Edgar Filing: METROCORP BANCSHARES INC

METROCORP BANCSHARES, INC.

May 10, 2002

/s/ Allen D. Brown

Allen D. Brown
President
(principal executive officer)

May 10, 2002

/s/ David D. Rinehart

David D. Rinehart
Executive Vice President and
Chief Financial Officer
(principal accounting officer and
principal financial officer)

e10-q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)


[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002

[ ]		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 (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)

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)

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 [ ].

As of May 9, 2002, the number of outstanding shares of Common Stock, par value $1.00 per share, was 7,021,592.

PART I

FINANCIAL INFORMATION

Item 1. Condensed Financial Statements.

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


					March 31,			December 31,
					2002			2001

				ASSETS
Cash and cash equivalents:
	Cash and due from banks				$	27,334		$	34,428
	Federal funds sold and other temporary investments					21,092			23,678

		Total cash and cash equivalents				48,426			58,106
Investment securities available-for-sale, at fair value						201,300			173,087
Other investments						3,160			3,143
Loans, net						481,382			484,242
Premises and equipment, net						5,401			5,623
Accrued interest receivable						3,196			3,602
Deferred income taxes						5,744			5,471
Due from customers on acceptances						5,159			4,605
Other real estate and repossessed assets, net						794			1,025
Other assets						2,979			3,270

		Total assets			$	757,541		$	742,174

			LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
	Noninterest-bearing				$	124,162		$	127,299
	Interest-bearing					514,368			515,452

		Total deposits				638,530			642,751
Other borrowings						42,823			25,195
Accrued interest payable						738			863
Income taxes payable						436			(608	)
Acceptances outstanding						5,159			4,605
Other liabilities						3,365			4,139

		Total liabilities				691,051			676,945
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; 7,187,423 shares are issued and 7,013,829 shares and 7,017,823 shares are outstanding at March 31, 2002 and December 31, 2001, respectively					7,187			7,187
	Additional paid-in-capital					26,173			26,144
	Retained earnings					34,504			32,834
	Accumulated other comprehensive income					12			376
	Treasury stock, at cost					(1,386	)		(1,312	)

		Total shareholders’ equity				66,490			65,229

		Total liabilities and shareholders’ equity			$	757,541		$	742,174

See accompanying notes to condensed consolidated financial statements

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


				For The Three Months
				Ended March 31,

				2002		2001

Interest income:
	Loans			$	9,261	$	12,019
	Investment securities:
		Taxable			1,998		2,108
		Tax-exempt			310		269
	Federal funds sold and other temporary investments				118		667

			Total interest income		11,687		15,063

Interest expense:
	Time deposits				2,960		5,660
	Demand and savings deposits				601		1,178
	Other borrowings				330		312

			Total interest expense		3,891		7,150

Net interest income					7,796		7,913
Provision for loan losses					600		427

Net interest income after provision for loan losses					7,196		7,486

Noninterest income:
	Service charges				1,657		1,522
	Other loan-related fees				586		200
	Letters of credit commissions and fees				126		165
	Gain on sale of investment securities, net				2		70
	Other noninterest income				105		145

			Total noninterest income		2,476		2,102

Noninterest expense:
	Employee compensation and benefits				3,570		3,319
	Occupancy				1,235		1,366
	Other real estate, net				263		7
	Data processing				24		16
	Professional fees				173		396
	Advertising				90		114
	Other noninterest expense				1,268		1,221

			Total noninterest expense		6,623		6,439

Income before provision for income taxes					3,049		3,149
Provision for income taxes					958		1,069

Net income				$	2,091	$	2,080

Earnings per common share:
	Basic			$	0.30	$	0.30
	Diluted			$	0.29	$	0.30
Weighted average shares outstanding:
	Basic				7,020		6,981
	Diluted				7,140		7,028

See accompanying notes to condensed consolidated financial statements

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


			For The Three Months
			Ended March 31,

			2002			2001

Net income			$	2,091		$	2,080
Other comprehensive income, net of tax:
	Unrealized (loss) gain on investment securities, net of tax:
		Other comprehensive income		(364	)		1,104

		Total comprehensive income	$	1,727		$	3,184

METROCORP BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For The Three Months Ended March 31, 2002 and 2001
(In thousands)
(Unaudited)


											Accumulated
	Common Stock					Additional					Other			Treasury
						Paid-in		Retained			Comprehensive			Stock
	Shares			At Par		Capital		Earnings			Income (Loss)			At Cost			Total

Balance at January 1, 2001		6,979		$	7,180	$	26,033	$	26,936		$	121		$	(1,569	)	$	58,701
Issuance of common stock		2			2		14		—			—			—			16
Other comprehensive income		—			—		—		—			1,104			—			1,104
Adjustment		—			—		1		—			—			—			1
Net income		—			—		—		2,080			—			—			2,080
Dividend payment		—			—		—		(418	)		—			—			(418	)

Balance at March 31, 2001		6,981		$	7,182	$	26,048	$	28,598		$	1,225		$	(1,569	)	$	61,484


Balance at January 1, 2002		7,017		$	7,187	$	26,144	$	32,834		$	376		$	(1,312	)	$	65,229
Repurchase of treasury stock		(13	)		—		—		—			—			(150	)		(150	)
Sale of treasury stock		10			—		29		—			—			76			105
Other comprehensive income		—			—		—		—			(364	)		—			(364	)
Net income		—			—		—		2,091			—			—			2,091
Dividend payment		—			—		—		(421	)		—			—			(421	)

Balance at March 31, 2002		7,014		$	7,187	$	26,173	$	34,504		$	12		$	(1,386	)	$	66,490

See accompanying notes to condensed consolidated financial statements

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


					For The Three Months
					Ended March 31,

					2002			2001

Cash flow from operating activities:
	Net income				$	2,091		$	2,080
	Adjustments to reconcile net income to net cash provided by (used in) operating activities:
			Depreciation			366			459
			Provision for loan losses			600			427
			Gain on securities sales			—			(70	)
			Loss on sale of other real estate			256			—
			Gain on sale of premises			(2	)		—
			Deferred loan fees			(586	)		(79	)
			Deferred income taxes			(86	)		(72	)
			Changes in:
				Accrued interest receivable		406			476
				Accrued interest payable		(125	)		(548	)
				Income taxes payable		1,044			841
				Other liabilities		(774	)		(14,805	)
				Other assets		291			454

				Net cash provided by (used in) operating activities		3,481			(10,837	)

Cash flows from investing activities:
	Purchases of securities available-for-sale					(48,207	)		(21,270	)
	Proceeds from sales, maturities and principal paydowns of securities available-for-sale					19,426			16,730
	Net change in loans					2,810			15,149
	Proceeds from sale of other real estate					11			5
	Proceeds from sale of premises and equipment					2			—
	Purchases of premises and equipment					(144	)		(142	)

	Net cash (used in) provided by investing activities					(26,102	)		10,472

Cash flows from financing activities:
	Net change in:
		Deposits				(4,221	)		(11,353	)
		Other borrowings				17,628			382
	Proceeds from issuance of common stock					29			17
	Treasury stock purchased, net					(74	)		—
	Dividends paid					(421	)		(419	)

				Net cash provided by (used in) financing activities		12,941			(11,373	)

Net decrease in cash and cash equivalents						(9,680	)		(11,738	)
Cash and cash equivalents at beginning of period						58,106			92,226

Cash and cash equivalents at end of period					$	48,426		$	80,488

See accompanying notes to condensed consolidated financial statements

METROCORP BANCSHARES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. 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”). 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 to present fairly the Company’s consolidated financial position at March 31, 2002, the Company’s consolidated results of operations for the three months ended March 31, 2002 and 2001, consolidated cash flows for the three months ended March 31, 2002 and 2001, and consolidated changes in shareholders’ equity for the three months ended March 31, 2002 and 2001. 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 followed. Such reclassifications do not affect earnings.

These financial statements and the notes thereto should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2001.

2. 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
		Ended March 31,

		2002		2001

		(In thousands, except
		per share amounts)

Net income available to common shareholders		$	2,091	$	2,080

Weighted-average common shares outstanding:
	Basic		7,020		6,981
	Diluted		7,140		7,028

Earnings per common share:
	Basic	$	0.30	$	0.30
	Diluted	$	0.29	$	0.30

3. SIGNIFICANT ACCOUNTING PRONOUNCEMENTS

In July 2001, FASB issued SFAS 142, Goodwill and Other Intangible Assets. The statement requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. This change provides investors with greater transparency regarding the economic value of goodwill and its impact on earnings. The amortization of goodwill ceases upon adoption of the statement, which for most companies, was to be January 1, 2002. The adoption of this statement on January 1, 2002 did not have a material impact on the Company’s financial position or results of operations as the Company does not have any goodwill.

In July 2001, FASB issued SFAS 143, Accounting for Asset Retirement Obligations. The statement requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The standard is effective for fiscal years beginning after September 15, 2002, with earlier application encouraged. Management believes adopting this statement will not have a material impact on the Company’s financial position or results of operations.

In August 2001, the FASB issued SFAS 144, Accounting for Impairment or Disposal of Long-lived Assets. SFAS 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. It supersedes, with exceptions, SFAS 121, Accounting for the Impairment of Long-lived assets and Long-lived Assets to be Disposed Of, and is effective for fiscal years beginning after December 15, 2001. Management believes adopting this statement will not have a material impact on the Company’s financial position or results of operations.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Special Cautionary Notice Regarding Forward-looking Statements

Statements and financial discussion and analysis contained in this Quarterly Report on Form 10-Q 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, that 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.

The Company undertakes no obligation to publicly update or otherwise revise any forward-looking statements, unless the securities laws require the Company to do so. All written or oral forward-looking statements attributable to the Company are expressly qualified in their entirety by these cautionary statements.

Overview

Net income for the three months ended March 31, 2002 was $2.1 million, up $11,000 or 0.5% from the quarter ended March 31, 2001. The Company’s basic and diluted EPS for the three months ended March 31, 2002 was $0.30 and $0.29, respectively, compared to $0.30 for the same quarter in 2001. The slight difference in diluted EPS at March 31, 2002, compared to March 31, 2001, was primarily the result of stock options granted during the third and fourth quarters of 2001.

At March 31, 2002, total assets were $757.5 million, up $15.3 million or 2.1% from $742.2 million at December 31, 2001. This was primarily the result of an increase in investment securities of $28.2 million that was funded by $11.2 million in cash and $17.0 million from other borrowings, reflecting management’s goal to increase earning assets. These funds were primarily invested in mortgage-backed securities and collateralized mortgage obligations (“CMOs”). The characteristics of the mortgage-backed securities and CMOs have durations of approximately three years and are both fixed rate and variable rate securities. Net loans at March 31, 2002 were $481.4 million, down slightly from $484.2 at December 31, 2001. The Company’s return on average assets (“ROAA”) for the three months ended March 31, 2002 and 2001 was 1.15% and 1.17%, respectively. The decrease in ROAA for the three months ended March 31, 2002 compared to the same period in 2001 was primarily the result of flat earnings over increased assets in 2002.

Shareholders’ equity at March 31, 2002 was $66.5 million compared with $65.2 million at December 31, 2001, an increase of $1.3 million or 1.9%. The return on average shareholders’ equity (“ROAE”) for the three months ended March 31, 2002 was 12.64% compared with 13.97% for the same period in 2001. The decrease in ROAE was primarily the result of flat earnings over increased equity in 2002.

Results of Operations

Net Interest Income. For the three months ended March 31, 2002, net interest income, before the provision for loan losses, was $7.8 million, down $100,000 or 1.5% from $7.9 million for the three months ended March 31, 2001. The net interest margin at March 31, 2002 was 4.55%, down 22 basis points from 4.77% at March 31, 2001. The decreases in net interest income and the net interest margin for the quarter ended March 31, 2002 compared to the same quarter in 2001 were primarily the result of lower interest rates at the end of 2001 and in 2002. The lower interest rates negatively impacted the yields on variable rate loans and contributed to increased refinancing activity on loans including those with interest rate floors. In terms of net interest income, the decrease in the yield on earning assets was partially offset by declining rates on interest-bearing liabilities.

Total interest income for the three months ended March 31, 2002 decreased $3.4 million or 22.9% to $11.7 million from $15.1 million for the same period in 2001. The decrease was primarily due to lower interest rates in 2002 compared to 2001. The loan portfolio is heavily weighted toward variable rate loans that reprice as the market “prime” rate moves, and therefore, is sensitive to interest rate movement. At March 31, 2002, the Company had $391.6 million in variable rate loans which represented 79.9% of the total loan portfolio.

Interest income from loans for the three months ended March 31, 2002 was $9.3 million, down $2.8 million or 22.9% from $12.0 million for the same period in 2001. For the three months ended March 31, 2002, the average yield on loans was 7.67%, compared to 10.26% for the same period in 2001. Approximately 55.8% of the loan portfolio is tied to loans with interest rate floors with a weighted average yield of 7.48% at March 31, 2002.

Interest income from investments for the three months ended March 31, 2002 was $2.4 million, down approximately $600,000 or 8.0% compared to $3.0 million for the same period in 2001, primarily due to lower interest rates in 2002. For the three months ended March 31, 2002, the

average yield on investments (securities, Federal Funds sold and other temporary investments) was 4.81% compared to 6.24% for the same period in 2001.

For the three months ended March 31, 2002, total earning assets averaged $694.5 million with an average yield of 6.82%, compared to $673.0 million with an average yield of 9.08% for the same period in 2001. This represented an increase in average earning assets of $21.5 million for the three months ended March 31, 2002 compared with the same period in 2001, and a decrease in average yield of 226 basis points.

Total interest expense for the three months ended March 31, 2002 decreased by $3.3 million or 45.6% to $3.9 million compared with $7.2 million for the same period in 2001. The decrease in total interest expense for the three months ended March 31, 2002 compared to the same period in 2001 was primarily the result of declining interest rates in 2001 that contributed to lower rates paid for interest-bearing deposits.

Interest paid on interest-bearing deposits for the three months ended March 31, 2002 was $3.6 million compared to $6.8 million for the same period in 2001, a decrease of $3.2 million or 47.1%. This was primarily due to decreases in the rates paid for interest-bearing deposits along with a decrease in deposit balances. Average interest-bearing deposits for the three months ended March 31, 2002 were $510.6 million compared with average interest-bearing deposits for the same period in 2001 of $519.5 million, a decrease of $8.9 million or 1.7%. The average rate paid on interest-bearing deposits for the three months ended March 31, 2002 was 2.83% compared with the average rate for the same three months in 2001 at 5.34%, a decrease of 251 basis points. During the first quarter 2002, approximately $110.2 million or 33.7% of the time deposit portfolio renewed. These time deposits had a weighted average interest rate of approximately 4.42%. Many of these time deposits renewed for six-month to one-year terms. The offering rates at the end of the first quarter 2002 for six-month and one-year time deposits (under $100,000) were approximately 2.10% and 2.30%, respectively. Management believes, based on its historical experience, that its large time deposits have core-type characteristics and anticipates that this source of funding will continue to sustain a substantial portion of the Company’s asset growth in the future.

Interest paid on borrowed funds for the three months ended March 31, 2002 was $330,000 compared to $312,000 for the same period in 2001, an increase of $18,000 or 5.8%. Average borrowed funds for the three months ended March 31, 2002 were $29.2 million compared with average borrowed funds for the same period in 2001 of $25.8 million, an increase of $3.4 million or 13.2%. The increase in borrowed funds reflected advances obtained from the Federal Home Loan Bank of Dallas (“FHLB”) to fund securities investments. The average rate paid on borrowed funds for the three months ended March 31, 2002 was 4.58%, compared to the same three months ended in 2001 at 4.90%, a decrease of 32 basis points.

The following table presents the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates for the periods indicated. No tax-equivalent adjustments were made and all average balances are daily average balances. Nonaccruing loans have been included in the table as loans having a zero yield.


					For The Three Months Ended March 31,

					2002								2001

					Average			Interest		Average			Average			Interest		Average
					Outstanding			Earned/		Yield/			Outstanding			Earned/		Yield/
					Balance			Paid		Rate(1)			Balance			Paid		Rate(1)

					(Dollars in thousands)
Assets
Interest-earning assets:
	Total loans				$	489,801		$	9,261		7.67	%	$	475,193		$	12,019		10.26	%
	Taxable securities					155,542			1,998		5.21			125,157			2,108		6.83
	Tax-exempt securities					24,931			310		5.04			20,873			269		5.23
	Federal funds sold and other temporary investments					24,203			118		1.98			51,817			667		5.22

				Total interest-earning assets		694,477			11,687		6.82	%		673,040			15,063		9.08	%
	Less allowance for loan losses					(8,957	)							(9,271	)

Total interest-earning assets, net of allowance for loan losses						685,520								663,769
Noninterest-earning assets						53,708								55,416

		Total assets			$	739,228							$	719,185

Liabilities and shareholders’ equity
Interest-bearing liabilities:
	Interest-bearing demand deposits				$	66,818			227		1.38	%	$	49,429			368		3.02	%
	Saving and money market accounts					111,433			374		1.36			96,050			810		3.42
	Time deposits					332,378			2,960		3.61			373,979			5,660		6.14
Federal funds purchased and other repurchase agreements						3,631			18		2.01			—			—		—
	Other borrowings					25,559			312		4.95			25,823			312		4.90

			Total interest-bearing liabilities			539,819			3,891		2.92	%		545,281			7,150		5.32	%
Noninterest-bearing liabilities:
	Noninterest-bearing demand deposits					123,832								102,706
	Other liabilities					8,469								10,812

			Total liabilities			672,120								658,799
Shareholders’ equity						67,108								60,386

		Total liabilities and shareholders’ equity			$	739,228							$	719,185

Net interest income								$	7,796							$	7,913

Net interest spread											3.90	%							3.76	%
Net interest margin											4.55	%							4.77	%

(1)

Annualized.

The following table presents the dollar amount of changes in interest income and interest expense for the major components of interest-earning assets and interest-bearing liabilities and distinguishes between changes in outstanding balances and changes in interest rates for the three months ended March 31, 2002 compared with the three months ended March 31, 2001. For purposes of this table, changes attributable to both rate and volume have been allocated to rate.


				Three Months Ended March 31,
				2002 vs. 2001

				Increase (Decrease)
				Due To

				Volume			Rate			Total

				(Dollars in thousands)
INTEREST- EARNING ASSETS:
		Loans		$	369		$	(3,127	)	$	(2,758	)
		Securities			734			(803	)		(69	)
		Federal funds sold and other temporary investments			(356	)		(193	)		(549	)

			Total increase (decrease) in interest income		747			(4,123	)		(3,376	)

INTEREST-BEARING LIABILITIES:
		Interest-bearing demand deposits			129			(270	)		(141	)
		Saving and money market accounts			129			(565	)		(436	)
		Time deposits			(629	)		(2,071	)		(2,700	)
		Federal funds purchased and other repurchase agreements			—			18			18
		Other borrowings			(3	)		3			—

			Total (decrease) in interest expense		(374	)		(2,885	)		(3,259	)

	Increase (decrease) in net interest income			$	1,121		$	(1,238	)	$	(117	)

Provision for Loan Losses. Provisions for loan losses are charged to income to bring the Company’s allowance for loan losses to a level which management considers adequate to absorb probable losses inherent in the loan portfolio. The provision for loan losses for the three months ended March 31, 2002 was $600,000, up $173,000 compared with $427,000 for the three months ended March 31, 2001, primarily due to increased nonaccrual loans. The allowance for loan losses as a percent of total loans (net of unearned interest, deferred fees, and discounts) at March 31, 2002 was 1.75% compared with 1.81% at March 31, 2001.

Noninterest Income. Total noninterest income for the three months ended March 31, 2002 was $2.5 million, up $400,000 or 17.8% compared to $2.1 million for the same three months in 2001. For the three months ended March 31, 2002, service charges on deposit accounts were $1.7 million and represented 66.9% of total noninterest income, compared to $1.5 million for the same period in 2001 when service charges on deposit accounts represented 72.4% of total noninterest income. For the three months ended March 31, 2002, other loan-related fees were $590,000, up $390,000 compared to $200,000 for the same period in 2001. The increases in noninterest income were primarily due to increased transaction deposit accounts as a result of continued relationship banking initiatives, more vigorous efforts in the collection of late fees and NSF fees, and a more structured fee collection process as a result of improved systems capabilities. In addition, management had discouraged the waiving of late fees, NSF fees, and other service-related fees. For the three months ended March 31, 2002 all other noninterest income was $230,000, down $150,000 from $380,000 for the three months ended March 31, 2001, primarily due to lower letters of credit volume and a decline in sales of noninsured products.

The following table presents, for the periods indicated, the major categories of noninterest income:


		For The Three Months
		Ended March 31,

		2002		2001

		(Dollars in thousands)
Service charges		$	1,657	$	1,522
Other loan-related fees			586		200
Letters of credit commissions and fees			126		165
Gain on sale of investment securities, net			2		70
Other noninterest income			105		145

	Total noninterest income	$	2,476	$	2,102

Noninterest Expense. Total noninterest expense for the three months ended March 31, 2002 was $6.6 million, up approximately $180,000 or 2.9% from $6.4 million for the same three months in 2001. The increase was primarily the result of a $250,000 increase in employee compensation and benefits and a $200,000 charge to other real estate, partially offset by decreased occupancy, professional fees, and other operating expenses of $270,000. The increase in employee compensation and benefits was primarily due to the addition of officer level employees and loan workout staff along with various incentive bonus payments. The decreases in non-staff expense were primarily due to lower occupancy expense as a result of the Galleria branch closing in November 2000 that had expenses trailing into 2001 and lower professional fees related to less legal and less audit/consulting fees.

The Company’s efficiency ratio for the three months ended March 31, 2002 was 64.48%, slightly higher than the 64.29% for the same three months ended in 2001. This was primarily the result of lower net interest income and slightly higher noninterest expense that was partially offset by higher noninterest income.

The following table presents, for the periods indicated, the major categories of noninterest expense:


			For The Three Months
			Ended March 31,

			2002		2001

			(Dollars in thousands)
Employee compensation and benefits			$	3,570	$	3,319
Non-staff expense:
	Occupancy			1,235		1,366
	Other real estate, net			263		7
	Data processing			24		16
	Professional fees			173		396
	Advertising			90		114
	Director compensation			61		98
	Printing and supplies			144		107
	Telecommunications			154		171
	Other noninterest expense			909		845

		Total non-staff expense		3,053		3,120

		Total noninterest expense	$	6,623	$	6,439

Employee compensation and benefits expense of $3.6 million for the three months ended March 31, 2002 represented 53.9% of total noninterest expense. The full-time equivalent (“FTE”) employees at March 31, 2002 were 284.1 compared with FTE of 306.6 at March 31, 2001, a decrease of 22.5 FTE. The decrease in FTE was primarily due to less contract and part-time employees. The full-time equivalent calculation includes all full-time, part-time, temporary, and contract staff and is based on total hours worked.

Financial Condition

Loan Portfolio. Total loans decreased by $3.2 million or 0.6%, from $493.1 million at December 31, 2001 to $490.0 million at March 31, 2002. The decrease was primarily due to loan prepayments that exceeded new loan funding during the quarter. Historically, the Company has experienced slower loan demand in the first quarter. At March 31, 2002 and December 31, 2001, the ratio of total loans to total deposits was 76.7%. At the same dates, total loans represented 64.7% and 66.4% of total assets, respectively.

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


		As of March 31, 2002						As of December 31, 2001

		Amount			Percent			Amount			Percent

					(Dollars in thousands)
Commercial and industrial		$	313,203			63.12	%	$	312,899			62.67	%
Real estate mortgage:
	Residential		7,301			1.47			7,833			1.57
	Commercial		128,944			25.99			131,022			26.24
Real estate construction:
	Residential		7,546			1.52			5,962			1.19
	Commercial		26,870			5.42			30,215			6.05
Consumer and other			12,305			2.48			11,364			2.28

Gross loans			496,169			100.00	%		499,295			100.00	%

	Less: unearned discounts, interest and deferred fees		(6,195	)					(6,150	)

Total loans			489,974						493,145
	Less: allowance for loan losses		(8,592	)					(8,903	)

Loans, net		$	481,382					$	484,242

Nonperforming Assets. Net nonperforming assets at March 31, 2002 were $10.4 million, an increase of $6.7 million from net nonperforming assets of $3.7 million at December 31, 2001. The $6.7 million increase in net nonperforming assets was primarily due to an increase of $9.0 million in nonaccrual loans partially offset by a $525,000 decrease in accruing loans 90 days or more past due, a $231,000 decrease in other real estate and other repossessed assets, and an increase in the government guaranteed portions on loans of $1.5 million. The ratios for net nonperforming assets to total loans and other real estate were 2.13% and 0.76% at March 31, 2002 and December 31, 2001, respectively. The ratios for net nonperforming assets to total assets were 1.38% and 0.50% for the same periods, respectively. These figures are net of the loan portions guaranteed from the United States Department of Commerce’s Small Business Administration (the “SBA”), the Export Import Bank of the United States (the “Ex-Im Bank”), an independent agency of the United States Government, and the Overseas Chinese Community Guaranty Fund (“OCCGF”), an agency sponsored by the government of Taiwan, which were $3.3 million at March 31, 2002 compared to $1.8 million at December 31, 2001.

During the quarter ended March 31, 2002, the Company continued its efforts that commenced in the fourth quarter 2001 to systematically review the quality of its loan portfolio. As a result, the Company placed approximately $9.8 million in loans (with a weighted average interest rate of 8.18%) on nonaccrual status. This proactive identification process is an integral part of an overall effort to improve credit quality, and to facilitate this process, loan review and problem resolution staff were added during the first quarter 2002. The largest credit placed on nonaccrual status during the quarter ended March 31, 2002 was a $3.6 million participation in a $5.3 million hotel loan. While further deterioration in the loan portfolio is possible, management will continue its risk assessment program as it also turns its attention to diversifying its credit risk through new business development.

Prior to 2001, the Company was actively involved in the origination and sale of certain federally guaranteed loans into the secondary market with servicing retained. Under the terms of these programs, the Company is required to repurchase any loans which may become nonperforming. As a result of this requirement, the Company’s nonperforming loans may increase during the period of time in which any loan repurchased is either restored to an accrual status or the Company claims on the guarantee.

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


		As of			As of
		March 31, 2002			December 31, 2001

		(Dollars in thousands)
Nonaccrual loans		$	12,720		$	3,758
Accruing loans 90 days or more past due			258			783
Other real estate			794			969
Other assets repossessed			—			56

	Total nonperforming assets		13,772			5,566
Less:
	Nonperforming loans guaranteed by the SBA, Ex-Im Bank and OCCGF		(3,333	)		(1,833	)

	Total net nonperforming assets	$	10,439		$	3,733

Total nonperforming assets to total assets			1.82	%		0.75	%
Total nonperforming assets to total loans and other real estate			2.81	%		1.13	%
Net nonperforming assets to total assets (1)			1.38	%		0.50	%
Net nonperforming assets to total loans and other real estate (1)			2.13	%		0.76	%

(1)

Net nonperforming assets are net of the loan portions guaranteed by the SBA, Ex-Im Bank and OCCGF.

Allowance for Loan Losses. For the three months ended March 31, 2002, net loan charge-offs were $911,000 or 0.19% of average total loans outstanding. The Company seeks recovery of charge-offs through all available channels. The Company continues working to further strengthen its credit administration systems, policies, and loan review procedures. At both March 31, 2002 and December 31, 2001, the allowance for loan losses aggregated $8.6 million and $8.9 million, respectively, or 1.75% and 1.81% of average total loans, respectively.

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


			As of and for the			As of and for the
			three months ended			year ended
			March 31, 2002			December 31, 2001

			(Dollars in thousands)
Average year-to-date total loans outstanding			$	489,801		$	474,986

Total loans outstanding at end of period			$	489,974		$	493,145

Allowance for loan losses at beginning of period			$	8,903		$	9,271
Provision for loan losses				600			3,799
Charge-offs:
	Commercial and industrial			(934	)		(4,075	)
	Real estate — mortgage			(19	)		—
	Real estate — construction			—			—
	Consumer and other			(49	)		(201	)

		Total charge-offs		(1,002	)		(4,276	)

Recoveries:
	Commercial and industrial			64			54
	Real estate — mortgage			—			11
	Real estate — construction			—			—
	Consumer and other			27			44

		Total recoveries		91			109

Net loan charge-offs				(911	)		(4,167	)

Allowance for loan losses at end of period			$	8,592		$	8,903

Ratio of allowance to end of period total loans				1.75	%		1.81	%
Ratio of net loan charge-offs to average total loans				0.19	%		0.88	%
Ratio of allowance to end of period total nonperforming loans				66.20	%		196.06	%
Ratio of allowance to end of period net nonperforming loans				89.08	%		328.77	%

Securities. At March 31, 2002, the securities portfolio totaled $201.3 million, reflecting an increase of $28.2 million or 16.3% from $173.1 million at December 31, 2001. The securities portfolio is primarily comprised of mortgage-backed securities, collateralized mortgage obligations, tax-free municipal bonds, and U.S. government agency securities. The securities portfolio has been funded primarily by the liquidity created from deposit growth and loan prepayments in excess of loan funding requirements. However, during the three months ended March 31, 2002, approximately $17.6 million in short-term borrowings, obtained from the FHLB, was utilized to purchase approximately the same amount of mortgage-backed securities in order to increase earning asset volumes.

Deposits. At March 31, 2002, total deposits were $638.5 million, down $4.3 million or 0.07% from $642.8 million at December 31, 2001. Noninterest-bearing demand deposits at March 31, 2002 decreased by $3.1 million or 2.5% to $124.2 million from $127.3 million at December 31, 2001. The Company’s ratios of noninterest-bearing demand deposits to total deposits at March 31, 2002 and December 31, 2001 were 19.4% and 19.8%, respectively. Interest-bearing deposits at March 31, 2002 decreased slightly by $1.1 million or 0.2% to $514.4 million from $515.5 million at December 31, 2001.

Other Borrowings. Other borrowings at March 31, 2002 were $42.8 million, compared to $25.2 million at March 31, 2001, an increase of $17.6 million that was primarily the result of short-term advances obtained from the FHLB to fund securities investments. The Company has two ten-year loans totaling $25.0 million from the FHLB to further leverage its balance sheet and diversify its funding sources. The ten-year loans bear interest at an average rate of 4.99% per annum until the fifth year anniversary of the loans, September 2003, at which time the loans may be repaid or the interest rate may be renegotiated. The Company has an additional unused, unsecured line of credit with the FHLB totaling $118.5 million at March 31, 2002. Other short-term borrowings principally consist of U.S. Treasury tax note option accounts. Additionally, the Company had several unused, unsecured lines of credit with correspondent banks totaling $15.0 million at March 31, 2002 and at December 31, 2001, respectively.

Capital Resources. Shareholders’ equity at March 31, 2002 increased by $1.3 million or 1.9% to $66.5 million from $65.2 million at December 31, 2001. The increase for the three months ended March 31, 2002 was primarily due to net income of $2.1 million that was partially offset by a dividend payment of $420,000, a decrease in other comprehensive income and the unrealized gains on investment securities of $360,000, and a net change in treasury stock of $45,000 that was the result of dividend reinvestments and treasury stock repurchases. During the first quarter 2002, the Company announced a plan to repurchase up to 350,000 shares of its common stock on the open market or in privately negotiated block transactions. As of March 31, 2002, the Company had repurchased 14,476 shares.

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


	Minimum			To Be Well
	Required For			Capitalized Under
	Capital Adequacy			Prompt Corrective			Actual Ratio At
	Purposes			Action Provisions			March 31, 2002

The Company
Leverage ratio		4.00	%(1)		N/A			8.99	%
Tier 1 risk-based capital ratio		4.00			N/A			12.64
Risk-based capital ratio		8.00			N/A			13.89

The Bank
Leverage ratio		4.00	%(2)		5.00	%		8.59	%
Tier 1 risk-based capital ratio		4.00			6.00			12.08
Risk-based capital ratio		8.00			10.00			13.33

(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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There have been no material changes in the market risk information previously disclosed in the Company’s Form 10-K for the year ended December 31, 2001. See Form 10-K, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Interest Rate Sensitivity and Liquidity.”

PART II

OTHER INFORMATION


Item 1.		*Legal Proceedings*

		Not applicable

Item 2.		*Changes in Securities and Use of Proceeds*

		Not applicable

Item 3.		*Defaults Upon Senior Securities*

		Not applicable

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

		Not applicable

Item 5.		*Other Information*

		Not applicable

Item 6A.		*Exhibits*


Exhibit		Identification
Number		of Exhibit

11	—	Computation of Earnings Per Common Share, included as Note (2) to the Condensed Consolidated Financial Statements on Page 5 of this Form 10-Q.

Item 6B. Reports On Form 8-K

	(1)		The Company filed a current report on Form 8-K on January 11, 2002 announcing the Company’s projected earnings for the 2001 fiscal year.

	(2)		The Company filed a current report on Form 8-K on January 25, 2002 announcing the Company’s earnings for the 2001 fiscal year.

	(3)		The Company filed a current report on Form 8-K on January 31, 2002 announcing the Company’s approval of a stock repurchase plan.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.