METROCORP BANCSHARES INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-25141

METROCORP BANCSHARES, INC.

(Exact name of registrant as specified in its charter)


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

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

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ.

As of August 16, 2004, the number of outstanding shares of Common Stock, par value $1.00 per share, was 7,181,437.

TABLE OF CONTENTS


PART I
	Item 1. Condensed Consolidated Financial Statements.
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risk.
	Item 4. Controls and Procedures
PART II OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 3. Defaults Upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6 (a) Exhibits
SIGNATURES
EXHIBIT INDEX
Certification of CEO pursuant to Rule 13a-14a
Certification of CFO pursuant to Rule 13a-14a
Certification of CEO pursuant to Section 906
Certification of CFO pursuant to Section 906

PART I

FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements.

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


	June 30,			December 31,
	2004			2003
				(Restated-Note 2)
ASSETS
Cash and due from banks	$	24,881		$	26,347
Federal funds sold and other investments		4,790			10,580

Total cash and cash equivalents		29,671			36,927
Securities available-for-sale, at fair value		280,010			257,064
Other investments		5,576			5,200
Loans, held-for-investment (net of allowance for loan losses of $11,033 and $10,448, respectively)		540,238			540,658
Loans, held-for-sale		2,892			6,030
Accrued interest receivable		3,317			3,452
Premises and equipment, net		6,458			5,674
Customers’ liability on acceptances		1,407			3,352
Foreclosed assets, net		1,065			2,585
Other assets		8,486			6,074

Total assets	$	879,120		$	867,016

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	175,007		$	169,097
Interest-bearing		541,978			555,844

Total deposits		716,985			724,941
Other borrowings		74,851			54,173
Accrued interest payable		536			567
Acceptances outstanding		1,407			3,352
Other liabilities		6,343			5,610

Total liabilities		800,122			788,643

Commitments and contingencies		—			—
Shareholders’ equity:
Preferred stock $1.00 par value, 2,000,000 shares authorized; none of which are issued and outstanding		—			—
Common stock, $1.00 par value, 20,000,000 shares authorized; 7,312,627 and 7,306,627 shares are issued and 7,175,563 and 7,156,689 shares are outstanding at June 30, 2004 and December 31, 2003, respectively		7,313			7,307
Additional paid-in capital		27,750			27,620
Retained earnings		47,915			44,105
Accumulated other comprehensive income (loss)		(2,752	)		671
Treasury stock, at cost		(1,228	)		(1,330	)

Total shareholders’ equity		78,998			78,373

Total liabilities and shareholders’ equity	$	879,120		$	867,016

See accompanying notes to condensed consolidated financial statements

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


	For the Three Months					For the Six Months
	Ended June 30,					Ended June 30,
	2004		2003			2004		2003
			(Restated-Note 2)					(Restated-Note 2)
Interest income:
Loans	$	8,281	$	8,784		$	16,459	$	17,481
Securities:
Taxable		2,124		1,680			4,311		3,592
Tax-exempt		232		252			466		514
Federal funds sold and other temporary investments		52		98			90		153

Total interest income		10,689		10,814			21,326		21,740

Interest expense:
Time deposits		1,850		2,342			3,751		4,703
Demand and savings deposits		294		373			590		756
Other borrowings		440		474			876		979

Total interest expense		2,584		3,189			5,217		6,438

Net interest income		8,105		7,625			16,109		15,302
Provision for loan losses		300		4,015			850		4,815

Net interest income after provision for loan losses		7,805		3,610			15,259		10,487

Noninterest income:
Service fees		1,627		1,610			3,286		3,152
Other loan-related fees		169		261			377		567
Letters of credit commissions and fees		124		131			239		265
Gain on sale of securities, net		—		—			—		163
Gain on sale of loans, net		514		141			569		263
Foreclosed assets, net		251		151			914		152
Other noninterest income		11		27			22		54

Total noninterest income		2,696		2,321			5,407		4,616

Noninterest expense:
Salaries and employee benefits		3,699		3,485			7,513		7,055
Occupancy and equipment		1,430		1,317			2,830		2,599
Other noninterest expense		1,730		3,081			3,527		4,480

Total noninterest expense		6,859		7,883			13,870		14,134

Income (loss) before provision for income taxes		3,642		(1,952	)		6,796		969
Provision (benefit) for income taxes		1,135		(693	)		2,126		250

Net income (loss)	$	2,507	$	(1,259	)	$	4,670	$	719

Earnings (loss) per common share:
Basic	$	0.35	$	(0.18	)	$	0.65	$	0.10
Diluted	$	0.35	$	(0.18	)	$	0.64	$	0.10
Weighted average shares outstanding:
Basic		7,172		7,037			7,167		7,035
Diluted		7,262		7,198			7,258		7,197
Dividends per common share	$	0.06	$	0.06		$	0.06	$	0.06

See accompanying notes to condensed consolidated financial statements

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


	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2004			2003			2004			2003
				(Restated-Note 2)						(Restated-Note 2)
Net income (loss)	$	2,507		$	(1,259	)	$	4,670		$	719
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on investment securities, net:
Unrealized holding gain (loss) arising during the period		(4,788	)		(208	)		(3,423	)		(466	)
Less: reclassification adjustment for gain included in net income		—			—			—			106

Other comprehensive income (loss)		(4,788	)		(208	)		(3,423	)		(572	)

Total comprehensive income (loss)	$	(2,281	)	$	(1,467	)	$	1,247		$	147

METROCORP BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Six Months Ended June 30, 2004
(In thousands)
(Unaudited)


	Common Stock				Additional Paid-in		Retained			Accumulated Other Comprehensive			Treasury Stock
	Shares		At par		Capital		Earnings			Income (Loss)			At Cost			Total
Balance at January 1, 2004 (restated-Note 2)		7,157	$	7,307	$	27,620	$	44,105		$	671		$	(1,330	)	$	78,373
Issuance of common stock		6		6		44		—			—			—			50
Re-issuance of treasury stock		13		—		86		—			—			102			188
Net income		—		—		—		4,670			—			—			4,670
Other comprehensive loss		—		—		—		—			(3,423	)		—			(3,423	)
Dividends		—		—		—		(860	)		—			—			(860	)

Balance at June 30, 2004		7,176	$	7,313	$	27,750	$	47,915		$	(2,752	)	$	(1,228	)	$	78,998

See accompanying notes to condensed consolidated financial statements

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


	For the Six Months Ended June 30,
	2004			2003
				(Restated-Note 2)
Cash flows from operating activities:
Net income	$	4,670		$	719
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		664			706
Provision for loan losses		850			4,815
Lower of cost or market adjustment-loans held-for-sale		—			1,325
Gain on sale of securities, net		—			(163	)
Gain on sale of foreclosed assets		(1,130	)		(194	)
Gain on sale of loans, net		(569	)		(263	)
Amortization of premiums and discounts on securities		1,490			1,316
Amortization of net deferred loan fees		(326	)		(214	)
Changes in:
Loans held-for-sale		3,486			—
Accrued interest receivable		135			763
Accrued interest payable		(31	)		(104	)
Other liabilities		733			(885	)
Other assets		(650	)		(1,344	)

Net cash provided by operating activities		9,322			6,477

Cash flows from investing activities:
Purchases of securities available-for-sale		(83,851	)		(88,297	)
Proceeds from sales, maturities and principal paydowns of securities available-for-sale		53,854			91,974
Net change in loans		(346	)		(35,682	)
Proceeds from sale of foreclosed assets		3,113			1,891
Purchases of premises and equipment		(1,448	)		(506	)

Net cash used in investing activities		(28,678	)		(30,620	)

Cash flows from financing activities:
Net change in:
Deposits		(7,956	)		25,131
Other borrowings		20,678			674
Proceeds from issuance of common stock		50			337
Treasury stock sold		188			213
Treasury stock purchased		—			(212	)
Dividends paid		(860	)		(844	)

Net cash provided by financing activities		12,100			25,299

Net increase (decrease) in cash and cash equivalents		(7,256	)		1,156
Cash and cash equivalents at beginning of period		36,927			38,186

Cash and cash equivalents at end of period	$	29,671		$	39,342

See accompanying notes to condensed consolidated financial statements

METROCORP BANCSHARES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The unaudited condensed consolidated financial statements include the accounts of MetroCorp Bancshares, Inc. (the “Company”) and its wholly-owned subsidiary MetroBank, National Association (the “Bank”). The Bank was formed in 1987 and is engaged in commercial banking activities through its fourteen branches in Houston and Dallas, Texas. The Company considers itself one reporting segment. All material intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for Form 10-Q. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the Company’s financial position at June 30, 2004, results of operations for the three and six months ended June 30, 2004 and 2003, and cash flows for the six months ended June 30, 2004 and 2003. Interim period results are not necessarily indicative of results for a full-year period.

Certain amounts applicable to the prior periods have been reclassified to conform to the classifications currently used. Such reclassifications had no effect on net income, total assets or shareholders’ equity.

These financial statements and the notes thereto should be read in conjunction with Amendment No. 1 to the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2003. See Note 2 for information regarding the restatement of prior period financial statements.

Stock Compensation

The Company grants stock options under several stock-based incentive compensation plans. The Company utilizes the intrinsic value method for its stock compensation plans. No compensation cost is recognized for fixed stock options in which the exercise price is equal to or greater than the estimated market price on the date of grant. Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, which, if fully adopted by the Company, would change the method the Company applies in recognizing the cost of the plans to the fair value method. Adoption of the cost recognition provisions of SFAS No. 123 is optional and the Company has decided to continue to follow the intrinsic value method. However, pro forma disclosures as if the Company adopted the fair value method are required. If the fair value based method of accounting under SFAS No. 123 had been applied, the Company’s net income available to common shareholders and earnings per common share would have been reduced to the pro forma amounts indicated below (assuming that the fair value of options granted during the year are amortized over the vesting period) (in thousands except per share amounts):


	For the Three Months					For the Six Months
	Ended June 30,					Ended June 30,
	2004		2003			2004		2003
			(Restated-Note 2)					(Restated-Note 2)
Net income (loss):
As reported	$	2,507	$	(1,259	)	$	4,670	$	719
Pro forma	$	2,464	$	(1,298	)	$	4,584	$	641
Stock-based compensation cost, net of income taxes:
As reported	$	—	$	—		$	—	$	—
Pro forma	$	43	$	39		$	86	$	78
Basic earnings (loss) per common share:
As reported	$	0.35	$	(0.18	)	$	0.65	$	0.10
Pro forma	$	0.34	$	(0.18	)	$	0.64	$	0.09
Diluted earnings (loss) per common share:
As reported	$	0.35	$	(0.18	)	$	0.64	$	0.10
Pro forma	$	0.34	$	(0.18	)	$	0.63	$	0.09

METROCORP BANCSHARES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Stock Compensation (Continued)

The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. SFAS No. 123 does not apply to awards prior to 1995, and the Company anticipates making awards in the future under its stock-based compensation plans. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

2. RESTATEMENT

The Company restated its condensed consolidated financial statements as of June 30, 2003 and for the three and six months ended June 30, 2003 to correct the amortization of deferred loan fees, net of costs, to interest income. The restatement decreased net loss by $95,000 for the three months ended June 30, 2003, increased net income by $164,000 for six months ended June 30, 2003, increased retained earnings by $1.9 million and $2.2 million as of June 30, 2003 and December 31, 2003, respectively.

The restatement resulted from a review of the Company’s application of FASB Statement No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.” Loan fees net of the associated costs should be recognized over the life of the related loan as an adjustment to yield. The Company recently discovered that $4.0 million of net deferred loan fees were not being amortized to interest income. These net deferred fees were not entered into the Company’s loan system, and therefore, amortization was not calculated each period. Accordingly, the restatement reflects the amortization of these net deferred fees. Additionally, in connection with the restatement of net deferred fees, the Company adjusted accruals of other noninterest expense previously deemed immaterial which resulted in an increase to retained earnings at December 31, 2003 of $63,000.

METROCORP BANCSHARES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table reflects the previously reported amounts for the three and six months ended June 30, 2003 and as of December 31, 2003 and the restated amounts.


	For the Three Months						As of and for the Six Months						As of December 31,
	Ended June 30, 2003						Ended June 30, 2003						2003
	Previously						Previously						Previously
	Reported			Restated			Reported			Restated			Reported		Restated
	(In thousand, except per share amounts)
Balance Sheet:
Loans, net of allowance for loan losses													$	537,305	$	540,658
Deferred tax asset														5,774		4,664
Total assets														864,773		867,016
Other liabilities														5,530		5,610
Retained earnings							$	39,647		$	41,572			41,942		44,105
Total shareholders’ equity								73,938			75,863			76,210		78,373
Total liabilities and shareholders’ equity														864,773		867,016
Statement of Income (Loss):
Interest income — loans	$	8,936		$	8,784			17,798			17,481
Total interest income		10,966			10,814			22,057			21,740
Net interest income		7,777			7,625			15,619			15,302
Total noninterest expense		8,028			7,883			14,548			14,134
Income (loss) before provision for income taxes		(2,096	)		(1,952	)		720			969
Provision for income taxes		(742	)		(693	)		165			250
Net income (loss)		(1,354	)		(1,259	)		555			719
Earnings (loss) per common share:
Basic		(0.19	)		(0.18	)		0.08			0.10
Diluted		(0.19	)		(0.18	)		0.08			0.10
Cash flow statement:
Cash flows from operating activities							$	6,725		$	9,322
Cash flows from investing activities								(30,868	)		(28,678	)

3. EARNINGS PER COMMON SHARE

Basic earnings per share (“EPS”) is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income available to common shareholders by the weighted-average number of common shares and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares are computed using the treasury stock method.

For the Three Months

For the Six Months

Ended June 30,

2004

2003

2004

2003

(Restated-Note 2)

(In thousands, except per share amounts)

Net income (loss) available to common shareholders

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