCC may determine
that a lesser amount is appropriate. Insiders are subject to enforcement
actions for knowingly accepting loans in violation of applicable restrictions.

Restrictions on Distribution of Subsidiary Bank Dividends and Assets.
Dividends paid by the Bank have provided a substantial part of the Companys
operating funds and for the foreseeable future it is anticipated that dividends
paid by the Bank to the Company will continue to be the Companys principal
source of operating funds. Capital adequacy requirements serve to limit the
amount of dividends that may be paid by the Bank. Until capital surplus equals
or exceeds capital stock, a national bank must transfer to surplus 10% of its
net income for the preceding four quarters in the case of an annual dividend or
10% of its net income for the preceding two quarters in the case of a quarterly
or semiannual dividend. At December 31, 2002, the Banks capital surplus
exceeded its capital stock. Without prior approval, a national bank may not
declare a dividend if the total amount of all dividends, declared by the bank
in any calendar year exceeds the total of the banks retained net income for
the current year and retained net income for the preceding two years. Under
federal law, the Bank cannot pay a dividend if, after paying the dividend, the
Bank will be undercapitalized. The OCC may declare a dividend payment to be
unsafe and unsound even though the Bank would continue to meet its capital
requirements after the dividend.

Because the Company is a legal entity separate and distinct from its
subsidiaries, its right to participate in the distribution of assets of any
subsidiary upon the subsidiarys liquidation or reorganization will be subject
to the prior claims of the subsidiarys creditors. In the event of a
liquidation or other resolution of an insured depository institution, the
claims of depositors and other general or subordinated creditors are entitled
to a priority of payment over the claims of holders of any obligation of the
institution to its shareholders, arising as a result of their status as
shareholders, including any depository institution holding company (such as the
Company) or any shareholder or creditor thereof.

Examinations.The OCC periodically examines and evaluates insured banks.
Based upon such an evaluation, the OCC may revalue the assets of the
institution and require that it establish specific reserves to compensate for
the difference between the OCC-determined value and the book value of such
assets.

Audit Reports.Insured institutions with total assets of $500 million or
more must submit annual audit reports prepared by independent auditors to
federal regulators. In some instances, the audit report of the institutions
holding company can be used to satisfy this requirement. Auditors must receive
examination reports, supervisory agreements, and reports of enforcement
actions. In addition, financial statements prepared in accordance with
accounting principles generally accepted in the U.S., managements
certifications concerning responsibility for the financial statements, internal
controls and compliance with legal requirements designated by the OCC, and an
attestation by the auditor regarding the statements of management relating to
the internal controls must be submitted. For institutions with total assets of
more than $3 billion, independent auditors may be required to review quarterly
financial statements. The Federal Deposit Insurance Corporation Improvement
Act of 1991 (FDICIA) requires that independent audit committees be formed,
consisting of outside directors

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only. The committees of such institutions must include members with
experience in banking or financial management, must have access to outside
counsel, and must not include representatives of large customers.

Capital Adequacy Requirements.Similar to the Federal Reserve Boards
requirements for bank holding companies, the OCC has adopted regulations
establishing minimum requirements for the capital adequacy of national banks.
The OCC may establish higher minimum requirements if, for example, a bank has
previously received special attention or has a high susceptibility to interest
rate risk.

The OCCs risk-based capital guidelines generally require national banks
to have a minimum ratio of Tier 1 capital to total risk-weighted assets of 4.0%
and a ratio of total capital to total risk-weighted assets of 8.0%. As of
December 31, 2002, the Banks ratio of Tier 1 capital to total risk-weighted
assets was 12.16% and its ratio of total capital to total risk-weighted assets
was 13.41%.

The OCCs leverage guidelines require national banks to maintain Tier 1
capital of no less than 4.0% of average total assets, except in the case of
certain highly rated banks for which the requirement is 3.0% of average total
assets unless a higher leverage capital ratio is warranted by the particular
circumstances or risk profile of the depository institution. As of December
31, 2002, the Banks ratio of Tier 1 capital to average total assets (leverage
ratio) was 8.20%.

Corrective Measures for Capital Deficiencies.The federal banking
regulators are required to take prompt corrective action with respect to
capital-deficient institutions. Agency regulations define, for each capital
category, the levels at which institutions are well capitalized, adequately
capitalized, under capitalized, significantly under capitalized and
critically under capitalized. A well capitalized bank has a total
risk-based capital ratio of 10.0% or higher; a Tier 1 risk-based capital ratio
of 6.0% or higher; a leverage ratio of 5.0% or higher; and is not subject to
any written agreement, order or directive requiring it to maintain a specific
capital level for any capital measure. An adequately capitalized bank has a
total risk-based capital ratio of 8.0% or higher; a Tier 1 risk-based capital
ratio of 4.0% or higher; a leverage ratio of 4.0% or higher (3.0% or higher if
the bank was rated a composite 1 in its most recent examination report and is
not experiencing significant growth); and does not meet the criteria for a well
capitalized bank. A bank is under capitalized if it fails to meet any one of
the ratios required to be adequately capitalized.

In addition to requiring undercapitalized institutions to submit a capital
restoration plan, agency regulations authorize broad restrictions on certain
activities of undercapitalized institutions including asset growth,
acquisitions, branch establishment, and expansion into new lines of business.
With certain exceptions, an insured depository institution is prohibited from
making capital distributions, including dividends, and is prohibited from
paying management fees to control persons if the institution would be
undercapitalized after any such distribution or payment.

As an institutions capital decreases, the OCCs enforcement powers become
more severe. A significantly undercapitalized institution is subject to
mandated capital raising activities, restrictions on interest rates paid and
transactions with affiliates, removal of management, and other restrictions.
The OCC has only very limited discretion in dealing with a critically
undercapitalized institution and is virtually required to appoint a receiver or
conservator.

Banks with risk-based capital and leverage ratios below the required
minimums may also be subject to certain administrative actions, including the
termination of deposit insurance upon notice and hearing, or a temporary
suspension of insurance without a hearing in the event the institution has no
tangible capital.

Deposit Insurance Assessments.The Bank must pay assessments to the FDIC
for federal deposit insurance protection. The FDIC has adopted a risk-based
assessment system as required by FDICIA. Under this system, FDIC-insured
depository institutions pay insurance premiums at rates based on their risk
classification. Institutions assigned to higher-risk classifications (that is,
institutions that pose a greater risk of loss to their respective deposit
insurance funds) pay assessments at higher rates than institutions that pose a
lower risk. An institutions risk classification is assigned based on its
capital levels and the level of supervisory concern the institution poses to
the regulators. In addition, the FDIC can impose special assessments in
certain instances.

The FDIC established a process for raising or lowering all rates for
insured institutions semi-annually if conditions warrant a change. Under this
new system, the FDIC has the flexibility to adjust the assessment rate schedule
twice a year without seeking prior public comment, but only within a range of
five cents per $100 above or below the assessment schedule adopted. Changes in
the rate schedule outside the five-cent range above

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or below the current schedule can be made by the FDIC only after a full
rulemaking with opportunity for public comment.

On September 30, 1996, President Clinton signed into law an act that
contained a comprehensive approach to recapitalizing the Savings Association
Insurance Fund (SAIF) and to assure the payment of the Financing
Corporations (FICO) bond obligations. Under this act, banks insured under
the BIF are required to pay a portion of the interest due on bonds that were
issued by FICO to help shore up the ailing Federal Savings and Loan Insurance
Corporation in 1987. The BIF rate was required to equal one-fifth of the SAIF
rate through year-end 1999, or until the insurance funds were merged, whichever
occurred first. Thereafter, BIF and SAIF payers will be assessed pro rata for
the FICO bond obligations. With regard to the assessment for the FICO
obligation, for the first quarter of 2003, the BIF and SAIF rates were 0.0168%
of deposits.

Enforcement Powers.The FDIC and the other federal banking agencies have
broad enforcement powers, including the power to terminate deposit insurance,
impose substantial fines and other civil and criminal penalties, and appoint a
conservator or receiver. Failure to comply with applicable laws, regulations
and supervisory agreements could subject the Company or its banking
subsidiaries, as well as officers, directors and other institution-affiliated
parties of these organizations, to administrative sanctions and potentially
substantial civil money penalties. The appropriate federal banking agency may
appoint the FDIC as conservator or receiver for a banking institution (or the
FDIC may appoint itself, under certain circumstances) if any one or more of a
number of circumstances exist, including, without limitation, the fact that the
banking institution is undercapitalized and has no reasonable prospect of
becoming adequately capitalized; fails to become adequately capitalized when
required to do so; fails to submit a timely and acceptable capital restoration
plan; or materially fails to implement an accepted capital restoration plan.

Brokered Deposit Restrictions.Adequately capitalized institutions (as
defined for purposes of the prompt corrective action rules described above)
cannot accept, renew or roll over brokered deposits except with a waiver from
the FDIC, and are subject to restrictions on the interest rates that can be
paid on such deposits. Undercapitalized institutions may not accept, renew, or
roll over brokered deposits.

Cross-Guarantee Provisions.The Financial Institutions Reform, Recovery
and Enforcement Act of 1989 (FIRREA) contains a cross-guarantee provision
which generally makes commonly controlled insured depository institutions
liable to the FDIC for any losses incurred in connection with the failure of a
commonly controlled depository institution.

Community Reinvestment Act.The CRA and the regulations issued thereunder
are intended to encourage banks to help meet the credit needs of their service
area, including low and moderate-income neighborhoods, consistent with the safe
and sound operations of the banks. These regulations also provide for
regulatory assessment of a banks record in meeting the needs of its service
area when considering applications to establish branches, merger applications
and applications to acquire the assets and assume the liabilities of another
bank. FIRREA requires federal banking agencies to make public a rating of a
banks performance under the CRA. In the case of a bank holding company, the
CRA performance record of the banks involved in the transaction are reviewed in
connection with the filing of an application to acquire ownership or control of
shares or assets of a bank or to merge with any other bank holding company. An
unsatisfactory record can substantially delay or block the transaction.

Consumer Laws and Regulations.In addition to the laws and regulations
discussed herein, the Bank is also subject to certain consumer laws and
regulations that are designed to protect consumers in transactions with banks.
While the list set forth herein is not exhaustive, these laws and regulations
include the Truth in Lending Act, the Truth in Savings Act, the Electronic
Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit
Opportunity Act, and the Fair Housing Act, among others. These laws and
regulations mandate certain disclosure requirements and regulate the manner in
which financial institutions must deal with customers when taking deposits or
making loans to such customers. The Bank must comply with the applicable
provisions of these consumer protection laws and regulations as part of their
ongoing customer relations.

Privacy.In addition to expanding the activities in which banks and bank
holding companies may engage, the Gramm-Leach-Bliley Act imposes new
requirements on financial institutions with respect to customer privacy. The
Gramm-Leach-Bliley Act generally prohibits disclosure of customer information
to non-affiliated third parties unless the customer has been given the
opportunity to object and has not objected to such disclosure. Financial
institutions are further required to disclose their privacy policies to
customers annually. Financial institutions, however, will be required to comply
with state law if it is more protective of customer privacy than the
Gramm-Leach-Bliley Act. The privacy provisions became effective on July 1,
2001. The Gramm-Leach-

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Bliley Act contains a variety of other provisions including a prohibition
against ATM surcharges unless the customer has first been provided notice of
the imposition and amount of the fee.

USA Patriot Act of 2001.The Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA
Patriot) Act of 2001 was enacted in October 2001. The USA Patriot Act is
intended to strengthen the ability of U.S. law enforcement and the intelligence
communities to work cohesively to combat terrorism on a variety of fronts. The
potential impact of the USA Patriot Act on financial institutions of all kinds
is significant and wide ranging. The USA Patriot Act contains a broad range of
anti-money laundering and financial transparency laws and requires various
regulations, including: (i) due diligence requirements for financial
institutions that administer, maintain, or manage private bank accounts or
correspondent accounts for non-U.S. persons; (ii) standards for verifying
customer identification at account opening; (iii) rules to promote cooperation
among financial institutions, regulators and law enforcement entities in
identifying parties that may be involved in terrorism or money laundering; (iv)
reports by nonfinancial trades and business filed with the Treasury
Departments Financial Crimes Enforcement Network for transactions exceeding
$10,000; and (v) filing of suspicious activities reports involving securities
by brokers and dealers if they believe a customer may be violating U.S. laws
and regulations.

Instability of Regulatory Structure

Various legislation, such as the Gramm-Leach-Bliley Act which expanded the
powers of banking institutions and bank holding companies, and proposals to
overhaul the bank regulatory system and limit the investments that a depository
institution may make with insured funds, is from time to time introduced in
Congress. Such legislation may change banking statutes and the operating
environment of the Company and its banking subsidiaries in substantial and
unpredictable ways. The Company cannot determine the ultimate effect that the
Gramm-Leach-Bliley Act will have or the effect that potential legislation, if
enacted, or implementing regulations with respect thereto, would have upon the
financial condition or results of operations of the Company or its
subsidiaries.

Expanding Enforcement Authority

One of the major additional burdens imposed on the banking industry by
FDICIA is the increased ability of banking regulators to monitor the activities
of banks and their holding companies. In addition, the Federal Reserve Board
and OCC possess extensive authority to police unsafe or unsound practices and
violations of applicable laws and regulations by depository institutions and
their holding companies. For example, the FDIC may terminate the deposit
insurance of any institution which it determines has engaged in an unsafe or
unsound practice. The agencies can also assess civil money penalties, issue
cease and desist or removal orders, seek injunctions, and publicly disclose
such actions. FDICIA, FIRREA and other laws have expanded the agencies
authority in recent years, and the agencies have not yet fully tested the
limits of their powers.

Effect of Monetary Policy

The policies of regulatory authorities, including the monetary policy of
the Federal Reserve Board, have a significant effect on the operating results
of bank holding companies and their subsidiaries. Among the means available to
the Federal Reserve Board to affect the money supply are open market operations
in U.S. Government securities, changes in the discount rate or federal funds
rate on member bank borrowings, and changes in reserve requirements against
member bank deposits. These means are used in varying combinations to
influence overall growth and distribution of bank loans, investments and
deposits, and their use may affect interest rates charged on loans or paid for
deposits.

Federal Reserve Board monetary policies have materially affected the
operating results of commercial banks in the past and are expected to continue
to do so in the future. The nature of future monetary policies and the effect
of such policies on the business and earnings of the Company and its
subsidiaries cannot be predicted.

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Item 2.Properties

Facilities

The Company conducts business at 15 locations, 11 of which are leased.
Included are 14 full-service banking locations and the Companys corporate
offices. The following table sets forth specific information on each location.
The Companys headquarters are located at 9600 Bellaire Boulevard, Suite 252,
Houston, Texas. The lease for the Companys corporate headquarters will expire
in December 2005.

|                                    |  |        |  |         |        |                   |  |             |         |                |  | 
|----------------------------------- |  | ------ |  | ------- | ------ | ----------------- |  | ----------- | ------- | -------------- |  | 
|                                    |  | Owned/ |  |         |        |                   |  | Deposits at
|Location                            |  | Leased |  | Sq. Ft. |        | December 31, 2002
|                                    |  |        |  |         |        |                  
|                                    |  |        |  |         |        |                   |  |             |         | (in thousands)
|Houston Area:                       |  |        |  |         |        |                   |  |             |         |                |  | 
|Corporate Offices                   |  | Leased |  |         | 31,428 |                   |  | $           | N/A     |               
|9600 Bellaire Boulevard, Suite 252  |  |        |  |         |        |                   |  |             |         |                |  | 
|Bellaire Boulevard                  |  | Leased |  |         | 7,002  |                   |  |             | 279,643 |               
|9600 Bellaire Boulevard, Suite 100  |  |        |  |         |        |                   |  |             |         |                |  | 
|East                                |  | Owned  |  |         | 16,400 |                   |  |             | 83,194  |               
|6730 Capitol at Wayside             |  |        |  |         |        |                   |  |             |         |                |  | 
|Chinatown                           |  | Leased |  |         | 2,500  |                   |  |             | 27,793  |               
|1005 Saint Emanuel                  |  |        |  |         |        |                   |  |             |         |                |  | 
|Sugar Land                          |  | Owned  |  |         | 5,665  |                   |  |             | 35,209  |               
|15144 Southwest Freeway             |  |        |  |         |        |                   |  |             |         |                |  | 
|Harwin                              |  | Leased |  |         | 2,463  |                   |  |             | 31,927  |               
|10000 Harwin Drive                  |  |        |  |         |        |                   |  |             |         |                |  | 
|Clear Lake                          |  | Owned  |  |         | 1,986  |                   |  |             | 32,035  |               
|2424 Bay Area Boulevard             |  |        |  |         |        |                   |  |             |         |                |  | 
|Veterans Memorial                   |  | Owned  |  |         | 5,571  |                   |  |             | 26,692  |               
|13480 Veterens Memorial Boulevard   |  |        |  |         |        |                   |  |             |         |                |  | 
|Milam                               |  | Leased |  |         | 2,546  |                   |  |             | 15,850  |               
|2808 Milam Street                   |  |        |  |         |        |                   |  |             |         |                |  | 
|Boone Road                          |  | Leased |  |         | 905    |                   |  |             | 9,242   |               
|11205 Bellaire Boulevard, Suite B-9 |  |        |  |         |        |                   |  |             |         |                |  | 
|Dulles                              |  | Leased |  |         | 479    |                   |  |             | 17,100  |               
|4635 Highway 6                      |  |        |  |         |        |                   |  |             |         |                |  | 
|Long Point                          |  | Leased |  |         | 3,000  |                   |  |             | 19,888  |               
|1426 Blalock                        |  |        |  |         |        |                   |  |             |         |                |  | 
|Dallas Area:                        |  |        |  |         |        |                   |  |             |         |                |  | 
|Richardson                          |  | Leased |  |         | 4,948  |                   |  |             | 63,018  |               
|275 West Campbell Road              |  |        |  |         |        |                   |  |             |         |                |  | 
|Dallas (Harry Hines)                |  | Leased |  |         | 6,000  |                   |  |             | 18,415  |               
|2527 Royal Lane                     |  |        |  |         |        |                   |  |             |         |                |  | 
|Garland                             |  | Leased |  |         | 2,400  |                   |  |             | 7,419   |               
|3500 West Walnut Street             |  |        |  |         |        |                   |  |             |         |                |  | 

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Item 3.Legal Proceedings

Legal Proceedings

The Company and the Bank are from time to time parties to or otherwise
involved in legal proceedings arising in the normal course of business.
Management does not believe that there is any pending or threatened proceeding
against the Company or the Bank which, upon resolution, would have a material
adverse effect on the Companys or the Banks business, financial condition,
results of operations, or cash flows.




Item 4.Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth
quarter of 2002.




PART II




Item 5.Market for
Registrants Common Equity and Related Shareholder Matters

The Companys Common Stock is listed on the Nasdaq National Market System
(Nasdaq NMS) under the symbol MCBI. As of March 21, 2003, there were
7,026,222 shares outstanding and approximately 181 shareholders of record.
The number of beneficial owners is unknown to the Company at this time.

The following table presents the high and low sales prices for the Common
Stock reported on the Nasdaq NMS during the two years ended December 31, 2002:

|               |  |      |       |     |  |   |       | 
|-------------- |  | ---- | ----- | --- |  | - | ----- | 
|2002           |  | High |       | Low
|               |  |      |       |    
|Fourth quarter |  | $    | 12.13 |     |  | $ | 11.40 | 
|Third quarter  |  |      | 12.40 |     |  |   | 11.00 | 
|Second quarter |  |      | 13.50 |     |  |   | 11.65 | 
|First quarter  |  |      | 11.81 |     |  |   | 10.50 | 

|               |  |   |       |  |  |   |      | 
|-------------- |  | - | ----- |  |  | - | ---- | 
|2001           |  |   |       |  |  |   |      | 
|               |  |   |       |  |  |   |      | 
|Fourth quarter |  | $ | 11.90 |  |  | $ | 9.57 | 
|Third quarter  |  |   | 11.86 |  |  |   | 9.85 | 
|Second quarter |  |   | 10.94 |  |  |   | 9.63 | 
|First quarter  |  |   | 12.38 |  |  |   | 8.25 | 

Dividends

Holders of Common Stock are entitled to receive dividends when, and if
declared by the Companys Board of Directors, out of funds legally available.
While the Company has declared and paid quarterly dividends since the fourth
quarter 1998, there is no assurance that the Company will pay dividends in the
future.

The cash dividends paid per share by quarter for the Companys last two
fiscal years were as follows:

|               |  |      |      |      |  |   |      | 
|-------------- |  | ---- | ---- | ---- |  | - | ---- | 
|               |  | 2002 |      | 2001
|               |  |      |      |     
|Fourth quarter |  | $    | 0.06 |      |  | $ | 0.06 | 
|Third quarter  |  |      | 0.06 |      |  |   | 0.06 | 
|Second quarter |  |      | 0.06 |      |  |   | 0.06 | 
|First quarter  |  |      | 0.06 |      |  |   | 0.06 | 

The principal source of cash revenues to the Company is dividends paid by
the Bank with respect to the Banks capital stock. There are certain
restrictions on the payment of such dividends imposed by federal banking laws,
regulations and authorities. Until capital surplus equals or exceeds capital,
a national bank must transfer to surplus 10% of its net income for the
preceding four quarters in the case of an annual dividend or 10% of its net
income for the preceding two quarters in the case of a quarterly or semiannual
dividend. As of December 31, 2002, the Banks capital surplus exceeded its
capital stock. Without prior approval, a national bank may not declare a
dividend if the total amount of all dividends, declared by the bank in any
calendar year exceeds the total of the banks retained net income for the
current year and retained net income for the preceding two years. As of
December 31, 2002, an aggregate of approximately $17.1 million was available
for payment of dividends by the

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Bank to the Company under applicable restrictions, without regulatory approval.
Regulatory authorities could impose administratively stricter limitations on
the ability of the Bank to pay dividends to the Company if such limits were
deemed appropriate to preserve certain capital adequacy requirements.

In the future, the declaration and payment of dividends on the Common
Stock will depend upon the earnings and financial condition of the Company,
liquidity and capital requirements, the general economic and regulatory
climate, the Companys ability to service any equity or debt obligations senior
to the Common Stock and other factors deemed relevant by the Companys Board of
Directors.

Securities Authorized for Issuance Under Equity Compensation Plans

The Company currently has stock options outstanding. The following table
provides information as of December 31, 2002 regarding the Companys equity
compensation plans under which the Companys equity securities are authorized
for issuance:

EQUITY COMPENSATION PLAN INFORMATION

|                                                           |  |                         |         |                     |  |                           |       |                       |  |                         |         | 
|---------------------------------------------------------- |  | ----------------------- | ------- | ------------------- |  | ------------------------- | ----- | --------------------- |  | ----------------------- | ------- | 
|                                                           |  | (a)                     |         | (b)                 |  | (c)                      
|                                                           |  |                         |         |                     |  | Number of securities     
|                                                           |  |                         |         |                     |  |                           |       |                       |  | remaining available for
|                                                           |  | Number of securities to |         |                     |  |                           |       | future issuance under
|                                                           |  | be issued upon exercise |         | Weighted average    |  | equity compensation plans
|                                                           |  | of outstanding options, |         | exercise price of   |  | (excluding securities    
|Plan category                                              |  | warrants and rights     |         | outstanding options |  | reflected in column (a)) 
|                                                           |  |                         |         |                     |  |                          
|Equity compensation plans
approved by security holders     |  |                         | 300,200 |                     |  | $                         | 10.81 |                       |  |                         | 499,800 | 
|Equity compensation plans not
approved by security holders |  |                         |        |                     |  |                           |      |                       |  |                         |        | 
|                                                           |  |                         |         |                     |  |                           |       |                       |  |                         |         | 
|Total                                                      |  |                         | 300,200 |                     |  | $                         | 10.81 |                       |  |                         | 499,800 | 
|                                                           |  |                         |         |                     |  |                           |       |                       |  |                         |         | 

-15-



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##### Table of Contents






Item 6.Selected Consolidated Financial Data

The following Selected Consolidated Financial Data of the Company should
be read in conjunction with the consolidated financial statements of the
Company, and the accompanying notes, appearing elsewhere in this Annual Report
on Form 10-K, and the information contained in Item 7, Managements Discussion
and Analysis of Financial Condition and Results of Operations. The selected
historical consolidated financial data as of and for each of the five years
ended December 31, 2002 is derived from the Companys Consolidated Financial
Statements which have been audited by independent accountants. Certain prior
year amounts have been reclassified to conform with the 2002 presentation.

|                                                    |         |                                          |                                                     |      |                                               |        |         |      |        |        |         |      |        |        |         |      |        |        |         |      |        |        | 
|--------------------------------------------------- | ------- | ---------------------------------------- | --------------------------------------------------- | ---- | --------------------------------------------- | ------ | ------- | ---- | ------ | ------ | ------- | ---- | ------ | ------ | ------- | ---- | ------ | ------ | ------- | ---- | ------ | ------ | 
|                                                    |         |                                          |                                                     |      | Years Ended December 31,                     
|                                                    |         |                                          |                                                     |      |                                              
|                                                    |         |                                          |                                                     |      | 2002                                          |        | 2001    |      | 2000   |        | 1999    |      | 1998  
|                                                    |         |                                          |                                                     |      |                                               |        |         |      |        |        |         |      |       
|                                                    |         |                                          |                                                     |      | (Dollars in
thousands, except per share data)
|Income Statement Data:                              |         |                                          |                                                     |      |                                               |        |         |      |        |        |         |      |        |        |         |      |        |        |         |     
|Interest income                                     |         | $                                        | 48,711                                              |      |                                               | $      | 55,451  |      |        | $      | 63,466  |      |        | $      | 53,668  |      |        | $      | 47,696  |     
|Interest expense                                    |         |                                          | 14,628                                              |      |                                               |        | 23,799  |      |        |        | 27,276  |      |        |        | 21,026  |      |        |        | 20,052  |     
|                                                    |         |                                          |                                                     |      |                                               |        |         |      |        |        |         |      |        |        |         |      |        |        |         |     
|                                                    |         | Net interest income                      |                                                     |      | 34,083                                        |        |         |      | 31,652 |        |         |      | 36,190 |        |         |      | 32,642 |        |         |      | 27,644 |       
|Provision for loan losses                           |         |                                          | 3,853                                               |      |                                               |        | 3,799   |      |        |        | 7,508   |      |        |        | 5,550   |      |        |        | 3,377   |     
|                                                    |         |                                          |                                                     |      |                                               |        |         |      |        |        |         |      |        |        |         |      |        |        |         |     
|                                                    |         |                                          | Net interest income after provision for loan losses |      |                                               | 30,230 |         |      |        | 27,853 |         |      |        | 28,682 |         |      |        | 27,092 |         |      |        | 24,267 | 
|Noninterest income                                  |         |                                          | 8,967                                               |      |                                               |        | 8,660   |      |        |        | 7,032   |      |        |        | 6,088   |      |        |        | 5,609   |     
|Noninterest expense                                 |         |                                          | 26,058                                              |      |                                               |        | 25,383  |      |        |        | 27,230  |      |        |        | 22,412  |      |        |        | 20,980  |     
|                                                    |         |                                          |                                                     |      |                                               |        |         |      |        |        |         |      |        |        |         |      |        |        |         |     
|                                                    |         | Income before provision for income taxes |                                                     |      | 13,139                                        |        |         |      | 11,130 |        |         |      | 8,484  |        |         |      | 10,768 |        |         |      | 8,896  |       
|Provision for income taxes                          |         |                                          | 4,350                                               |      |                                               |        | 3,553   |      |        |        | 3,001   |      |        |        | 3,638   |      |        |        | 2,777   |     
|                                                    |         |                                          |                                                     |      |                                               |        |         |      |        |        |         |      |        |        |         |      |        |        |         |     
|Net income                                          |         | $                                        | 8,789                                               |      |                                               | $      | 7,577   |      |        | $      | 5,483   |      |        | $      | 7,130   |      |        | $      | 6,119   |     
|                                                    |         |                                          |                                                     |      |                                               |        |         |      |        |        |         |      |        |        |         |      |        |        |         |     
|Per Share Data:                                     |         |                                          |                                                     |      |                                               |        |         |      |        |        |         |      |        |        |         |      |        |        |         |     
|Net income:                                         |         |                                          |                                                     |      |                                               |        |         |      |        |        |         |      |        |        |         |      |        |        |         |     
|                                                    | Basic   |                                          | $                                                   | 1.25 |                                               |        | $       | 1.08 |        |        | $       | 0.79 |        |        | $       | 1.00 |        |        | $       | 1.08 |       
|                                                    | Diluted |                                          |                                                     | 1.23 |                                               |        |         | 1.07 |        |        |         | 0.79 |        |        |         | 1.00 |        |        |         | 1.06 |       
|Book value                                          |         |                                          | 10.59                                               |      |                                               |        | 9.32    |      |        |        | 8.42    |      |        |        | 7.38    |      |        |        | 7.14    |     
|Tangible book value                                 |         |                                          | 10.59                                               |      |                                               |        | 9.32    |      |        |        | 8.42    |      |        |        | 7.38    |      |        |        | 7.14    |     
|Cash dividends                                      |         |                                          | 0.24                                                |      |                                               |        | 0.24    |      |        |        | 0.24    |      |        |        | 0.24    |      |        |        | 0.06    |     
|Weighted average shares outstanding (in thousands): |         |                                          |                                                     |      |                                               |        |         |      |        |        |         |      |        |        |         |      |        |        |         |     
|                                                    |         | Basic                                    |                                                     |      | 7,024                                         |        |         |      | 6,998  |        |         |      | 6,972  |        |         |      | 7,114  |        |         |      | 5,691  |       
|                                                    |         | Diluted                                  |                                                     |      | 7,154                                         |        |         |      | 7,059  |        |         |      | 6,973  |        |         |      | 7,114  |        |         |      | 5,749  |       
|                                                   
|Balance Sheet Data:                                 |         |                                          |                                                     |      |                                               |        |         |      |        |        |         |      |        |        |         |      |        |        |         |     
|Total assets                                        |         | $                                        | 840,065                                             |      |                                               | $      | 742,174 |      |        | $      | 736,757 |      |        | $      | 660,589 |      |        | $      | 587,308 |     
|Securities                                          |         |                                          | 264,418                                             |      |                                               |        | 176,230 |      |        |        | 143,759 |      |        |        | 110,065 |      |        |        | 123,190 |     
|Total loans                                         |         |                                          | 527,759                                             |      |                                               |        | 493,145 |      |        |        | 483,738 |      |        |        | 495,669 |      |        |        | 417,686 |     
|Allowance for loan losses                           |         |                                          | 10,150                                              |      |                                               |        | 8,903   |      |        |        | 9,271   |      |        |        | 7,537   |      |        |        | 6,119   |     
|Total deposits                                      |         |                                          | 691,361                                             |      |                                               |        | 642,751 |      |        |        | 625,906 |      |        |        | 544,436 |      |        |        | 479,506 |     
|Other borrowings                                    |         |                                          | 65,774                                              |      |                                               |        | 25,195  |      |        |        | 25,573  |      |        |        | 55,636  |      |        |        | 50,043  |     
|Total shareholders equity                          |         |                                          | 74,463                                              |      |                                               |        | 65,229  |      |        |        | 58,701  |      |        |        | 52,580  |      |        |        | 50,024  |     
|                                                   
|Average Balance Sheet Data:                         |         |                                          |                                                     |      |                                               |        |         |      |        |        |         |      |        |        |         |      |        |        |         |     
|Total assets                                        |         | $                                        | 790,752                                             |      |                                               | $      | 727,841 |      |        | $      | 698,209 |      |        | $      | 620,646 |      |        | $      | 532,751 |     
|Securities                                          |         |                                          | 222,752                                             |      |                                               |        | 159,416 |      |        |        | 127,865 |      |        |        | 119,952 |      |        |        | 114,248 |     
|Total loans                                         |         |                                          | 505,495                                             |      |                                               |        | 474,986 |      |        |        | 486,549 |      |        |        | 456,653 |      |        |        | 368,394 |     
|Allowances for loan losses                          |         |                                          | 9,238                                               |      |                                               |        | 9,315   |      |        |        | 8,589   |      |        |        | 6,720   |      |        |        | 5,049   |     
|Total deposits                                      |         |                                          | 656,824                                             |      |                                               |        | 626,970 |      |        |        | 590,217 |      |        |        | 501,808 |      |        |        | 477,793 |     
|Other borrowings                                    |         |                                          | 53,056                                              |      |                                               |        | 25,570  |      |        |        | 42,757  |      |        |        | 58,037  |      |        |        | 14,020  |     
|Total shareholders equity                          |         |                                          | 70,607                                              |      |                                               |        | 63,539  |      |        |        | 53,462  |      |        |        | 53,010  |      |        |        | 33,992  |     
|                                                   
|Performance Ratios:                                 |         |                                          |                                                     |      |                                               |        |         |      |        |        |         |      |        |        |         |      |        |        |         |     
|Return on average assets                            |         |                                          | 1.11                                                | %    |                                               |        | 1.04    | %    |        |        | 0.79    | %    |        |        | 1.15    | %    |        |        | 1.15    | %   
|Return on average equity                            |         |                                          | 12.45                                               |      |                                               |        | 11.92   |      |        |        | 10.26   |      |        |        | 13.52   |      |        |        | 18.00   |     
|Net interest margin                                 |         |                                          | 4.54                                                |      |                                               |        | 4.64    |      |        |        | 5.57    |      |        |        | 5.55    |      |        |        | 5.50    |     
|Efficiency ratio (1)                                |         |                                          | 60.53                                               |      |                                               |        | 62.97   |      |        |        | 62.98   |      |        |        | 57.92   |      |        |        | 63.48   |     

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##### Table of Contents



|                                                          |  |                                               |       |      |  |      |        |      |  |      |        |   |  |  |        |   |  |  |        |  
|--------------------------------------------------------- |  | --------------------------------------------- | ----- | ---- |  | ---- | ------ | ---- |  | ---- | ------ | - |  |  | ------ | - |  |  | ------ | -
|                                                          |  | Years Ended December 31,                     
|                                                          |  |                                              
|                                                          |  | 2002                                          |       | 2001 |  | 2000 |        | 1999 |  | 1998
|                                                          |  |                                               |       |      |  |      |        |      |  |     
|                                                          |  | (Dollars in
thousands, except per share data)
|Asset Quality Ratios:                                     |  |                                               |       |      |  |      |        |      |  |      |        |   |  |  |        |   |  |  |        |  
|Nonperforming assets to total loans and other real estate |  |                                               | 3.55  | %    |  |      | 1.13   | %    |  |      | 0.62   | % |  |  | 1.42   | % |  |  | 1.26   | %
|Nonperforming assets to total assets                      |  |                                               | 2.24  |      |  |      | 0.75   |      |  |      | 0.40   |   |  |  | 1.07   |   |  |  | 0.90   |  
|Net loan charge-offs to total loans                       |  |                                               | 0.49  |      |  |      | 0.84   |      |  |      | 1.19   |   |  |  | 0.90   |   |  |  | 0.22   |  
|Allowance for loan losses to total loans                  |  |                                               | 1.92  |      |  |      | 1.81   |      |  |      | 1.92   |   |  |  | 1.52   |   |  |  | 1.46   |  
|Allowance for loan losses to nonperforming loans (2)      |  |                                               | 57.71 |      |  |      | 250.86 |      |  |      | 416.67 |   |  |  | 115.03 |   |  |  | 132.44 |  
|Capital Ratios:                                           |  |                                               |       |      |  |      |        |      |  |      |        |   |  |  |        |   |  |  |        |  
|Leverage ratio (3)                                        |  |                                               | 8.58  | %    |  |      | 8.91   | %    |  |      | 8.39   | % |  |  | 8.80   | % |  |  | 8.83   | %
|Average shareholders equity to average total assets      |  |                                               | 8.93  |      |  |      | 8.73   |      |  |      | 7.66   |   |  |  | 8.54   |   |  |  | 6.38   |  
|Tier-1 risk-based capital ratio  period end              |  |                                               | 12.71 |      |  |      | 12.50  |      |  |      | 11.74  |   |  |  | 11.41  |   |  |  | 11.73  |  
|Total risk-based capital ratio  period end               |  |                                               | 13.97 |      |  |      | 13.76  |      |  |      | 13.00  |   |  |  | 12.66  |   |  |  | 12.98  |  



---

|(1) |  | Calculated by dividing total noninterest expense by net interest income plus noninterest income, excluding net securities gains and losses.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Nonperforming assets consist of nonaccrual loans, loans contractually past due 90 days or more and restructured loans.                     
|   
|(3) |  | The leverage ratio is calculated by dividing Tier 1 capital by average assets at December 31st.                                            




Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations

Managements Discussion and Analysis of Financial Condition and Results of
Operations of the Company analyzes the major elements of the Companys balance
sheets and statements of operations. This section should be read in
conjunction with the Companys Consolidated Financial Statements and
accompanying notes and other detailed information appearing elsewhere in this
document.

For the Years Ended December 31, 2002, 2001 and 2000

Overview

The Company experienced growth as assets increased from $742.2 million at
December 31, 2001 to $840.1 million at December 31, 2002, an increase of $97.9
million. Growth in loans and investment securities accounted for the majority
of the Companys asset growth in this period, increasing from $493.1 million
and $176.2 million, respectively, at December 31, 2001 to $527.8 million and
$264.4 million, respectively, at December 31, 2002. Supporting this growth was
an increase in deposits, which rose $48.6 million or 7.6% from $642.8 million
to $691.4 million during this period. Shareholders equity increased to $74.5
million at December 31, 2002, an increase of $9.3 million or 14.2% compared
with $65.2 million at December 31, 2001.

The Company experienced modest growth in 2001 as assets increased from
$736.8 million at December 31, 2000 to $742.2 million at December 31, 2001, an
increase of $5.4 million. Loan growth and a 22.5% increase in
investment securities accounted for the majority of the Companys asset growth
in this period, increasing from $483.7 million and $143.8 million,
respectively, at December 31, 2000 to $493.1 million and $176.2 million,
respectively, at December 31, 2001. Supporting this growth was an increase in
deposits, which rose $16.9 million or 2.7% from $625.9 million to $642.8
million during this period. Shareholders equity increased to $65.2 million at
December 31, 2001, an increase of $6.5 million or 11.1% compared with $58.7
million at December 31, 2000.

Net income was $8.8 million, $7.6 million and $5.5 million for the years
ended December 31, 2002, 2001 and 2000, respectively, and diluted earnings per
common share were $1.23, $1.07 and $0.79 for these same periods. The Company
posted returns on average assets of 1.11%, 1.04% and 0.79% and returns on
average equity of 12.45%, 11.92% and 10.26% for the years ended December 31,
2002, 2001 and 2000, respectively. The increases in the return on average assets
and the return on average equity were primarily due to increased net income that
was supported by growth in the loan, investment, and deposit portfolios.

-17-



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##### Table of Contents



Results of Operations

Net Interest Income

Net interest income represents the amount by which interest income on
interest-earning assets, including securities and loans, exceeds interest
expense incurred on interest-bearing liabilities, including deposits and other
borrowed funds. Net interest income is the principal source of the Companys
earnings. Interest rate fluctuations, as well as changes in the amount and
type of earning assets and liabilities, combine to affect net interest income.

Eleven prime rate reductions occurred in 2001, totaling 475 basis points.
The prime rate declined from 9.50% at January 1, 2001 to 4.75% at December 31,
2001, the lowest sustained rate since the early 1960s. In 2002, the prime
rate remained flat for the first ten months of the year and decreased by 50
basis points to 4.25% in November 2002. As a result, interest income for 2002
was 12.2% lower than interest income in 2001, and interest expense in 2002
decreased 38.5%. Net interest income for 2002 was 7.7% higher than
net interest income in 2001 primarily due to maturities on time deposits that
renewed at significantly lower rates in 2002 combined with the
effect of interest rate floors on approximately 61.3% of the loan
portfolio. The loans with interest rate floors had a
weighted average yield of approximately 6.58% at December 31, 2002 compared to
approximately 53.9% of the loan portfolio with interest rate floors that had a weighted average yield of
approximately 7.75% at December 31, 2001.

2002 versus 2001.Net interest income was $34.1 million in 2002 compared with
$31.7 million in 2001, an increase of $2.4 million or 7.7%. The increase in
net interest income for 2002 was primarily due to a decrease of $9.1 million in
interest expense partially offset by a decrease of $6.7 million in interest
income. The net interest spread in 2002 improved 20 basis points to 3.96%
compared to 3.76% in 2001. The increase in the net interest spread reflects a
decrease of 185 basis points in the average rate on interest-bearing
liabilities which was partially offset by a decrease of 165 basis points in the
average yield on interest-earning assets. Interest rate floors on
approximately 61.3% of the loan portfolio helped curtail the decrease in the
average yield on total loans. The net
interest margin in 2002 decreased 10 basis points to 4.54% compared to 4.64% in
2001 and was primarily due to the refinancing of existing loans and
the origination of new loans both at lower rates. The Federal
Reserves 50 basis point interest rate reduction in November 2002 partially
contributed to this decrease.

Interest income in 2002 decreased by $6.7 million or 12.2% to $48.7
million from $55.5 million in 2001. The decrease in interest income for 2002
was primarily due to the lower interest rate economy, a lower yield on loans as
a result of refinancing, increased nonaccrual loan balances, and lower yields
on the investment portfolio. Approximately 84% of the loans in the loan
portfolio have variable interest rates tied to the prime rate and are,
therefore, sensitive to interest rate movement. However, at December 31, 2002
approximately 61.3% of the loans in the loan portfolio had interest rate floors
with a weighted average yield of 6.58%. This was down 117 basis points from
7.75% at December 31, 2001, primarily as a result of new loans with floors at
lower interest rates in addition to refinanced floor rates on pre-existing
loans. These floor rates helped to partially offset the decline in interest
rate yield and therefore, curtail the decline in interest income. The average
yield on the total loan portfolio for 2002 was 7.51%, down 174 basis points
compared to 9.25% in 2001. The average yield on the investment portfolio for
2002 was 4.38%, down 120 basis points compared to 5.58% in 2001. The yield on
average earning assets for 2002 was 6.49%, down 165 basis points compared to
8.14% in 2001.

Interest expense in 2002 decreased by $9.2 million or 38.5% to $14.6
million from $23.8 million in 2001. The decrease in interest expense for 2002
was also primarily the result of lower interest rates paid for deposits in
2002. Additionally, as interest rates fell in 2001, the majority of
the lower interest expense
was not realized until the latter half of 2001, when a significant portion of
the contractual time deposit portfolio matured and renewed at much lower rates,
giving 2002 a full year effect of lower interest rates paid for deposits. The
average cost of interest-bearing liabilities for 2002 was 2.53%, down 185 basis
points compared to 4.38% in 2001. This was primarily the result of lower
interest rates paid on non-maturing transaction accounts and significantly
lower rates paid on matured and renewed contractual time deposits.

2001 versus 2000.Net interest income totaled $31.7 million in 2001 compared
with $36.2 million in 2000, a decrease of $4.5 million or 12.5%. The decrease
was primarily due to lower market interest rates in 2001 with an end-of-year
prime rate of 4.75%, compared to higher market interest rates in 2000 when the
prime rate reached a high of 9.50%. Approximately 75% of the loans in the loan
portfolio had variable interest rates tied to the prime rate and were,
therefore, sensitive to interest rate movement. However, approximately half of
the loans in the entire loan portfolio had interest rate floors with a
weighted average rate of 7.75% at December 31, 2001.

-18-



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##### Table of Contents



These loans partially offset the decline in interest rate yield and the
overall decline in interest income. In addition, interest expense on deposits
declined which also partially offset the decline in interest income. The net
interest spread in 2001 narrowed 86 basis points to 3.76% compared to 4.62% in
2000. The net interest margin in 2001 narrowed 93 basis points to 4.64%
compared to 5.57% in 2000.

Interest income in 2001 decreased by $8.0 million or 12.6% to $55.5
million from $63.5 million in 2000. The decrease in interest income for 2001
was primarily the result of the eleven reductions in market interest rates
compared to the four increases in interest rates during 2000. In addition,
loan growth was slower in 2001 compared to prior years due to certain large
loan prepayments (primarily in the first quarter), slower loan demand, and the
Companys more conservative credit policies. The average yield on earning
assets in 2001 was 8.14%, compared to 9.77% in 2000, a decline of 163 basis
points.

Interest expense in 2001 decreased by $3.5 million or 12.7% to $23.8
million from $27.3 million in 2000. The decrease in interest expense for 2001
was also primarily due to the reductions in market interest rates. However,
the decreases in interest rates paid on interest-bearing liabilities were
realized at a slower pace than the decreases in interest rates earned on
interest-earning assets due to the contractual terms of the time deposits. There was
significant time deposit growth in 2000 (primarily in the second and third
quarters) with the majority contracted for one-year terms at higher 2000 rates.
The interest expense on those time deposits did not begin to decrease until
the maturities of those contractual time deposits (primarily in the latter half
of 2001). The average rate paid for interest-bearing liabilities in 2001 was
4.38%, compared to 5.15% in 2000, a reduction of 77 basis points.

The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the
resulting yields, as well as the interest expense on average interest-bearing
liabilities, expressed both in dollars and rates. No tax-equivalent
adjustments were made and all average balances are average daily balances.
Nonaccrual loans have been included in the tables as loans carrying a zero
yield with income, if any, recognized at the end of the loan term.

|                                     |                                                                 |              |                                            |                               |         |                          |         |          |  |         |        |             |   |          |        |         |         |             |         |          |  |         |        |      |   |      |        |         |         |         |         |        |  |        |        |       |   |      |      |  
|------------------------------------ | --------------------------------------------------------------- | ------------ | ------------------------------------------ | ----------------------------- | ------- | ------------------------ | ------- | -------- |  | ------- | ------ | ----------- | - | -------- | ------ | ------- | ------- | ----------- | ------- | -------- |  | ------- | ------ | ---- | - | ---- | ------ | ------- | ------- | ------- | ------- | ------ |  | ------ | ------ | ----- | - | ---- | ---- | -
|                                     |                                                                 |              |                                            |                               |         | Years Ended December 31,
|                                     |                                                                 |              |                                            |                               |         |                         
|                                     |                                                                 |              |                                            |                               |         | 2002                     |         | 2001     |  | 2000   
|                                     |                                                                 |              |                                            |                               |         |                          |         |          |  |        
|                                     |                                                                 |              |                                            |                               |         | Average                  |         | Interest |  | Average |        | Average     |   | Interest |        | Average |         | Average     |         | Interest |  | Average
|                                     |                                                                 |              |                                            |                               |         | Outstanding              |         | Earned/  |  | Yield/  |        | Outstanding |   | Earned/  |        | Yield/  |         | Outstanding |         | Earned/  |  | Yield/ 
|                                     |                                                                 |              |                                            |                               |         | Balance                  |         | Paid     |  | Rate    |        | Balance     |   | Paid     |        | Rate    |         | Balance     |         | Paid     |  | Rate   
|                                     |                                                                 |              |                                            |                               |         |                          |         |          |  |         |        |             |   |          |        |         |         |             |         |          |  |        
|                                     |                                                                 |              |                                            |                               |         | (Dollars in thousands)  
|Assets                               |                                                                 |              |                                            |                               |         |                          |         |          |  |         |        |             |   |          |        |         |         |             |         |          |  |         |        |      |   |      |        |         |         |         |         |        |  |        |        |      
|Interest-earning assets:             |                                                                 |              |                                            |                               |         |                          |         |          |  |         |        |             |   |          |        |         |         |             |         |          |  |         |        |      |   |      |        |         |         |         |         |        |  |        |        |      
|                                     | Total loans                                                     |              | $                                          | 505,495                       |         |                          | $       | 37,987   |  |         |        | 7.51        | % |          | $      | 474,986 |         |             | $       | 43,926   |  |         |        | 9.25 | % |      | $      | 486,549 |         |         | $       | 52,280 |  |        |        | 10.75 | %
|                                     | Taxable securities                                              |              |                                            | 195,649                       |         |                          |         | 9,080    |  |         |        | 4.64        |   |          |        | 132,366 |         |             |         | 8,356    |  |         |        | 6.31 |   |      |        | 102,261 |         |         |         | 7,313  |  |        |        | 7.15  |  
|                                     | Tax-exempt securities                                           |              |                                            | 23,362                        |         |                          |         | 1,160    |  |         |        | 4.97        |   |          |        | 23,491  |         |             |         | 1,177    |  |         |        | 5.01 |   |      |        | 20,963  |         |         |         | 1,046  |  |        |        | 4.99  |  
|                                     | Federal funds sold and other temporary investments              |              |                                            | 25,843                        |         |                          |         | 484      |  |         |        | 1.87        |   |          |        | 50,715  |         |             |         | 1,992    |  |         |        | 3.93 |   |      |        | 39,589  |         |         |         | 2,827  |  |        |        | 7.14  |  
|                                     |                                                                 |              |                                            |                               |         |                          |         |          |  |         |        |             |   |          |        |         |         |             |         |          |  |         |        |      |   |      |        |         |         |         |         |        |  |        |        |      
|                                     |                                                                 |              |                                            | Total interest-earning assets |         |                          | 750,349 |          |  |         | 48,711 |             |   |          | 6.49   | %       |         |             | 681,558 |          |  |         | 55,451 |      |   |      | 8.14   | %       |         |         | 649,362 |        |  |        | 63,466 |       |   |      | 9.77 | %
|                                     | Less allowance for loan losses                                  |              |                                            | (9,238                        | )       |                          |         |          |  |         |        |             |   |          |        | (9,315  | )       |             |         |          |  |         |        |      |   |      |        | (8,589  | )       |         |         |        |  |        |        |       |  
|                                     |                                                                 |              |                                            |                               |         |                          |         |          |  |         |        |             |   |          |        |         |         |             |         |          |  |         |        |      |   |      |        |         |         |         |         |        |  |        |        |      
|                                     | Total interest-earning assets, net of allowance for
loan losses |              |                                            | 741,111                       |         |                          |         |          |  |         |        |             |   |          |        | 672,243 |         |             |         |          |  |         |        |      |   |      |        | 640,773 |         |         |         |        |  |        |        |       |  
|Noninterest-earning assets           |                                                                 |              | 49,641                                     |                               |         |                          |         |          |  |         |        |             |   |          | 55,598 |         |         |             |         |          |  |         |        |      |   |      | 57,436 |         |         |         |         |        |  |        |        |      
|                                     |                                                                 |              |                                            |                               |         |                          |         |          |  |         |        |             |   |          |        |         |         |             |         |          |  |         |        |      |   |      |        |         |         |         |         |        |  |        |        |      
|                                     |                                                                 | Total assets |                                            | $                             | 790,752 |                          |         |          |  |         |        |             |   |          |        | $       | 727,841 |             |         |          |  |         |        |      |   |      |        | $       | 698,209 |         |         |        |  |        |        |       |   |     
|                                     |                                                                 |              |                                            |                               |         |                          |         |          |  |         |        |             |   |          |        |         |         |             |         |          |  |         |        |      |   |      |        |         |         |         |         |        |  |        |        |      
|Liabilities and shareholders equity |                                                                 |              |                                            |                               |         |                          |         |          |  |         |        |             |   |          |        |         |         |             |         |          |  |         |        |      |   |      |        |         |         |         |         |        |  |        |        |      
|Interest-bearing liabilities:        |                                                                 |              |                                            |                               |         |                          |         |          |  |         |        |             |   |          |        |         |         |             |         |          |  |         |        |      |   |      |        |         |         |         |         |        |  |        |        |      
|                                     | Interest-bearing demand deposits                                |              | $                                          | 71,059                        |         |                          | $       | 837      |  |         |        | 1.18        | % |          | $      | 54,694  |         |             | $       | 1,209    |  |         |        | 2.21 | % |      | $      | 42,888  |         |         | $       | 1,283  |  |        |        | 2.99  | %
|                                     | Saving and money market accounts                                |              |                                            | 110,372                       |         |                          |         | 1,378    |  |         |        | 1.25        |   |          |        | 102,268 |         |             |         | 2,322    |  |         |        | 2.27 |   |      |        | 96,520  |         |         |         | 3,231  |  |        |        | 3.35  |  
|                                     | Time deposits                                                   |              |                                            | 342,707                       |         |                          |         | 10,595   |  |         |        | 3.09        |   |          |        | 360,370 |         |             |         | 19,003   |  |         |        | 5.27 |   |      |        | 348,265 |         |         |         | 20,444 |  |        |        | 5.87  |  
|                                     | Federal funds purchased                                         |              |                                            | 162                           |         |                          |         | 4        |  |         |        | 2.47        |   |          |        | 1       |         |             |         |         |  |         |        |     |   |      |        | 14,957  |         |         |         | 941    |  |        |        | 6.29  |  
|                                     | Other borrowings                                                |              |                                            | 52,894                        |         |                          |         | 1,814    |  |         |        | 3.43        |   |          |        | 25,570  |         |             |         | 1,265    |  |         |        | 4.95 |   |      |        | 27,268  |         |         |         | 1,377  |  |        |        | 5.05  |  
|                                     |                                                                 |              |                                            |                               |         |                          |         |          |  |         |        |             |   |          |        |         |         |             |         |          |  |         |        |      |   |      |        |         |         |         |         |        |  |        |        |      
|                                     |                                                                 |              | Total interest-bearing liabilities         |                               |         | 577,194                  |         |          |  | 14,628  |        |             |   | 2.53     | %      |         |         | 542,903     |         |          |  | 23,799  |        |      |   | 4.38 | %      |         |         | 529,898 |         |        |  | 27,276 |        |       |   | 5.15 | %   
|Noninterest-bearing liabilities:     |                                                                 |              |                                            |                               |         |                          |         |          |  |         |        |             |   |          |        |         |         |             |         |          |  |         |        |      |   |      |        |         |         |         |         |        |  |        |        |      
|                                     | Noninterest-bearing demand deposits                             |              |                                            | 132,686                       |         |                          |         |          |  |         |        |             |   |          |        | 109,638 |         |             |         |          |  |         |        |      |   |      |        | 102,544 |         |         |         |        |  |        |        |       |  
|                                     | Other liabilities                                               |              |                                            | 10,265                        |         |                          |         |          |  |         |        |             |   |          |        | 11,761  |         |             |         |          |  |         |        |      |   |      |        | 12,305  |         |         |         |        |  |        |        |       |  
|                                     |                                                                 |              |                                            |                               |         |                          |         |          |  |         |        |             |   |          |        |         |         |             |         |          |  |         |        |      |   |      |        |         |         |         |         |        |  |        |        |      
|                                     |                                                                 |              | Total liabilities                          |                               |         | 720,145                  |         |          |  |         |        |             |   |          |        |         |         | 664,302     |         |          |  |         |        |      |   |      |        |         |         | 644,747 |         |        |  |        |        |       |   |      |     
|Shareholders equity                 |                                                                 |              | 70,607                                     |                               |         |                          |         |          |  |         |        |             |   |          | 63,539 |         |         |             |         |          |  |         |        |      |   |      | 53,462 |         |         |         |         |        |  |        |        |      
|                                     |                                                                 |              |                                            |                               |         |                          |         |          |  |         |        |             |   |          |        |         |         |             |         |          |  |         |        |      |   |      |        |         |         |         |         |        |  |        |        |      
|                                     |                                                                 |              | Total liabilities and shareholders equity |                               | $       | 790,752                  |         |          |  |         |        |             |   |          |        |         | $       | 727,841     |         |          |  |         |        |      |   |      |        |         | $       | 698,209 |         |        |  |        |        |       |   |      |     
|                                     |                                                                 |              |                                            |                               |         |                          |         |          |  |         |        |             |   |          |        |         |         |             |         |          |  |         |        |      |   |      |        |         |         |         |         |        |  |        |        |      
|Net interest income                  |                                                                 |              |                                            |                               |         | $                        | 34,083  |          |  |         |        |             |   |          |        |         |         | $           | 31,652  |          |  |         |        |      |   |      |        |         |         | $       | 36,190  |        |  |        |        |      
|                                     |                                                                 |              |                                            |                               |         |                          |         |          |  |         |        |             |   |          |        |         |         |             |         |          |  |         |        |      |   |      |        |         |         |         |         |        |  |        |        |      
|Net interest spread                  |                                                                 |              |                                            |                               |         |                          |         |          |  |         | 3.96   | %           |   |          |        |         |         |             |         |          |  |         | 3.76   | %    |   |      |        |         |         |         |         |        |  |        | 4.62   | %    
|Net interest margin                  |                                                                 |              |                                            |                               |         |                          |         |          |  |         | 4.54   | %           |   |          |        |         |         |             |         |          |  |         | 4.64   | %    |   |      |        |         |         |         |         |        |  |        | 5.57   | %    

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The following table presents the dollar amount of changes in interest
income and interest expense for the major components of interest-earning assets
and interest-bearing liabilities and distinguishes between changes in
outstanding balances and changes in interest rates. For purposes of this
table, changes attributable to both rate and volume have been allocated to
rate.

|                                           |                                                    |                                               |       |                          |       |               |        |        |         |            |       |        |        |       |       |        |       |   |        |        |         |   |        |        |        |  
|------------------------------------------ | -------------------------------------------------- | --------------------------------------------- | ----- | ------------------------ | ----- | ------------- | ------ | ------ | ------- | ---------- | ----- | ------ | ------ | ----- | ----- | ------ | ----- | - | ------ | ------ | ------- | - | ------ | ------ | ------ | -
|                                           |                                                    |                                               |       | Years Ended December 31,
|                                           |                                                    |                                               |       |                         
|                                           |                                                    |                                               |       | 2002 vs. 2001            |       | 2001 vs. 2000
|                                           |                                                    |                                               |       |                          |       |              
|                                           |                                                    |                                               |       | Increase                 |       |               |        |        |         | Increase   |       |        |        |      
|                                           |                                                    |                                               |       | (Decrease)               |       |               |        |        |         | (Decrease) |       |        |        |      
|                                           |                                                    |                                               |       | Due to                   |       |               |        |        |         | Due to     |       |        |        |      
|                                           |                                                    |                                               |       |                          |       |               |        |        |         |            |       |        |        |      
|                                           |                                                    |                                               |       | Volume                   |       | Rate          |        | Total  |         | Volume     |       | Rate   |        | Total
|                                           |                                                    |                                               |       |                          |       |               |        |        |         |            |       |        |        |      
|                                           |                                                    |                                               |       | (Dollars in thousands)  
|Interest-earning assets:                   |                                                    |                                               |       |                          |       |               |        |        |         |            |       |        |        |       |       |        |       |   |        |        |         |   |        |       
|                                           | Loans                                              |                                               | $     | 2,821                    |       |               | $      | (8,760 | )       |            | $     | (5,939 | )      |       | $     | (1,242 | )     |   | $      | (7,112 | )       |   | $      | (8,354 | )     
|                                           | Securities                                         |                                               |       | 4,467                    |       |               |        | (3,760 | )       |            |       | 707    |        |       |       | 2,449  |       |   |        | (1,275 | )       |   |        | 1,174  |       
|                                           | Federal funds sold and other temporary investments |                                               |       | (977                     | )     |               |        | (531   | )       |            |       | (1,508 | )      |       |       | 794    |       |   |        | (1,629 | )       |   |        | (835   | )     
|                                           |                                                    |                                               |       |                          |       |               |        |        |         |            |       |        |        |       |       |        |       |   |        |        |         |   |        |       
|                                           |                                                    | Total increase (decrease) in interest income  |       |                          | 6,311 |               |        |        | (13,051 | )          |       |        | (6,740 | )     |       |        | 2,001 |   |        |        | (10,016 | ) |        |        | (8,015 | )
|Interest-bearing liabilities:              |                                                    |                                               |       |                          |       |               |        |        |         |            |       |        |        |       |       |        |       |   |        |        |         |   |        |       
|                                           | Interest-bearing demand deposits                   |                                               |       | 362                      |       |               |        | (734   | )       |            |       | (372   | )      |       |       | 353    |       |   |        | (427   | )       |   |        | (74    | )     
|                                           | Saving and money market accounts                   |                                               |       | 184                      |       |               |        | (1,128 | )       |            |       | (944   | )      |       |       | 192    |       |   |        | (1,101 | )       |   |        | (909   | )     
|                                           | Time deposits                                      |                                               |       | (931                     | )     |               |        | (7,477 | )       |            |       | (8,408 | )      |       |       | 711    |       |   |        | (2,152 | )       |   |        | (1,441 | )     
|                                           | Fed funds purchased                                |                                               |       |                         |       |               |        | 4      |         |            |       | 4      |        |       |       | (941   | )     |   |        |       |         |   |        | (941   | )     
|                                           | Other borrowings                                   |                                               |       | 1,352                    |       |               |        | (803   | )       |            |       | 549    |        |       |       | (86    | )     |   |        | (26    | )       |   |        | (112   | )     
|                                           |                                                    |                                               |       |                          |       |               |        |        |         |            |       |        |        |       |       |        |       |   |        |        |         |   |        |       
|                                           |                                                    | Total increase (decrease) in interest expense |       |                          | 967   |               |        |        | (10,138 | )          |       |        | (9,171 | )     |       |        | 229   |   |        |        | (3,706  | ) |        |        | (3,477 | )
|Increase (decrease) in net interest income |                                                    | $                                             | 5,344 |                          |       | $             | (2,913 | )      |         | $          | 2,431 |        |        | $     | 1,772 |        |       | $ | (6,310 | )      |         | $ | (4,538 | )     
|                                           |                                                    |                                               |       |                          |       |               |        |        |         |            |       |        |        |       |       |        |       |   |        |        |         |   |        |       

Provision for Loan Losses

Provisions for loan losses are charged to income to bring the Companys
allowance for loan losses to a target level based on the factors discussed
under   Financial Condition- Allowance for Loan Losses.

The 2002 provision for loan losses was $3.85 million, up by $54,000 or
1.4% compared to $3.8 million in 2001. In 2002, management determined an additional
provision was needed primarily due to the results of continued asset quality
risk assessment procedures and a 7.0% increase in the loan portfolio.
The provision for loan losses in 2001 was impacted by an additional $2.6
million provision made in the fourth quarter of 2001 based on the results of a
review of the loan portfolio. More specifically, during the fourth quarter
2001, the Company committed extensive resources to the review of the loan
portfolio and probable losses inherent therein. A significant number of
credits with balances greater than $500,000 were reviewed. Each loan was
graded according to its historical performance, current status, collateral
value, and financial strength of the borrower. Due consideration was also
given to the uncertainty of the local and national economy.

The ratio of the allowance for loan losses to total loans at December 31,
2002 was 1.92% compared with 1.81% and 1.92% at December 31, 2001 and 2000,
respectively. The Company strives to maintain its allowance for loan losses at
target levels commensurate with probable losses inherent in the loan portfolio.
Management conducts ongoing risk assessments that may, from time to time,
necessitate varying levels of allowance for loan losses based on these
risk assessments.

Noninterest Income

For the years ended December 31, 2002, 2001 and 2000, noninterest income
was $9.0 million, $8.7 million, and $7.0 million, respectively, reflecting an
increase of approximately $307,000 or 3.5% in 2002 compared to 2001, and an
increase of $1.6 million or 23.2% in 2001 compared to 2000. The majority of the
growth in noninterest income during 2002 and 2001 was attributed to customer
service charges on deposit accounts as a result of continued deposit growth
coupled with ongoing relationship banking initiatives. The service
fees category of noninterest income includes monthly account service charge
assessments, non-sufficient funds charges, and all other traditional
non-lending bank services fees. Other loan-related fees for 2002 were $1.4
million, up $342,000 compared to 2001, and were attributed to a $58,000
increase in late fees collected and a $102,000 increase in mortgage
broker fees.

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The following table presents the major categories of noninterest income:

|                                           |                          |   |                          |       |      |   |       |       |  |   |       |       | 
|------------------------------------------ | ------------------------ | - | ------------------------ | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                                           |                          |   | Years Ended December 31,
|                                           |                          |   |                         
|                                           |                          |   | 2002                     |       | 2001 |   | 2000 
|                                           |                          |   |                          |       |      |   |      
|                                           |                          |   | (Dollars in thousands)  
|Service fees                               |                          | $ | 6,670                    |       |      | $ | 6,360 |       |  | $ | 4,752 |      
|Other loan-related fees                    |                          |   | 1,405                    |       |      |   | 1,063 |       |  |   | 1,271 |      
|Letters of credit commissions and fees     |                          |   | 610                      |       |      |   | 655   |       |  |   | 583   |      
|Gain on sale of investment securities, net |                          |   | 34                       |       |      |   | 189   |       |  |   | 2     |      
|Other noninterest income                   |                          |   | 248                      |       |      |   | 393   |       |  |   | 424   |      
|                                           |                          |   |                          |       |      |   |       |       |  |   |       |      
|                                           | Total noninterest income |   | $                        | 8,967 |      |   | $     | 8,660 |  |   | $     | 7,032 | 
|                                           |                          |   |                          |       |      |   |       |       |  |   |       |      

Noninterest Expense

For the years ended December 31, 2002, 2001 and 2000, noninterest expense
was $26.1 million, $25.4 million, and $27.2 million, respectively, reflecting
an increase of approximately $680,000 or 2.7% in 2002 compared to 2001, and a
decrease of $1.8 million or 6.8% in 2001 compared to 2000. The increase in
total noninterest expense in 2002 compared to 2001 was primarily due to higher
employee compensation and benefits as a result of increased staffing levels in
lending operations and compliance functions. Additionally, the
expenses in 2002 reflected the
full-year effect of executive level additions made during the third and fourth
quarters of 2001. With the exception of losses incurred on net
foreclosed assets,
generally, other noninterest expenses decreased for the year ended
December 31, 2002
compared to the same period in 2001.

The decrease in total noninterest expense in 2001 compared to 2000 was the
result of a decrease in non-staff expense primarily related to decreased
occupancy costs as a result of the closing of the Banks Galleria branch office
in November 2000, and decreased legal and professional fees. Additionally,
during 2000, the Company incurred expenses related to legal, special accounting
projects, and various systems-related implementations and improvements
including online/internet banking. Such projects did not recur in 2001.

The efficiency ratio
is a measure designed to show how well a company utilizes its
resources and manages its expenses. The efficiency ratio is
calculated by dividing noninterest expense by net interest income plus
noninterest income excluding securities gains and losses. The Companys efficiency ratio for 2002 of 60.53% reflects improvement
compared to the efficiency ratios for 2001 and 2000 of 62.97% and 62.98%,
respectively. The improvement in the Companys efficiency ratio in 2002
compared to 2001 was primarily the result of higher net interest income and
higher noninterest income. The Companys efficiency ratio in 2001 compared to
2000 was basically flat primarily due to the effect of lower net interest
income that was partially offset by higher noninterest income and lower
noninterest expense.

The following table presents the major categories of noninterest expense:

|                               |                             |                            |        |                          |        |      |        |       |        |   |        |       |        | 
|------------------------------ | --------------------------- | -------------------------- | ------ | ------------------------ | ------ | ---- | ------ | ----- | ------ | - | ------ | ----- | ------ | 
|                               |                             |                            |        | Years Ended December 31,
|                               |                             |                            |        |                         
|                               |                             |                            |        | 2002                     |        | 2001 |        | 2000 
|                               |                             |                            |        |                          |        |      |        |      
|                               |                             |                            |        | (Dollars in thousands)  
|Salaries and employee benefits |                             | $                          | 14,746 |                          |        | $    | 13,180 |       |        | $ | 12,447 |      
|Non-staff expenses:            |                             |                            |        |                          |        |      |        |       |        |   |        |      
|                               | Occupancy and equipment     |                            |        | 5,089                    |        |      |        | 5,189 |        |   |        | 5,724 |       
|                               | Foreclosed assets, net      |                            |        | 680                      |        |      |        | 153   |        |   |        | (50   | )     
|                               | Data processing             |                            |        | 94                       |        |      |        | 86    |        |   |        | 154   |       
|                               | Legal and professional fees |                            |        | 568                      |        |      |        | 963   |        |   |        | 3,197 |       
|                               | Advertising                 |                            |        | 314                      |        |      |        | 426   |        |   |        | 436   |       
|                               | Printing and supplies       |                            |        | 572                      |        |      |        | 526   |        |   |        | 410   |       
|                               | Telecommunications          |                            |        | 578                      |        |      |        | 623   |        |   |        | 580   |       
|                               | Other noninterest expense   |                            |        | 3,417                    |        |      |        | 4,237 |        |   |        | 4,332 |       
|                               |                             |                            |        |                          |        |      |        |       |        |   |        |      
|                               |                             | Total non-staff expenses   |        |                          | 11,312 |      |        |       | 12,203 |   |        |       | 14,783 | 
|                               |                             |                            |        |                          |        |      |        |       |        |   |        |      
|                               |                             | Total noninterest expenses |        | $                        | 26,058 |      |        | $     | 25,383 |   |        | $     | 27,230 | 
|                               |                             |                            |        |                          |        |      |        |       |        |   |        |      

Salaries and employee benefits for the years ended December 31, 2002, 2001
and 2000 was $14.7 million, $13.2 million, and $12.4 million, respectively,
reflecting an increase of $1.6 million or 11.9% in 2002 compared to 2001 and a
$733,000 or 5.9% increase in 2001 compared to 2000. The increase in 2002
versus 2001 primarily reflected the full-year effect of increased staffing
levels in lending operations and compliance functions in

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addition to the full-year effect of executive level additions made during the
third and fourth quarters of 2001. The increase in 2001 versus 2000 primarily
reflected annual salary increases, additions to officer and senior officer
level employees, and various incentive program payments. Total full-time
equivalent employees (FTE) at December 31, 2002, 2001 and 2000 were 309, 298,
and 319, respectively.

Non-staff expenses for 2002, 2001 and 2000 were $11.3 million, $12.2
million, and $14.8 million, respectively, reflecting a decrease in 2002
compared to 2001 of $900,000 or 7.3% and a decrease in 2001 compared to 2000 of
$2.6 million or 17.6%. The decrease in non-staff expenses in 2002 primarily
reflected decreases of $100,000 in occupancy and equipment, $395,000 in legal
and professional fees, $112,000 in advertising, and $820,000 in other noninterest
expense that was partially offset by an increase in losses incurred
on net foreclosed assets of approximately $527,000. The decrease in occupancy and equipment
primarily reflected lower depreciation expense, the reduction in legal and
professional fees reflected a decrease in both legal and outside consulting fees,
and advertising declined due to the elimination of certain contractual
advertising arrangements. Other noninterest expense in 2002 reflected an accumulation
of decreases, including $368,000 in directors fees due to the absence
of incentive compensation accruals that were made in 2001; $108,000 in
franchise tax; $51,000 in
insurance; $75,000 in temporary help resulting from an increase in full-time
employees; and $438,000 in deposit operations losses resulting
from a robbery loss of approximately $200,000 in 2001 and a related insurance
recovery of approximately $250,000 in 2002. These decreases were partially
offset by increases of $100,000 in placement fees for newly hired employees,
visa checkcard processing fees of $42,000, and charitable donations of $24,000.

The $2.6 million decrease in non-staff expense during 2001 compared to
2000 was primarily due to lower legal and professional fees of $2.2 million,
lower occupancy expense of $535,000, and lower data processing, and
other noninterest expense of $163,000, that was partially offset by higher
net real estate expense of $203,000, higher telecommunications expense of
$43,000, and increased printing and supplies expense of $116,000.

Income Taxes

Income tax expense includes the regular federal income tax at the
statutory rate plus the income tax component of the Texas franchise tax. The
amount of federal income tax expense is influenced by the amount of taxable
income, the amount of tax-exempt income, the amount of non-deductible interest
expense and the amount of other non-deductible expenses. Taxable income for
the income tax component of the Texas franchise tax is the federal pre-tax
income, plus certain officers salaries, less interest income on federal
securities.

Income tax expense is influenced by the level and mix of taxable and
tax-exempt income and the amount of non-deductible interest and other expenses.
Income tax expense for 2002 was $4.4 million, up approximately $800,000 or
22.4% from income tax of $3.6 million in 2001. Income tax expense for 2001 was
up approximately $600,000 or 18.4% from income tax of $3.0 million in 2000.
The effective income tax rates in 2002, 2001 and 2000 were 33.1%, 31.9%, and
35.4%, respectively. The Texas franchise tax was $153,252, $345,800, and
$298,600 in 2002, 2001, and 2000, respectively. In 2002, the Company received
a franchise tax refund as a result of a franchise tax audit conducted on tax
years 1999, 2000, and 2001.

Impact of Inflation

The effects of inflation on the local economy and on the Companys
operating results have been relatively modest for the past several years.
Since substantially all of the Companys assets and liabilities are monetary in
nature, such as cash, securities, loans and deposits, their values are less
sensitive to the effects of inflation than to changing interest rates, which do
not necessarily change in accordance with inflation rates. The Company tries
to control the impact of interest rate fluctuations by managing the
relationship between its interest rate sensitive assets and liabilities. See
-Financial Condition  Interest Rate Sensitivity and Liquidity.

Financial Condition

Loan Portfolio

Total loans were $527.8 million at December 31, 2002, up $34.7 million or
7.0% from $493.1 million at December 31, 2001. The increase in 2002
represented growth of $12.5 million in commercial and industrial loans, $23.3
million in real estate loans, partially offset by a decrease in consumer and
other loans of $1.1 million. Total loans were $493.1 million at December 31,
2001, an increase of $9.4 million or 1.9% from $483.7

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million at December 31, 2000. The $9.4 million increase in 2001 compared to
2000 was modest and represented slower than planned loan growth resulting from
a combination of loan prepayments, softer loan demand, and the Companys more
conservative credit standards.

For the years ended December 31, 2002, 2001, and 2000, the ratios of total
loans to total deposits were 76.3%, 76.7%, and 77.3%, respectively. For the
same periods, total loans represented 62.8%, 66.4%, and 65.7% of total assets,
respectively.

The following table summarizes the loan portfolio of the Company by type
of loan:

|                                                     |             |   |                        |         |         |  |        |       |         |   |         |         |         |  |        |       |         |   |         |         |         |  |        |       |  |   |         |         |  |  |        |       |  |   |         |         |  |  |        |       | 
|---------------------------------------------------- | ----------- | - | ---------------------- | ------- | ------- |  | ------ | ----- | ------- | - | ------- | ------- | ------- |  | ------ | ----- | ------- | - | ------- | ------- | ------- |  | ------ | ----- |  | - | ------- | ------- |  |  | ------ | ----- |  | - | ------- | ------- |  |  | ------ | ----- | 
|                                                     |             |   | As of December 31,    
|                                                     |             |   |                       
|                                                     |             |   | 2002                   |         | 2001    |  | 2000   |       | 1999    |   | 1998   
|                                                     |             |   |                        |         |         |  |        |       |         |   |        
|                                                     |             |   | Amount                 |         | Percent |  | Amount |       | Percent |   | Amount  |         | Percent |  | Amount |       | Percent |   | Amount  |         | Percent
|                                                     |             |   |                        |         |         |  |        |       |         |   |         |         |         |  |        |       |         |   |         |         |        
|                                                     |             |   | (Dollars in thousands)
|Commercial and industrial                            |             | $ | 325,424                |         |         |  | 60.94  | %     |         | $ | 312,899 |         |         |  | 62.67  | %     |         | $ | 298,134 |         |         |  | 60.92  | %     |  | $ | 298,150 |         |  |  | 59.55  | %     |  | $ | 256,311 |         |  |  | 60.73  | %    
|Real estate mortgage                                
|                                                     | Residential |   |                        | 7,326   |         |  |        | 1.37  |         |   |         | 7,833   |         |  |        | 1.57  |         |   |         | 10,141  |         |  |        | 2.07  |  |   |         | 10,934  |  |  |        | 2.18  |  |   |         | 11,795  |  |  |        | 2.79  | 
|                                                     | Commercial  |   |                        | 165,608 |         |  |        | 31.01 |         |   |         | 131,022 |         |  |        | 26.24 |         |   |         | 128,242 |         |  |        | 26.20 |  |   |         | 126,363 |  |  |        | 25.24 |  |   |         | 103,677 |  |  |        | 24.57 | 
|                                                     |             |   |                        |         |         |  |        |       |         |   |         |         |         |  |        |       |         |   |         |         |         |  |        |       |  |   |         |         |  |  |        |       |  |   |         |         |  |  |        |      
|                                                     |             |   | 172,934                |         |         |  | 32.38  |       |         |   | 138,855 |         |         |  | 27.81  |       |         |   | 138,383 |         |         |  | 28.27  |       |  |   | 137,297 |         |  |  | 27.42  |       |  |   | 115,472 |         |  |  | 27.36  |      
|                                                     |             |   |                        |         |         |  |        |       |         |   |         |         |         |  |        |       |         |   |         |         |         |  |        |       |  |   |         |         |  |  |        |       |  |   |         |         |  |  |        |      
|Real estate construction                            
|                                                     | Residential |   |                        | 10,589  |         |  |        | 1.99  |         |   |         | 5,962   |         |  |        | 1.19  |         |   |         | 7,542   |         |  |        | 1.54  |  |   |         | 11,348  |  |  |        | 2.27  |  |   |         | 10,842  |  |  |        | 2.57  | 
|                                                     | Commercial  |   |                        | 14,805  |         |  |        | 2.76  |         |   |         | 30,215  |         |  |        | 6.05  |         |   |         | 32,059  |         |  |        | 6.55  |  |   |         | 28,661  |  |  |        | 5.72  |  |   |         | 17,769  |  |  |        | 4.21  | 
|                                                     |             |   |                        |         |         |  |        |       |         |   |         |         |         |  |        |       |         |   |         |         |         |  |        |       |  |   |         |         |  |  |        |       |  |   |         |         |  |  |        |      
|                                                     |             |   | 25,394                 |         |         |  | 4.75   |       |         |   | 36,177  |         |         |  | 7.24   |       |         |   | 39,601  |         |         |  | 8.09   |       |  |   | 40,009  |         |  |  | 7.99   |       |  |   | 28,611  |         |  |  | 6.78   |      
|                                                     |             |   |                        |         |         |  |        |       |         |   |         |         |         |  |        |       |         |   |         |         |         |  |        |       |  |   |         |         |  |  |        |       |  |   |         |         |  |  |        |      
|Consumer and other                                   |             |   | 10,286                 |         |         |  | 1.93   |       |         |   | 11,364  |         |         |  | 2.28   |       |         |   | 11,986  |         |         |  | 2.45   |       |  |   | 11,550  |         |  |  | 2.31   |       |  |   | 12,117  |         |  |  | 2.87   |      
|Factored receivables                                 |             |   |                       |         |         |  |       |       |         |   |        |         |         |  |       |       |         |   | 1,297   |         |         |  | 0.27   |       |  |   | 13,700  |         |  |  | 2.73   |       |  |   | 9,506   |         |  |  | 2.26   |      
|                                                     |             |   |                        |         |         |  |        |       |         |   |         |         |         |  |        |       |         |   |         |         |         |  |        |       |  |   |         |         |  |  |        |       |  |   |         |         |  |  |        |      
|Gross loans                                          |             |   | 534,038                |         |         |  | 100.00 | %     |         |   | 499,295 |         |         |  | 100.00 | %     |         |   | 489,401 |         |         |  | 100.00 | %     |  |   | 500,706 |         |  |  | 100.00 | %     |  |   | 422,017 |         |  |  | 100.00 | %    
|                                                     |             |   |                        |         |         |  |        |       |         |   |         |         |         |  |        |       |         |   |         |         |         |  |        |       |  |   |         |         |  |  |        |       |  |   |         |         |  |  |        |      
|Less: unearned discounts,
interest and deferred fees |             |   | (6,279                 | )       |         |  |        |       |         |   | (6,150  | )       |         |  |        |       |         |   | (5,663  | )       |         |  |        |       |  |   | (5,037  | )       |  |  |        |       |  |   | (4,331  | )       |  |  |        |      
|                                                     |             |   |                        |         |         |  |        |       |         |   |         |         |         |  |        |       |         |   |         |         |         |  |        |       |  |   |         |         |  |  |        |       |  |   |         |         |  |  |        |      
|Total loans                                          |             | $ | 527,759                |         |         |  |        |       |         | $ | 493,145 |         |         |  |        |       |         | $ | 483,738 |         |         |  |        |       |  | $ | 495,669 |         |  |  |        |       |  | $ | 417,686 |         |  |  |        |      
|                                                     |             |   |                        |         |         |  |        |       |         |   |         |         |         |  |        |       |         |   |         |         |         |  |        |       |  |   |         |         |  |  |        |       |  |   |         |         |  |  |        |      

Each of the following principal product lines is an outgrowth of the
Companys expertise in meeting the particular needs of the small and
medium-sized businesses and consumers in the multicultural communities it
serves:

Commercial and Industrial Loans.The primary lending focus of the Company
is on loans to small and medium-sized businesses in a wide variety of
industries. The Companys commercial lending emphasis includes loans to
wholesalers, manufacturers and business service companies. A broad range of
short and medium-term commercial lending products are made available to
businesses for working capital (including inventory and accounts receivable),
purchases of equipment and machinery and business expansion (including
acquisitions of real estate and improvements). Generally, the Companys
commercial loans are underwritten on the basis of the borrowers ability to
service such debt as reflected by cash flow projections. Commercial loans are
generally collateralized by business assets, which may include accounts
receivable and inventory, certificates of deposit, securities, real estate,
guarantees or other collateral. The Company also generally obtains personal
guarantees from the principals of the business. Working capital loans are
primarily collateralized by short-term assets, whereas term loans are primarily
collateralized by long-term assets. As a result, commercial loans involve
additional complexities, variables and risks and require more thorough
underwriting and servicing than other types of loans. Indigenous to
individuals in the Asian business community is the desire to own the building
and land which houses their businesses. Accordingly, while a loan may be
principally driven and classified by the type of business operated, real estate
is frequently the primary source of collateral. As of December 31, 2002,
approximately $234.6 million or 72.1% of the commercial and industrial loan
portfolio was collateralized by real estate. The Company continually monitors
real estate value trends and takes into consideration changes in market trends
in its underwriting standards. As of December 31, 2002, the Companys
commercial and industrial loan portfolio totaled $325.4 million or 60.9% of the
gross loan portfolio.

Commercial Mortgage Loans.In addition to commercial loans, the Company
makes commercial mortgage loans to finance the purchase of real property, which
generally consists of developed real estate. The Companys commercial mortgage
loans are collateralized by first liens on real estate, typically have variable
rates and amortize over a 15 to 20 year period with balloon payments due at the
end of five to seven years. Payments on loans collateralized by such
properties are dependent on the successful operation or management of the
properties. Accordingly, repayment of these loans may be subject to adverse
conditions in the real estate market or the economy to a greater extent than
other types of loans. In underwriting commercial mortgage loans,

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consideration is given to the propertys historical cash flow, current and
projected occupancy, location and physical condition. The underwriting
analysis also includes credit checks, appraisals, environmental impact reports
and a review of the financial condition of the borrower. As of December 31,
2002, the Company had a commercial mortgage portfolio of $165.6 million or
31.0% of the gross loan portfolio.

Construction Loans.The Company makes loans to finance the construction
of residential and non-residential properties. The substantial majority of the
Companys residential construction loans are for single-family dwellings that
are pre-sold or are under earnest money contracts. The Company also originates
loans to finance the construction of commercial properties such as
multi-family, office, industrial, warehouse and retail centers. Construction
loans involve additional risks attributable to the fact that loan funds are
advanced upon the security of a project under construction, and the project is
of uncertain value prior to its completion. Because of uncertainties inherent
in estimating construction costs, the market value of the completed project and
the effects of governmental regulation on real property, it can be difficult to
accurately evaluate the total funds required to complete a project and the
related loan to value ratio. As a result of these uncertainties, construction
lending often involves the disbursement of substantial funds with repayment
dependent, in part, on the success of the ultimate project rather than the
ability of a borrower or guarantor to repay the loan. If the Company is forced
to foreclose on a project prior to completion, there is no assurance that the
Company will be able to recover all of the unpaid portion of the loan. In
addition, the Company may be required to fund additional amounts to complete a
project and may have to hold the property for an indeterminable period of time.
While the Company has underwriting procedures designed to identify what it
believes to be acceptable levels of risks in construction lending, no assurance
can be given that these procedures will prevent losses from the risks described
above. As of December 31, 2002, the Company had a real estate construction
portfolio of $25.4 million or 4.8% of the gross loan portfolio, of which $10.6
million was residential and $14.8 million was commercial. While residential
real estate and residential construction loan portfolios have decreased, the
Company intends to continue this type of lending provided it can do so
profitably.

Residential Mortgage Brokerage and Lending.The Company uses its existing
branch network to offer a complete line of single-family residential mortgage
products through third party mortgage companies. The Company specializes in
mortgages that conform with government sponsored programs, such as those
offered by Fannie Mae. The Company solicits and receives a fee to process
these residential mortgage loans, which are then underwritten and pre-sold to
third party mortgage companies. The Company does not fund or service these
loans. The volume of residential mortgage loans processed by the Company and
pre-sold to third party mortgage companies in 2002 was $24.0 million. Since
the Company does not fund these loans, there is no interest rate or credit risk
to the Company. The Company also makes five to seven year balloon residential
mortgage loans primarily collateralized by non-owner occupied residential
properties, which are retained in the Companys residential mortgage portfolio.
At December 31, 2002, the Companys residential mortgage portfolio totaled
$7.3 million.

Government Guaranteed Small Business Lending.The Company has developed
an expertise in several government guaranteed lending programs in order to
provide credit enhancement to its commercial and industrial and mortgage
portfolio. As a Preferred Lender under the federally guaranteed SBA lending
program, the Companys pre-approved status allows it to quickly respond to
customers needs. Under this program, the Company originates and funds SBA 7-A
and 504 chapter loans qualifying for federal guarantees of 75% to 90% of
principal and accrued interest. Depending upon prevailing market conditions,
the Company may sell the guaranteed portion of these loans into the secondary
market with servicing retained. The Company specializes in SBA loans to
minority-owned businesses. As of December 31, 2002, the Company had $98.0
million in the retained portion of SBA loans, approximately $64.9 million of
which was guaranteed by the SBA.

For the SBAs fiscal year ended September 30, 2002, the Company was the
third largest SBA loan originator in the 32-county Houston SBA District in
terms of dollar volume. For the SBAs fiscal year ended September 30, 2001,
the Company was the largest SBA loan originator in terms of dollar volume, and
for each of the previous seven years, the Company has been the second largest
SBA loan originator. SBA loan originations were $19.1 million and $20.2
million for the years ended December 31, 2002 and 2001, respectively. Another
source of government guaranteed lending is B&I loans which are collateralized
by the U.S. Department of Agriculture and are available to borrowers in areas
with a population of less than 50,000. The Company also offers guaranteed
loans through the OCCGF, which is sponsored by the government of Taiwan. These
loans are for people of Chinese decent or origin, who are not mainland Chinese
by birth and reside overseas. As of December 31, 2002, the Companys OCCGF
portfolio totaled $4.2 million.

Trade Finance.Since its inception in 1987, the Company has originated
trade finance loans and letters of credit to facilitate export and import
transactions for small and medium-sized businesses. In this capacity, the

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Company has worked with the Ex-Im Bank, an agency of the U.S. Government which
provides guarantees for trade finance loans. Trade finance credit facilities
rely heavily on the quality of the business customers accounts receivable and
the ability to perform the underlying transaction which, if monitored and
controlled properly, limits the financial risks to the Company associated with
this short-term financing. To mitigate the risk of nonpayment, the Company
generally obtains a governmental guaranty or credit insurance from a
governmental agency such as the Ex-Im Bank. As of December 31, 2002, the
Companys aggregate trade finance portfolio commitments totaled approximately
$8.1 million.

Consumer Loans.The Company offers a wide variety of loan products to
retail customers through its branch network in Houston and Dallas. Loans to
retail customers include residential mortgage loans, residential construction
loans, automobile loans, lines of credit and other personal loans. The terms
of these loans typically range from 12 to 60 months depending on the nature of
the collateral and the size of the loan.

The Company selectively extends credit for the purpose of establishing
long-term relationships with its customers. The Company mitigates the risks
inherent in lending by focusing on businesses and individuals with demonstrated
payment history, historically favorable profitability trends and stable cash
flows. In addition to these primary sources of repayment, the Company looks to
tangible collateral and personal guarantees as secondary sources of repayment.
Lending officers are provided with detailed underwriting policies covering all
lending activities in which the Company is engaged and that require all lenders
to obtain appropriate approvals for the extension of credit. The Company also
maintains documentation requirements and extensive credit quality assurance
practices in order to identify credit portfolio weaknesses as early as possible
so any exposures that are discovered may be reduced.

Inherent in all lending is the risk of nonpayment. The types of
collateral required, the terms of the loans and the underwriting practices
discussed under each category above are all designed to minimize the risk of
nonpayment. In addition, as further risk protection, the Company rarely makes
loans at its legal lending limit. Although the Companys legal loan limit is
individually $11.4 million, the Company generally does not make loans larger
than $6.0 million. Loans are approved by lending officers
pursuant to a lending authorization schedule which is based on each loan
officers credit experience and portfolio. The Banks Loan Committee approves
loans between $1.5 million and $2.0 million. The Directors Credit Committee
approves loans over $2.0 million. Control systems and procedures are in place
to ensure all loans are approved in accordance with credit policies. The
Companys policies and procedures designed to minimize the risk of nonpayment
with respect to outstanding loans are discussed under -Nonperforming Assets.

The following table summarizes the industry concentrations (greater than
25% of capital) of the Companys loan portfolio at December 31, 2002, 2001, and
2000:

|                              |             |   |                    |         |      |   |         |         |  |   |         |         | 
|----------------------------- | ----------- | - | ------------------ | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                              |             |   | As of December 31,
|                              |             |   |                   
|                              |             |   | 2002               |         | 2001 |   | 2000   
|                              |             |   |                    |         |      |   |        
|Hotels/motels                 |             | $ | 82,015             |         |      | $ | 87,991  |         |  | $ | 79,007  |        
|Retail centers                |             |   | 103,623            |         |      |   | 100,649 |         |  |   | 85,177  |        
|Restaurants                   |             |   | 33,094             |         |      |   | 36,160  |         |  |   | 24,967  |        
|Apartment buildings           |             |   | 14,941             |         |      |   | 13,362  |         |  |   | 8,391   |        
|Convenience/gasoline stations |             |   | 27,383             |         |      |   | 31,556  |         |  |   | 19,585  |        
|All other                     |             |   | 272,982            |         |      |   | 229,577 |         |  |   | 272,274 |        
|                              |             |   |                    |         |      |   |         |         |  |   |         |        
|                              | Gross loans |   | $                  | 534,038 |      |   | $       | 499,295 |  |   | $       | 489,401 | 
|                              |             |   |                    |         |      |   |         |         |  |   |         |        

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The contractual maturity ranges of the commercial and industrial and real
estate portfolio and the amount of such loans with predetermined interest rates
and floating rates in each maturity range as of December 31, 2002 are
summarized in the following table:

|                                         |             |   |                         |         |            |   |            |         |       |   |        |         |  |   |         |         | 
|---------------------------------------- | ----------- | - | ----------------------- | ------- | ---------- | - | ---------- | ------- | ----- | - | ------ | ------- |  | - | ------- | ------- | 
|                                         |             |   | As of December 31, 2002
|                                         |             |   |                        
|                                         |             |   | One                     |         | After One  |   |            |         |       |   |        |         | 
|                                         |             |   | Year or                 |         | Through    |   | After Five |         |       |   |       
|                                         |             |   | Less                    |         | Five Years |   | Years      |         | Total
|                                         |             |   |                         |         |            |   |            |         |      
|                                         |             |   | (Dollars in thousands) 
|Commercial and industrial                |             | $ | 64,629                  |         |            | $ | 170,047    |         |       | $ | 90,748 |         |  | $ | 325,424 |        
|Real estate mortgage:                    |             |   |                         |         |            |   |            |         |       |   |        |         |  |   |         |        
|                                         | Residential |   |                         | 1,906   |            |   |            | 2,943   |       |   |        | 2,477   |  |   |         | 7,326   | 
|                                         | Commercial  |   |                         | 24,588  |            |   |            | 124,057 |       |   |        | 16,963  |  |   |         | 165,608 | 
|Real estate construction:                |             |   |                         |         |            |   |            |         |       |   |        |         |  |   |         |        
|                                         | Residential |   |                         | 8,247   |            |   |            | 2,342   |       |   |        |        |  |   |         | 10,589  | 
|                                         | Commercial  |   |                         | 993     |            |   |            | 8,914   |       |   |        | 4,898   |  |   |         | 14,805  | 
|                                         |             |   |                         |         |            |   |            |         |       |   |        |         |  |   |         |        
|                                         | Total       |   | $                       | 100,363 |            |   | $          | 308,303 |       |   | $      | 115,086 |  |   | $       | 523,752 | 
|                                         |             |   |                         |         |            |   |            |         |       |   |        |         |  |   |         |        
|Loans with a predetermined interest rate |             | $ | 19,786                  |         |            | $ | 40,765     |         |       | $ | 16,022 |         |  | $ | 76,573  |        
|Loans with a floating interest rate      |             |   | 80,577                  |         |            |   | 267,538    |         |       |   | 99,064 |         |  |   | 447,179 |        
|                                         |             |   |                         |         |            |   |            |         |       |   |        |         |  |   |         |        
|                                         | Total       |   | $                       | 100,363 |            |   | $          | 308,303 |       |   | $      | 115,086 |  |   | $       | 523,752 | 
|                                         |             |   |                         |         |            |   |            |         |       |   |        |         |  |   |         |        

Nonperforming Assets

The Company believes that it has procedures in place to maintain a high
quality loan portfolio. These procedures include the approval of lending
policies and underwriting guidelines by the Board of Directors, review of the
loan portfolio by the Companys internal loan review department (formally
approved by the Board of Directors in the fourth quarter of 2001 and
established in January 2002), review of the loan portfolio by an independent
external loan review company as necessary, approval from the Directors Credit
Committee for large credit relationships, and policy/administrative oversight
by the Directors Loan Committee. The loan review department reports credit
risk grade changes on a monthly basis to management and the Board of Directors.
Facilitiating the loan review process, loan review and problem resolution
personnel were added during the first and second quarters of 2002. The Company
performs monthly and quarterly concentration analyses based on industries,
collateral types, business lines, large credit sizes and officer portfolio
loads. There can be no assurance, however, that the Companys loan portfolio
will not become subject to increasing pressures from deteriorating borrowers
financial condition due to general economic and other factors. While future
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 avenues.

The Company generally places a loan on nonaccrual status and ceases
accruing interest when, in the opinion of management, full payment of loan
principal or interest is in doubt. All loans past due 90 days are placed on
nonaccrual status unless the loan is both well collateralized and in the
process of collection. Cash payments received while a loan is classified as
nonaccrual are recorded as a reduction of principal as long as significant
doubt exists as to collection of the principal. In addition to nonaccrual
loans, the Company evaluates on an ongoing basis additional loans which are
potential problem loans as to risk exposure in determining the adequacy of the
allowance for loan losses.

The Company updates appraisals on loans collateralized by real estate when
loans are renewed, prior to foreclosure and at other times as necessary,
particularly in problem loan situations. In instances where updated appraisals
reflect reduced collateral values, an evaluation of the borrowers overall
financial condition is made to determine the need, if any, for possible
write-downs or appropriate additions to the allowance for loan losses. The
Company records other real estate at fair value at the time of acquisition less
estimated costs to sell.

A loan is considered impaired based on current information and events, if
it is probable that the Company will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms
of the loan agreement. The measurement of impaired loans is based on the
present value of expected future cash flows discounted at the loans effective
interest rate or the loans observable market price or based on the fair value
of the collateral if the loan is collateral-dependent.

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2002 versus 2001.Total nonperforming assets at December 31, 2002 and 2001
were $18.8 million and $5.6 million, respectively, an increase of $13.2
million. Nonaccrual loans at December 31, 2002 and 2001 were $17.2 million
and $3.8 million, respectively, an increase of $13.4 million. Had these nonaccrual loans remained on an
accrual basis, interest in the amount of approximately $657,000 and $202,000
would have been recorded on these loans during the years ended December 31, 2002
and 2001, respectively. The increase in
nonperforming and nonaccrual loans primarily occurred during the first quarter
of 2002 with approximately $9.0 million added to nonaccrual loans as part of an
identification process that represents an integral part of an overall effort to
improve credit quality. The largest of these loans were a $3.2 million hotel
loan, a $1.2 million entertainment facility, and two restaurant loans of $1.4
million and $1.3 million. The $1.3 million restaurant loan paid off in July
2002 and the $1.4 million loan was paid off in January 2003. During the third
quarter of 2002, a $5.1 million commercial loan to a wholesale
food distributor was added to nonaccrual status. During the fourth quarter of 2002, a $1.1 million hotel loan and a $1.0 million convenience store
loan were added to nonaccrual status.

Included in total nonperforming assets are the portions guaranteed by the
SBA, OCCGF and Ex-Im Bank, which totaled $3.3 million and $1.8 million at
December 31, 2002 and 2001, respectively. Nonperforming assets, net of their
guaranteed portions, were $15.5 million and $3.7 million, for the same periods,
respectively. The ratios for net nonperforming assets to total loans and other
real estate were 2.92% and 0.76% at December 31, 2002 and 2001, respectively.
The ratios for net nonperforming assets to total assets were 1.84% and 0.50%,
for the same periods, respectively.

2001 versus 2000.Total nonperforming assets at December 31, 2001 and 2000
were $5.6 million and $3.0 million, respectively, an increase of $2.6 million.
Nonaccrual loans at December 31, 2001 and 2000 were $3.8 million and $2.2
million, respectively, an increase of $1.5 million. The increases were
primarily due to the slower economic conditions in 2001 in addition to the
inability of one borrower to service its debt during this period.
Nonperforming assets, net of their guaranteed portions of $1.8 million and $1.1
million, respectively, were $3.7 million and $1.9 million, at December 31, 2001
and 2000, respectively. The ratios for net nonperforming assets to total loans
and other real estate were 0.76% and 0.40% at December 31, 2001 and 2000,
respectively. The ratios for net nonperforming assets to total assets were
0.50% and 0.26%, for the same periods, respectively.

The following table presents information regarding nonperforming assets at
the periods indicated:

|                                                                          |                            |   |                        |        |      |   |        |       |      |   |        |       |  |   |        |       |  |   |        |       | 
|------------------------------------------------------------------------- | -------------------------- | - | ---------------------- | ------ | ---- | - | ------ | ----- | ---- | - | ------ | ----- |  | - | ------ | ----- |  | - | ------ | ----- | 
|                                                                          |                            |   | As of December 31,    
|                                                                          |                            |   |                       
|                                                                          |                            |   | 2002                   |        | 2001 |   | 2000   |       | 1999 |   | 1998  
|                                                                          |                            |   |                        |        |      |   |        |       |      |   |       
|                                                                          |                            |   | (Dollars in thousands)
|Nonaccrual loans                                                          |                            | $ | 17,209                 |        |      | $ | 3,758  |       |      | $ | 2,225  |       |  | $ | 6,552  |       |  | $ | 3,329  |      
|Accruing loans 90 days or more past due                                   |                            |   | 380                    |        |      |   | 783    |       |      |   |       |       |  |   |       |       |  |   | 1,291  |      
|Other real estate (ORE) and other assets repossessed (OAR)            |                            |   | 1,190                  |        |      |   | 1,025  |       |      |   | 757    |       |  |   | 490    |       |  |   | 654    |      
|                                                                          |                            |   |                        |        |      |   |        |       |      |   |        |       |  |   |        |       |  |   |        |      
|                                                                          | Total nonperforming assets |   |                        | 18,779 |      |   |        | 5,566 |      |   |        | 2,982 |  |   |        | 7,042 |  |   |        | 5,274 | 
|Less: nonperforming loans guaranteed by the SBA, Ex-Im Bank,
or the OCCGF |                            |   | (3,310                 | )      |      |   | (1,833 | )     |      |   | (1,049 | )     |  |   | (1,821 | )     |  |   | (1,500 | )    
|                                                                          |                            |   |                        |        |      |   |        |       |      |   |        |       |  |   |        |       |  |   |        |      
|                                                                          | Net nonperforming assets   |   | $                      | 15,469 |      |   | $      | 3,733 |      |   | $      | 1,933 |  |   | $      | 5,221 |  |   | $      | 3,774 | 
|                                                                          |                            |   |                        |        |      |   |        |       |      |   |        |       |  |   |        |       |  |   |        |      
|Total nonperforming assets to total loans and ORE/OAR                     |                            |   | 3.55                   | %      |      |   | 1.13   | %     |      |   | 0.62   | %     |  |   | 1.42   | %     |  |   | 1.26   | %    
|Total nonperforming assets to total assets                                |                            |   | 2.24                   | %      |      |   | 0.75   | %     |      |   | 0.40   | %     |  |   | 1.07   | %     |  |   | 0.90   | %    
|Net nonperforming assets to total loans and ORE/OAR                       |                            |   | 2.92                   | %      |      |   | 0.76   | %     |      |   | 0.40   | %     |  |   | 1.05   | %     |  |   | 0.90   | %    
|Net nonperforming assets to total assets                                  |                            |   | 1.84                   | %      |      |   | 0.50   | %     |      |   | 0.26   | %     |  |   | 0.79   | %     |  |   | 0.64   | %    

During the first
quarter of 2003, the Company added two
loans to nonaccrual status. One loan, to a motel, in the amount of
$3.4 million was added to nonaccrual status due to a lack of sufficient cash
flows to service the debt. The guarantor on the loan continues to make the
monthly payments, however there is no assurance he will continue to do so. A
second loan in the amount of $1.2 million has also been placed on nonaccrual
status primarily due to the borrowers failure to make the required monthly
payments.

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Allowance for Loan Losses

The allowance for
loan losses is a reserve established through charges to earnings
in the form of a provision for loan losses. Management has established an
allowance for loan losses which it believes is adequate to absorb estimated
losses inherent in the Companys loan portfolio. Based on an evaluation of the
loan portfolio, management presents a quarterly review of the allowance for
loan losses to the Companys Board of Directors, indicating any change in the
allowance since the last review and any recommendations as to adjustments in
the allowance. In making its evaluation, management considers the
diversification by industry of the Companys commercial loan portfolio, the
effect of changes in the local real estate market on collateral values, the
results of recent regulatory examinations, the effects on the loan portfolio of
current economic indicators and their probable impact on borrowers, the amount
of charge-offs for the period, the amount of nonperforming loans and related
collateral security and the evaluation of its loan portfolio by the independent
third party loan review function. Charge-offs occur when loans are deemed to be
uncollectible in whole or in part.

The Company follows a loan review program to evaluate the credit risk in
the loan portfolio. Through the loan review process, the Company maintains an
internally classified loan list which, along with the delinquency list of
loans, helps management assess the overall quality of the loan portfolio and
the adequacy of the allowance for loan losses. Loans classified as
substandard are those loans with clear and defined weaknesses such as a
highly-leveraged position, unfavorable financial ratios, uncertain repayment
sources or poor financial condition, which may jeopardize recoverability of the
debt. Loans classified as doubtful are those loans which have
characteristics similar to substandard loans but with an increased risk that a
loss may occur, or at least a portion of the loan may require a charge-off if
liquidated at present. Although loans classified as substandard do not
duplicate loans classified as doubtful, both substandard and doubtful loans
include some loans that are delinquent at least 30 days or on nonaccrual
status. Loans classified as loss are those loans which are in the process of
being charged off.

In addition to the internally classified loan list and delinquency list of
loans, the Company maintains a separate watch list which further aids the
Company in monitoring loan portfolios. Watch list loans show warning elements
where the present status portrays one or more deficiencies that require
attention in the short-term or where pertinent ratios of the loan account have
weakened to a point where more frequent monitoring is warranted. These loans
do not have all of the characteristics of a classified loan (substandard or
doubtful) but do show weakened elements compared with those of a satisfactory
credit. The Company reviews these loans to assist in assessing the adequacy of
the allowance for loan losses.

In order to determine the adequacy of the allowance for loan losses,
management establishes specific allowances for loans which management believes
require reserves greater than those allocated according to their classification
or the delinquent status of specific loans. Management then considers the risk
classification or delinquency status of the remaining portfolio and other
factors, such as collateral value, portfolio composition, trends in economic
conditions and the financial strength of borrowers. The Company then charges
to operations a provision for loan losses to maintain the allowance for loan
losses at a target level determined by the foregoing methodology.

The Company allocates the allowance for loan losses according to
managements assessments of risk inherent in the portfolio. In addition, on
July 6, 2001, the Securities and Exchange Commission released Accounting
Bulletin (SAB) No. 102, Selected Loan Loss Allowance Methodology and
Documentation Issues, which requires companies to have adequate documentation
on the development and application of a systematic methodology in determining
allowance for loan losses. The Company believes that it is in compliance with
the requirements.

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The following table presents an analysis of the allowance for loan losses
and other related data:

|                                                           |                            |                   |         |                                            |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |      |      |  
|---------------------------------------------------------- | -------------------------- | ----------------- | ------- | ------------------------------------------ | ------ | ---- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ---- | ---- | -
|                                                           |                            |                   |         | As of and for the Years Ended December 31,
|                                                           |                            |                   |         |                                           
|                                                           |                            |                   |         | 2002                                       |        | 2001 |         | 2000   |        | 1999 |         | 1998  
|                                                           |                            |                   |         |                                            |        |      |         |        |        |      |         |       
|                                                           |                            |                   |         | (Dollars in thousands)                    
|Average total loans outstanding                            |                            | $                 | 505,495 |                                            |        | $    | 474,986 |        |        | $    | 486,549 |        |        | $ | 456,653 |        |        | $ | 368,394 |     
|                                                           |                            |                   |         |                                            |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |     
|Total loans outstanding at end of period                   |                            | $                 | 527,759 |                                            |        | $    | 493,145 |        |        | $    | 483,738 |        |        | $ | 495,669 |        |        | $ | 417,686 |     
|                                                           |                            |                   |         |                                            |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |     
|Allowance for loan losses at beginning of period           |                            | $                 | 8,903   |                                            |        | $    | 9,271   |        |        | $    | 7,537   |        |        | $ | 6,119   |        |        | $ | 3,569   |     
|Provision for loan losses                                  |                            |                   | 3,853   |                                            |        |      | 3,799   |        |        |      | 7,508   |        |        |   | 5,550   |        |        |   | 3,377   |     
|Charge-offs:                                               |                            |                   |         |                                            |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |     
|                                                           | Commercial and industrial  |                   |         | (2,721                                     | )      |      |         | (4,075 | )      |      |         | (1,479 | )      |   |         | (3,563 | )      |   |         | (237 | )   
|                                                           | Real estate  mortgage     |                   |         | (271                                       | )      |      |         |       |        |      |         | (23    | )      |   |         | (32    | )      |   |         | (114 | )   
|                                                           | Real estate  construction |                   |         |                                           |        |      |         |       |        |      |         |       |        |   |         |       |        |   |         |     |     
|                                                           | Consumer and other         |                   |         | (132                                       | )      |      |         | (201   | )      |      |         | (5,524 | )      |   |         | (807   | )      |   |         | (619 | )   
|                                                           |                            |                   |         |                                            |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |     
|                                                           |                            | Total charge-offs |         |                                            | (3,124 | )    |         |        | (4,276 | )    |         |        | (7,026 | ) |         |        | (4,402 | ) |         |      | (970 | )
|                                                           |                            |                   |         |                                            |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |     
|Recoveries:                                                |                            |                   |         |                                            |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |     
|                                                           | Commercial and industrial  |                   |         | 450                                        |        |      |         | 54     |        |      |         | 901    |        |   |         | 94     |        |   |         | 77   |     
|                                                           | Real estate  mortgage     |                   |         | 20                                         |        |      |         | 11     |        |      |         | 8      |        |   |         |       |        |   |         | 17   |     
|                                                           | Real estate  construction |                   |         |                                           |        |      |         |       |        |      |         |       |        |   |         |       |        |   |         | 16   |     
|                                                           | Consumer and other         |                   |         | 48                                         |        |      |         | 44     |        |      |         | 343    |        |   |         | 176    |        |   |         | 33   |     
|                                                           |                            |                   |         |                                            |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |     
|                                                           |                            | Total recoveries  |         |                                            | 518    |      |         |        | 109    |      |         |        | 1,252  |   |         |        | 270    |   |         |      | 143  |  
|                                                           |                            |                   |         |                                            |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |     
|Net loan charge-offs                                       |                            |                   | (2,606  | )                                          |        |      | (4,167  | )      |        |      | (5,774  | )      |        |   | (4,132  | )      |        |   | (827    | )   
|                                                           |                            |                   |         |                                            |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |     
|Allowance for loan losses at end of period                 |                            | $                 | 10,150  |                                            |        | $    | 8,903   |        |        | $    | 9,271   |        |        | $ | 7,537   |        |        | $ | 6,119   |     
|                                                           |                            |                   |         |                                            |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |     
|Ratio of allowance to end of period total loans            |                            |                   | 1.92    | %                                          |        |      | 1.81    | %      |        |      | 1.92    | %      |        |   | 1.52    | %      |        |   | 1.46    | %   
|Ratio of net loan charge-offs to end of period total loans |                            |                   | 0.49    | %                                          |        |      | 0.84    | %      |        |      | 1.19    | %      |        |   | 0.83    | %      |        |   | 0.20    | %   
|Ratio of allowance to end of period nonperforming loans    |                            |                   | 57.71   | %                                          |        |      | 196.06  | %      |        |      | 416.67  | %      |        |   | 115.03  | %      |        |   | 132.45  | %   

For the years ended
December 31, 2002, 2001, and 2000, net loan charge-offs
were $2.6 million, $4.2 million, and $5.8 million, respectively. The
significant charge-offs for the year 2002 were related to the restaurant and
grocery categories. Approximately $1.0 million in charge-offs was related to
full-service restaurants and approximately $572,000 was related to the grocery
category. The largest individual charge-off for 2002 totaled approximately
$250,000. Of the $4.2 million in charge-offs in 2001, $3.0 million was
charged-off in the fourth quarter following a significant review of the loan
portfolio. The significant charge-offs included in the $3.0 million were
related to twelve credits, with the two largest being commercial operating
lines of credit of $1.0 million and $900,000. Of the $5.8 million in
charge-offs in 2000, $5.3 million was charged-off in May 2000 after it was
discovered that the Bank had been a victim of a fraudulent factoring
receivables scheme conducted by a customer of the Banks former subsidiary,
Advantage Finance Corporation (AFC). In December 2000, the Bank sold the
assets of AFC. The ratios of net loan charge-offs to total loans outstanding
for the years ended December 31, 2002, 2001, and 2000 were 0.49%, 0.84%, and
1.19%, respectively. The Company seeks recovery on its charge-offs through all
available channels. At December 31, 2002, 2001, and 2000 the allowance for
loan losses aggregated $10.2 million, $8.9 million, and $9.3 million,
respectively, or 1.92%, 1.81%, and 1.92% of total loans, respectively.

The following table describes the allocation of the allowance for loan
losses among various categories of loans and certain other information. The
allocation is made for analytical purposes and is not necessarily indicative of
the categories in which future losses may occur. The total allowance is
available to absorb losses from any segment of the credit portfolio.

|                                                    |                            |   |                        |       |       |  |          |       |       |   |        |       |          |  |        |       |       |   |          |       |       |  |        |       |          |   |       |       |  |  |          |       |   |   |       |       |  |  |        |       |  
|--------------------------------------------------- | -------------------------- | - | ---------------------- | ----- | ----- |  | -------- | ----- | ----- | - | ------ | ----- | -------- |  | ------ | ----- | ----- | - | -------- | ----- | ----- |  | ------ | ----- | -------- | - | ----- | ----- |  |  | -------- | ----- | - | - | ----- | ----- |  |  | ------ | ----- | -
|                                                    |                            |   | As of December 31,    
|                                                    |                            |   |                       
|                                                    |                            |   | 2002                   |       | 2001  |  | 2000     |       | 1999  |   | 1998  
|                                                    |                            |   |                        |       |       |  |          |       |       |   |       
|                                                    |                            |   |                        |       |       |  | Percent  |       |       |   |        |       | Percent  |  |        |       |       |   | Percent  |       |       |  |        |       | Percent  |   |       |       |  |  | Percent 
|                                                    |                            |   |                        |       |       |  | of Loans |       |       |   |        |       | of Loans |  |        |       |       |   | of Loans |       |       |  |        |       | of Loans |   |       |       |  |  | of Loans
|                                                    |                            |   |                        |       |       |  | to Gross |       |       |   |        |       | to Gross |  |        |       |       |   | to Gross |       |       |  |        |       | to Gross |   |       |       |  |  | to Gross
|                                                    |                            |   | Amount                 |       | Loans |  | Amount   |       | Loans |   | Amount |       | Loans    |  | Amount |       | Loans |   | Amount   |       | Loans
|                                                    |                            |   |                        |       |       |  |          |       |       |   |        |       |          |  |        |       |       |   |          |       |      
|                                                    |                            |   | (Dollars in thousands)
|Balance of allowance for loan
losses applicable to: |                            |   |                        |       |       |  |          |       |       |   |        |       |          |  |        |       |       |   |          |       |       |  |        |       |          |   |       |       |  |  |          |       |   |   |       |       |  |  |        |      
|                                                    | Commercial and industrial  |   | $                      | 6,383 |       |  |          | 60.94 | %     |   | $      | 5,054 |          |  |        | 62.67 | %     |   | $        | 4,814 |       |  |        | 60.92 | %        |   | $     | 3,783 |  |  |          | 59.55 | % |   | $     | 3,249 |  |  |        | 60.73 | %
|                                                    | Real estate  mortgage     |   |                        | 2,285 |       |  |          | 32.38 |       |   |        | 1,947 |          |  |        | 27.81 |       |   |          | 758   |       |  |        | 28.27 |          |   |       | 823   |  |  |          | 27.42 |   |   |       | 725   |  |  |        | 27.36 |  
|                                                    | Real estate  construction |   |                        | 355   |       |  |          | 4.75  |       |   |        | 274   |          |  |        | 7.24  |       |   |          | 230   |       |  |        | 8.09  |          |   |       | 204   |  |  |          | 7.99  |   |   |       | 139   |  |  |        | 6.78  |  
|                                                    | Consumer and other         |   |                        | 136   |       |  |          | 1.93  |       |   |        | 686   |          |  |        | 2.28  |       |   |          | 444   |       |  |        | 2.45  |          |   |       | 357   |  |  |          | 2.31  |   |   |       | 415   |  |  |        | 2.87  |  
|                                                    | Factored receivables       |   |                        |      |       |  |          |      |       |   |        |      |          |  |        |      |       |   |          | 20    |       |  |        | 0.27  |          |   |       | 243   |  |  |          | 2.74  |   |   |       | 266   |  |  |        | 2.25  |  
|                                                    | Unallocated                |   |                        | 991   |       |  |          |      |       |   |        | 942   |          |  |        |      |       |   |          | 3,005 |       |  |        |      |          |   |       | 2,127 |  |  |          |      |   |   |       | 1,325 |  |  |        |      |  
|                                                    |                            |   |                        |       |       |  |          |       |       |   |        |       |          |  |        |       |       |   |          |       |       |  |        |       |          |   |       |       |  |  |          |       |   |   |       |       |  |  |        |       |  
|Total allowance for loan losses                     |                            | $ | 10,150                 |       |       |  | 100.00   | %     |       | $ | 8,903  |       |          |  | 100.00 | %     |       | $ | 9,271    |       |       |  | 100.00 | %     |          | $ | 7,537 |       |  |  | 100.00   | %     |   | $ | 6,119 |       |  |  | 100.00 | %    
|                                                    |                            |   |                        |       |       |  |          |       |       |   |        |       |          |  |        |       |       |   |          |       |       |  |        |       |          |   |       |       |  |  |          |       |   |   |       |       |  |  |        |       |  

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Securities

The Company uses its securities portfolio primarily as a source of income
and secondarily as a source of liquidity. At December 31, 2002, the fair value
of securities net of the Federal Home Loan Bank (FHLB) and Federal Reserve
Bank (FRB) stock was $260.0 million, an increase of $86.9 million or 50.2%
from the fair value of net securities at December 31, 2001. At December 31,
2001, the fair value of securities net of FHLB and Federal Reserve Bank stock
totaled $173.1 million, an increase of $34.2 million or 24.6% from $138.9
million at December 31, 2000. The increase in 2002 was primarily due to
liquidity created from increased deposits, loan prepayments, and increased FHLB borrowings. The increase in 2001 was
primarily due to liquidity created from increased deposits and loan prepayments
in excess of loan funding requirements.

At the date of purchase, the Company is required to classify debt and
equity securities into one of three categories: held-to-maturity, trading or
available-for-sale. At each reporting date, the appropriateness of the
classification is reassessed. Investments in debt securities are classified as
held-to-maturity and measured at amortized cost in the financial statements
only if management has the positive intent and ability to hold those securities
to maturity. The Company does not have a trading account. Investments not
classified as either held-to-maturity or trading are classified as
available-for-sale and measured at fair value in the financial statements with
unrealized gains and losses reported, net of tax, as a component of accumulated
other comprehensive income in shareholders equity until realized. On January
1, 2001, the Company reclassified its held-to-maturity investment securities to
the available-for-sale category as allowed under SFAS 133. The adoption of
SFAS 133 allowed this one-time reclassification of securities between
held-to-maturity and available-for-sale.

The following table presents the amortized cost of securities classified
as available-for-sale and their approximate fair values as of the dates shown:

|                                                                     |                  |   |                         |         |                         |   |            |       |       |   |           |      |            |   |            |         |       |   |         |         |       |   |       |       |  |   |      |        |   |   |         |         | 
|-------------------------------------------------------------------- | ---------------- | - | ----------------------- | ------- | ----------------------- | - | ---------- | ----- | ----- | - | --------- | ---- | ---------- | - | ---------- | ------- | ----- | - | ------- | ------- | ----- | - | ----- | ----- |  | - | ---- | ------ | - | - | ------- | ------- | 
|                                                                     |                  |   | As of December 31, 2002 |         | As of December 31, 2001
|                                                                     |                  |   |                         |         |                        
|                                                                     |                  |   |                         |         |                         |   | Gross      |       | Gross |   |           |      |            |   |            |         |       |   | Gross   |         | Gross |   |       |       | 
|                                                                     |                  |   | Amortized               |         | Unrealized              |   | Unrealized |       | Fair  |   | Amortized |      | Unrealized |   | Unrealized |         | Fair 
|                                                                     |                  |   | Cost                    |         | Gain                    |   | Loss       |       | Value |   | Cost      |      | Gain       |   | Loss       |         | Value
|                                                                     |                  |   |                         |         |                         |   |            |       |       |   |           |      |            |   |            |         |      
|                                                                     |                  |   | (Dollars in thousands) 
|U.S. Treasury securities and obligations
of U.S. government agencies |                  | $ | 2,488                   |         |                         | $ | 50         |       |       | $ |          |      |            | $ | 2,538      |         |       | $ | 2,453   |         |       | $ | 122   |       |  | $ |     |        |   | $ | 2,575   |        
|Obligations of state and political
subdivisions                      |                  |   | 22,059                  |         |                         |   | 591        |       |       |   | (2        | )    |            |   | 22,648     |         |       |   | 25,045  |         |       |   | 183   |       |  |   | (589 | )      |   |   | 24,639  |        
|Mortgage-backed securities and
collateralized mortgage obligations   |                  |   | 180,599                 |         |                         |   | 2,862      |       |       |   | (151      | )    |            |   | 183,310    |         |       |   | 138,696 |         |       |   | 1,561 |       |  |   | (671 | )      |   |   | 139,586 |        
|Other debt securities                                                |                  |   | 2,378                   |         |                         |   | 33         |       |       |   | (20       | )    |            |   | 2,391      |         |       |   | 3,229   |         |       |   | 20    |       |  |   | (57  | )      |   |   | 3,192   |        
|Investment in ARM and CRA funds                                      |                  |   | 48,982                  |         |                         |   | 169        |       |       |   |          |      |            |   | 49,151     |         |       |   | 3,094   |         |       |   | 1     |       |  |   |     |        |   |   | 3,095   |        
|FHLB and Federal Reserve Bank stock                                  |                  |   | 4,380                   |         |                         |   |           |       |       |   |          |      |            |   | 4,380      |         |       |   | 3,143   |         |       |   |      |       |  |   |     |        |   |   | 3,143   |        
|                                                                     |                  |   |                         |         |                         |   |            |       |       |   |           |      |            |   |            |         |       |   |         |         |       |   |       |       |  |   |      |        |   |   |         |        
|                                                                     | Total securities |   | $                       | 260,886 |                         |   | $          | 3,705 |       |   | $         | (173 | )          |   | $          | 264,418 |       |   | $       | 175,660 |       |   | $     | 1,887 |  |   | $    | (1,317 | ) |   | $       | 176,230 | 
|                                                                     |                  |   |                         |         |                         |   |            |       |       |   |           |      |            |   |            |         |       |   |         |         |       |   |       |       |  |   |      |        |   |   |         |        

|                                                                     |                  |   |                         |         |            |   |            |       |       |   |      |      |   |   |        |         | 
|-------------------------------------------------------------------- | ---------------- | - | ----------------------- | ------- | ---------- | - | ---------- | ----- | ----- | - | ---- | ---- | - | - | ------ | ------- | 
|                                                                     |                  |   | As of December 31, 2000
|                                                                     |                  |   |                        
|                                                                     |                  |   |                         |         |            |   | Gross      |       | Gross |   |      |      |  
|                                                                     |                  |   | Amortized               |         | Unrealized |   | Unrealized |       | Fair 
|                                                                     |                  |   | Cost                    |         | Gain       |   | Loss       |       | Value
|                                                                     |                  |   |                         |         |            |   |            |       |      
|                                                                     |                  |   | (Dollars in thousands) 
|U.S. Treasury securities and obligations
of U.S. government agencies |                  | $ | 25,810                  |         |            | $ | 154        |       |       | $ | (296 | )    |   | $ | 25,668 |        
|Obligations of state and political
subdivisions                      |                  |   | 9,560                   |         |            |   | 149        |       |       |   | (125 | )    |   |   | 9,584  |        
|Mortgage-backed securities and
collateralized mortgage obligations   |                  |   | 68,511                  |         |            |   | 679        |       |       |   | (432 | )    |   |   | 68,758 |        
|Other debt securities                                                |                  |   | 3,010                   |         |            |   | 79         |       |       |   | (7   | )    |   |   | 3,082  |        
|FHLB and Federal Reserve Bank stock                                  |                  |   | 4,924                   |         |            |   |           |       |       |   |     |      |   |   | 4,924  |        
|                                                                     |                  |   |                         |         |            |   |            |       |       |   |      |      |   |   |        |        
|                                                                     | Total securities |   | $                       | 111,815 |            |   | $          | 1,061 |       |   | $    | (860 | ) |   | $      | 112,016 | 
|                                                                     |                  |   |                         |         |            |   |            |       |       |   |      |      |   |   |        |        

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The following table presents the amortized cost of securities classified
as held-to-maturity and their approximate fair values as of the date shown:

|                                                                     |                  |   |                         |        |            |   |            |     |       |   |      |      |   |   |        |        | 
|-------------------------------------------------------------------- | ---------------- | - | ----------------------- | ------ | ---------- | - | ---------- | --- | ----- | - | ---- | ---- | - | - | ------ | ------ | 
|                                                                     |                  |   | As of December 31, 2000
|                                                                     |                  |   |                        
|                                                                     |                  |   |                         |        |            |   | Gross      |     | Gross |   |      |      |  
|                                                                     |                  |   | Amortized               |        | Unrealized |   | Unrealized |     | Fair 
|                                                                     |                  |   | Cost                    |        | Gain       |   | Loss       |     | Value
|                                                                     |                  |   |                         |        |            |   |            |     |      
|                                                                     |                  |   | (Dollars in thousands) 
|U.S. Treasury securities and obligations
of U.S. government agencies |                  | $ | 4,969                   |        |            | $ | 2          |     |       | $ | (14  | )    |   | $ | 4,957  |       
|Obligations of state and political
subdivisions                      |                  |   | 10,447                  |        |            |   | 121        |     |       |   | (158 | )    |   |   | 10,410 |       
|Mortgage-backed securities and
collateralized mortgage obligations   |                  |   | 13,797                  |        |            |   | 238        |     |       |   | (4   | )    |   |   | 14,031 |       
|Other debt securities                                                |                  |   | 2,530                   |        |            |   | 2          |     |       |   | (49  | )    |   |   | 2,463  |       
|                                                                     |                  |   |                         |        |            |   |            |     |       |   |      |      |   |   |        |       
|                                                                     | Total securities |   | $                       | 31,743 |            |   | $          | 363 |       |   | $    | (225 | ) |   | $      | 31,861 | 
|                                                                     |                  |   |                         |        |            |   |            |     |       |   |      |      |   |   |        |       

The following table summarizes the contractual maturity of investment
securities at amortized cost (including federal funds sold and other temporary
investments) and their weighted average yields. No tax-equivalent adjustments
were made.

|                                                                     |                  |   |                         |        |                 |  |                |      |                 |   |                |       |                  |  |        |      |       |   |        |        |       |  |      |      |   |   |         |         |  |  |      |      |   |   |         |         |  |  |      |      |  
|-------------------------------------------------------------------- | ---------------- | - | ----------------------- | ------ | --------------- |  | -------------- | ---- | --------------- | - | -------------- | ----- | ---------------- |  | ------ | ---- | ----- | - | ------ | ------ | ----- |  | ---- | ---- | - | - | ------- | ------- |  |  | ---- | ---- | - | - | ------- | ------- |  |  | ---- | ---- | -
|                                                                     |                  |   | As of December 31, 2002
|                                                                     |                  |   |                        
|                                                                     |                  |   |                         |        |                 |  |                |      |                 |   | After One Year |       | After Five Years |  |        |      |       |   |        |        |       |  |      |      |   |   |         |         | 
|                                                                     |                  |   | Within One              |        | But Within Five |  | But Within Ten |      |                 |   |                |       |                  |  |        |      |       |   |        |        |       |  |     
|                                                                     |                  |   | Year                    |        | Years           |  | Years          |      | After Ten Years |   | Total         
|                                                                     |                  |   |                         |        |                 |  |                |      |                 |   |               
|                                                                     |                  |   | Amount                  |        | Yield           |  | Amount         |      | Yield           |   | Amount         |       | Yield            |  | Amount |      | Yield |   | Amount |        | Yield
|                                                                     |                  |   |                         |        |                 |  |                |      |                 |   |                |       |                  |  |        |      |       |   |        |        |      
|                                                                     |                  |   | (Dollars in thousands) 
|U.S. Treasury securities and obligations of
U.S. government agencies |                  | $ | 2,488                   |        |                 |  | 7.10           | %    |                 | $ |               |       |                  |  |       | %    |       | $ |       |        |       |  |     | %    |   | $ |        |         |  |  |     | %    |   | $ | 2,488   |         |  |  | 7.10 | %   
|Obligations of state and political
subdivisions                      |                  |   |                        |        |                 |  |               |      |                 |   | 5,506          |       |                  |  | 4.94   |      |       |   | 2,479  |        |       |  | 5.07 |      |   |   | 14,074  |         |  |  | 4.92 |      |   |   | 22,059  |         |  |  | 4.94 |     
|Mortgage-backed securities and
collateralized mortgage obligations   |                  |   |                        |        |                 |  |               |      |                 |   | 1,286          |       |                  |  | 4.59   |      |       |   | 34,492 |        |       |  | 4.99 |      |   |   | 144,821 |         |  |  | 3.99 |      |   |   | 180,599 |         |  |  | 4.19 |     
|Other debt securities                                                |                  |   | 1,076                   |        |                 |  | 5.86           |      |                 |   | 20             |       |                  |  | 5.30   |      |       |   | 232    |        |       |  | 5.36 |      |   |   | 1,050   |         |  |  | 5.22 |      |   |   | 2,378   |         |  |  | 5.56 |     
|Investment in ARM and CRA funds                                      |                  |   | 45,766                  |        |                 |  | 2.52           |      |                 |   |               |       |                  |  |       |      |       |   |       |        |       |  |     |      |   |   | 3,216   |         |  |  | 5.09 |      |   |   | 48,982  |         |  |  | 2.69 |     
|FHLB and Federal Reserve Bank stock                                  |                  |   |                        |        |                 |  |               |      |                 |   |               |       |                  |  |       |      |       |   |       |        |       |  |     |      |   |   | 4,380   |         |  |  | 3.00 |      |   |   | 4,380   |         |  |  | 3.00 |     
|                                                                     |                  |   |                         |        |                 |  |                |      |                 |   |                |       |                  |  |        |      |       |   |        |        |       |  |      |      |   |   |         |         |  |  |      |      |   |   |         |         |  |  |      |     
|                                                                     | Total securities |   | $                       | 49,330 |                 |  |                | 2.82 | %               |   | $              | 6,812 |                  |  |        | 4.88 | %     |   | $      | 37,203 |       |  |      | 5.00 | % |   | $       | 167,541 |  |  |      | 4.07 | % |   | $       | 260,886 |  |  |      | 3.99 | %
|                                                                     |                  |   |                         |        |                 |  |                |      |                 |   |                |       |                  |  |        |      |       |   |        |        |       |  |      |      |   |   |         |         |  |  |      |      |   |   |         |         |  |  |      |     

The following table summarizes the fair value and classification of
securities:

|                   |                  |   |                        |         |      |   |         |         |  |   |         |         | 
|------------------ | ---------------- | - | ---------------------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                   |                  |   | As of December 31,    
|                   |                  |   |                       
|                   |                  |   | 2002                   |         | 2001 |   | 2000   
|                   |                  |   |                        |         |      |   |        
|                   |                  |   | (Dollars in thousands)
|Available-for-sale |                  | $ | 264,418                |         |      | $ | 176,230 |         |  | $ | 112,016 |        
|Held-to maturity   |                  |   |                       |         |      |   |        |         |  |   | 31,861  |        
|                   |                  |   |                        |         |      |   |         |         |  |   |         |        
|                   | Total securities |   | $                      | 264,418 |      |   | $       | 176,230 |  |   | $       | 143,877 | 
|                   |                  |   |                        |         |      |   |         |         |  |   |         |        

The securities portfolio includes mortgage-backed securities which have
been developed by pooling a number of real estate mortgages and are principally
issued by federal agencies such as Fannie Mae (FNMA), Freddie Mac (FHLMC), and
Ginnie Mae (GNMA). These securities are deemed to have high credit ratings,
and certain minimum levels of regular monthly cash flows of principal and
interest are insured or guaranteed by the issuing agencies. Included in the
Companys mortgage-backed securities at December 31, 2002, 2001 and 2000, were
$100.2 million, $89.2 million and $22.6 million, respectively, in agency-issued
collateral mortgage obligations (CMOs).

As of December 31, 2002, 2001 and 2000, 80.2%, 81.1%, and 88.9%,
respectively, of the mortgage-backed securities held by the Company had final
maturities of more than ten years. However, unlike U.S. Treasury and U.S.
Government agency securities, which have a lump sum payment at maturity,
mortgage-backed securities provide cash flows from regular principal and
interest payments and principal prepayments throughout the lives of the
securities. Mortgage-backed securities which are purchased at a premium will
generally suffer decreasing net yields as interest rates drop because
homeowners tend to refinance their mortgages. Thus, the premium paid must be
amortized over a shorter period. Therefore, securities purchased at a discount
will obtain higher net

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yields in a decreasing interest rate environment. As interest rates rise, the
opposite will generally be true. During a period of increasing interest rates,
fixed rate mortgage-backed securities do not tend to experience heavy
prepayments of principal and consequently, the average life of this security
will not be unduly shortened. Additionally, the value of
mortgage-backed securities generally decreases as interest rates
increase. At December 31, 2002, approximately $44.3
million or 24.5% of the Companys mortgage-backed securities earn interest at
floating rates and reprice within one year, and accordingly are less
susceptible to declines in value should interest rates increase.

CMOs are bonds that are backed by pools of mortgages. The pools can be GNMA,
FNMA or FHLMC pools or they can be private-label pools. The CMOs are designed
so that the mortgage collateral will generate a cash flow sufficient to provide
for the timely repayment of the bonds. The mortgage collateral pool can be
structured to accommodate various desired bond repayment schedules, provided
that the collateral cash flow is adequate to meet scheduled bond payments.
This is accomplished by dividing the bonds into classes to which payments on
the underlying mortgage pools are allocated in different order. The bonds
cash flow, for example can be dedicated to one class of bondholders at a time,
thereby increasing call protection to bondholders. In private-label CMOs,
losses on underlying mortgages are directed to the most junior of all classes
and then to the classes above in order of increasing seniority, which means
that the senior classes have enough credit protection to be given the highest
credit rating by the rating agencies.

Deposits

The Companys lending and investing activities are funded principally by
deposits. At December 31, 2002, 52.2% of the Companys total deposits were
interest-bearing certificates of deposit (CDs), 26.9% were interest-bearing
savings, NOW, and money market accounts and 20.9% were noninterest-bearing
demand deposit accounts. Total deposits at December 31, 2002 were $691.4
million compared with $642.8 million at December 31, 2001 and $625.9 million at
December 31, 2000. This represents annual increases over the two-year period
of $48.6 million or 7.6% and $16.9 million or 2.7%, respectively.

Average noninterest-bearing demand deposits for the year ended December
31, 2002 were $132.7 million, an increase of $23.1 million or 21.1%, compared
with $109.6 million for the same period in 2000. Average noninterest-bearing
demand deposits for the year ended December 31, 2001 compared with the same
period in 2000 increased $7.1 million or 6.9% from $102.5 million.

Average interest-bearing deposits for the year ended December 31, 2002
were $524.1 million, an increase of $6.8 million or 1.3%, compared with $517.3
million for the same period in 2000. Average interest-bearing deposits for the
year ended December 31, 2001 compared with the same period in 2000 increased
$29.7 million or 6.1% from $487.7 million.

Average total deposits for the year ended December 31, 2002 were $656.8
million, an increase of $29.9 million or 4.8%, compared with $626.9 million for
the same period in 2001. Average total deposits for the year ended December
31, 2001 compared with the same period in 2000 increased $36.8 million or 6.2%.

The increases in deposits during 2002 and 2001 were primarily the result
of continued relationship banking initiatives. The Companys ratios of
average noninterest-bearing demand deposits to average total deposits for the
years ended December 31, 2002, 2001 and 2000 were 20.2%, 17.5%, and 17.4%,
respectively.

As part of its effort to cross-sell its products and services, the Company
actively solicits time deposits from existing customers. In addition, the
Company receives time deposits from government municipalities and utility
districts as well as from corporations seeking to place deposits in
minority-owned businesses, such as the Company. These time deposits typically
renew at maturity and have provided a stable source of funds. Unlike other
financial institutions, where large time deposits are often considered
volatile, the Company believes that based on its historical experience its
large time deposits have core-type characteristics. In pricing its time
deposits, the Company seeks to be competitive but typically prices near the
middle of a given market.

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The average daily balances and weighted average rates paid on deposits for
each of the years ended December 31, 2002, 2001 and 2000 are presented below:

|                              |                                   |                                 |         |                          |         |      |   |        |      |      |         |         |         |      |   |      |      |   |         |         |         |  |   |      |      |  
|----------------------------- | --------------------------------- | ------------------------------- | ------- | ------------------------ | ------- | ---- | - | ------ | ---- | ---- | ------- | ------- | ------- | ---- | - | ---- | ---- | - | ------- | ------- | ------- |  | - | ---- | ---- | -
|                              |                                   |                                 |         | Years Ended December 31,
|                              |                                   |                                 |         |                         
|                              |                                   |                                 |         | 2002                     |         | 2001 |   | 2000  
|                              |                                   |                                 |         |                          |         |      |   |       
|                              |                                   |                                 |         | Amount                   |         | Rate |   | Amount |      | Rate |         | Amount  |         | Rate
|                              |                                   |                                 |         |                          |         |      |   |        |      |      |         |         |         |     
|                              |                                   |                                 |         | (Dollars in thousands)  
|Interest-bearing deposits:    |                                   |                                 |         |                          |         |      |   |        |      |      |         |         |         |      |   |      |      |   |         |         |         |  |   |     
|                              | Money market checking             |                                 | $       | 71,059                   |         |      |   | 1.18   | %    |      | $       | 54,694  |         |      |   | 2.21 | %    |   | $       | 42,888  |         |  |   | 2.99 | %   
|                              | Savings and money market deposits |                                 |         | 110,372                  |         |      |   | 1.25   |      |      |         | 102,268 |         |      |   | 2.27 |      |   |         | 96,520  |         |  |   | 3.35 |     
|                              | Time deposits less than $100,000  |                                 |         | 176,941                  |         |      |   | 2.69   |      |      |         | 182,588 |         |      |   | 5.13 |      |   |         | 185,310 |         |  |   | 5.89 |     
|                              | Time deposits $100,000 and over   |                                 |         | 165,766                  |         |      |   | 3.52   |      |      |         | 177,782 |         |      |   | 5.42 |      |   |         | 162,955 |         |  |   | 5.92 |     
|                              |                                   |                                 |         |                          |         |      |   |        |      |      |         |         |         |      |   |      |      |   |         |         |         |  |   |      |     
|                              |                                   | Total interest-bearing deposits |         |                          | 524,138 |      |   |        | 2.44 |      |         |         | 517,332 |      |   |      | 4.36 |   |         |         | 487,673 |  |   |      | 5.14 |  
|Non interest-bearing deposits |                                   |                                 | 132,686 |                          |         |      |  |        |      |      | 109,638 |         |         |      |  |      |      |   | 102,544 |         |         |  |  |     
|                              |                                   |                                 |         |                          |         |      |   |        |      |      |         |         |         |      |   |      |      |   |         |         |         |  |   |      |     
|                              |                                   | Total deposits                  |         | $                        | 656,824 |      |   |        | 1.95 | %    |         | $       | 626,970 |      |   |      | 3.59 | % |         | $       | 590,217 |  |   |      | 4.25 | %
|                              |                                   |                                 |         |                          |         |      |   |        |      |      |         |         |         |      |   |      |      |   |         |         |         |  |   |      |     

The following table sets forth the amount of the Companys time deposits
that are $100,000 or greater by time remaining until maturity:

|                              |  |                        |         | 
|----------------------------- |  | ---------------------- | ------- | 
|                              |  | As of                 
|                              |  | December 31, 2002     
|                              |  |                       
|                              |  | (Dollars in thousands)
|Three months or less          |  | $                      | 45,996  | 
|Over three through six months |  |                        | 41,330  | 
|Over six through 12 months    |  |                        | 66,884  | 
|Over 12 months                |  |                        | 40,477  | 
|                              |  |                        |         | 
|Total                         |  | $                      | 194,687 | 
|                              |  |                        |         | 

Other Borrowings

Other borrowings
include $25.0 million of loans from the
FHLB of Dallas, maturing in September 2008. The loans bear interest
at an average rate
of 4.99% per annum until the fifth anniversary at which time they may
be repaid or the interest rate may be renegotiated.

Other borrowings
also include several FHLB advances obtained in 2002 to acquire mortgage-related securities
in order to increase earning assets. These borrowings were $40.2 million at December 31, 2002 with maturities
ranging from one month to two years and carried a weighted average interest
rate of 1.85%.

Additionally, the Company had several unused, uncollateralized lines of
credit with correspondent banks totaling $15.0 million, $15.0 million, and $5.0
million at December 31, 2002, 2001, and 2000, respectively.

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The following table presents the categories of other borrowings by the
Company:

|                             |                                           |  |                        |        |      |  |      |        |  |  |   |        | 
|---------------------------- | ----------------------------------------- |  | ---------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                             |                                           |  | As of December 31,    
|                             |                                           |  |                       
|                             |                                           |  | 2002                   |        | 2001 |  | 2000
|                             |                                           |  |                        |        |      |  |     
|                             |                                           |  | (Dollars in thousands)
|Federal funds purchased:     |                                           |  |                        |        |      |  |      |        |  |  |   |       
|                             | on December 31,                           |  | $                      |       |      |  | $    |       |  |  | $ |       | 
|                             | average during the year                   |  |                        | 162    |      |  |      | 1      |  |  |   | 14,957 | 
|                             | maximum month end balance during the year |  |                        |       |      |  |      |       |  |  |   | 20,000 | 
|FHLB notes:                  |                                           |  |                        |        |      |  |      |        |  |  |   |       
|                             | on December 31,                           |  | $                      | 65,200 |      |  | $    | 25,000 |  |  | $ | 25,000 | 
|                             | average during the year                   |  |                        | 52,343 |      |  |      | 25,000 |  |  |   | 27,268 | 
|                             | maximum month end balance during the year |  |                        | 69,700 |      |  |      | 25,000 |  |  |   | 35,000 | 
|Other short-term borrowings: |                                           |  |                        |        |      |  |      |        |  |  |   |       
|                             | on December 31,                           |  | $                      | 574    |      |  | $    | 195    |  |  | $ | 573    | 
|                             | average during the year                   |  |                        | 551    |      |  |      | 570    |  |  |   | 532    | 
|                             | maximum month end balance during the year |  |                        | 713    |      |  |      | 555    |  |  |   | 577    | 

At December 31, 2002, the following table presents the
payments due by period for the Companys contractual borrowing obligations
(other than deposit obligations):

|                              |  |                        |        |             |  |            |       |             |  |       |     |  |  |   |        |  |  |   |        | 
|----------------------------- |  | ---------------------- | ------ | ----------- |  | ---------- | ----- | ----------- |  | ----- | --- |  |  | - | ------ |  |  | - | ------ | 
|                              |  |                        |        |             |  | After One  |       | After Three |  |       |     |  |  |   |        | 
|                              |  | Within One             |        | But Within  |  | But Within |       | After Five  |  |       |     | 
|                              |  | Year                   |        | Three Years |  | Five Years |       | Years       |  | Total
|                              |  |                        |        |             |  |            |       |             |  |      
|                              |  | (Dollars in thousands)
|Federal Reserve TT&L          |  | $                      | 574    |             |  | $          |      |             |  | $     |    |  |  | $ |       |  |  | $ | 574    | 
|Short-term borrowings         |  |                        | 32,200 |             |  |            |      |             |  |       |    |  |  |   |       |  |  |   | 32,200 | 
|Long-term borrowings          |  |                        |       |             |  |            | 8,000 |             |  |       |    |  |  |   | 25,000 |  |  |   | 33,000 | 
|                              |  |                        |        |             |  |            |       |             |  |       |     |  |  |   |        |  |  |   |        | 
|Total borrowing obligations   |  |                        | 32,774 |             |  |            | 8,000 |             |  |       |    |  |  |   | 25,000 |  |  |   | 65,774 | 
|Operating lease obligations   |  |                        | 867    |             |  |            | 1,645 |             |  |       | 466 |  |  |   | 334    |  |  |   | 3,312  | 
|                              |  |                        |        |             |  |            |       |             |  |       |     |  |  |   |        |  |  |   |        | 
|Total contractual obligations |  | $                      | 33,641 |             |  | $          | 9,645 |             |  | $     | 466 |  |  | $ | 25,334 |  |  | $ | 69,086 | 
|                              |  |                        |        |             |  |            |       |             |  |       |     |  |  |   |        |  |  |   |        | 

Interest Rate Sensitivity and Market Risk

As a financial institution, the Companys primary component of market risk
is interest rate volatility, primarily in the prime lending rate. Fluctuations
in interest rates will ultimately impact both the level of income and expense
recorded on most of the Companys assets and liabilities, and the market value
of all interest-earning assets and interest-bearing liabilities, other than
those which have a short term to maturity. Based upon the nature of the
Companys operations, the Company is not subject to foreign exchange or
commodity price risk. The Company does not own any trading assets.

Interest rate risk is
managed by the Asset and Liability Committee
(ALCO) which is composed of senior officers of the Company, in accordance
with policies approved by the Companys Board of Directors. Interest rate risk
is the potential of economic losses due to future
interest rate changes. These economic losses can be reflected as a loss of
future net interest income and/or a loss of current fair market values. The
objective is to measure the effect on net interest income and to adjust the
balance sheet to minimize the inherent risk while at the same time maximizing
income. Management realizes certain risks are inherent, and that the goal is
to identify, monitor, manage or exploit the risks.

The ALCO
formulates strategies based on appropriate levels of interest rate
risk. In
determining the appropriate level of interest rate risk, the ALCO considers the
impact on earnings and capital of the current outlook on interest rates,
potential changes in interest rates, regional economies, liquidity, business
strategies and other factors. The ALCO meets regularly to review, among other things, the sensitivity of assets
and liabilities to interest rate changes, the book and market values of assets
and liabilities, unrealized gains and losses, purchase and sale activities,
commitments to originate loans and the maturities of investments and
borrowings. Additionally, the ALCO reviews liquidity, cash flow flexibility,
maturities of deposits and consumer and commercial deposit activity.
Management uses two methodologies to manage interest rate risk: (i) an analysis
of relationships between interest-earning assets and interest-bearing
liabilities and (ii) an interest rate shock simulation model. The Company has
traditionally managed its business to reduce its overall exposure to changes in
interest rates, however, under current policies of the Companys Board of
Directors, management has been given some latitude to increase the Companys
interest rate sensitivity position within certain limits if, in managements
judgment, it will enhance profitability. As a result, changes in market
interest rates may have a greater impact on the Companys financial performance
in the future than they have had historically.

The Companys Funds Management Policy provides management with the
necessary guidelines for effective funds management, and the Company has
established a measurement system for monitoring its net interest rate
sensitivity position. The Company manages its sensitivity position within
established guidelines.

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An interest rate sensitive asset or liability is one that, within a
defined time period, either matures or experiences an interest rate change in
line with general market interest rates. The management of interest rate risk
is performed by analyzing the maturity and repricing relationships between
interest-earning assets and interest-bearing liabilities at specific points in
time (GAP) and by analyzing the effects of interest rate changes on net
interest income over specific periods of time by projecting the performance of
the mix of assets and liabilities in varied interest rate environments.
Interest rate sensitivity reflects the potential effect on net interest income
of a movement in interest rates. A company is considered to be asset
sensitive, or having a positive GAP, when the amount of its interest-earning
assets maturing or repricing within a given period exceeds the amount of its
interest-bearing liabilities also maturing or repricing within that time
period. Conversely, a company is considered to be liability sensitive, or
having a negative GAP, when the amount of its interest-bearing liabilities
maturing or repricing within a given period exceeds the amount of its
interest-earning assets also maturing or repricing within that time period.
During a period of rising interest rates, a negative GAP would tend to
adversely affect net interest income, while a positive GAP would tend to result
in an increase in net interest income.

The following table sets forth an interest rate sensitivity analysis for
the Company at December 31, 2002:

|                              |                                                                               |  |                              |         |        |  |         |         |       |  |       |         |       |  |         |         |       |  |   |         |    |  |   |         |    |  |         |         |   |  |   |         | 
|----------------------------- | ----------------------------------------------------------------------------- |  | ---------------------------- | ------- | ------ |  | ------- | ------- | ----- |  | ----- | ------- | ----- |  | ------- | ------- | ----- |  | - | ------- | -- |  | - | ------- | -- |  | ------- | ------- | - |  | - | ------- | 
|                              |                                                                               |  | Volumes Subject to Repricing
|                              |                                                                               |  |                             
|                              |                                                                               |  |                              |         |        |  |         |         |       |  |       |         |       |  |         |         |       |  |   |         |    |  |   |         |    |  | Greater |         |   |  |  
|                              |                                                                               |  | 0-30                         |         | 31-180 |  | 181-365 |         | 1-3   |  | 3-5   |         | 5-10  |  | than 10 |         |       |  |  
|                              |                                                                               |  | days                         |         | days   |  | days    |         | years |  | years |         | years |  | years   |         | Total
|                              |                                                                               |  |                              |         |        |  |         |         |       |  |       |         |       |  |         |         |      
|                              |                                                                               |  | (Dollars in thousands)      
|Interest-earning assets:      |                                                                               |  |                              |         |        |  |         |         |       |  |       |         |       |  |         |         |       |  |   |         |    |  |   |         |    |  |         |         |   |  |   |        
|                              | Securities                                                                    |  | $                            | 61,541  |        |  | $       | 66,013  |       |  | $     | 56,490  |       |  | $       | 38,618  |       |  | $ | 21,150  |    |  | $ | 16,070  |    |  | $       | 156     |   |  | $ | 260,038 | 
|                              | Total loans                                                                   |  |                              | 391,923 |        |  |         | 65,259  |       |  |       | 25,741  |       |  |         | 37,956  |       |  |   | 5,767   |    |  |   | 1,102   |    |  |         | 11      |   |  |   | 527,759 | 
|                              | Federal funds sold and other
temporary investments                            |  |                              | 38,186  |        |  |         |        |       |  |       |        |       |  |         |        |       |  |   |        |    |  |   |        |    |  |         |        |   |  |   | 38,186  | 
|                              |                                                                               |  |                              |         |        |  |         |         |       |  |       |         |       |  |         |         |       |  |   |         |    |  |   |         |    |  |         |         |   |  |   |         | 
|                              | Total interest-bearing assets                                                 |  |                              | 491,650 |        |  |         | 131,272 |       |  |       | 82,231  |       |  |         | 76,574  |       |  |   | 26,917  |    |  |   | 17,172  |    |  |         | 167     |   |  |   | 825,983 | 
|                              |                                                                               |  |                              |         |        |  |         |         |       |  |       |         |       |  |         |         |       |  |   |         |    |  |   |         |    |  |         |         |   |  |   |         | 
|Interest-bearing liabilities: |                                                                               |  |                              |         |        |  |         |         |       |  |       |         |       |  |         |         |       |  |   |         |    |  |   |         |    |  |         |         |   |  |   |        
|                              | Demand, money market and
savings deposits                                     |  |                              |        |        |  |         | 16,728  |       |  |       | 16,728  |       |  |         | 57,619  |       |  |   | 39,032  |    |  |   | 55,761  |    |  |         |        |   |  |   | 185,868 | 
|                              | Time deposits                                                                 |  |                              | 36,793  |        |  |         | 146,112 |       |  |       | 113,666 |       |  |         | 59,914  |       |  |   | 4,399   |    |  |   | 65      |    |  |         |        |   |  |   | 360,949 | 
|                              | Federal funds purchased                                                       |  |                              |        |        |  |         |        |       |  |       |        |       |  |         |        |       |  |   |        |    |  |   |        |    |  |         |        |   |  |   |        | 
|                              | Other borrowings                                                              |  |                              | 18,274  |        |  |         | 9,200   |       |  |       | 5,300   |       |  |         | 8,000   |       |  |   |        |    |  |   | 25,000  |    |  |         |        |   |  |   | 65,774  | 
|                              |                                                                               |  |                              |         |        |  |         |         |       |  |       |         |       |  |         |         |       |  |   |         |    |  |   |         |    |  |         |         |   |  |   |         | 
|                              | Total interest-bearing liabilities                                            |  |                              | 55,067  |        |  |         | 172,040 |       |  |       | 135,694 |       |  |         | 125,533 |       |  |   | 43,431  |    |  |   | 80,826  |    |  |         |        |   |  |   | 612,591 | 
|                              |                                                                               |  |                              |         |        |  |         |         |       |  |       |         |       |  |         |         |       |  |   |         |    |  |   |         |    |  |         |         |   |  |   |         | 
|                              | Period GAP                                                                    |  | $                            | 436,583 |        |  | $       | (40,768 | )     |  | $     | (53,463 | )     |  | $       | (48,959 | )     |  | $ | (16,514 | )  |  | $ | (63,654 | )  |  | $       | 167     |   |  | $ | 213,392 | 
|                              |                                                                               |  |                              |         |        |  |         |         |       |  |       |         |       |  |         |         |       |  |   |         |    |  |   |         |    |  |         |         |   |  |   |         | 
|                              | Cumulative GAP                                                                |  | $                            | 436,583 |        |  | $       | 395,815 |       |  | $     | 342,352 |       |  | $       | 293,393 |       |  | $ | 276,879 |    |  | $ | 213,225 |    |  | $       | 213,392 |   |  |   |         | 
|                              |                                                                               |  |                              |         |        |  |         |         |       |  |       |         |       |  |         |         |       |  |   |         |    |  |   |         |    |  |         |         |   |  |   |        
|                              | Period GAP to total assets                                                    |  |                              | 51.97   | %      |  |         | (4.85   | )%    |  |       | (6.36   | )%    |  |         | (5.83   | )%    |  |   | (1.97   | )% |  |   | (7.58   | )% |  |         | 0.02    | % |  |   |         | 
|                              | Cumulative GAP to total
assets                                                |  |                              | 51.97   | %      |  |         | 47.12   | %     |  |       | 40.75   | %     |  |         | 34.93   | %     |  |   | 32.96   | %  |  |   | 25.38   | %  |  |         | 25.40   | % |  |   |         | 
|                              | Cumulative interest-earning
assets to cumulative
interest-bearing liabilities |  |                              | 892.83  | %      |  |         | 274.29  | %     |  |       | 194.36  | %     |  |         | 160.08  | %     |  |   | 152.07  | %  |  |   | 134.81  | %  |  |         | 111.04  | % |  |   |         | 

The preceding table provides Company management with repricing data within
given time frames. The purpose of this information is to assist management in
the elements of pricing and of matching interest sensitive assets with interest
sensitive liabilities within time frames. The table indicates a positive GAP
on a cumulative basis for the three time periods covering the next 365 days of
$436.6 million (1-30 days), $395.8 million (31-180 days) and $342.4 million
(181-365 days), respectively. With this
condition, the Company is susceptible to a decrease in net interest income
should market interest rates decrease. GAP reflects a one-day position that is
continually changing and is not indicative of the

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Companys position at any other time. While the GAP position is a useful tool
in measuring interest rate risk and contributes toward effective asset and
liability management, it is difficult to predict the effect of changing
interest rates solely on that measure, without accounting for alterations in
the maturity or repricing characteristics of the balance sheet that occur
during changes in market interest rates. For example, the GAP position
reflects only the prepayment assumptions pertaining to the current rate
environment. Assets tend to prepay more rapidly during periods of declining
interest rates than during periods of rising interest rates. Because of this
and other risk factors not contemplated by the GAP position, an institution
could have a matched GAP position in the current rate environment and still
have its net interest income exposed to increased rate risk. The Companys
Rate Committee and the ALCO review the Companys interest rate risk position on
a weekly and monthly basis, respectively.

The Company applies an economic value of equity (EVE) methodology to
gauge its interest rate risk exposure as derived from its simulation model.
Generally, EVE is the discounted present value of the difference between
incoming cash flows on interest-earning assets and other investments and
outgoing cash flows on interest-bearing liabilities. The application of the
methodology attempts to quantify interest rate risk by measuring the change in
the EVE that would result from a theoretical instantaneous and sustained 200
basis point shift in market interest rates.

Presented below, as of December 31, 2002, is an analysis of the Companys
interest rate risk as measured by changes in EVE for parallel shifts of 200
basis points in market interest rates:

|                |      |                        |                 |                 |  |           |        |        |  |  |                         |       |   |          |  |   | 
|--------------- | ---- | ---------------------- | --------------- | --------------- |  | --------- | ------ | ------ |  |  | ----------------------- | ----- | - | -------- |  | - | 
|                |      |                        |                 |                 |  |           |        |        |  |  | EVE as a % of          
|                |      |                        |                 |                 |  |           |        |        |  |  | Present Value of Assets
|                |      |                        | $ Change in EVE |                 |  |           |        |        | 
|Change in Rates |      | (Dollars in thousands) |                 | % Change in EVE |  | EVE Ratio |        | Change
|                |      |                        |                 |                 |  |           |        |       
|-200 bp         |      | $                      | (19,812         | )               |  |           | (20.26 | )%     |  |  | 9.16                    | %     |   | (242) bp
|                | 0 bp |                        |                 |                |  |           |        |       |  |  |                         | 11.58 | % |          |  |  | 
|+200 bp         |      |                        | 7,364           |                 |  |           | 7.53   | %      |  |  | 12.73                   | %     |   | 115 bp  

The percentage change in EVE as a result of a 200 basis point decrease in
interest rates at December 31, 2002 was (20.26)% compared with (10.00)% as of
December 31, 2001. The percentage change in EVE as a result of a 200 basis
point increase in interest rates on December 31, 2002 of 7.53% compared with
(9.93)% as of December 31, 2001. In 2002, the Bank conducted a study to
determine the average life of its non-maturity deposits. The resulting
conclusion was that the non-maturity deposits have a longer average life than
was previously assumed and reflected in previous EVE calculations. This new
assumption was reflected in the EVE at December 31, 2002.

In 2002, the investment portfolio experienced a significant amount of
mortgage-backed security prepayments and agency security calls as a result of
interest rate declines. The proceeds from these cash flows were generally
invested in shorter-term securities resulting in a shortening in the
weighted-average life of the portfolio. The shorter duration should mitigate
future portfolio price depreciation as interest rates increase.

Management believes that the EVE methodology overcomes three shortcomings
of the typical maturity GAP methodology. First, it does not use arbitrary
repricing intervals and accounts for all expected future cash flows. Second,
because the EVE method projects cash flows of each financial instrument under
different interest rate environments, it can incorporate the effect of embedded
options on an institutions interest rate risk exposure. Third, it allows
interest rates on different instruments to change by varying amounts in
response to a change in market interest rates, resulting in more accurate
estimates of cash flows.

As with any method of gauging interest rate risk, however, there are
certain shortcomings inherent to the EVE methodology. The model assumes
interest rate changes are instantaneous parallel shifts in the yield curve. In
reality, rate changes are rarely instantaneous. The use of the simplifying
assumption that short-term and long-term rates change by the same degree may
also misstate historical rate patterns which rarely show parallel yield curve
shifts. Further, the model assumes that certain assets and liabilities of
similar maturity or repricing will react identically to changes in rates. In
reality, the market value of certain types of financial instruments may adjust
in anticipation of changes in market rates, while any adjustment in the
valuation of other types of financial instruments may lag behind the change in
general market rates. Additionally, the EVE methodology does not reflect the
full impact of contractual restrictions on changes in rates for certain assets,
such as adjustable rate loans. When interest rates change, actual loan
prepayments and actual early withdrawals from time deposits may deviate
significantly from the assumptions used in the model. Finally, this
methodology does not measure or reflect the impact that higher rates may have
on the ability of adjustable rate loan clients to service their debt. All of
these factors are considered in monitoring the Companys exposure to interest
rate risk.

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The prime rate in effect for December 31, 2002 and December 31, 2001 was
4.25% and 4.75%, respectively. In November 2002, the Federal Reserve lowered
interest rates 50 basis points. During 2001, the Federal Reserve lowered
interest rates eleven times for a total of 475 basis points.

Liquidity

Liquidity involves the Companys ability to raise funds to support asset
growth or reduce assets to meet deposit withdrawals and other payment
obligations, to maintain reserve requirements and otherwise to operate the
Company on an ongoing basis. The Companys liquidity needs are met primarily
by financing activities, which consist mainly of growth in deposits,
supplemented by available-for-sale investment securities, other borrowings and
earnings through operating activities. Although access to purchased funds from
correspondent banks is available and has been utilized on occasion to take
advantage of investment opportunities, the Company does not generally rely on
these external funding sources. The cash and federal funds sold position,
supplemented by amortizing investments along with payments and maturities
within the loan portfolio, have historically created an adequate liquidity
position.

The Company uses federal funds purchased and other borrowings as funding
sources and in its management of interest rate risk. Federal funds purchased
generally represent overnight borrowings. Other borrowings principally consist
of U.S. Treasury tax note option accounts that have maturities of 14 days or
less and borrowings from the FHLB.

FHLB advances may be utilized from time to time as either a short-term
funding source or a longer-term funding source. FHLB advances can be
particularly attractive as a longer-term funding source to balance interest
rate sensitivity and reduce interest rate risk. The Company is eligible for
several borrowing programs through the FHLB. The first, a short-term borrowing
program, requires delivery of eligible securities for collateral. Maturities
under this program range from one to 365 days. The Company currently maintains
most of its investment securities in safekeeping at the FHLB of Dallas.

Under another borrowing program, long-term borrowings are available to the
Company from the FHLB. These borrowings have maturities greater than one year
and are collateralized first by FHLB stock, second by the Companys one to four
family mortgage loans and third by the Companys investment securities in
safekeeping at the FHLB. Borrowings collateralized by the Companys one to
four family mortgage loans are limited to 75% of the loan value. At December
31, 2002, the Company had $65.2 million in borrowings under this program.

Off-Balance Sheet Arrangements

The Bank is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include various guarantees, commitments to extend
credit and standby letters of credit. Additionally, these instruments may
involve, to varying degrees, credit risk in excess of the amount recognized in
the statement of financial condition. The Banks maximum exposure to credit
loss under such arrangements is represented by the contractual amount of those
instruments. The Bank applies the same credit policies and collateralization
guidelines in making commitments and conditional obligations as it does for
on-balance sheet instruments. Unfunded loan commitments including
unfunded lines of credit at December 31,
2002 and 2001 aggregated approximately $74.9 million and $64.4 million,
respectively. Commitments under standby and commercial letters of credit at December 31, 2002 and
2001 totaled $10.4 million and $3.6 million, respectively.
Operating leases at December 31, 2002 and 2001 totaled
$3.3 million and $3.5 million, respectively.

The contractual amount of the Companys financial instruments with
off-balance sheet risk expiring by period at December 31, 2002 is presented
below:

|                                                             |  |                        |        |             |  |            |       |             |  |       |     |  |  |   |     |  |  |   |        | 
|------------------------------------------------------------ |  | ---------------------- | ------ | ----------- |  | ---------- | ----- | ----------- |  | ----- | --- |  |  | - | --- |  |  | - | ------ | 
|                                                             |  |                        |        |             |  | After One  |       | After Three |  |       |     |  |  |   |     | 
|                                                             |  | Within One             |        | But Within  |  | But Within |       | After Five  |  |       |     | 
|                                                             |  | Year                   |        | Three Years |  | Five Years |       | Years       |  | Total
|                                                             |  |                        |        |             |  |            |       |             |  |      
|                                                             |  | (Dollars in thousands)
|Unfunded loan commitments including unfunded lines
of credit |  | $                      | 74,937 |             |  | $          |      |             |  | $     |    |  |  | $ |    |  |  | $ | 74,937 | 
|Standby letters of credit                                    |  |                        | 2,668  |             |  |            | 228   |             |  |       |    |  |  |   |    |  |  |   | 2,896  | 
|Commercial letters of credit                                 |  |                        | 7,541  |             |  |            |      |             |  |       |    |  |  |   |    |  |  |   | 7,541  | 
|Operating leases                                             |  |                        | 867    |             |  |            | 1,645 |             |  |       | 466 |  |  |   | 334 |  |  |   | 3,312  | 
|                                                             |  |                        |        |             |  |            |       |             |  |       |     |  |  |   |     |  |  |   |        | 
|
|Total
financial instruments with off-balance sheet risk      |  | $                      | 86,013 |             |  | $          | 1,873 |             |  | $     | 466 |  |  | $ | 334 |  |  | $ | 88,686 | 
|                                                             |  |                        |        |             |  |            |       |             |  |       |     |  |  |   |     |  |  |   |        | 

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Capital Resources

Capital management consists of providing equity to support both current
and future operations. The Company is subject to capital adequacy requirements
imposed by the Federal Reserve Board and the Bank is subject to capital
adequacy requirements imposed by the OCC. Both the Federal Reserve Board and
the OCC have adopted risk-based capital requirements for assessing bank holding
company and bank capital adequacy. These standards define capital and
establish minimum capital requirements in relation to assets and off-balance
sheet exposure, adjusted for credit risk. The risk-based capital standards
currently in effect are designed to make regulatory capital requirements more
sensitive to differences in risk profiles among bank holding companies and
banks, to account for off-balance sheet exposure and to minimize disincentives
for holding liquid assets. Assets and off-balance sheet items are assigned to
broad risk categories, each with appropriate relative risk weights. The
resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off-balance sheet items.

The risk-based capital standards of the Federal Reserve Board require all
bank holding companies to have Tier 1 capital of at least 4.0% and total
risk-based capital (Tier 1 and Tier 2) of at least 8.0% of total risk-adjusted
assets. Tier 1 capital generally includes common shareholders equity and
qualifying perpetual preferred stock together with related surpluses and
retained earnings, less deductions for goodwill and various other intangibles.
Tier 2 capital may consist of a limited amount of intermediate-term preferred
stock, a limited amount of term subordinated debt, certain hybrid capital
instruments and other debt securities, perpetual preferred stock not qualifying
as Tier 1 capital, and a limited amount of the general valuation allowance for
loan losses. The sum of Tier 1 capital and Tier 2 capital is total risk-based
capital.

The Federal Reserve Board has also adopted guidelines which supplement the
risk-based capital guidelines with a minimum ratio of Tier 1 capital to average
total consolidated assets (leverage ratio) of 3.0% for institutions with well
diversified risk, including no undue interest rate exposure; excellent asset
quality; high liquidity; good earnings; and that are generally considered to be
strong banking organizations, rated composite 1 under applicable federal
guidelines, and that are not experiencing or anticipating significant growth.
Other banking organizations are required to maintain a leverage ratio of at
least 4.0%. These rules further provide that banking organizations
experiencing internal growth or making acquisitions will be expected to
maintain capital positions substantially above the minimum supervisory levels
and comparable to peer group averages, without significant reliance on
intangible assets.

Pursuant to FDICIA, each federal banking agency revised its risk-based
capital standards to ensure that those standards take adequate account of
interest rate risk, concentration of credit risk and the risks of
nontraditional activities, as well as reflect the actual performance and
expected risk of loss on multifamily mortgages. The Bank is subject to capital
adequacy guidelines of the OCC that are substantially similar to the Federal
Reserve Boards guidelines. Also pursuant to FDICIA, the OCC has promulgated
regulations setting the levels at which an insured institution such as the Bank
would be considered well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. The Bank is classified well capitalized for purposes of
the OCCs prompt corrective action regulations. See Business-Supervision and
Regulation-The Company and -The Bank.

Shareholders equity at December 31, 2002 was $74.5 million, an increase
of $9.2 million or 14.2% compared to shareholders equity of $65.2 million at
December 31, 2001. This increase was primarily the result of net income of
$8.8 million, common and treasury stock issuances of approximately $100,000,
and a net unrealized gain on securities of approximately $2.0 million that was
partially offset by dividend payments of $1.7 million.

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The following table provides a comparison of the Companys and the Banks
leverage and risk-weighted capital ratios as of December 31, 2002 to the
minimum and well-capitalized regulatory standards:

|            |                                 |  |                   |      |                         |  |                   |       |   |  |  |       |  
|----------- | ------------------------------- |  | ----------------- | ---- | ----------------------- |  | ----------------- | ----- | - |  |  | ----- | -
|            |                                 |  | Minimum Required  |      | To be Well Capitalized  |  | Actual           
|            |                                 |  | for Capital       |      | under Prompt Corrective |  | Ratio at         
|            |                                 |  | Adequacy Purposes |      | Action Provisions       |  | December 31, 2002
|            |                                 |  |                   |      |                         |  |                  
|The Company |                                 |  |                   |      |                         |  |                   |       |   |  |  |      
|            | Leverage ratio                  |  |                   | 4.00 | %(1)                    |  |                   | N/A   |   |  |  | 8.58  | %
|            | Tier 1 risk-based capital ratio |  |                   | 4.00 | %                       |  |                   | N/A   |   |  |  | 12.71 | %
|            | Risk-based capital ratio        |  |                   | 8.00 | %                       |  |                   | N/A   |   |  |  | 13.97 | %
|The Bank    |                                 |  |                   |      |                         |  |                   |       |   |  |  |      
|            | Leverage ratio                  |  |                   | 4.00 | %(2)                    |  |                   | 5.00  | % |  |  | 8.20  | %
|            | Tier 1 risk-based capital ratio |  |                   | 4.00 | %                       |  |                   | 6.00  | % |  |  | 12.16 | %
|            | Risk-based capital ratio        |  |                   | 8.00 | %                       |  |                   | 10.00 | % |  |  | 13.41 | %



---

|(1) |  | The Federal Reserve Board may require the Company to maintain a leverage ratio above the required
minimum.
|--- |  | ----------------------------------------------------------------------------------------------------------
|(2) |  | The OCC may require the Bank to maintain a leverage ratio above the required minimum.                     

Critical Accounting Policies

The Company has established various accounting policies which govern the
application of accounting principles generally accepted in the United States in
the preparation of the Companys financial statements. Certain accounting
policies involve significant judgments and assumptions by management which have
a material impact on the carrying value of certain assets and liabilities;
management considers such accounting policies to be critical accounting
policies. The judgments and assumptions used by management are based on
historical experience and other factors, which are believed to be reasonable
under the circumstances. Because of the nature of the judgments and
assumptions made by management, actual results could differ from these
judgments and estimates which could have a material impact on the carrying
values of assets and liabilities and the results of operations of the Company.
The Company believes the allowance for loan losses is a critical accounting
policy that requires the most significant judgments and estimates used in the
preparation of its consolidated financial statements. In estimating the
allowance for loan losses, management reviews effect of changes in the local
real estate market on collateral values, the effect of current economic
indicators on the loan portfolio and their probable impact on borrowers and
increases or decreases in nonperforming and impaired loans. Changes in these
factors may cause managements estimate of the allowance to increase or
decrease and result in adjustments to the Companys provision for loan losses.
SeeFinancial Condition  Allowance for Loan Losses.

New Accounting Pronouncements

On October 24, 2002, the Financial Accounting Standards Board (FASB)
approved Statement of Financial Accounting Standards (SFAS) No. 147,
Acquisitions of Certain Financial Institutions.SFAS No. 147 amends previously
issued guidance regarding the accounting and reporting for the acquisition of
all or part of a financial institution. The statement also provides guidance
on the accounting for impairment of core deposits. It is effective for
acquisitions after October 1, 2002. The Company does not expect the adoption
of this standard to have any effect on its financial condition or results of
operations.

On December 31, 2002, the FASB approved SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure, an amendment of FASB
Statement No. 123.SFAS No. 148 amends SFAS No. 123, to provide alternative
methods of transition for an entity that voluntarily changes to the fair value
based method of accounting for stock-based employee compensation. It also
amends the disclosure provisions of SFAS No. 123 to require prominent
disclosure about the effects on reported net income of an entitys accounting
policy decisions with respect to stock-based employee compensation. Finally,
it amends the Accounting Research Bulletin (ARB) Opinion No. 28, Interim
Financial Reporting,to require disclosure about those effects in interim
financial information. The Company does not expect the adoption of this
standard to have a material effect on its financial condition or results of
operations.

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##### Table of Contents



On November 25, 2002, the FASB issued FASB Interpretation (FIN) No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others.FIN No. 45 considers standby
letters of credit, excluding commercial letters of credit and other lines of
credit, a guarantee of the Bank. The Bank enters into a standby letter 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 standby 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 December 31, 2002 the maximum
potential amount of future payments is $2.9 million. See Note 12 
Off-Balance Sheet Risk for a discussion of significant guarantees that have
been entered into by the Company. The Company does not expect the requirements
of FIN No. 45 to have a material effect on its financial condition or results
of operations.

On January 17, 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities,which addresses consolidation by business enterprises of
variable Interest entities. FIN No. 46 clarifies the application of ARB No.
51, Consolidated Financial Statements,to certain entities in which equity
investors do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. The Company has not determined the impact this
interpretation will have on its financial condition or results of operations.




Item 7A.Quantitative and Qualitative Disclosure About Market Risk

For information regarding the market risk of the Companys financial
instruments, see Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations-Interest Rate Sensitivity and Market Risk.
The Companys principal market risk exposure is to interest rates.




Item 8.Financial Statements and Supplementary Data

Reference is made to the financial statements, the reports thereon, the
notes thereto and supplementary data commencing at page 47 of this Form 10-K,
which financial statements, reports, notes and data are incorporated herein by
reference.

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##### Table of Contents



Quarterly Financial Data

The following table represents summarized data for each of the quarters in
fiscal 2002 and 2001 (in thousands, except per share data):

|                                     |                            |                                                     |      |         |       |         |      |         |       |         |      |         |       |         |      |         |       |         |      |        |       |   |      |        |       |   |      |        |       |   |      |        |       | 
|------------------------------------ | -------------------------- | --------------------------------------------------- | ---- | ------- | ----- | ------- | ---- | ------- | ----- | ------- | ---- | ------- | ----- | ------- | ---- | ------- | ----- | ------- | ---- | ------ | ----- | - | ---- | ------ | ----- | - | ---- | ------ | ----- | - | ---- | ------ | ----- | 
|                                     |                            |                                                     |      | 2002    |       | 2001   
|                                     |                            |                                                     |      |         |       |        
|                                     |                            |                                                     |      | Fourth  |       | Third   |      | Second  |       | First   |      | Fourth  |       | Third   |      | Second  |       | First  
|                                     |                            |                                                     |      | Quarter |       | Quarter |      | Quarter |       | Quarter |      | Quarter |       | Quarter |      | Quarter |       | Quarter
|                                     |                            |                                                     |      |         |       |         |      |         |       |         |      |         |       |         |      |         |       |        
|                                     | Interest income            |                                                     | $    | 11,865  |       |         | $    | 12,298  |       |         | $    | 12,354  |       |         | $    | 11,687  |       |         | $    | 12,767 |       |   | $    | 13,425 |       |   | $    | 14,196 |       |   | $    | 15,063 |      
|                                     | Interest expense           |                                                     |      | 3,532   |       |         |      | 3,610   |       |         |      | 3,596   |       |         |      | 3,891   |       |         |      | 4,683  |       |   |      | 5,549  |       |   |      | 6,417  |       |   |      | 7,150  |      
|                                     |                            |                                                     |      |         |       |         |      |         |       |         |      |         |       |         |      |         |       |         |      |        |       |   |      |        |       |   |      |        |       |   |      |        |      
|                                     |                            | Net interest income                                 |      |         | 8,333 |         |      |         | 8,688 |         |      |         | 8,758 |         |      |         | 7,796 |         |      |        | 8,084 |   |      |        | 7,876 |   |      |        | 7,779 |   |      |        | 7,913 | 
|                                     | Provision for loan losses  |                                                     |      | 1,533   |       |         |      | 750     |       |         |      | 970     |       |         |      | 600     |       |         |      | 2,609  |       |   |      | 407    |       |   |      | 356    |       |   |      | 427    |      
|                                     |                            |                                                     |      |         |       |         |      |         |       |         |      |         |       |         |      |         |       |         |      |        |       |   |      |        |       |   |      |        |       |   |      |        |      
|                                     |                            | Net interest income after
provision for loan losses |      |         | 6,800 |         |      |         | 7,938 |         |      |         | 7,788 |         |      |         | 7,196 |         |      |        | 5,475 |   |      |        | 7,469 |   |      |        | 7,423 |   |      |        | 7,486 | 
|                                     | Noninterest income         |                                                     |      | 2,261   |       |         |      | 2,440   |       |         |      | 2,297   |       |         |      | 2,476   |       |         |      | 2,106  |       |   |      | 2,112  |       |   |      | 2,339  |       |   |      | 2,102  |      
|                                     | Noninterest expense        |                                                     |      | 6,023   |       |         |      | 6,519   |       |         |      | 6,892   |       |         |      | 6,623   |       |         |      | 6,154  |       |   |      | 6,170  |       |   |      | 6,620  |       |   |      | 6,439  |      
|                                     |                            |                                                     |      |         |       |         |      |         |       |         |      |         |       |         |      |         |       |         |      |        |       |   |      |        |       |   |      |        |       |   |      |        |      
|                                     |                            | Income before income taxes                          |      |         | 3,038 |         |      |         | 3,859 |         |      |         | 3,193 |         |      |         | 3,049 |         |      |        | 1,427 |   |      |        | 3,411 |   |      |        | 3,142 |   |      |        | 3,149 | 
|                                     | Provision for income taxes |                                                     |      | 1,060   |       |         |      | 1,329   |       |         |      | 1,003   |       |         |      | 958     |       |         |      | 362    |       |   |      | 1,103  |       |   |      | 1,019  |       |   |      | 1,069  |      
|                                     |                            |                                                     |      |         |       |         |      |         |       |         |      |         |       |         |      |         |       |         |      |        |       |   |      |        |       |   |      |        |       |   |      |        |      
|                                     | Net income                 |                                                     | $    | 1,978   |       |         | $    | 2,530   |       |         | $    | 2,190   |       |         | $    | 2,091   |       |         | $    | 1,065  |       |   | $    | 2,308  |       |   | $    | 2,123  |       |   | $    | 2,080  |      
|                                     |                            |                                                     |      |         |       |         |      |         |       |         |      |         |       |         |      |         |       |         |      |        |       |   |      |        |       |   |      |        |       |   |      |        |      
|Earnings per share:                  |                            |                                                     |      |         |       |         |      |         |       |         |      |         |       |         |      |         |       |         |      |        |       |   |      |        |       |   |      |        |       |   |      |       
|                                     |                            | Basic                                               |      | $       | 0.28  |         |      | $       | 0.36  |         |      | $       | 0.31  |         |      | $       | 0.30  |         |      | $      | 0.15  |   |      | $      | 0.33  |   |      | $      | 0.30  |   |      | $      | 0.30  | 
|                                     |                            | Diluted                                             |      | $       | 0.28  |         |      | $       | 0.35  |         |      | $       | 0.30  |         |      | $       | 0.29  |         |      | $      | 0.15  |   |      | $      | 0.33  |   |      | $      | 0.30  |   |      | $      | 0.30  | 
|Weighted average shares outstanding: |                            |                                                     |      |         |       |         |      |         |       |         |      |         |       |         |      |         |       |         |      |        |       |   |      |        |       |   |      |        |       |   |      |       
|                                     |                            | Basic                                               |      |         | 7,031 |         |      |         | 7,026 |         |      |         | 7,020 |         |      |         | 7,020 |         |      |        | 7,016 |   |      |        | 7,003 |   |      |        | 6,990 |   |      |        | 6,981 | 
|                                     |                            | Diluted                                             |      |         | 7,179 |         |      |         | 7,147 |         |      |         | 7,140 |         |      |         | 7,140 |         |      |        | 7,127 |   |      |        | 7,081 |   |      |        | 7,001 |   |      |        | 7,028 | 
|Dividends per common share           |                            | $                                                   | 0.06 |         |       | $       | 0.06 |         |       | $       | 0.06 |         |       | $       | 0.06 |         |       | $       | 0.06 |        |       | $ | 0.06 |        |       | $ | 0.06 |        |       | $ | 0.06 |       




Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

The information required by this item has previously been reported in a
Current Report on Form 8-K, as amended, the Company filed with the Securities
and Exchange Commission on August 20, 2002.




PART III




Item 10.Directors and Executive Officers of the Company

The information under the captions Election of Directors, Continuing
Directors and Executive Officers and Section 16(a) Beneficial Ownership
Reporting Compliance in the Companys definitive Proxy Statement for its 2003
Annual Meeting of Shareholders to be filed with the Commission within 120 days
after December 31, 2002 pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (the 2003 Proxy Statement), is incorporated
herein by reference in response to this item.




Item 11.Executive Compensation

The information under the caption Executive Compensation and Other
Matters in the 2003 Proxy Statement is incorporated herein by reference in
response to this item.




Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information under the caption Beneficial Ownership of Common Stock by
Management of the Company and Principal Shareholders in the 2003 Proxy
Statement is incorporated herein by reference in response to this item.




Item 13.Certain Relationships and Related Transactions

The information under the caption Interests of Management and Others in
Certain Transactions in the 2003 Proxy Statement is incorporated herein by
reference in response to this item.

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##### Table of Contents






Item 14.Controls and Procedures

Evaluation of disclosure controls and procedures.Within 90 days prior to
the date of this report, the Company carried out an evaluation, under the
supervision and with the participation of our management, including our
President and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on this evaluation,
the Companys President and Chief Financial Officer concluded that the
Companys disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c) under the Securities Exchange Act of 1934 (the Exchange Act)) are
effective to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported to the Companys management within the time periods
specified in the Securities and Exchange Commissions rules and forms.

Changes in internal controls. Subsequent to the date of their evaluation,
there were no significant changes in the Companys internal controls or in
other factors that could significantly affect the Companys disclosure controls
and procedures, and there were no corrective actions with regard to significant
deficiencies and material weaknesses based on such evaluation.




PART IV




Item 15.Exhibits, Financial Statement Schedules, and Reports on Form 10-K

Consolidated Financial Statements and Financial Statement Schedules

Reference is made to the Consolidated Financial Statements, the reports
thereon, the notes thereto and supplementary data commencing at page
47 of this
Annual Report on Form 10-K. Set forth below is a list of such Consolidated
Financial Statements:



| | Report of Independent Accountants
Independent Auditors Report
Consolidated Balance Sheets as of December 31, 2002 and 2001
Consolidated Statements of Income for the Years Ended December 31, 2002, 2001, and 2000
Consolidated Statements of Comprehensive Income for the Years Ended
     December 31, 2002, 2001, and 2000
Consolidated Statements of Changes in Shareholders Equity for the Years
     Ended December 31, 2002, 2001, and 2000
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001, and 2000
Notes to Consolidated Financial Statements
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Financial Statement Schedules

All supplemental schedules are omitted as inapplicable or because the
required information is included in the Consolidated Financial Statements or
notes thereto.

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##### Table of Contents



Exhibits

|        |  |                                                                                                                                                                                                                                 
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                 
|Number  |  | Description                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                 
|3.1     |  | Amended and Restated Articles of Incorporation of the Company
(incorporated herein by reference to Exhibit 3.1 to the Companys
Registration Statement on Form S-1 (Registration No. 333-62667)
(the Registration Statement)).
|        |  |                                                                                                                                                                                                                                 
|3.2     |  | Amended and Restated Bylaws of the Company (incorporated herein
by reference to Exhibit 3.2 to the Registration Statement).                                                                                                     
|        |  |                                                                                                                                                                                                                                 
|4       |  | Specimen form of certificate evidencing the Common Stock
(incorporated herein by reference to Exhibit 4 to the
Registration Statement).                                                                                         
|        |  |                                                                                                                                                                                                                                 
|10.1    |  | Agreement and Plan of Reorganization by and among MetroCorp
Bancshares, Inc., MC Bancshares of Delaware, Inc. and MetroBank,
N.A. (incorporated herein by reference to Exhibit 10.1 to the
Registration Statement).             
|        |  |                                                                                                                                                                                                                                 
|10.2   |  | Form of Director Stock Option Agreement (incorporated herein by
reference to Exhibit 10.2 to the Registration Statement).                                                                                                       
|        |  |                                                                                                                                                                                                                                 
|10.3   |  | MetroCorp Bancshares, Inc. Non-Employee Director Stock Bonus
Plan (incorporated herein by reference to Exhibit 10.3 to the
Registration Statement).                                                                             
|        |  |                                                                                                                                                                                                                                 
|10.4    |  | MetroCorp Bancshares, Inc. 1998 Employee Stock Purchase Plan
(incorporated herein by reference to Exhibit 10.4 to the
Registration Statement).                                                                                  
|        |  |                                                                                                                                                                                                                                 
|10.5   |  | MetroCorp Bancshares, Inc. 1998 Stock Incentive Plan
(incorporated herein by reference to Exhibit 10.5 to the
Registration Statement).                                                                                          
|        |  |                                                                                                                                                                                                                                 
|10.6   |  | First Amendment to the MetroCorp Bancshares, Inc. 1998 Employee
Stock Purchase Plan (incorporated herein by reference to Exhibit
10.6 to the Companys Annual Report on Form 10-K for the year
ended December 31, 1998).        
|        |  |                                                                                                                                                                                                                                 
|10.7   |  | First Amendment to the MetroCorp Bancshares, Inc. Non-Employee
Director Stock Bonus Plan (incorporated herein by reference to
Exhibit 4.5 to the Companys Registration Statement on Form S-8
(Registration Number 333-94327)). 
|        |  |                                                                                                                                                                                                                                 
|10.8   |  | Second Amendment to the MetroCorp Bancshares, Inc. Non-Employee
Director Stock Bonus Plan (incorporated herein by reference to
Exhibit 4.6 to the Companys Registration Statement on Form S-8
(Registration Number 333-94327)).
|        |  |                                                                                                                                                                                                                                 
|10.9   |  | Employment Agreement between MetroCorp Bancshares, Inc. and Allen
D. Brown (incorporated herein by reference to Exhibit 10.9 to the
Companys Annual Report on Form 10-K for the year ended December
31, 2001).                 
|        |  |                                                                                                                                                                                                                                 
|21      |  | Subsidiaries of MetroCorp Bancshares, Inc. (incorporated herein
by reference to Exhibit 21 to the Registration Statement).                                                                                                      
|        |  |                                                                                                                                                                                                                                 
|23.1*   |  | Consent of PricewaterhouseCoopers LLP.                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                 
|23.2*   |  | Consent of Deloitte & Touche L.L.P.                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                 
|99.1*   |  | Certification of President pursuant to 18 U.S.C Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                                                                                             
|        |  |                                                                                                                                                                                                                                 
|99.2*   |  | Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 fo the Sarbanes
Oxley Act of 2002.                                                                              



---

|* |  | Filed herewith.                                         
|- |  | --------------------------------------------------------
| |  | Management contract or compensatory plan or arrangement.

Reports on Form 8-K

The following reports on Form 8-K were filed during the quarter ended
December 31, 2002:



|(1) |  | Current report on Form 8-K filed October 24, 2002 announcing the release
of the Companys earnings for the third quarter of 2002.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Houston, on March 28, 2003.

| |                            |                                           
| | -------------------------- | ------------------------------------------
| | MetroCorp Bancshares, Inc.
|
| | By:                        | /s/ Allen D. BrownAllen D. Brown
President

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the indicated capacities on
March 28, 2003.

|                                       |  |                                                                                                                            
|-------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------
|Signature                              |  | Title                                                                                                                      
|                                       |  |                                                                                                                            
|                                       |  |                                                                                                                            
|/s/ Don J. WangDon J. Wang             |  | Chairman of the Board                                                                                                      
|                                      
|                                       |  |                                                                                                                            
|/s/ Allen D. BrownAllen D. Brown       |  | Director and President (principal executive officer)                                                                       
|                                      
|                                       |  |                                                                                                                            
|/s/ David TaiDavid Tai                 |  | Director                                                                                                                   
|                                      
|                                       |  |                                                                                                                            
|/s/ David D. RinehartDavid D. Rinehart |  | Chief Financial Officer and Executive Vice President
    (principal financial officer and principal accounting
    officer)
|                                       |  |                                                                                                                            
|                                      
|Tiong L. Ang                           |  | Director                                                                                                                   
|                                      
|                                       |  |                                                                                                                            
|/s/ Helen F. ChenHelen F. Chen         |  | Director                                                                                                                   
|                                      
|                                       |  |                                                                                                                            
|/s/ Tommy F. ChenTommy F. Chen         |  | Director                                                                                                                   
|                                      
|                                       |  |                                                                                                                            
|/s/ May P. ChuMay P. Chu               |  | Director                                                                                                                   
|                                      
|                                       |  |                                                                                                                            
|/s/ George M. LeeGeorge M. Lee         |  | Director                                                                                                                   
|                                      
|                                       |  |                                                                                                                            
|/s/ John LeeJohn Lee                   |  | Director                                                                                                                   
|                                      
|                                       |  |                                                                                                                            
|/s/ Joe TingJoe Ting                   |  | Director                                                                                                                   

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##### Table of Contents






CERTIFICATIONS

I, Allen D. Brown, President of the registrant, certify that:

1.     I have reviewed this annual report on Form 10-K of MetroCorp Bancshares,
Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this annual report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| | (a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the Evaluation Date); and                                                                                                  
|
| | (c) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the
equivalent functions):



| | (a) |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

|                      |  |                   
|--------------------- |  | ------------------
|Dated: March 28, 2003 |  | /s/ Allen D. Brown
|                      |  |                   
|                      |  | President         

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##### Table of Contents



I, David D. Rinehart, Chief Financial Officer of the registrant, certify that:

1.     I have reviewed this annual report on Form 10-K of MetroCorp Bancshares,
Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this annual report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| | (a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the Evaluation Date); and                                                                                                  
|
| | (c) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the
equivalent functions):



| | (a) |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

|                      |  |                        
|--------------------- |  | -----------------------
|Dated: March 28, 2003 |  | /s/ David D. Rinehart  
|                      |  |                        
|                      |  | Chief Financial Officer

-46-



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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
METROCORP BANCSHARES, INC. AND SUBSIDIARIES

|                                                                                                                 |  |      |    | 
|---------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                 |  | Page
|                                                                                                                 |  |     
|Report of Independent Accountants                                                                                |  |      | 48 | 
|Independent Auditors Report                                                                                     |  |      | 49 | 
|Consolidated Balance Sheets as of December 31, 2002 and 2001                                                     |  |      | 50 | 
|Consolidated Statements of Income for the Years Ended December 31, 2002, 2001, and 2000                          |  |      | 51 | 
|Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2002,
2001, and 2000            |  |      | 52 | 
|Consolidated Statements of Changes in Shareholders Equity for the Years Ended December 31,
2002, 2001, and 2000 |  |      | 53 | 
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001, and 2000                      |  |      | 54 | 
|Notes to Consolidated Financial Statements                                                                       |  |      | 55 | 

47



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##### Table of Contents



Report of Independent Accountants

To the Board of
Directors and Shareholders of
MetroCorp Bancshares, Inc.

In our opinion, the accompanying consolidated
balance sheet as of December 31, 2002 and the related
consolidated statements of income, comprehensive income, changes in
shareholders equity and cash flows present fairly, in all material respects,
the consolidated financial position of MetroCorp Bancshares, Inc. and
subsidiaries (the Company) at December 31, 2002, and
the consolidated results of their operations and their cash flows for the year
then ended in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Companys management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

February 28, 2003
Houston, Texas

48



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##### Table of Contents



INDEPENDENT AUDITORS REPORT

To the Board of Directors and Shareholders of
MetroCorp Bancshares, Inc.
Houston, Texas

We have audited the accompanying consolidated balance sheets of MetroCorp
Bancshares, Inc. and subsidiary (the Company) as of December 31, 2001 and
the related consolidated statements of income, shareholders equity
and cash flows for the years ended December 31,
2001 and 2000. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
2001 and the results of their operations and their cash flows for
each of the years ended December 31, 2001 and 2000 in
conformity with accounting principles generally accepted in the United States
of America.

Deloitte & Touche LLP

March 20, 2002
Houston, Texas

49



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METROCORP BANCSHARES, INC.CONSOLIDATED BALANCE SHEETS(In thousands, except share amounts)

|                                                                            |                                                                                                                                                                                                             |   |                                            |                                      |   |              |         |         |   |         |  | 
|--------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------------------------------------ | ------------------------------------ | - | ------------ | ------- | ------- | - | ------- |  | 
|                                                                            |                                                                                                                                                                                                             |   |                                            |                                      |   | December 31,
|                                                                            |                                                                                                                                                                                                             |   |                                            |                                      |   |             
|                                                                            |                                                                                                                                                                                                             |   |                                            |                                      |   | 2002         |         | 2001   
|                                                                            |                                                                                                                                                                                                             |   |                                            |                                      |   |              |         |        
|                                                                            |                                                                                                                                                                                                             |   |                                            | ASSETS                               |   |              |         |         |   |         |  | 
|Cash and due from banks                                                     |                                                                                                                                                                                                             | $ | 30,195                                     |                                      |   | $            | 34,428  |        
|Federal funds sold and other temporary investments                          |                                                                                                                                                                                                             |   | 7,991                                      |                                      |   |              | 23,678  |        
|                                                                            |                                                                                                                                                                                                             |   |                                            |                                      |   |              |         |        
|                                                                            |                                                                                                                                                                                                            
|                                                                            |                                                                                                                                                                                                             |   | Total cash and cash equivalents            |                                      |   | 38,186       |         |         |   | 58,106  | 
|Securities available-for-sale, at fair value                                |                                                                                                                                                                                                             |   | 260,038                                    |                                      |   |              | 173,087 |        
|Other investments                                                           |                                                                                                                                                                                                             |   | 4,380                                      |                                      |   |              | 3,143   |        
|Loans, net of allowance for loan losses of $10,150 and $8,903, respectively |                                                                                                                                                                                                             |   | 517,609                                    |                                      |   |              | 484,242 |        
|Premises and equipment, net                                                 |                                                                                                                                                                                                             |   | 5,841                                      |                                      |   |              | 5,623   |        
|Accrued interest receivable                                                 |                                                                                                                                                                                                             |   | 3,391                                      |                                      |   |              | 3,602   |        
|Deferred income taxes                                                       |                                                                                                                                                                                                             |   | 4,584                                      |                                      |   |              | 5,471   |        
|Customers liability on acceptances                                         |                                                                                                                                                                                                             |   | 4,080                                      |                                      |   |              | 4,605   |        
|Foreclosed assets, net                                                      |                                                                                                                                                                                                             |   | 1,190                                      |                                      |   |              | 1,025   |        
|Other assets                                                                |                                                                                                                                                                                                             |   | 766                                        |                                      |   |              | 3,270   |        
|                                                                            |                                                                                                                                                                                                             |   |                                            |                                      |   |              |         |        
|                                                                            |                                                                                                                                                                                                             |   | Total assets                               |                                      | $ | 840,065      |         |         | $ | 742,174 | 
|                                                                            |                                                                                                                                                                                                             |   |                                            |                                      |   |              |         |        
|                                                                            |                                                                                                                                                                                                             |   |                                            | LIABILITIES AND SHAREHOLDERS EQUITY |   |              |         |         |   |         |  | 
|Deposits:                                                                   |                                                                                                                                                                                                             |   |                                            |                                      |   |              |         |        
|                                                                            | Noninterest-bearing                                                                                                                                                                                         |   | $                                          | 144,544                              |   |              | $       | 127,299 |  
|                                                                            | Interest-bearing                                                                                                                                                                                            |   |                                            | 546,817                              |   |              |         | 515,452 |  
|                                                                            |                                                                                                                                                                                                             |   |                                            |                                      |   |              |         |        
|                                                                            |                                                                                                                                                                                                             |   | Total deposits                             |                                      |   | 691,361      |         |         |   | 642,751 | 
|Other borrowings                                                            |                                                                                                                                                                                                             |   | 65,774                                     |                                      |   |              | 25,195  |        
|Accrued interest payable                                                    |                                                                                                                                                                                                             |   | 717                                        |                                      |   |              | 863     |        
|Income taxes payable                                                        |                                                                                                                                                                                                             |   | (671                                       | )                                    |   |              | (608    | )      
|Acceptances outstanding                                                     |                                                                                                                                                                                                             |   | 4,080                                      |                                      |   |              | 4,605   |        
|Other liabilities                                                           |                                                                                                                                                                                                             |   | 4,341                                      |                                      |   |              | 4,139   |        
|                                                                            |                                                                                                                                                                                                             |   |                                            |                                      |   |              |         |        
|                                                                            |                                                                                                                                                                                                             |   | Total liabilities                          |                                      |   | 765,602      |         |         |   | 676,945 | 
|                                                                            |                                                                                                                                                                                                             |   |                                            |                                      |   |              |         |        
|Commitments and contingencies                                               |                                                                                                                                                                                                             |   |                                           |                                      |   |              |        |        
|Shareholders equity:                                                       |                                                                                                                                                                                                             |   |                                            |                                      |   |              |         |        
|                                                                            | Common stock, $1.00 par value, 20,000,000 shares authorized;
7,195,927 shares and 7,187,423 shares issued and 7,031,882 shares
and 7,017,823 shares outstanding at December 31, 2002 and 2001,
respectively |   |                                            | 7,196                                |   |              |         | 7,187   |  
|                                                                            | Additional paid-in-capital                                                                                                                                                                                  |   |                                            | 26,344                               |   |              |         | 26,144  |  
|                                                                            | Retained earnings                                                                                                                                                                                           |   |                                            | 39,938                               |   |              |         | 32,834  |  
|                                                                            | Accumulated other comprehensive income                                                                                                                                                                      |   |                                            | 2,354                                |   |              |         | 376     |  
|                                                                            | Treasury stock, at cost                                                                                                                                                                                     |   |                                            | (1,369                               | ) |              |         | (1,312  | )
|                                                                            |                                                                                                                                                                                                             |   |                                            |                                      |   |              |         |        
|                                                                            |                                                                                                                                                                                                             |   | Total shareholders equity                 |                                      |   | 74,463       |         |         |   | 65,229  | 
|                                                                            |                                                                                                                                                                                                             |   |                                            |                                      |   |              |         |        
|                                                                            |                                                                                                                                                                                                             |   | Total liabilities and shareholders equity |                                      | $ | 840,065      |         |         | $ | 742,174 | 
|                                                                            |                                                                                                                                                                                                             |   |                                            |                                      |   |              |         |        

The accompanying notes are an integral part of these consolidated financial statements.

50



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METROCORP BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)

|                                                    |                                          |            |                           |        |                          |        |        |        |       |        |        |        |       |        | 
|--------------------------------------------------- | ---------------------------------------- | ---------- | ------------------------- | ------ | ------------------------ | ------ | ------ | ------ | ----- | ------ | ------ | ------ | ----- | ------ | 
|                                                    |                                          |            |                           |        | Years ended December 31,
|                                                    |                                          |            |                           |        |                         
|                                                    |                                          |            |                           |        | 2002                     |        | 2001   |        | 2000 
|                                                    |                                          |            |                           |        |                          |        |        |        |      
|Interest income:                                    |                                          |            |                           |        |                          |        |        |        |       |        |        |       
|                                                    | Loans                                    |            | $                         | 37,987 |                          |        | $      | 43,926 |       |        | $      | 52,280 |      
|                                                    | Securities:                              |            |                           |        |                          |        |        |        |       |        |        |        |      
|                                                    |                                          | Taxable    |                           |        | 9,080                    |        |        |        | 8,356 |        |        |        | 7,313 |       
|                                                    |                                          | Tax-exempt |                           |        | 1,160                    |        |        |        | 1,177 |        |        |        | 1,046 |       
|                                                    | Federal funds sold and other investments |            |                           | 484    |                          |        |        | 1,992  |       |        |        | 2,827  |      
|                                                    |                                          |            |                           |        |                          |        |        |        |       |        |        |       
|                                                    |                                          |            | Total interest income     |        |                          | 48,711 |        |        |       | 55,451 |        |        |       | 63,466 | 
|                                                    |                                          |            |                           |        |                          |        |        |        |       |        |        |       
|Interest expense:                                   |                                          |            |                           |        |                          |        |        |        |       |        |        |       
|                                                    | Time deposits                            |            |                           | 10,595 |                          |        |        | 19,003 |       |        |        | 20,444 |      
|                                                    | Demand and savings deposits              |            |                           | 2,215  |                          |        |        | 3,531  |       |        |        | 4,514  |      
|                                                    | Other borrowings                         |            |                           | 1,818  |                          |        |        | 1,265  |       |        |        | 2,318  |      
|                                                    |                                          |            |                           |        |                          |        |        |        |       |        |        |       
|                                                    |                                          |            | Total interest expense    |        |                          | 14,628 |        |        |       | 23,799 |        |        |       | 27,276 | 
|                                                    |                                          |            |                           |        |                          |        |        |        |       |        |        |       
|Net interest income                                 |                                          |            | 34,083                    |        |                          |        | 31,652 |        |       |        | 36,190 |       
|Provision for loan losses                           |                                          |            | 3,853                     |        |                          |        | 3,799  |        |       |        | 7,508  |       
|                                                    |                                          |            |                           |        |                          |        |        |        |       |        |        |       
|Net interest income after provision for loan losses |                                          |            | 30,230                    |        |                          |        | 27,853 |        |       |        | 28,682 |       
|                                                    |                                          |            |                           |        |                          |        |        |        |       |        |        |       
|Noninterest income:                                 |                                          |            |                           |        |                          |        |        |        |       |        |        |       
|                                                    | Service fees                             |            |                           | 6,670  |                          |        |        | 6,360  |       |        |        | 4,752  |      
|                                                    | Other loan-related fees                  |            |                           | 1,405  |                          |        |        | 1,063  |       |        |        | 1,271  |      
|                                                    | Letters of credit commissions and fees   |            |                           | 610    |                          |        |        | 655    |       |        |        | 583    |      
|                                                    | Gain on sale of securities, net          |            |                           | 34     |                          |        |        | 189    |       |        |        | 2      |      
|                                                    | Other noninterest income                 |            |                           | 248    |                          |        |        | 393    |       |        |        | 424    |      
|                                                    |                                          |            |                           |        |                          |        |        |        |       |        |        |       
|                                                    |                                          |            | Total noninterest income  |        |                          | 8,967  |        |        |       | 8,660  |        |        |       | 7,032  | 
|                                                    |                                          |            |                           |        |                          |        |        |        |       |        |        |       
|Noninterest expense:                                |                                          |            |                           |        |                          |        |        |        |       |        |        |       
|                                                    | Salaries and employee benefits           |            |                           | 14,746 |                          |        |        | 13,180 |       |        |        | 12,447 |      
|                                                    | Occupancy and equipment                  |            |                           | 5,089  |                          |        |        | 5,189  |       |        |        | 5,724  |      
|                                                    | Foreclosed assets, net                   |            |                           | 680    |                          |        |        | 153    |       |        |        | (50    | )    
|                                                    | Data processing                          |            |                           | 94     |                          |        |        | 86     |       |        |        | 154    |      
|                                                    | Other noninterest expense                |            |                           | 5,449  |                          |        |        | 6,775  |       |        |        | 8,955  |      
|                                                    |                                          |            |                           |        |                          |        |        |        |       |        |        |       
|                                                    |                                          |            | Total noninterest expense |        |                          | 26,058 |        |        |       | 25,383 |        |        |       | 27,230 | 
|                                                    |                                          |            |                           |        |                          |        |        |        |       |        |        |       
|Income before provision for income taxes            |                                          |            | 13,139                    |        |                          |        | 11,130 |        |       |        | 8,484  |       
|Provision for income taxes                          |                                          |            | 4,350                     |        |                          |        | 3,553  |        |       |        | 3,001  |       
|                                                    |                                          |            |                           |        |                          |        |        |        |       |        |        |       
|Net income                                          |                                          | $          | 8,789                     |        |                          | $      | 7,577  |        |       | $      | 5,483  |       
|                                                    |                                          |            |                           |        |                          |        |        |        |       |        |        |       
|Earnings per common share:                          |                                          |            |                           |        |                          |        |        |        |       |        |        |       
|                                                    | Basic                                    |            | $                         | 1.25   |                          |        | $      | 1.08   |       |        | $      | 0.79   |      
|                                                    | Diluted                                  |            | $                         | 1.23   |                          |        | $      | 1.07   |       |        | $      | 0.79   |      
|Weighted average shares outstanding:                |                                          |            |                           |        |                          |        |        |        |       |        |        |       
|                                                    | Basic                                    |            |                           | 7,024  |                          |        |        | 6,998  |       |        |        | 6,972  |      
|                                                    | Diluted                                  |            |                           | 7,154  |                          |        |        | 7,059  |       |        |        | 6,973  |      
|Dividends per common share                          |                                          | $          | 0.24                      |        |                          | $      | 0.24   |        |       | $      | 0.24   |       

The accompanying notes are an integral part of these consolidated financial statements.

51



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METROCORP BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)

|                                        |                                                        |                            |                                                                    |   |        |       |       |   |       |      |       |   |       |       |  
|--------------------------------------- | ------------------------------------------------------ | -------------------------- | ------------------------------------------------------------------ | - | ------ | ----- | ----- | - | ----- | ---- | ----- | - | ----- | ----- | -
|                                        |                                                        |                            |                                                                    |   | 2002   |       | 2001  |   | 2000 
|                                        |                                                        |                            |                                                                    |   |        |       |       |   |      
|Net income                              |                                                        | $                          | 8,789                                                              |   |        | $     | 7,577 |   |       | $    | 5,483 |  
|Other comprehensive income, net of tax: |                                                        |                            |                                                                    |   |        |       |       |   |       |      |       |  
|                                        | Unrealized gains on investment securities, net of tax: |                            |                                                                    |   |        |       |       |   |       |      |       |   |      
|                                        |                                                        |                            | Unrealized holding gains arising during the period                 |   |        | 2,000 |       |   |       | 380  |       |   |       | 3,295 |  
|                                        |                                                        |                            | Less:
Reclassification adjustment for gains included in net income |   |        | (22   | )     |   |       | (125 | )     |   |       | (29   | )
|                                        |                                                        |                            |                                                                    |   |        |       |       |   |       |      |       |  
|                                        |                                                        | Other comprehensive income |                                                                    |   | 1,978  |       |       |   | 255   |      |       |   | 3,266 |      
|                                        |                                                        |                            |                                                                    |   |        |       |       |   |       |      |       |  
|                                        |                                                        | Total comprehensive income |                                                                    | $ | 10,767 |       |       | $ | 7,832 |      |       | $ | 8,749 |      
|                                        |                                                        |                            |                                                                    |   |        |       |       |   |       |      |       |  

The accompanying notes are an integral part of these consolidated financial statements.

52



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METROCORP BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
Years ended December 31, 2002, 2001 and 2000
(In thousands)

|                              |  |              |       |            |  |          |       |               |  |               |        |          |  |       |        |   |  |             |        |   |  |   |        |   |  |   |        |  
|----------------------------- |  | ------------ | ----- | ---------- |  | -------- | ----- | ------------- |  | ------------- | ------ | -------- |  | ----- | ------ | - |  | ----------- | ------ | - |  | - | ------ | - |  | - | ------ | -
|                              |  |              |       |            |  |          |       |               |  |               |        |          |  |       |        |   |  | Accumulated |        |   |  |   |        |   |  |  
|                              |  | Common Stock |       | Additional |  |          |       |               |  | Other         |        | Treasury |  |       |        |  
|                              |  |              |       | Paid-in    |  | Retained |       | Comprehensive |  | Stock At      |        |          |  |      
|                              |  | Shares       |       | At Par     |  | Capital  |       | Earnings      |  | Income (Loss) |        | Cost     |  | Total
|                              |  |              |       |            |  |          |       |               |  |               |        |          |  |      
|Balance at January 1, 2000    |  |              | 7,102 |            |  | $        | 7,122 |               |  | $             | 25,646 |          |  | $     | 23,124 |   |  | $           | (3,145 | ) |  | $ | (167   | ) |  | $ | 52,580 |  
|Issuance of common stock      |  |              | 58    |            |  |          | 58    |               |  |               | 387    |          |  |       |       |   |  |             |       |   |  |   |       |   |  |   | 445    |  
|Repurchase of common stock    |  |              | (181  | )          |  |          |      |               |  |               |       |          |  |       |       |   |  |             |       |   |  |   | (1,402 | ) |  |   | (1,402 | )
|Net income                    |  |              |      |            |  |          |      |               |  |               |       |          |  |       | 5,483  |   |  |             |       |   |  |   |       |   |  |   | 5,483  |  
|Other comprehensive income    |  |              |      |            |  |          |      |               |  |               |       |          |  |       |       |   |  |             | 3,266  |   |  |   |       |   |  |   | 3,266  |  
|Dividends ($0.24 per share)   |  |              |      |            |  |          |      |               |  |               |       |          |  |       | (1,671 | ) |  |             |       |   |  |   |       |   |  |   | (1,671 | )
|                              |  |              |       |            |  |          |       |               |  |               |        |          |  |       |        |   |  |             |        |   |  |   |        |   |  |   |        |  
|Balance at December 31, 2000  |  |              | 6,979 |            |  |          | 7,180 |               |  |               | 26,033 |          |  |       | 26,936 |   |  |             | 121    |   |  |   | (1,569 | ) |  |   | 58,701 |  
|                              |  |              |       |            |  |          |       |               |  |               |        |          |  |       |        |   |  |             |        |   |  |   |        |   |  |   |        |  
|Issuance of common stock      |  |              | 7     |            |  |          | 7     |               |  |               | 52     |          |  |       |       |   |  |             |       |   |  |   |       |   |  |   | 59     |  
|Re-issuance of treasury stock |  |              | 31    |            |  |          |      |               |  |               | 59     |          |  |       |       |   |  |             |       |   |  |   | 257    |   |  |   | 316    |  
|Net income                    |  |              |      |            |  |          |      |               |  |               |       |          |  |       | 7,577  |   |  |             |       |   |  |   |       |   |  |   | 7,577  |  
|Other comprehensive income    |  |              |      |            |  |          |      |               |  |               |       |          |  |       |       |   |  |             | 255    |   |  |   |       |   |  |   | 255    |  
|Dividends ($0.24 per share)   |  |              |      |            |  |          |      |               |  |               |       |          |  |       | (1,679 | ) |  |             |       |   |  |   |       |   |  |   | (1,679 | )
|                              |  |              |       |            |  |          |       |               |  |               |        |          |  |       |        |   |  |             |        |   |  |   |        |   |  |   |        |  
|Balance at December 31, 2001  |  |              | 7,017 |            |  |          | 7,187 |               |  |               | 26,144 |          |  |       | 32,834 |   |  |             | 376    |   |  |   | (1,312 | ) |  |   | 65,229 |  
|                              |  |              |       |            |  |          |       |               |  |               |        |          |  |       |        |   |  |             |        |   |  |   |        |   |  |   |        |  
|Issuance of common stock      |  |              | 9     |            |  |          | 9     |               |  |               | 67     |          |  |       |       |   |  |             |       |   |  |   |       |   |  |   | 76     |  
|Re-issuance of treasury stock |  |              | 37    |            |  |          |      |               |  |               | 133    |          |  |       |       |   |  |             |       |   |  |   | 292    |   |  |   | 425    |  
|Repurchase of common stock    |  |              | (31   | )          |  |          |      |               |  |               |       |          |  |       |       |   |  |             |       |   |  |   | (349   | ) |  |   | (349   | )
|Net income                    |  |              |      |            |  |          |      |               |  |               |       |          |  |       | 8,789  |   |  |             |       |   |  |   |       |   |  |   | 8,789  |  
|Other comprehensive income    |  |              |      |            |  |          |      |               |  |               |       |          |  |       |       |   |  |             | 1,978  |   |  |   |       |   |  |   | 1,978  |  
|Dividends ($0.24 per share)   |  |              |      |            |  |          |      |               |  |               |       |          |  |       | (1,685 | ) |  |             |       |   |  |   |       |   |  |   | (1,685 | )
|                              |  |              |       |            |  |          |       |               |  |               |        |          |  |       |        |   |  |             |        |   |  |   |        |   |  |   |        |  
|Balance at December 31, 2002  |  |              | 7,032 |            |  | $        | 7,196 |               |  | $             | 26,344 |          |  | $     | 39,938 |   |  | $           | 2,354  |   |  | $ | (1,369 | ) |  | $ | 74,463 |  
|                              |  |              |       |            |  |          |       |               |  |               |        |          |  |       |        |   |  |             |        |   |  |   |        |   |  |   |        |  

The accompanying notes are an integral part of these consolidated financial statements.

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METROCORP BANCSHARES, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

|                                                     |                                                                                             |                                                      |                             |                                                     |        |                          |          |          |        |         |         |         |         |        |         |  
|---------------------------------------------------- | ------------------------------------------------------------------------------------------- | ---------------------------------------------------- | --------------------------- | --------------------------------------------------- | ------ | ------------------------ | -------- | -------- | ------ | ------- | ------- | ------- | ------- | ------ | ------- | -
|                                                     |                                                                                             |                                                      |                             |                                                     |        | Years ended December 31,
|                                                     |                                                                                             |                                                      |                             |                                                     |        |                         
|                                                     |                                                                                             |                                                      |                             |                                                     |        | 2002                     |          | 2001     |        | 2000   
|                                                     |                                                                                             |                                                      |                             |                                                     |        |                          |          |          |        |        
|Cash flows from operating activities:                |                                                                                             |                                                      |                             |                                                     |        |                          |          |          |        |         |         |        
|                                                     | Net income                                                                                  |                                                      | $                           | 8,789                                               |        |                          | $        | 7,577    |        |         | $       | 5,483   |        
|                                                     | Adjustments to reconcile net income to net cash provided by (used in) operating activities: |                                                      |                             |                                                     |        |                          |          |          |        |         |         |         |        
|                                                     |                                                                                             | Depreciation                                         |                             |                                                     | 1,435  |                          |          |          | 1,636  |         |         |         | 2,105   |       
|                                                     |                                                                                             | Provision for loan losses                            |                             |                                                     | 3,853  |                          |          |          | 3,799  |         |         |         | 7,508   |       
|                                                     |                                                                                             | Gain on securities sales                             |                             |                                                     | (34    | )                        |          |          | (189   | )       |         |         | (2      | )     
|                                                     |                                                                                             | Loss (gain) on sale of foreclosed assets             |                             |                                                     | 640    |                          |          |          | 115    |         |         |         | (50     | )     
|                                                     |                                                                                             | (Gain) loss on sale of premises and equipment        |                             |                                                     | (5     | )                        |          |          |       |         |         |         | 4       |       
|                                                     |                                                                                             | Amortization
of premiums and discounts on securities |                             |                                                     | 1,332  |                          |          |          | 39     |         |         |         | (64     | )     
|                                                     |                                                                                             | Amortization of deferred loan fees and discounts     |                             |                                                     | 142    |                          |          |          | 507    |         |         |         | 625     |       
|                                                     |                                                                                             | Deferred income taxes                                |                             |                                                     | (121   | )                        |          |          | 195    |         |         |         | (963    | )     
|                                                     |                                                                                             | Changes in:                                          |                             |                                                     |        |                          |          |          |        |         |         |         |         |       
|                                                     |                                                                                             |                                                      | Accrued interest receivable |                                                     |        | 211                      |          |          |        | 669     |         |         |         | (416   | )      
|                                                     |                                                                                             |                                                      | Accrued interest payable    |                                                     |        | (146                     | )        |          |        | (953    | )       |         |         | 258    |        
|                                                     |                                                                                             |                                                      | Income taxes payable        |                                                     |        | (63                      | )        |          |        | (1,279  | )       |         |         | 671    |        
|                                                     |                                                                                             |                                                      | Other liabilities           |                                                     |        | 225                      |          |          |        | (16,631 | )       |         |         | 15,204 |        
|                                                     |                                                                                             |                                                      | Other assets                |                                                     |        | 2,506                    |          |          |        | 2,312   |         |         |         | 634    |        
|                                                     |                                                                                             |                                                      |                             |                                                     |        |                          |          |          |        |         |         |        
|                                                     |                                                                                             |                                                      |                             | Net cash provided by (used in) operating activities |        |                          | 18,764   |          |        |         | (2,203  | )       |         |        | 30,997  |  
|                                                     |                                                                                             |                                                      |                             |                                                     |        |                          |          |          |        |         |         |        
|Cash flows from investing activities:                |                                                                                             |                                                      |                             |                                                     |        |                          |          |          |        |         |         |        
|                                                     | Purchases of securities available-for-sale                                                  |                                                      |                             | (179,932                                            | )      |                          |          | (111,207 | )      |         |         | (49,398 | )      
|                                                     | Proceeds from sales, maturities and principal paydowns of securities available-for-sale     |                                                      |                             | 93,406                                              |        |                          |          | 79,273   |        |         |         | 17,336  |        
|                                                     | Proceeds from maturities and principal paydowns of securities held-to-maturity              |                                                      |                             |                                                    |        |                          |          |         |        |         |         | 3,367   |        
|                                                     | Net change in loans                                                                         |                                                      |                             | (38,826                                             | )      |                          |          | (15,542  | )      |         |         | 3,271   |        
|                                                     | Proceeds from sale of foreclosed assets                                                     |                                                      |                             | 659                                                 |        |                          |          | 1,078    |        |         |         | 2,044   |        
|                                                     | Proceeds from sale of premises and equipment                                                |                                                      |                             | 5                                                   |        |                          |          |         |        |         |         | 25      |        
|                                                     | Purchases of premises and equipment                                                         |                                                      |                             | (1,653                                              | )      |                          |          | (684     | )      |         |         | (603    | )      
|                                                     |                                                                                             |                                                      |                             |                                                     |        |                          |          |          |        |         |         |        
|                                                     |                                                                                             |                                                      |                             | Net cash used in investing activities               |        |                          | (126,341 | )        |        |         | (47,082 | )       |         |        | (23,958 | )
|                                                     |                                                                                             |                                                      |                             |                                                     |        |                          |          |          |        |         |         |        
|Cash flows from financing activities:                |                                                                                             |                                                      |                             |                                                     |        |                          |          |          |        |         |         |        
|                                                     | Net change in:                                                                              |                                                      |                             |                                                     |        |                          |          |          |        |         |         |         |        
|                                                     |                                                                                             | Deposits                                             |                             |                                                     | 48,610 |                          |          |          | 16,845 |         |         |         | 81,470  |       
|                                                     |                                                                                             | Other borrowings                                     |                             |                                                     | 40,579 |                          |          |          | (378   | )       |         |         | (30,063 | )     
|                                                     | Proceeds from issuance of common stock                                                      |                                                      |                             | 76                                                  |        |                          |          | 59       |        |         |         | 445     |        
|                                                     | Treasury stock sold                                                                         |                                                      |                             | 425                                                 |        |                          |          | 316      |        |         |         |        |        
|                                                     | Treasury stock purchased                                                                    |                                                      |                             | (349                                                | )      |                          |          |         |        |         |         | (1,402  | )      
|                                                     | Dividends paid                                                                              |                                                      |                             | (1,684                                              | )      |                          |          | (1,677   | )      |         |         | (1,679  | )      
|                                                     |                                                                                             |                                                      |                             |                                                     |        |                          |          |          |        |         |         |        
|                                                     |                                                                                             |                                                      |                             | Net cash provided by financing activities           |        |                          | 87,657   |          |        |         | 15,165  |         |         |        | 48,771  |  
|                                                     |                                                                                             |                                                      |                             |                                                     |        |                          |          |          |        |         |         |        
|Net (decrease) increase in cash and cash equivalents |                                                                                             |                                                      | (19,920                     | )                                                   |        |                          | (34,120  | )        |        |         | 55,810  |        
|Cash and cash equivalents at beginning of period     |                                                                                             |                                                      | 58,106                      |                                                     |        |                          | 92,226   |          |        |         | 36,416  |        
|                                                     |                                                                                             |                                                      |                             |                                                     |        |                          |          |          |        |         |         |        
|Cash and cash equivalents at end of period           |                                                                                             | $                                                    | 38,186                      |                                                     |        | $                        | 58,106   |          |        | $       | 92,226  |        
|                                                     |                                                                                             |                                                      |                             |                                                     |        |                          |          |          |        |         |         |        

The accompanying notes are an integral part of these consolidated financial statements.

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METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

The consolidated financial statements of MetroCorp Bancshares, Inc. (the
Company) include the accounts of 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 accounting principles followed by the Company and the methods of
applying these principles conform with accounting principles generally accepted
in the United States and with general practices within the banking industry.
Certain principles which significantly affect the determination of financial
position, results of operations and cash flows are summarized below.

Use of Estimates

These financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America, which require
management to make estimates and assumptions. These assumptions affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Significant
estimates include the allowance for loan losses. Amounts are recognized when
it is probable that an asset has been impaired or a liability has been incurred
and the cost can be reasonable estimated. Actual results could differ from
those estimates.

Principles of Consolidation

All significant intercompany accounts and transactions are eliminated in
consolidation.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, amounts due from banks,
federal funds sold, and other temporary investments with original maturities of
less than three months.

Securities

Investments in securities for which the Company has both the ability and
intent to hold to maturity are classified as investments held-to-maturity and
are stated at amortized cost. Amortization of premiums and accretion of
discounts are recognized as adjustments to interest income using the
effective-interest method. Investments in securities which management believes
may be sold prior to maturity are classified as investments available-for-sale
and are stated at fair value. Unrealized net gains and losses, net of the
associated deferred income tax effect, are excluded from income and reported as
a separate component of shareholders equity in Accumulated other
comprehensive income. Realized gains and losses from sales of investments
available-for-sale are recorded on the trade date and determined using the
specific identification method.

Loans and Allowance for Loan Losses

Loans are reported at the principal amount outstanding, reduced by
unearned discounts, net deferred loan fees, and an allowance for loan losses.
Unearned income on installment loans is recognized using the effective interest
method over the term of the loan. Interest on other loans is calculated using
the simple interest method on the daily principal amount outstanding.

Loans are placed on nonaccrual status when principal or interest is past
due more than 90 days or when, in managements opinion, collection of principal
and interest is not likely to be made in accordance with a loans contractual
terms. Interest accrued but not collected at the date a loan is placed on
nonaccrual status is reversed against interest income. In addition, the
amortization of deferred loan fees is suspended when a loan is placed on
nonaccrual status. Interest income on nonaccrual loans is recognized only to
the extent received in cash; however, where there is doubt regarding the
ultimate collectibility of the loan principal, cash receipts, whether
designated as principal or interest, are thereafter applied to reduce the

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METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

principal balance of the loan. Loans are restored to accrual status only when
interest and principal payments are brought current and, in managements
judgement, future payments are reasonably assured.

A loan, with the exception of groups of smaller-balance homogenous loans
that are collectively evaluated for impairment, is considered impaired when,
based on current information, it is probable that the borrower will be unable
to pay contractual interest or principal payments as scheduled in the loan
agreement. A creditor may use existing methods for recognizing interest income
on impaired loans. The Bank recognizes interest income on impaired loans
pursuant to the discussion above for nonaccrual loans.

The allowance for loan losses related to impaired loans is determined
based on the difference of carrying value of loans and the present value of
expected cash flows discounted at the loans effective interest rate or, as a
practical expedient, the loans observable market price or the fair value of
the collateral if the loan is collateral dependent.

Estimates of loan losses involve an exercise of judgment. While it is
possible that in the short-term the Company may sustain losses which are
substantial in relation to the allowance for loan losses, it is the judgment of
management that the allowance for loan losses reflected in the consolidated
balance sheets is adequate to absorb probable losses that exist in the current
loan portfolio.

The allowance for loan losses provides for the risk of losses inherent in
the lending process. The allowance for loan losses is based on periodic
reviews and analyses of the loan portfolio which include consideration of such
factors as the risk rating of individual credits, the size and diversity of the
portfolio, economic conditions, prior loss experience and results of periodic
credit reviews of the portfolio. The allowance for loan losses is increased by
provisions for loan losses charged against income and reduced by charge-offs,
net of recoveries. In managements judgement, the allowance for loan losses is
considered adequate to absorb losses inherent in the loan portfolio.

Nonrefundable Fees and Costs Associated with Lending Activities

Loan origination fees in excess of the associated costs are recognized
over the life of the related loan as an adjustment to yield using the interest
method.

Generally, loan commitment fees are deferred, except for certain
retrospectively determined fees, and recognized as an adjustment of yield by
the interest method over the related loan life or, if the commitment expires
unexercised, recognized in income upon expiration of the commitment.

Premises and Equipment

Premises and equipment are stated at cost, less accumulated depreciation.
For financial accounting purposes, depreciation is computed using the
straight-line method over the estimated useful lives of the assets.
Expenditures for maintenance and repairs, which do not extend the life of bank
premises and equipment, are charged to operations as incurred.

Other Real Estate

Other real estate consists of properties acquired through a foreclosure
proceeding or acceptance of a deed in lieu of foreclosure. These properties
are initially recorded at fair value less estimated costs to sell. On an
ongoing basis they are carried at the lower of cost or fair value minus
estimated costs to sell based on appraised value. Operating expenses, net of
related revenue and gain and losses on sale of such assets, are reported in
noninterest expense.

Other Borrowings

Other borrowings include U.S. Treasury tax note option accounts with
maturities of 14 days or less and Federal Home Loan Bank (FHLB) borrowings.

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METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Income Taxes

The Company provides for an asset and liability approach to income taxes
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Companys financial statements or tax returns. When management determines that
it is more likely than not that a deferred tax asset will not be realized, a
valuation allowance is established. In estimating future tax consequences, all
expected future events other than enactments of changes in tax laws or rates
are considered.

Earnings Per Share

Basic earnings per common share is calculated by dividing earnings
available for common shareholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share is calculated
by dividing net earnings available for common shareholders by the weighted
average number of common and potentially dilutive common shares. Stock options
can be dilutive common shares and are therefore considered in the earnings per
share calculation, if dilutive. The number of potentially dilutive common
shares is determined using the treasury stock method.

Interest Rate Risk Management

The operations of the Bank are subject to the risk of interest rate
fluctuations to the extent that interest-bearing assets and interest-bearing
liabilities mature or reprice at different times or in differing amounts. Risk
management activities are aimed at optimizing net interest income, given a
level of interest rate risk consistent with the Banks business strategies.

Asset liability management activities are conducted in the context of the
Banks asset sensitivity to interest rate changes. This asset sensitivity
arises due to interest-earning assets repricing more frequently than
interest-bearing liabilities. For example, if interest rates are declining,
margins will narrow as assets reprice downward more quickly than liabilities.
The converse applies when interest rates are on the rise.

As part of the Banks interest rate risk management, loans of
approximately $316.7 million and $269.3 million, at December 31, 2002 and 2001,
respectively, contain interest rate floors to reduce the unfavorable impact to
the Bank during interest rate declines. The weighted average interest rate on
these loans at December 31, 2002 was 6.58% and the interest rate floors ranged
from 4.75% to 11.0%.

Stock Compensation

The Company grants stock options under several stock-based incentive
compensation plans. The Company applies APB Opinion 25 and related
Interpretations in accounting for such 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. In 1995, the Financial
Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 123 Accounting for Stock-Based Compensation which, if fully adopted by the
Company, would change the methods the Company applies in recognizing the cost
of the plans. Adoption of the cost recognition provisions of SFAS No. 123 is
optional and the Company has decided not to elect these provisions of SFAS No.
123. However, pro forma disclosures as if the Company adopted the cost
recognition provisions of SFAS No. 123 are required by SFAS No. 123.

If the fair value based method of accounting under SFAS No. 123 had been
applied, the Companys net income available for 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):

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METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

|                                                    |             |  |                          |       |      |  |      |       |  |  |   |       | 
|--------------------------------------------------- | ----------- |  | ------------------------ | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                    |             |  | Years Ended December 31,
|                                                    |             |  |                         
|                                                    |             |  | 2002                     |       | 2001 |  | 2000
|                                                    |             |  |                          |       |      |  |     
|Net income:                                         |             |  |                          |       |      |  |      |       |  |  |   |      
|                                                    | As reported |  | $                        | 8,789 |      |  | $    | 7,577 |  |  | $ | 5,483 | 
|                                                    | Pro forma   |  | $                        | 8,681 |      |  | $    | 7,546 |  |  | $ | 5,479 | 
|Stock-based compensation cost, net of income taxes: |             |  |                          |       |      |  |      |       |  |  |   |      
|                                                    | As reported |  | $                        |      |      |  | $    |      |  |  | $ |      | 
|                                                    | Pro forma   |  | $                        | 108   |      |  | $    | 31    |  |  | $ | 4     | 
|Basic earnings per common share:                    |             |  |                          |       |      |  |      |       |  |  |   |      
|                                                    | As reported |  | $                        | 1.25  |      |  | $    | 1.08  |  |  | $ | 0.79  | 
|                                                    | Pro forma   |  | $                        | 1.24  |      |  | $    | 1.07  |  |  | $ | 0.79  | 
|Diluted earnings per common share:                  |             |  |                          |       |      |  |      |       |  |  |   |      
|                                                    | As reported |  | $                        | 1.23  |      |  | $    | 1.08  |  |  | $ | 0.79  | 
|                                                    | Pro forma   |  | $                        | 1.21  |      |  | $    | 1.07  |  |  | $ | 0.79  | 

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.

Derivatives

In order to limit interest rate risk exposure the Company enters into
interest rate swap agreements. Under the swap agreements, the Company agrees
to make fixed rate payments and receive variable rate payments on specified
notional amounts. Notional amounts of interest rate swap and cap agreements do
not represent exposure to credit loss.

On January 1, 2001, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities", as amended. Under SFAS No.
133, derivatives must be measured at fair value and recognized as either assets
or liabilities in the consolidated balance sheets. In addition, hedge
accounting should only be provided for those transactions that meet certain
specified criteria. The accounting for changes in fair value of a derivative
is dependent upon the use in relation to the Companys hedging of its interest
rate exposure. To the extent the interest rate swaps qualify for hedge
accounting treatment, the gain or loss due to changes in their fair value is
recognized in accumulated other comprehensive income until realized, at which
time the gain or loss is recognized along with the offsetting loss or gain on
the hedged item. To the extent the interest rate swaps do not qualify for
hedge accounting treatment, the gain or loss due to changes in fair value is
recognized in the consolidated statement of income, but is generally offset
by unrecognized changes in the value of the underlying exposure. Prior to adoption of
SFAS No. 133,
the amount paid or received on interest rate swap agreements was recorded in
interest income/expense as paid/received.

The Bank entered into two callable interest rate swaps in 1999 which were
designated fair value hedges under SFAS No. 133. Amounts receivable or payable
based on the interest rate differentials of interest rate swaps are accrued
monthly and are reflected in interest expense. At December 31, 2000, the fair
value of the swaps was estimated to be ($35,000). In the first quarter of
2001, the swaps were called as a result of declining market interest rates and
there were no outstanding swaps as of December 31, 2001 or 2002.

Off-Balance Sheet Instruments

The Company has entered into off-balance sheet financial instruments
consisting of commitments to extend credit. Such financial instruments are
recorded in the financial statements when they are funded.

New Accounting Pronouncements

On October 24,
2002, the FASB approved SFAS No. 147,
Acquisitions of Certain Financial Institutions.SFAS No. 147 amends previously
issued guidance regarding the accounting and reporting for the acquisition of
all or part of a financial institution. The statement also provides guidance
on the accounting for impairment of core deposits. It is effective for
acquisitions after October 1, 2002. The Company does not expect the adoption
of this standard to have any effect on its financial condition or results of
operations.

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METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

On December 31, 2002, the FASB approved SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure, an amendment of FASB
Statement No. 123.SFAS No. 148 amends SFAS No. 123, to provide alternative
methods of transition for an entity that voluntarily changes to the fair value
based method of accounting for stock-based employee compensation. It also
amends the disclosure provisions of SFAS No. 123 to require prominent
disclosure about the effects on reported net income of an entitys accounting
policy decisions with respect to stock-based employee compensation. Finally,
it amends the Accounting Research Bulletin (ARB) Opinion No. 28, Interim
Financial Reporting,to require disclosure about those effects in interim
financial information. The Company does not expect the adoption of this
standard to have a material effect on its financial condition or results of
operations.

On November 25, 2002, the FASB issued FASB Interpretation (FIN) No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others.FIN No. 45 considers standby
letters of credit, excluding commercial letters of credit and other lines of
credit, a guarantee of the Bank. The Bank enters into a standby letter 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 standby 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 December 31, 2002 the maximum
potential amount of future payments is $2.9 million. See  Note 12 
Off-Balance Sheet Risk for a discussion of significant guarantees that have
been entered into by the Company. The Company does not expect the requirements
of FIN No. 45 to have a material effect on its financial condition or results
of operations.

On January 17, 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities,which addresses consolidation by business enterprises of
variable interest entities. FIN No. 46 clarifies the application of ARB No.
51, Consolidated Financial Statements,to certain entities in which equity
investors do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. The Company has not determined the impact this
interpretation will have on its financial condition or results of operations.

Reclassifications

Certain 2001 and 2000 amounts have been reclassified to conform to the
2002 presentation.

2.     Cash and Cash Equivalents

The Bank is required by the Board of Governors of the Federal Reserve
System to maintain average reserve balances.

3.     Securities

In the normal course of business, the Bank invests in Federal government,
Federal agency, state and municipal securities which inherently carry interest
rate risks based upon overall economic trends and related market yield
fluctuations. Securities within the available-for-sale portfolio may be used
as part of the Companys asset/liability strategy and may be sold in response
to changes in interest rate risk, prepayment risk or other similar economic
factors. Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than temporary
would result in write-down of the individual securities to their fair value.
The related write-downs would be included in earnings as realized losses.

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METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

|                    |                                                                     |                  |   |                         |         |            |   |            |       |       |   |      |      |   |   |         |         | 
|------------------- | ------------------------------------------------------------------- | ---------------- | - | ----------------------- | ------- | ---------- | - | ---------- | ----- | ----- | - | ---- | ---- | - | - | ------- | ------- | 
|                    |                                                                     |                  |   | As of December 31, 2002
|                    |                                                                     |                  |   |                        
|                    |                                                                     |                  |   |                         |         |            |   | Gross      |       | Gross |   |      |      |  
|                    |                                                                     |                  |   | Amortized               |         | unrealized |   | unrealized |       | Fair 
|                    |                                                                     |                  |   | cost                    |         | gains      |   | losses     |       | value
|                    |                                                                     |                  |   |                         |         |            |   |            |       |      
|                    |                                                                     |                  |   | (in thousands)         
|Available-for-sale: |                                                                     |                  |   |                         |         |            |   |            |       |       |   |      |      |   |   |        
|                    | U.S. Treasury securities and obligations of U.S
government agencies |                  | $ | 2,488                   |         |            | $ | 50         |       |       | $ |     |      |   | $ | 2,538   |        
|                    | Obligations of state and political subdivisions                     |                  |   | 22,059                  |         |            |   | 591        |       |       |   | (2   | )    |   |   | 22,648  |        
|                    | Mortgage-backed securities and collateralized
mortgage obligations  |                  |   | 180,599                 |         |            |   | 2,862      |       |       |   | (151 | )    |   |   | 183,310 |        
|                    | Other debt securities                                               |                  |   | 2,378                   |         |            |   | 33         |       |       |   | (20  | )    |   |   | 2,391   |        
|                    | Investment in ARM and CRA funds                                     |                  |   | 48,982                  |         |            |   | 169        |       |       |   |     |      |   |   | 49,151  |        
|                    | FHLB and Federal Reserve Bank stock(1)(2)                           |                  |   | 4,380                   |         |            |   |           |       |       |   |     |      |   |   | 4,380   |        
|                    |                                                                     |                  |   |                         |         |            |   |            |       |       |   |      |      |   |   |        
|                    |                                                                     | Total securities |   | $                       | 260,886 |            |   | $          | 3,705 |       |   | $    | (173 | ) |   | $       | 264,418 | 
|                    |                                                                     |                  |   |                         |         |            |   |            |       |       |   |      |      |   |   |        

|                    |                                                                     |                  |   |                         |         |            |   |            |       |       |   |      |        |   |   |         |         | 
|------------------- | ------------------------------------------------------------------- | ---------------- | - | ----------------------- | ------- | ---------- | - | ---------- | ----- | ----- | - | ---- | ------ | - | - | ------- | ------- | 
|                    |                                                                     |                  |   | As of December 31, 2001
|                    |                                                                     |                  |   |                        
|                    |                                                                     |                  |   |                         |         |            |   | Gross      |       | Gross |   |      |        |  
|                    |                                                                     |                  |   | Amortized               |         | unrealized |   | unrealized |       | Fair 
|                    |                                                                     |                  |   | cost                    |         | gains      |   | losses     |       | value
|                    |                                                                     |                  |   |                         |         |            |   |            |       |      
|                    |                                                                     |                  |   | (in thousands)         
|Available-for-sale: |                                                                     |                  |   |                         |         |            |   |            |       |       |   |      |        |   |   |        
|                    | U.S. Treasury securities and obligations of U.S
government agencies |                  | $ | 2,453                   |         |            | $ | 122        |       |       | $ |     |        |   | $ | 2,575   |        
|                    | Obligations of state and political subdivisions                     |                  |   | 25,045                  |         |            |   | 183        |       |       |   | (589 | )      |   |   | 24,639  |        
|                    | Mortgage-backed securities and collateralized
mortgage obligations  |                  |   | 138,696                 |         |            |   | 1,561      |       |       |   | (671 | )      |   |   | 139,586 |        
|                    | Other debt securities                                               |                  |   | 3,229                   |         |            |   | 20         |       |       |   | (57  | )      |   |   | 3,192   |        
|                    | Investment in ARM and CRA funds                                     |                  |   | 3,094                   |         |            |   | 1          |       |       |   |     |        |   |   | 3,095   |        
|                    | FHLB and Federal Reserve Bank stock(1)(2)                           |                  |   | 3,143                   |         |            |   |           |       |       |   |     |        |   |   | 3,143   |        
|                    |                                                                     |                  |   |                         |         |            |   |            |       |       |   |      |        |   |   |        
|                    |                                                                     | Total securities |   | $                       | 175,660 |            |   | $          | 1,887 |       |   | $    | (1,317 | ) |   | $       | 176,230 | 
|                    |                                                                     |                  |   |                         |         |            |   |            |       |       |   |      |        |   |   |        



---

|(1) |  | FHLB stock held by the Bank is subject to certain restrictions under a
credit policy of the FHLB dated May 1, 1997. Redemption of FHLB stock is
dependent upon repayment of borrowings from the FHLB.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Federal Reserve Bank stock held by the Bank is subject to certain
restrictions under Federal Reserve Bank Policy.                                                                                    

The following sets forth information concerning sales (excluding
maturities) of available-for-sale securities (in thousands):

|                      |  |                          |        |      |  |      |        |  |  |   |        | 
|--------------------- |  | ------------------------ | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                      |  | Years ended December 31,
|                      |  |                         
|                      |  | 2002                     |        | 2001 |  | 2000
|                      |  |                          |        |      |  |     
|Amortized cost        |  | $                        | 18,981 |      |  | $    | 37,059 |  |  | $ | 11,153 | 
|Proceeds              |  |                          | 19,015 |      |  |      | 37,248 |  |  |   | 11,231 | 
|Gross realized gains  |  |                          | 98     |      |  |      | 201    |  |  |   | 121    | 
|Gross realized losses |  |                          | 64     |      |  |      | 12     |  |  |   | 119    | 

Investments carried
at approximately $1.8 million and $2.9 million at December
31, 2002 and 2001, respectively, were pledged to collateralize public deposits
and short-term borrowings of approximately $1.6 million and $780,000,
respectively. Additionally, investments in the securities portfolio carried at
approximately $34.5 million and $35.0 million were pledged as collateral for other
borrowings at December 31, 2002 and 2001, respectively.

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METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

At December 31, 2002, future contractual maturities of securities are as
follows (in thousands):

|                                                                   |                  |   |                    |         |       |   |         |         | 
|------------------------------------------------------------------ | ---------------- | - | ------------------ | ------- | ----- | - | ------- | ------- | 
|                                                                   |                  |   | Securities        
|                                                                   |                  |   | available-for-sale
|                                                                   |                  |   |                   
|                                                                   |                  |   | Amortized          |         | Fair 
|                                                                   |                  |   | cost               |         | value
|                                                                   |                  |   |                    |         |      
|Within one year                                                    |                  | $ | 3,565              |         |       | $ | 3,636   |        
|Within two to five years                                           |                  |   | 5,526              |         |       |   | 5,597   |        
|Within six to ten years                                            |                  |   | 2,710              |         |       |   | 2,803   |        
|After ten years                                                    |                  |   | 15,124             |         |       |   | 15,541  |        
|Mortgage-backed securities and collateralized mortgage obligations |                  |   | 180,599            |         |       |   | 183,310 |        
|                                                                   |                  |   |                    |         |       |   |         |        
|Debt securities                                                    |                  |   | 207,524            |         |       |   | 210,887 |        
|Investment in ARM and CRA funds                                    |                  |   | 48,982             |         |       |   | 49,151  |        
|FHLB and Federal Reserve Bank stock                                |                  |   | 4,380              |         |       |   | 4,380   |        
|                                                                   |                  |   |                    |         |       |   |         |        
|                                                                   | Total securities |   | $                  | 260,886 |       |   | $       | 264,418 | 
|                                                                   |                  |   |                    |         |       |   |         |        

The Bank holds mortgage-backed securities which may mature at an earlier
date than the contractual maturity due to prepayments. The Bank also holds
certain securities which may be called by the issuer at an earlier date than
the contractual maturity date.

The Company does not own any securities of any one issuer (other than U.S.
government and its agencies) of which aggregate adjusted cost exceeded 10% of
consolidated shareholders equity at December 31, 2002 or 2001.

4.     Loans and Allowance for Loan Losses

The Bank makes commercial, real estate and other loans to commercial and
individual customers throughout the markets it serves in Texas.

The loan portfolio is summarized by major categories as follows (in
thousands):

|                                |             |   |                    |         |      |   |         |         | 
|------------------------------- | ----------- | - | ------------------ | ------- | ---- | - | ------- | ------- | 
|                                |             |   | As of December 31,
|                                |             |   |                   
|                                |             |   | 2002               |         | 2001
|                                |             |   |                    |         |     
|Commercial and industrial       |             | $ | 325,424            |         |      | $ | 312,899 |        
|Real estate-mortgage            |             |   | 172,934            |         |      |   | 138,855 |        
|Real estate-construction        |             |   | 25,394             |         |      |   | 36,177  |        
|Consumer and other              |             |   | 10,286             |         |      |   | 11,364  |        
|                                |             |   |                    |         |      |   |         |        
|                                | Gross loans |   |                    | 534,038 |      |   |         | 499,295 | 
|Unearned discounts and interest |             |   | (805               | )       |      |   | (1,034  | )      
|Deferred loan fees              |             |   | (5,474             | )       |      |   | (5,116  | )      
|                                |             |   |                    |         |      |   |         |        
|                                | Total loans |   |                    | 527,759 |      |   |         | 493,145 | 
|Allowance for loan losses       |             |   | (10,150            | )       |      |   | (8,903  | )      
|                                |             |   |                    |         |      |   |         |        
|                                | Loans, net  |   | $                  | 517,609 |      |   | $       | 484,242 | 
|                                |             |   |                    |         |      |   |         |        
|Variable rate loans             |             | $ | 447,655            |         |      | $ | 391,866 |        
|Fixed rate loans                |             |   | 86,383             |         |      |   | 107,429 |        
|                                |             |   |                    |         |      |   |         |        
|                                | Gross loans |   | $                  | 534,038 |      |   | $       | 499,295 | 
|                                |             |   |                    |         |      |   |         |        

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METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Although the Banks loan portfolio is diversified, a substantial portion
of its customers ability to service their debts is dependent primarily on the
service sectors of the economy. At December 31, 2002 and 2001, the Banks loan
portfolio consisted of concentrations in the following industries. With the
exception of the concentration in apartment buildings, all such amounts
represent a concentration greater than 25% of capital (in thousands):

|                              |             |   |                    |         |      |   |         |         | 
|----------------------------- | ----------- | - | ------------------ | ------- | ---- | - | ------- | ------- | 
|                              |             |   | As of December 31,
|                              |             |   |                   
|                              |             |   | 2002               |         | 2001
|                              |             |   |                    |         |     
|Hotels/motels                 |             | $ | 82,015             |         |      | $ | 87,991  |        
|Retail centers                |             |   | 103,623            |         |      |   | 100,649 |        
|Restaurants                   |             |   | 33,094             |         |      |   | 36,160  |        
|Apartment buildings           |             |   | 14,941             |         |      |   | 13,362  |        
|Convenience/gasoline stations |             |   | 27,383             |         |      |   | 31,556  |        
|All other                     |             |   | 272,982            |         |      |   | 229,577 |        
|                              |             |   |                    |         |      |   |         |        
|                              | Gross loans |   | $                  | 534,038 |      |   | $       | 499,295 | 
|                              |             |   |                    |         |      |   |         |        

Changes in the allowance for loan losses are as follows (in thousands):

|                             |  |                    |        |      |  |   |        |  
|---------------------------- |  | ------------------ | ------ | ---- |  | - | ------ | -
|                             |  | As of December 31,
|                             |  |                   
|                             |  | 2002               |        | 2001
|                             |  |                    |        |     
|Balance at beginning of year |  | $                  | 8,903  |      |  | $ | 9,271  |  
|Provision for loan losses    |  |                    | 3,853  |      |  |   | 3,799  |  
|Charge-offs                  |  |                    | (3,124 | )    |  |   | (4,276 | )
|Recoveries                   |  |                    | 518    |      |  |   | 109    |  
|                             |  |                    |        |      |  |   |        |  
|Balance at end of year       |  | $                  | 10,150 |      |  | $ | 8,903  |  
|                             |  |                    |        |      |  |   |        |  

Loans for which the accrual of interest has been discontinued totaled
approximately $17.2 million and $3.8 million at December 31, 2002 and 2001,
respectively. Had these loans remained on an accrual basis, interest in the
amount of approximately $657,000 and $202,000 would have been accrued on these
loans during the years ended December 31, 2002 and 2001, respectively.

Included in other assets on the balance sheet at December 31, 2002 and
2001 is $105,000 and $2.5 million, respectively, due from the SBA, the Export
Import Bank of the United States (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. These amounts
represent the guaranteed portions of loans previously charged-off.

The recorded investment in loans for which impairment has been recognized
and the related specific allowance for loan losses on such loans at December
31, 2002 and 2001, is presented below (in thousands):

|                                                        |                                                      |                                                                 |     |             |     |            |        |          |        |       |     |     |    |   |        |        |        | 
|------------------------------------------------------- | ---------------------------------------------------- | --------------------------------------------------------------- | --- | ----------- | --- | ---------- | ------ | -------- | ------ | ----- | --- | --- | -- | - | ------ | ------ | ------ | 
|                                                        |                                                      |                                                                 |     | Real Estate |     | Commercial |        | Consumer |        | Total
|                                                        |                                                      |                                                                 |     |             |     |            |        |          |        |      
|December 31, 2002                                       |                                                      |                                                                 |     |             |     |            |        |          |        |       |     |     |    |   |        |       
|Impaired loans having related allowance for loan losses |                                                      | $                                                               |    |             |     | $          | 17,101 |          |        | $     | 108 |     |    | $ | 17,209 |       
|                                                        | Less: Allowance for loan losses                      |                                                                 |     |            |     |            |        | (3,224   | )      |       |     | (54 | )  |   |        | (3,278 | )     
|                                                        | Less: Guaranteed portion (SBA, OCCGF and Ex-Im Bank) |                                                                 |     |            |     |            |        | (3,310   | )      |       |     |    |    |   |        | (3,310 | )     
|                                                        |                                                      |                                                                 |     |             |     |            |        |          |        |       |     |     |    |   |        |       
|                                                        |                                                      | Impaired loans, net of allowance for loan losses and
guarantees |     | $           |    |            |        | $        | 10,567 |       |     | $   | 54 |   |        | $      | 10,621 | 
|                                                        |                                                      |                                                                 |     |             |     |            |        |          |        |       |     |     |    |   |        |       
|December 31,
2001                                       |                                                      |                                                                 |     |             |     |            |        |          |        |       |     |     |    |   |        |       
|Impaired loans having related allowance for loan losses |                                                      | $                                                               | 199 |             |     | $          | 3,537  |          |        | $     | 22  |     |    | $ | 3,758  |       
|                                                        | Less: Allowance for loan losses                      |                                                                 |     | (10         | )   |            |        | (453     | )      |       |     | (11 | )  |   |        | (474   | )     
|                                                        | Less: Guaranteed portion (SBA, OCCGF and Ex-Im Bank) |                                                                 |     |            |     |            |        | (1,833   | )      |       |     |    |    |   |        | (1,833 | )     
|                                                        |                                                      |                                                                 |     |             |     |            |        |          |        |       |     |     |    |   |        |       
|                                                        |                                                      | Impaired loans, net of allowance for loan losses and
guarantees |     | $           | 189 |            |        | $        | 1,251  |       |     | $   | 11 |   |        | $      | 1,451  | 
|                                                        |                                                      |                                                                 |     |             |     |            |        |          |        |       |     |     |    |   |        |       

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METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

For the years ended December 31, 2002 and 2001, the average recorded
investment in impaired loans was approximately $17.2 million and $3.8 million,
respectively. The related amount of interest income recognized while the loans
were impaired approximated $215,000 and $202,000 for the years ended December
31, 2002 and 2001, respectively.

Additionally, at December 31, 2002, loans with a value of approximately
$30.7 million were available as collateral under a blanket loan agreement with
the Federal Home Loan Bank of Dallas. At December 31, 2002, there were no
loans specifically pledged to collateralize borrowed funds.

5.     Premises and Equipment

Premises and equipment are summarized as follows (in thousands):

|                                  |  |                  |      |                    |  |      |         |   |  |   |         |  
|--------------------------------- |  | ---------------- | ---- | ------------------ |  | ---- | ------- | - |  | - | ------- | -
|                                  |  | Estimated useful |      | As of December 31,
|                                  |  | lives (in years) |      | 2002               |  | 2001
|                                  |  |                  |      |                    |  |     
|Furniture, fixtures and equipment |  |                  | 3-10 |                    |  | $    | 11,633  |   |  | $ | 10,149  |  
|Building and improvements         |  |                  | 3-20 |                    |  |      | 4,018   |   |  |   | 4,010   |  
|Land                              |  |                  |     |                    |  |      | 1,679   |   |  |   | 1,679   |  
|Leasehold improvements            |  |                  | 5    |                    |  |      | 2,655   |   |  |   | 2,535   |  
|                                  |  |                  |      |                    |  |      |         |   |  |   |         |  
|                                  |  |                  |      |                    |  |      | 19,985  |   |  |   | 18,373  |  
|Accumulated depreciation          |  |                  |      |                    |  |      | (14,144 | ) |  |   | (12,750 | )
|                                  |  |                  |      |                    |  |      |         |   |  |   |         |  
|Premises and equipment, net       |  |                  |      |                    |  | $    | 5,841   |   |  | $ | 5,623   |  
|                                  |  |                  |      |                    |  |      |         |   |  |   |         |  

6.     Interest-Bearing Deposits

The types of accounts and their respective balances included in
interest-bearing deposits are as follows (in thousands):

|                                  |  |                    |         |      |  |   |         | 
|--------------------------------- |  | ------------------ | ------- | ---- |  | - | ------- | 
|                                  |  | As of December 31,
|                                  |  |                   
|                                  |  | 2002               |         | 2001
|                                  |  |                    |         |     
|Interest-bearing demand deposits  |  | $                  | 78,147  |      |  | $ | 66,164  | 
|Savings and money market accounts |  |                    | 107,722 |      |  |   | 107,095 | 
|Time deposits less than $100,000  |  |                    | 166,261 |      |  |   | 168,985 | 
|Time deposits $100,000 and over   |  |                    | 194,687 |      |  |   | 173,208 | 
|                                  |  |                    |         |      |  |   |         | 
|Interest-bearing deposits         |  | $                  | 546,817 |      |  | $ | 515,452 | 
|                                  |  |                    |         |      |  |   |         | 

At December 31, 2002, the scheduled maturities of time deposits are as
follows (in thousands):

|           |  |   |         | 
|---------- |  | - | ------- | 
|2003       |  | $ | 296,569 | 
|2004       |  |   | 46,292  | 
|2005       |  |   | 13,623  | 
|2006       |  |   | 1,022   | 
|2007       |  |   | 3,377   | 
|After 2007 |  |   | 65      | 
|           |  |   |         | 
|           |  | $ | 360,948 | 
|           |  |   |         | 

The Bank had no
brokered deposits as of December 31, 2002 and $5.1 million in
brokered deposits as of December 31, 2001. There were no major deposit
concentrations as of December 31, 2002 or 2001.

7.     Other Borrowings

Other borrowings
include $25.0 million of loans from the
FHLB of Dallas, maturing in September 2008. The loans bear interest
at an average rate
of 4.99% per annum until the fifth anniversary at which time they may
be repaid or the interest rate may be renegotiated.

Other borrowings
also include several FHLB advances obtained in 2002 to acquire mortgage-related securities
in order to increase earning assets. These borrowings were $40.2 million at December 31, 2002 with maturities
ranging from one month to two years and carried a weighted average interest
rate of 1.85%.

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METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

The following is a
schedule by year of payments required on the Company's FHLB borrowings (in thousands):

|           |  |   |        | 
|---------- |  | - | ------ | 
|Year       |  |   | Amount
|           |  |   |       
|2003       |  | $ | 32,200
|2004       |  |   | 8,000 
|2005       |  |   |      
|2006       |  |   |      
|2007       |  |   |      
|After
2007 |  |   | 25,000
|           |  |   |       
|           |  | $ | 65,200
|           |  |   |       

Other short-term borrowings at December 31, 2002 and 2001 consist of
$574,000 and $195,000, respectively, in Treasury, Tax and Loan (TT&L) payments
in Company accounts for the benefit of the U.S. Treasury. These funds typically
remain in the Company for one day and are then moved to the U.S. Treasury.

Additionally, the Bank has several unused, unsecured lines of credit with
correspondent banks totaling $15.0 million at December 31, 2002
and 2001.

8.     Income Taxes

Deferred income taxes result from differences between the amounts of
assets and liabilities as measured for income tax return and for financial
reporting purposes. The significant components of the net deferred tax asset
are as follows (in thousands):

|                                                                   |                        |   |                    |       |      |   |       |       | 
|------------------------------------------------------------------ | ---------------------- | - | ------------------ | ----- | ---- | - | ----- | ----- | 
|                                                                   |                        |   | As of December 31,
|                                                                   |                        |   |                   
|                                                                   |                        |   | 2002               |       | 2001
|                                                                   |                        |   |                    |       |     
|Deferred Tax Assets:                                               |                        |   |                    |       |      |   |       |      
|Allowance for loan losses                                          |                        | $ | 3,451              |       |      | $ | 3,151 |      
|Recognition of deferred loan fees                                  |                        |   | 1,861              |       |      |   | 1,740 |      
|Depreciation                                                       |                        |   | 1,011              |       |      |   | 1,036 |      
|Recognition of interest on nonaccrual loans                        |                        |   | 640                |       |      |   | 319   |      
|                                                                   |                        |   |                    |       |      |   |       |      
|Gross deferred tax assets                                          |                        |   | 6,963              |       |      |   | 6,246 |      
|                                                                   |                        |   |                    |       |      |   |       |      
|Deferred Tax Liabilities:                                          |                        |   |                    |       |      |   |       |      
|Unrealized gains on investments securities
available-for-sale, net |                        |   | 1,201              |       |      |   | 193   |      
|FHLB stock dividends                                               |                        |   | 374                |       |      |   | 345   |      
|Other                                                              |                        |   | 804                |       |      |   | 237   |      
|                                                                   |                        |   |                    |       |      |   |       |      
|Gross deferred tax liabilities                                     |                        |   | 2,379              |       |      |   | 775   |      
|                                                                   |                        |   |                    |       |      |   |       |      
|                                                                   | Net deferred tax asset |   | $                  | 4,584 |      |   | $     | 5,471 | 
|                                                                   |                        |   |                    |       |      |   |       |      

The Bank has not provided a valuation allowance for the net deferred tax
asset at December 31, 2002 and 2001 due primarily to its ability to offset
reversals of net deductible temporary differences against income taxes paid in
previous years and expected to be paid in future years.

Components of the provision for income taxes are as follows (in
thousands):

|                                                |                                  |   |                          |       |      |   |       |       |  |   |       |       | 
|----------------------------------------------- | -------------------------------- | - | ------------------------ | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                                                |                                  |   | Years ended December 31,
|                                                |                                  |   |                         
|                                                |                                  |   | 2002                     |       | 2001 |   | 2000 
|                                                |                                  |   |                          |       |      |   |      
|Current provision for federal income taxes      |                                  | $ | 4,471                    |       |      | $ | 3,358 |       |  | $ | 3,964 |      
|Deferred
federal income tax provision (benefit) |                                  |   | (121                     | )     |      |   | 195   |       |  |   | (963  | )    
|                                                |                                  |   |                          |       |      |   |       |       |  |   |       |      
|                                                | Total provision for income taxes |   | $                        | 4,350 |      |   | $     | 3,553 |  |   | $     | 3,001 | 
|                                                |                                  |   |                          |       |      |   |       |       |  |   |       |      

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METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

A reconciliation of the provision for income taxes computed at statutory
rates compared to the actual provision for income taxes is as follows (in
thousands):

|                                             |                            |   |                          |       |         |  |        |    |         |   |        |       |         |  |    |    |   |   |       |       |  |  |    |    |  
|-------------------------------------------- | -------------------------- | - | ------------------------ | ----- | ------- |  | ------ | -- | ------- | - | ------ | ----- | ------- |  | -- | -- | - | - | ----- | ----- |  |  | -- | -- | -
|                                             |                            |   | Years ended December 31,
|                                             |                            |   |                         
|                                             |                            |   | 2002                     |       | 2001    |  | 2000  
|                                             |                            |   |                          |       |         |  |       
|                                             |                            |   | Amount                   |       | Percent |  | Amount |    | Percent |   | Amount |       | Percent
|                                             |                            |   |                          |       |         |  |        |    |         |   |        |       |        
|Federal income tax expense at statutory rate |                            | $ | 4,467                    |       |         |  | 34     | %  |         | $ | 3,784  |       |         |  | 34 | %  |   | $ | 2,885 |       |  |  | 34 | % 
|Tax-exempt interest income                   |                            |   | (361                     | )     |         |  | (3     | )  |         |   | (400   | )     |         |  | (3 | )  |   |   | (356  | )     |  |  | (4 | ) 
|Other, net                                   |                            |   | 244                      |       |         |  | 2      |    |         |   | 169    |       |         |  | 1  |    |   |   | 472   |       |  |  | 5  |   
|                                             |                            |   |                          |       |         |  |        |    |         |   |        |       |         |  |    |    |   |   |       |       |  |  |    |   
|                                             | Provision for income taxes |   | $                        | 4,350 |         |  |        | 33 | %       |   | $      | 3,553 |         |  |    | 32 | % |   | $     | 3,001 |  |  |    | 35 | %
|                                             |                            |   |                          |       |         |  |        |    |         |   |        |       |         |  |    |    |   |   |       |       |  |  |    |   

The following sets forth the deferred tax benefit (expense) related to
other comprehensive income (in thousands):

|                                                                   |                            |   |                          |       |      |   |      |     |  |   |        |        |  
|------------------------------------------------------------------ | -------------------------- | - | ------------------------ | ----- | ---- | - | ---- | --- |  | - | ------ | ------ | -
|                                                                   |                            |   | Years ended December 31,
|                                                                   |                            |   |                         
|                                                                   |                            |   | 2002                     |       | 2001 |   | 2000
|                                                                   |                            |   |                          |       |      |   |     
|Unrealized gains (losses) arising during the period                |                            | $ | 1,020                    |       |      | $ | 196  |     |  | $ | (1,682 | )     
|Less: reclassification adjustment for gains realized in net income |                            |   | (12)                     |       |      |   | (64  | )   |  |   |       |       
|                                                                   |                            |   |                          |       |      |   |      |     |  |   |        |       
|                                                                   | Other comprehensive income |   | $                        | 1,008 |      |   | $    | 132 |  |   | $      | (1,682 | )
|                                                                   |                            |   |                          |       |      |   |      |     |  |   |        |       

9.     401(k) Profit Sharing Plan

The Company has established a defined contributory profit sharing plan
pursuant to Internal Revenue Code Section 401(k) covering substantially all
employees (the Plan). The Plan provides for pretax employee contributions of
up to 15% of annual compensation. The Company matches each participants
contributions to the Plan up to 4% of such participants salary. The Company
made contributions, before expenses, to the Plan of approximately $354,000,
$308,000, and $291,000 during the years ended December 31, 2002, 2001, and
2000, respectively.

10.     Shareholders Equity

The Company declared and paid dividends of $0.24 per share to the
shareholders of record during the year ended December 31, 2002 which included a
dividend declared of $0.06 per share to shareholders of record as of December 31, 2002, which was paid on January
15, 2003. The Company also paid dividends of $0.24 per share in 2001 and 2000.

The declaration and payment of dividends on the Common Stock by the
Company depends upon the earnings and financial condition of the Company,
liquidity and capital requirements, the general economic and regulatory
climate, the Companys ability to service any equity or debt obligations senior
to the Common Stock and other factors deemed relevant by the Companys Board of
Directors.

The Companys
Non-Employee Director Stock Bonus Plan (Non-Employee Director Plan)
authorizes the issuance of up to 60,000 shares of Common Stock to the directors
of the Company who do not serve as an officer or employee of the Company.
Under the Non-Employee Director Plan, up to 12,000 shares of Common Stock may
be issued each year for a five-year period beginning in 1998 if the Company achieves a certain
return on equity ratio with no shares to be issued if the Companys return on
equity is below 13.0%. This return on equity goal was not achieved in 2002,
2001 or 2000. As of December 31, 2002, 24,000 shares have been issued under
the Non-Employee Director Plan and no additional shares are available
for issuance under this plan.

The Companys 1998 Employee Stock Purchase Plan (Purchase Plan)
authorizes the offer and sale of up to 200,000 shares of Common Stock to
employees of the Company and its subsidiaries. The Purchase Plan will be
implemented through ten annual offerings. Each year the Board of Directors
determines the number of shares to be offered under the Purchase Plan; provided
that in any one year the offering may not exceed 20,000 shares plus any
unsubscribed shares from prior years. The offering price per share will be

65



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METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

an amount equal to 90% of the closing trading price of a share of Common Stock
on the business day immediately prior to the commencement of such offering. In
each offering, each employee may purchase a number of whole shares of Common
Stock that are equal to 20% of the employees base salary divided by the
offering price. Pursuant to the Purchase Plan, the employee pays for the
Common Stock either immediately or through a payroll deduction program over a
period of up to one year, at the employees option. The first annual offering
under the Purchase Plan began in the second quarter of 1999. As of December
31, 2002 there were 16,139 shares issued under the Purchase Plan.

11.     Regulatory Matters

Regulatory restrictions limit the payment of cash dividends by the Bank.
The approval of the Office of the Comptroller of the Currency (OCC) is required
for any cash dividend paid by the Bank if the total of all cash dividends
declared in any calendar year exceeds the total of its net income for that year
combined with the net addition to undivided profits for the preceding two
years. As of December 31, 2002, approximately $17.1 million was available for
payment of dividends by the Bank to the Company under applicable restrictions,
without regulatory approval.

The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Companys financial statements. The
regulations require the Company to meet specific capital adequacy guidelines
that involve quantitative measures of the Companys assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Banks capital classification is also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of
total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to
average assets. Management believes, as of December 31, 2002 that the Company
and the Bank meet all capital adequacy requirements to which it is subject.

The most recent notifications from the OCC categorized the Bank as well
capitalized, as defined, under the regulatory framework for prompt corrective
action. To be categorized as adequately capitalized, the Bank must maintain
minimum total risk-based, Tier 1 risk-based and Tier leverage ratios as set
forth in the table below. There are no conditions or events since the
notifications that management believes have changed the Banks level of capital
adequacy.

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METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

The Companys and the Banks actual capital amounts and ratios are
presented in the following table:

|                                |                           |  |        |        |          |  |                   |       |       |  |                        |        |                   |  |  |      |   |  |   |        |  |  |  |       |  
|------------------------------- | ------------------------- |  | ------ | ------ | -------- |  | ----------------- | ----- | ----- |  | ---------------------- | ------ | ----------------- |  |  | ---- | - |  | - | ------ |  |  |  | ----- | -
|                                |                           |  |        |        |          |  |                   |       |       |  | Minimum                |        | To be well       
|                                |                           |  |        |        |          |  |                   |       |       |  | required for           |        | capitalized under
|                                |                           |  |        |        |          |  |                   |       |       |  | capital adequacy       |        | prompt corrective
|                                |                           |  | Actual |        | purposes |  | action provisions
|                                |                           |  |        |        |          |  |                  
|                                |                           |  | Amount |        | Ratio    |  | Amount            |       | Ratio |  | Amount                 |        | Ratio            
|                                |                           |  |        |        |          |  |                   |       |       |  |                        |        |                  
|                                |                           |  |        |        |          |  |                   |       |       |  | (Dollars in thousands) |        |                   |  |  |      |   |  |  
|As of December 31, 2002         |                           |  |        |        |          |  |                   |       |       |  |                        |        |                   |  |  |      |   |  |   |        |  |  |  |      
|Total risk-based capital ratio  |                           |  |        |        |          |  |                   |       |       |  |                        |        |                   |  |  |      |   |  |   |        |  |  |  |      
|                                | MetroCorp Bancshares, Inc |  | $      | 79,237 |          |  |                   | 13.97 | %     |  | $                      | 45,375 |                   |  |  | 8.00 | % |  | $ | N/A    |  |  |  | N/A   | %
|                                | MetroBank, N.A            |  |        | 76,072 |          |  |                   | 13.41 |       |  |                        | 45,374 |                   |  |  | 8.00 |   |  |   | 56,718 |  |  |  | 10.00 |  
|Tier 1 risk-based capital ratio |                           |  |        |        |          |  |                   |       |       |  |                        |        |                   |  |  |      |   |  |   |        |  |  |  |      
|                                | MetroCorp Bancshares, Inc |  |        | 72,109 |          |  |                   | 12.71 |       |  |                        | 22,688 |                   |  |  | 4.00 |   |  |   | N/A    |  |  |  | N/A   |  
|                                | MetroBank, N.A            |  |        | 68,944 |          |  |                   | 12.16 |       |  |                        | 22,687 |                   |  |  | 4.00 |   |  |   | 34,031 |  |  |  | 6.00  |  
|Leverage ratio                  |                           |  |        |        |          |  |                   |       |       |  |                        |        |                   |  |  |      |   |  |   |        |  |  |  |      
|                                | MetroCorp Bancshares, Inc |  |        | 72,108 |          |  |                   | 8.58  |       |  |                        | 33,627 |                   |  |  | 4.00 |   |  |   | N/A    |  |  |  | N/A   |  
|                                | MetroBank, N.A            |  |        | 68,944 |          |  |                   | 8.20  |       |  |                        | 33,625 |                   |  |  | 4.00 |   |  |   | 42,031 |  |  |  | 5.00  |  
|                                |                           |  |        |        |          |  |                   |       |       |  |                        |        |                   |  |  |      |   |  |   |        |  |  |  |      
|As of December 31, 2001         |                           |  |        |        |          |  |                   |       |       |  |                        |        |                   |  |  |      |   |  |   |        |  |  |  |      
|Total risk-based capital ratio  |                           |  |        |        |          |  |                   |       |       |  |                        |        |                   |  |  |      |   |  |   |        |  |  |  |      
|                                | MetroCorp Bancshares, Inc |  | $      | 71,366 |          |  |                   | 13.76 | %     |  | $                      | 41,493 |                   |  |  | 8.00 | % |  | $ | N/A    |  |  |  | N/A   | %
|                                | MetroBank, N.A            |  |        | 68,353 |          |  |                   | 13.18 |       |  |                        | 41,493 |                   |  |  | 8.00 |   |  |   | 51,866 |  |  |  | 10.00 |  
|Tier 1 risk-based capital ratio |                           |  |        |        |          |  |                   |       |       |  |                        |        |                   |  |  |      |   |  |   |        |  |  |  |      
|                                | MetroCorp Bancshares, Inc |  |        | 64,853 |          |  |                   | 12.50 |       |  |                        | 20,746 |                   |  |  | 4.00 |   |  |   | N/A    |  |  |  | N/A   |  
|                                | MetroBank, N.A            |  |        | 61,840 |          |  |                   | 11.92 |       |  |                        | 20,746 |                   |  |  | 4.00 |   |  |   | 31,120 |  |  |  | 6.00  |  
|Leverage ratio                  |                           |  |        |        |          |  |                   |       |       |  |                        |        |                   |  |  |      |   |  |   |        |  |  |  |      
|                                | MetroCorp Bancshares, Inc |  |        | 64,853 |          |  |                   | 8.91  |       |  |                        | 29,114 |                   |  |  | 4.00 |   |  |   | N/A    |  |  |  | N/A   |  
|                                | MetroBank, N.A            |  |        | 61,840 |          |  |                   | 8.50  |       |  |                        | 29,114 |                   |  |  | 4.00 |   |  |   | 36,392 |  |  |  | 5.00  |  

12.     Off-Balance Sheet Risk

The Bank is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include various guarantees, commitments to extend
credit and standby letters of credit. Additionally, these instruments may
involve, to varying degrees, credit risk in excess of the amount recognized in
the statement of financial condition. The Banks maximum exposure to credit
loss under such arrangements is represented by the contractual amount of those
instruments. The Bank applies the same credit policies and collateralization
guidelines in making commitments and conditional obligations as it does for
on-balance sheet instruments. Commitments to extend credit at December 31,
2002 and 2001 aggregated approximately $85.4 million and $64.4 million,
respectively. Commitments under letters of credit at December 31, 2002 and
2001 totaled $10.4 million and $3.6 million, respectively.

The contractual amount of the Companys financial instruments with
off-balance sheet risk expiring by period at December 31, 2002 is presented
below:

|                                                             |  |            |        |             |  |                        |       |             |  |       |     |  |  |   |     |  |  |   |        | 
|------------------------------------------------------------ |  | ---------- | ------ | ----------- |  | ---------------------- | ----- | ----------- |  | ----- | --- |  |  | - | --- |  |  | - | ------ | 
|                                                             |  |            |        |             |  | After One              |       | After Three |  |       |     |  |  |   |     | 
|                                                             |  | Within One |        | But Within  |  | But Within             |       | After Five  |  |       |     | 
|                                                             |  | Year       |        | Three Years |  | Five Years             |       | Years       |  | Total
|                                                             |  |            |        |             |  |                        |       |             |  |      
|                                                             |  |            |        |             |  | (Dollars in thousands) |       |             |  |      
|Unfunded loan commitments including unfunded lines
of credit |  | $          | 74,937 |             |  | $                      |      |             |  | $     |    |  |  | $ |    |  |  | $ | 74,937 | 
|Standby letters of credit                                    |  |            | 2,668  |             |  |                        | 228   |             |  |       |    |  |  |   |    |  |  |   | 2,896  | 
|Commercial letters of credit                                 |  |            | 7,541  |             |  |                        |      |             |  |       |    |  |  |   |    |  |  |   | 7,541  | 
|Operating leases                                             |  |            | 867    |             |  |                        | 1,645 |             |  |       | 466 |  |  |   | 344 |  |  |   | 3,312  | 
|                                                             |  |            |        |             |  |                        |       |             |  |       |     |  |  |   |     |  |  |   |        | 
|Total financial instruments with off-balance sheet risk      |  | $          | 86,013 |             |  | $                      | 1,873 |             |  | $     | 466 |  |  | $ | 334 |  |  | $ | 88,686 | 
|                                                             |  |            |        |             |  |                        |       |             |  |       |     |  |  |   |     |  |  |   |        | 

67



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METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

13.     Fair Value of Financial Instruments

SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosures of estimated fair values for all financial instruments and
the methods and assumptions used by management to estimate the fair value for
each type of financial instrument. The fair value of a financial instrument is
the current amount that would be exchanged between willing parties other than
in a forced liquidation. Fair value is best determined based upon quoted
market prices. However, in many instances, there are no quoted market prices
for the Companys various financial instruments.

In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. Accordingly, the fair value
estimates may not be realized in an immediate settlement of the instrument.
SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented may not necessarily represent the underlying fair value
of the Company.

The following summary presents the methodologies and assumptions used to
estimate the fair value of the Companys financial instruments, required to be
valued pursuant to SFAS No. 107:

Assets for Which Fair Value Approximates Carrying Value

The fair values of certain financial assets and liabilities carried at
cost, including cash and due from banks, deposits with banks, federal funds
sold, due from customers on acceptances and accrued interest receivable, are
considered to approximate their respective carrying values due to their
short-term nature and negligible credit losses.

Investment Securities

Fair values are based upon publicly quoted market prices.

Loans

The fair value of loans originated by the Bank is estimated by discounting
the expected future cash flows using a discount rate commensurate with the
risks involved. The loan portfolio is segregated into groups of loans with
homogeneous characteristics and expected future cash flows and interest rates
reflecting appropriate credit risk are determined for each group. An estimate
of future credit losses based on historical experience is factored into the
discounted cash flow calculation. The estimated fair value of the loan portfolio
at December 31, 2002 and 2001 was $519.3 million and
$488.5 million, respectively.

Liabilities for Which Fair Value Approximates Carrying Value

SFAS No. 107 requires that the fair value disclosed for deposit
liabilities with no stated maturity (i.e., demand, savings, and certain money
market deposits) be equal to the carrying value. SFAS No. 107 does not allow
for the recognition of the inherent funding value of these instruments. The
fair value of federal funds purchased, borrowed funds, acceptances outstanding,
accounts payable and accrued liabilities are considered to approximate their
respective carrying values due to their short-term nature.

Time Deposits

The fair values disclosed for demand deposits (e.g., interest and
noninterest checking, passbook savings, and certain types of money market
accounts) are, by definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying amounts). The carrying amounts of
variable-rate, fixed-term money market accounts and certificates of deposit
(time deposits) approximate their fair values at the reporting date. Fair
values for fixed-rate time deposits are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on time
deposits to a schedule of aggregated expected monthly maturities on time
deposits. The estimated fair value of time deposits at
December 31, 2002 and 2001 was
$365.0 million and $345.7 million, respectively.

Other Borrowings

The carrying amounts
of Federal funds purchased, borrowings under repurchase agreements,
and other borrowings maturing within ninety days
approximate their fair values. Fair values of other borrowings
are estimated using discounted cash flow analyses based on the
Company's current incremental borrowing rates for similar types of
borrowing arrangements. The estimated fair value of other borrowings
at December 31, 2002 and 2001 was $67.3 million and $23.9 million,
respectively.

68



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METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Commitments to Extend Credit and Standby Letters of Credit

The fair value of the commitments to extend credit of $85.0 million and
$74.0 million is considered to approximate carrying value at December 31, 2002
and 2001, respectively.

14.     Commitments and Contingencies

The Bank leases certain branch premises and equipment under operating
leases which expire between 2003 through 2008. The Bank
incurred rental expense of approximately $859,000, $825,000, and $861,000, for
the years ended December 31, 2002, 2001 and 2000, respectively, under these
lease agreements. Future minimum lease payments at December 31, 2002 due under
these lease agreements are as follows (in thousands):

|           |  |        |       | 
|---------- |  | ------ | ----- | 
|Year       |  | Amount
|           |  |       
|2003       |  | $      | 867   | 
|2004       |  |        | 858   | 
|2005       |  |        | 787   | 
|2006       |  |        | 332   | 
|2007       |  |        | 134   | 
|After 2007 |  |        | 334   | 
|           |  |        |       | 
|           |  | $      | 3,312 | 
|           |  |        |       | 

The Bank is a defendant in several legal actions arising from its normal
business activities. Management, based on consultation with legal counsel,
believes that the ultimate liability, if any, resulting from these legal
actions will not materially affect the Companys financial position, results of
operations, or cash flows.

15.     Parent Company Financial Information

The condensed balance sheets, statements of income and statements of cash
flows for MetroCorp Bancshares, Inc. (parent only) are presented below:

Condensed Balance Sheets
(in thousands, except share amounts)

|                                                                                                                                                                                              |                            |                                      |        |        |                    |   |        |        |  |  | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------ | ------ | ------ | ------------------ | - | ------ | ------ |  |  | 
|                                                                                                                                                                                              |                            |                                      |        |        | As of December 31,
|                                                                                                                                                                                              |                            |                                      |        |        |                   
|                                                                                                                                                                                              |                            |                                      |        |        | 2002               |   | 2001  
|                                                                                                                                                                                              |                            |                                      |        |        |                    |   |       
|                                                                                                                                                                                              |                            |                                      | Assets |        |                    |   |        |        |  |  | 
|Cash and due from subsidiary bank                                                                                                                                                             |                            | $                                    | 3,587  |        |                    | $ | 3,471  |       
|Investments in bank subsidiary                                                                                                                                                                |                            |                                      | 71,298 |        |                    |   | 62,216 |       
|                                                                                                                                                                                              |                            |                                      |        |        |                    |   |        |       
|                                                                                                                                                                                              | Total assets               |                                      | $      | 74,885 |                    |   | $      | 65,687 | 
|                                                                                                                                                                                              |                            |                                      |        |        |                    |   |        |       
|                                                                                                                                                                                              |                            | Liabilities and Shareholders Equity |        |        |                    |   |        |        |  | 
|Other liabilities                                                                                                                                                                             |                            | $                                    | 422    |        |                    | $ | 458    |       
|                                                                                                                                                                                              |                            |                                      |        |        |                    |   |        |       
|                                                                                                                                                                                              | Total liabilities          |                                      |        | 422    |                    |   |        | 458    | 
|                                                                                                                                                                                              |                            |                                      |        |        |                    |   |        |       
|Shareholders equity:                                                                                                                                                                         |                            |                                      |        |        |                    |   |        |       
|Common stock, $1.00 par value, 20,000,000 shares authorized; 7,195,927 and
7,187,423 shares issued and 7,031,882 and 7,017,823 shares outstanding at
December 31, 2002 and 2001, respectively |                            |                                      | 7,196  |        |                    |   | 7,187  |       
|Additional paid-in-capital                                                                                                                                                                    |                            |                                      | 26,344 |        |                    |   | 26,144 |       
|Retained earnings                                                                                                                                                                             |                            |                                      | 39,938 |        |                    |   | 32,834 |       
|Net accumulated other comprehensive income from subsidiary                                                                                                                                    |                            |                                      | 2,354  |        |                    |   | 376    |       
|Treasury stock, at cost                                                                                                                                                                       |                            |                                      | (1,369 | )      |                    |   | (1,312 | )     
|                                                                                                                                                                                              |                            |                                      |        |        |                    |   |        |       
|                                                                                                                                                                                              | Total shareholders equity |                                      |        | 74,463 |                    |   |        | 65,229 | 
|                                                                                                                                                                                              |                            |                                      |        |        |                    |   |        |       
|Total liabilities and shareholders equity                                                                                                                                                    |                            | $                                    | 74,885 |        |                    | $ | 65,687 |       
|                                                                                                                                                                                              |                            |                                      |        |        |                    |   |        |       

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METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Condensed Statements of Income
(in thousands)

|                                             |              |   |                          |       |      |   |       |       |  |   |       |       | 
|-------------------------------------------- | ------------ | - | ------------------------ | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                                             |              |   | Years Ended December 31,
|                                             |              |   |                         
|                                             |              |   | 2002                     |       | 2001 |   | 2000 
|                                             |              |   |                          |       |      |   |      
|Equity in undistributed income of subsidiary |              | $ | 7,104                    |       |      | $ | 5,898 |       |  | $ | 4,136 |      
|Dividends received from subsidiary           |              |   | 1,685                    |       |      |   | 1,679 |       |  |   | 1,671 |      
|                                             |              |   |                          |       |      |   |       |       |  |   |       |      
|                                             | Total income |   |                          | 8,789 |      |   |       | 7,577 |  |   |       | 5,807 | 
|Operating expenses                           |              |   |                         |       |      |   |      |       |  |   | 324   |      
|                                             |              |   |                          |       |      |   |       |       |  |   |       |      
|Net income                                   |              | $ | 8,789                    |       |      | $ | 7,577 |       |  | $ | 5,483 |      
|                                             |              |   |                          |       |      |   |       |       |  |   |       |      

Condensed Statements of Cash Flows
(in thousands)

|                                                     |                                             |                                           |                                       |        |                          |        |       |        |       |        |        |        |      |        |  
|---------------------------------------------------- | ------------------------------------------- | ----------------------------------------- | ------------------------------------- | ------ | ------------------------ | ------ | ----- | ------ | ----- | ------ | ------ | ------ | ---- | ------ | -
|                                                     |                                             |                                           |                                       |        | Years Ended December 31,
|                                                     |                                             |                                           |                                       |        |                         
|                                                     |                                             |                                           |                                       |        | 2002                     |        | 2001  |        | 2000 
|                                                     |                                             |                                           |                                       |        |                          |        |       |        |      
|Cash flow from operating activities:                 |                                             |                                           |                                       |        |                          |        |       |        |       |        |        |       
|                                                     | Net income                                  |                                           | $                                     | 8,789  |                          |        | $     | 7,577  |       |        | $      | 5,483  |     
|                                                     | Equity in income of subsidiary              |                                           |                                       | (8,789 | )                        |        |       | (7,577 | )     |        |        | (5,807 | )   
|                                                     | Increase (decrease) in other liabilities    |                                           |                                       | (35    | )                        |        |       | (92    | )     |        |        | (170   | )   
|                                                     |                                             |                                           |                                       |        |                          |        |       |        |       |        |        |       
|                                                     |                                             | Net cash provided by operating activities |                                       |        | (35                      | )      |       |        | (92   | )      |        |        | (494 | )     
|                                                     |                                             |                                           |                                       |        |                          |        |       |        |       |        |        |       
|Cash flow from investment activities:                |                                             |                                           |                                       |        |                          |        |       |        |       |        |        |       
|                                                     | Dividend received from subsidiary           |                                           |                                       | 1,685  |                          |        |       | 1,679  |       |        |        | 1,671  |     
|                                                     | Investment in subsidiary                    |                                           |                                       |       |                          |        |       |       |       |        |        | (700   | )   
|                                                     |                                             |                                           |                                       |        |                          |        |       |        |       |        |        |       
|                                                     |                                             | Net cash used in investing activities     |                                       |        | 1,685                    |        |       |        | 1,679 |        |        |        | 971  |       
|                                                     |                                             |                                           |                                       |        |                          |        |       |        |       |        |        |       
|Cash flow from financing activities:                 |                                             |                                           |                                       |        |                          |        |       |        |       |        |        |       
|                                                     | Proceeds from issuance of common stock      |                                           |                                       | 76     |                          |        |       | 59     |       |        |        | 445    |     
|                                                     | Proceeds from re-issuance of treasury stock |                                           |                                       | 425    |                          |        |       | 316    |       |        |        |       |     
|                                                     | Payment to repurchase common stock          |                                           |                                       | (349   | )                        |        |       |       |       |        |        | (1,402 | )   
|                                                     | Dividends paid                              |                                           |                                       | (1,685 | )                        |        |       | (1,679 | )     |        |        | (1,671 | )   
|                                                     |                                             |                                           |                                       |        |                          |        |       |        |       |        |        |       
|                                                     |                                             |                                           | Net cash used in financing activities |        |                          | (1,533 | )     |        |       | (1,304 | )      |        |      | (2,628 | )
|                                                     |                                             |                                           |                                       |        |                          |        |       |        |       |        |        |       
|Net increase (decrease) in cash and cash equivalents |                                             |                                           | 117                                   |        |                          |        | 283   |        |       |        | (2,151 | )     
|Cash and cash equivalents at beginning of year       |                                             |                                           | 3,470                                 |        |                          |        | 3,187 |        |       |        | 5,338  |       
|                                                     |                                             |                                           |                                       |        |                          |        |       |        |       |        |        |       
|Cash and cash equivalents at end of year             |                                             | $                                         | 3,587                                 |        |                          | $      | 3,470 |        |       | $      | 3,187  |       
|                                                     |                                             |                                           |                                       |        |                          |        |       |        |       |        |        |       
|Dividends declared but not paid                      |                                             | $                                         | 422                                   |        |                          | $      | 421   |        |       | $      | 419    |       

16.     Related Party Transactions

In the ordinary course of business, the Bank enters into transactions with
its and the Companys officers and directors and their affiliates. It is the
Banks policy that all transactions with these parties are on the same terms,
including interest rates and collateral requirements on loans, as those
prevailing at the same time for comparable transactions with unrelated parties.
At December 31, 2002 and 2001, certain of these officers and directors and
their affiliated companies were indebted to the Bank in the aggregate amounts
of approximately $2.6 million and $4.8 million respectively.

The following is an analysis of activity for the years ended December 31,
2002 and 2001 for such amounts (in thousands):

|                        |                        |   |       |        |      |   |       |        |  
|----------------------- | ---------------------- | - | ----- | ------ | ---- | - | ----- | ------ | -
|                        |                        |   | 2002  |        | 2001
|                        |                        |   |       |        |     
|Balance at January 1,   |                        | $ | 4,846 |        |      | $ | 6,263 |       
|                        | New loans and advances |   |       | 1,190  |      |   |       | 2,810  |  
|                        | Repayments             |   |       | (3,401 | )    |   |       | (4,227 | )
|                        |                        |   |       |        |      |   |       |       
|Balance at December 31, |                        | $ | 2,635 |        |      | $ | 4,846 |       
|                        |                        |   |       |        |      |   |       |       

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METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

In addition, as of December 31, 2002 and 2001, the Bank held demand and
other deposits for related parties of approximately $6,825,000 and $2,845,000,
respectively.

New Era Life Insurance Company is the agency used by the Company for the
insurance coverage the Company provides to employees of the Company and the
Bank and their dependents. The insurance coverage consists of medical, dental,
life, accidental death and dismemberment and long-term disability insurance.
The Companys Chairman is a principal shareholder in New Era Life Insurance Company.
The Company paid New Era Life Insurance Company $1.2 million for
such insurance coverage for the years ended December 31, 2002 and 2001.

In addition to the insurance transactions, the Bank has three commercial
real estate loan participations with New Era Life Insurance Company. These loans were originated and
are being serviced by the Bank. All three loans are contractually current on
their payments. The following is an analysis of these loans as of December 31,
2002 and 2001, respectively (in thousands):

|                        |                                                           |   |       |       |      |   |       |       | 
|----------------------- | --------------------------------------------------------- | - | ----- | ----- | ---- | - | ----- | ----- | 
|                        |                                                           |   | 2002  |       | 2001
|                        |                                                           |   |       |       |     
|Gross balance           |                                                           | $ | 7,558 |       |      | $ | 8,393 |      
|                        | Less:
participation portion sold to New Era Life Ins. Co. |   |       | 2,310 |      |   |       | 2,721 | 
|                        |                                                           |   |       |       |      |   |       |      
|Net balance outstanding |                                                           | $ | 5,248 |       |      | $ | 5,672 |      
|                        |                                                           |   |       |       |      |   |       |      

Two of the loans have interest rates which float with the prime rate and
mature in April 2003 and May 2005. The remaining loan has a fixed rate of
12.0% and matures in May 2003. The percent of the participation
portion sold to New
Era Life Insurance Company varies from 8.29% to 58.33%.

Guamnitz, Inc. owns the buildings in which the Companys corporate
headquarters and the Banks Bellaire branch are located and has entered into
lease agreements for these locations with the Company. A Company director is
Chairman of the Board and the controlling shareholder of Gaumnitz, Inc. The
lease covering the Companys headquarters is for a term of four years and nine
months commencing on February 1, 2001 at a net rent of $24,833 per month. The
lease covering the Banks Bellaire branch is for a term of four years and
eleven months commencing on January 1, 2002 at a net rent of $10,503 per month.
For these respective lease agreements, the Company paid Gaumnitz, Inc.
$441,000 and $421,000 during the years ended December 31, 2002 and 2001,
respectively.

17.     Earnings Per Share

The following data show the amounts used in computing earnings per share
(EPS) and the weighted average number of shares of dilutive potential common
stock (in thousands):

|                                                                                   |                                             |   |                          |       |      |   |       |       |  |   |       |       | 
|---------------------------------------------------------------------------------- | ------------------------------------------- | - | ------------------------ | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                                                                                   |                                             |   | Years ended December 31,
|                                                                                   |                                             |   |                         
|                                                                                   |                                             |   | 2002                     |       | 2001 |   | 2000 
|                                                                                   |                                             |   |                          |       |      |   |      
|Net income                                                                         |                                             | $ | 8,789                    |       |      | $ | 7,577 |       |  | $ | 5,483 |      
|                                                                                   |                                             |   |                          |       |      |   |       |       |  |   |       |      
|                                                                                   | Weighted average common shares in basic EPS |   |                          | 7,024 |      |   |       | 6,998 |  |   |       | 6,972 | 
|                                                                                   | Effects of dilutive securities: Options     |   |                          | 130   |      |   |       | 61    |  |   |       | 1     | 
|                                                                                   |                                             |   |                          |       |      |   |       |       |  |   |       |      
|Weighted average common and potentially dilutive common shares used in
diluted EPS |                                             |   | 7,154                    |       |      |   | 7,059 |       |  |   | 6,973 |      
|                                                                                   |                                             |   |                          |       |      |   |       |       |  |   |       |      

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METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

18.     Supplemental Statement of Cash Flow Information:

|                                            |                                                               |  |                          |        |      |  |      |        |  |  |   |        | 
|------------------------------------------- | ------------------------------------------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                            |                                                               |  | Years ended December 31,
|                                            |                                                               |  |                         
|                                            |                                                               |  | 2002                     |        | 2001 |  | 2000
|                                            |                                                               |  |                          |        |      |  |     
|                                            |                                                               |  | (in thousands)          
|Cash payments during the year for:          |                                                               |  |                          |        |      |  |      |        |  |  |   |       
|                                            | Interest                                                      |  | $                        | 14,774 |      |  | $    | 24,752 |  |  | $ | 27,018 | 
|                                            | Income taxes                                                  |  |                          | 4,510  |      |  |      | 4,337  |  |  |   | 3,086  | 
|Noncash investing and financing activities: |                                                               |  |                          |        |      |  |      |        |  |  |   |       
|                                            | Dividends declared not paid                                   |  |                          | 422    |      |  |      | 421    |  |  |   | 419    | 
|                                            | Real
estate acquired through foreclosure                      |  |                          | 1,464  |      |  |      | 1,461  |  |  |   | 2,261  | 
|                                            | Loans to facilitate the sale of foreclosed assets             |  |                          | 325    |      |  |      | 106    |  |  |   | 269    | 
|                                            | Transfer of held-to-maturity securities to available-for-sale |  |                          |       |      |  |      | 31,743 |  |  |   |       | 

19.     Stock Options

The Company has outstanding options issued to five of the six founding
directors of the Bank to purchase an aggregate of 100,000 shares of Common
Stock pursuant to the 1998 Director Stock Option Agreement (Founding Director
Plan). Pursuant to the Founding Director Plan, each of the five participants
was granted non-qualified options to purchase 20,000 shares of Common Stock at
a price of $11.00 per share. A total of 20,000 options which were
initially granted to one of the founding directors were cancelled upon his
resignation as a director. Of the six founding directors of the Bank, the five
participants (Tommy F. Chen, May P. Chu, John Lee, David Tai and Don J. Wang)
currently serve as directors of the Company and the Bank. The remaining
options expire if not exercised by July 24, 2003.

The Companys 1998 Stock Incentive Plan (Incentive Plan) authorizes the
issuance of up to 700,000 shares of Common Stock under both non-qualified and
incentive stock options and performance shares of Common Stock.
Non-qualified options and incentive stock options will be granted at no less
than the fair market value of the Common Stock and must be exercised within ten
years. Performance shares are certificates representing the right to acquire
shares of Common Stock upon the satisfaction of performance goals established
by the Company. Holders of performance shares have all of the voting, dividend
and other rights of shareholders of the Company, subject to the terms of the
award agreement relating to such shares. If the performance goals are
achieved, the performance shares will vest and may be exchanged for shares of
Common Stock. If the performance goals are not achieved, the performance
shares may be forfeited. In 2002, there were options granted to acquire 1,100
shares of common stock. As of December 31, 2002, there are options to acquire
200,200 shares of common stock outstanding under the Incentive Plan. No
performance shares have been awarded under the Incentive Plan.

The options granted during 1998 under the Founding Director Plan vested
immediately on the date of the grant and have contractual terms of five years.
The options granted during 2000 under the Incentive Plan vest 30% in each of
the two years following the date of the grant and 40% in the third year
following the date of the grant and have contractual terms of seven years. The
options granted in 2001 under the Incentive Plan vest at 20% per year. All
options are granted at a fixed exercise price. The exercise price for the
options granted under the Founding Director Plan is $11.00 per share and the
exercise price for the options granted under the Incentive Plan is the fair
market value of the Companys common stock on the grant date, which was $7.25
for the options granted in 2000, and a weighted average of $11.30 for the

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METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

options granted in 2001 and a weighted average of $13.05 for the options
granted in 2002. Any excess of the fair market value on the grant date over
the exercise price is recognized as compensation expense in the accompanying
financial statements. There was no compensation expense under the Founding
Director Plan for the years ended December 31, 2002, 2001 or 2000.

A summary of the status of the Companys stock options granted to
employees as of December 31, 2002, 2001 and 2000 and the changes during the
years ended on these dates is presented below:

|                                                   |  |             |         |          |  |             |       |          |  |            |         |          |  |          |       |          |  |   |         |   |  |   |       | 
|-------------------------------------------------- |  | ----------- | ------- | -------- |  | ----------- | ----- | -------- |  | ---------- | ------- | -------- |  | -------- | ----- | -------- |  | - | ------- | - |  | - | ----- | 
|                                                   |  | 2002        |         | 2001     |  | 2000       
|                                                   |  |             |         |          |  |            
|                                                   |  |             |         |          |  | Weighted    |       |          |  |            |         | Weighted |  | # Shares |       | Weighted
|                                                   |  | # Shares of |         | Average  |  | # Shares of |       | Average  |  | of         |         | Average 
|                                                   |  | Underlying  |         | Exercise |  | Underlying  |       | Exercise |  | Underlying |         | Exercise
|                                                   |  | Options     |         | Prices   |  | Options     |       | Prices   |  | Options    |         | Prices  
|                                                   |  |             |         |          |  |             |       |          |  |            |         |         
|Outstanding at beginning of the year               |  |             | 300,000 |          |  | $           | 10.78 |          |  |            | 150,700 |          |  | $        | 10.03 |          |  |   | 146,700 |   |  | $ | 10.14 | 
|Granted                                            |  |             | 1,100   |          |  | $           | 13.05 |          |  |            | 163,900 |          |  | $        | 11.30 |          |  |   | 10,000  |   |  | $ | 7.25  | 
|Exercised                                          |  |             | (900    | )        |  | $           | 8.31  |          |  |            | (2,760  | )        |  | $        | 8.31  |          |  |   |        |   |  | $ |      | 
|Canceled                                           |  |             |        |          |  | $           |      |          |  |            | (11,840 | )        |  | $        | 8.31  |          |  |   | (6,000  | ) |  | $ | 8.31  | 
|                                                   |  |             |         |          |  |             |       |          |  |            |         |          |  |          |       |          |  |   |         |   |  |   |       | 
|Outstanding at end of the year                     |  |             | 300,200 |          |  | $           | 10.81 |          |  |            | 300,000 |          |  | $        | 10.78 |          |  |   | 150,700 |   |  | $ | 10.03 | 
|                                                   |  |             |         |          |  |             |       |          |  |            |         |          |  |          |       |          |  |   |         |   |  |   |       | 
|Exercisable at end of the year                     |  |             | 165,200 |          |  | $           | 10.51 |          |  |            | 131,400 |          |  | $        | 10.33 |          |  |   | 112,210 |   |  | $ | 10.71 | 
|                                                   |  |             |         |          |  |             |       |          |  |            |         |          |  |          |       |          |  |   |         |   |  |   |       | 
|Weighted average fair value of all options
granted |  | $           | 2.53    |          |  |             |       |          |  | $          | 4.65    |          |  |          |       |          |  | $ | 2.78    |   |  |   |       | 

The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:

|                        |  |         |       |         |  |         |       |   |  |   |       |  
|----------------------- |  | ------- | ----- | ------- |  | ------- | ----- | - |  | - | ----- | -
|Assumptions             |  | 2002    |       | 2001    |  | 2000   
|                        |  |         |       |         |  |        
|Expected term           |  | 3 years |       | 5 years |  | 5 years
|Expected volatility     |  |         | 20.00 | %       |  |         | 30.00 | % |  |   | 20.00 | %
|Expected dividend       |  | $       | 0.24  |         |  | $       | 0.24  |   |  | $ | 0.24  |  
|Risk-free interest rate |  |         | 1.99  | %       |  |         | 5.30  | % |  |   | 6.30  | %

The following table summarizes information about stock options outstanding
at December 31, 2002:

|                         |  |                     |         |                     |  |                  |         |             |  |                |  |  |         |  |  |   |         |  |  | 
|------------------------ |  | ------------------- | ------- | ------------------- |  | ---------------- | ------- | ----------- |  | -------------- |  |  | ------- |  |  | - | ------- |  |  | 
|                         |  | Options Outstanding |         | Options Exercisable
|                         |  |                     |         |                    
|                         |  | Number              |         | Weighted            |  | Wgtd. Avg.       |         | Number      |  | Weighted      
|                         |  | Outstanding         |         | Average             |  | Remaining        |         | Outstanding |  | Average       
|Range of Exercise Prices |  | at 12/31/02         |         | Exercise Price      |  | Contractual Life |         | at 12/31/02 |  | Exercise Price
|                         |  |                     |         |                     |  |                  |         |             |  |               
|$7.25 - $13.05           |  |                     | 300,200 |                     |  | $                | 10.8092 |             |  | 4.10 years     |  |  | 165,200 |  |  | $ | 10.5089 | 

73



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Index to Exhibits

|        |  |                                                                                                                                                                                                                                 
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                 
|Number  |  | Description                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                 
|3.1     |  | Amended and Restated Articles of Incorporation of the Company
(incorporated herein by reference to Exhibit 3.1 to the Companys
Registration Statement on Form S-1 (Registration No. 333-62667)
(the Registration Statement)).
|        |  |                                                                                                                                                                                                                                 
|3.2     |  | Amended and Restated Bylaws of the Company (incorporated herein
by reference to Exhibit 3.2 to the Registration Statement).                                                                                                     
|        |  |                                                                                                                                                                                                                                 
|4       |  | Specimen form of certificate evidencing the Common Stock
(incorporated herein by reference to Exhibit 4 to the
Registration Statement).                                                                                         
|        |  |                                                                                                                                                                                                                                 
|10.1    |  | Agreement and Plan of Reorganization by and among MetroCorp
Bancshares, Inc., MC Bancshares of Delaware, Inc. and MetroBank,
N.A. (incorporated herein by reference to Exhibit 10.1 to the
Registration Statement).             
|        |  |                                                                                                                                                                                                                                 
|10.2   |  | Form of Director Stock Option Agreement (incorporated herein by
reference to Exhibit 10.2 to the Registration Statement).                                                                                                       
|        |  |                                                                                                                                                                                                                                 
|10.3   |  | MetroCorp Bancshares, Inc. Non-Employee Director Stock Bonus
Plan (incorporated herein by reference to Exhibit 10.3 to the
Registration Statement).                                                                             
|        |  |                                                                                                                                                                                                                                 
|10.4    |  | MetroCorp Bancshares, Inc. 1998 Employee Stock Purchase Plan
(incorporated herein by reference to Exhibit 10.4 to the
Registration Statement).                                                                                  
|        |  |                                                                                                                                                                                                                                 
|10.5   |  | MetroCorp Bancshares, Inc. 1998 Stock Incentive Plan
(incorporated herein by reference to Exhibit 10.5 to the
Registration Statement).                                                                                          
|        |  |                                                                                                                                                                                                                                 
|10.6   |  | First Amendment to the MetroCorp Bancshares, Inc. 1998 Employee
Stock Purchase Plan (incorporated herein by reference to Exhibit
10.6 to the Companys Annual Report on Form 10-K for the year
ended December 31, 1998).        
|        |  |                                                                                                                                                                                                                                 
|10.7   |  | First Amendment to the MetroCorp Bancshares, Inc. Non-Employee
Director Stock Bonus Plan (incorporated herein by reference to
Exhibit 4.5 to the Companys Registration Statement on Form S-8
(Registration Number 333-94327)). 
|        |  |                                                                                                                                                                                                                                 
|10.8   |  | Second Amendment to the MetroCorp Bancshares, Inc. Non-Employee
Director Stock Bonus Plan (incorporated herein by reference to
Exhibit 4.6 to the Companys Registration Statement on Form S-8
(Registration Number 333-94327)).
|        |  |                                                                                                                                                                                                                                 
|10.9   |  | Employment Agreement between MetroCorp Bancshares, Inc. and Allen
D. Brown (incorporated herein by reference to Exhibit 10.9 to the
Companys Annual Report on Form 10-K for the year ended December
31, 2001).                 
|        |  |                                                                                                                                                                                                                                 
|21      |  | Subsidiaries of MetroCorp Bancshares, Inc. (incorporated herein
by reference to Exhibit 21 to the Registration Statement).                                                                                                      
|        |  |                                                                                                                                                                                                                                 
|23.1*   |  | Consent of PricewaterhouseCoopers LLP.                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                 
|23.2*   |  | Consent of Deloitte & Touche L.L.P.                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                 
|99.1*   |  | Certification of President pursuant to 18 U.S.C Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                                                                                             
|        |  |                                                                                                                                                                                                                                 
|99.2*   |  | Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes
Oxley Act of 2002.                                                                              



---

|* |  | Filed herewith.                                         
|- |  | --------------------------------------------------------
| |  | Management contract or compensatory plan or arrangement.