##### Table of Contents



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 SEPTEMBER 30, 2006
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission file number 000-25141
 METROCORP BANCSHARES, INC.
  Texas
    
    76-0579161(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 9600 Bellaire Boulevard, Suite 252
Houston, Texas 77036
 (713) 776-3876
 þ o
  o þ o
 o þ




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TABLE OF CONTENTS  PART IItem 1. Condensed Consolidated Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures about Market RiskItem 4. Controls and ProceduresPART IIItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. ExhibitsSIGNATURESEXHIBIT INDEXCertification of CEO pursuant to Rule 13a-14aCertification of CFO Pursuant to Rule 13a-14aCertification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906    Table of Contents  
 PART I
 FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements.
 METROCORP BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
 September 30,
    
    
    December 31,2006
    
    
    2005ASSETSCash and due from banks
    
    $
    24,870
    
    
    $
    28,213Federal funds sold and other short-term investments
    
    
    122,507
    
    
    
    53,599Total cash and cash equivalents
    
    
    147,377
    
    
    
    81,812Securities available-for-sale, at fair
value
    
    
    194,037
    
    
    
    236,100Loans, net of allowance for loan losses of $11,852 and
$13,169, respectively
    
    
    828,420
    
    
    
    758,304Accrued interest receivable
    
    
    5,000
    
    
    
    4,835Premises and equipment, net
    
    
    7,283
    
    
    
    6,196Goodwill
    
    
    21,827
    
    
    
    21,607Core deposit intangibles
    
    
    1,238
    
    
    
    1,428Customers liability on acceptances
    
    
    5,894
    
    
    
    3,148Foreclosed assets, net
    
    
    6,038
    
    
    
    3,866Other assets
    
    
    8,987
    
    
    
    10,908Total assets
    
    $
    1,226,101
    
    
    $
    1,128,204LIABILITIES AND SHAREHOLDERS EQUITYDeposits:Noninterest-bearing
    
    $
    190,228
    
    
    $
    195,422Interest-bearing
    
    
    854,003
    
    
    
    766,328Total deposits
    
    
    1,044,231
    
    
    
    961,750Junior subordinated debentures
    
    
    36,083
    
    
    
    36,083Other borrowings
    
    
    26,032
    
    
    
    26,054Accrued interest payable
    
    
    1,405
    
    
    
    1,126Acceptances outstanding
    
    
    5,894
    
    
    
    3,148Other liabilities
    
    
    10,370
    
    
    
    7,815Total liabilities
    
    
    1,124,015
    
    
    
    1,035,976Commitments and contingencies
    
    
    
    
    
    
    Shareholders equity:Common stock, $1.00 par value, 50,000,000 shares
authorized; 10,994,965 shares and 7,329,977 shares issued
and 10,927,155 shares and 7,232,239 shares outstanding at
September 30, 2006 and December 31, 2005, respectively
    
    
    10,995
    
    
    
    7,330Additional paid-in capital
    
    
    25,759
    
    
    
    28,576Retained earnings
    
    
    68,885
    
    
    
    60,023Accumulated other comprehensive loss
    
    
    (3,027
    )
    
    
    (2,783
    )Treasury stock, at cost
    
    
    (526
    )
    
    
    (918
    )Total shareholders equity
    
    
    102,086
    
    
    
    92,228Total liabilities and shareholders equity
    
    $
    1,226,101
    
    
    $
    1,128,204
  2




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##### Table of Contents



METROCORP BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
 For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Interest income:Loans
    
    $
    19,103
    
    
    $
    11,552
    
    
    $
    53,357
    
    
    $
    32,279Securities:Taxable
    
    
    2,113
    
    
    
    2,382
    
    
    
    6,573
    
    
    
    7,163Tax-exempt
    
    
    179
    
    
    
    211
    
    
    
    572
    
    
    
    641Federal funds sold and other short-term investments
    
    
    1,171
    
    
    
    207
    
    
    
    2,830
    
    
    
    343Total interest income
    
    
    22,566
    
    
    
    14,352
    
    
    
    63,332
    
    
    
    40,426Interest expense:Time deposits
    
    
    6,665
    
    
    
    3,214
    
    
    
    17,493
    
    
    
    8,274Demand and savings deposits
    
    
    1,442
    
    
    
    636
    
    
    
    3,750
    
    
    
    1,449Other borrowings
    
    
    318
    
    
    
    365
    
    
    
    957
    
    
    
    1,420Junior subordinated debentures
    
    
    532
    
    
    
    
    
    
    
    1,577
    
    
    
    Total interest expense
    
    
    8,957
    
    
    
    4,215
    
    
    
    23,777
    
    
    
    11,143Net interest income
    
    
    13,609
    
    
    
    10,137
    
    
    
    39,555
    
    
    
    29,283Provision for loan losses
    
    
    114
    
    
    
    468
    
    
    
    560
    
    
    
    1,396Net interest income after provision for loan losses
    
    
    13,495
    
    
    
    9,669
    
    
    
    38,995
    
    
    
    27,887Noninterest income:Service fees
    
    
    1,397
    
    
    
    1,711
    
    
    
    4,303
    
    
    
    4,972Loan-related fees
    
    
    212
    
    
    
    168
    
    
    
    647
    
    
    
    485Letters of credit commissions and fees
    
    
    219
    
    
    
    145
    
    
    
    597
    
    
    
    420Other noninterest income
    
    
    75
    
    
    
    63
    
    
    
    237
    
    
    
    274Total noninterest income
    
    
    1,903
    
    
    
    2,087
    
    
    
    5,784
    
    
    
    6,151Noninterest expenses:Salaries and employee benefits
    
    
    5,455
    
    
    
    4,225
    
    
    
    16,077
    
    
    
    12,229Occupancy and equipment
    
    
    1,907
    
    
    
    1,424
    
    
    
    5,109
    
    
    
    4,160Foreclosed assets, net
    
    
    52
    
    
    
    (67
    )
    
    
    213
    
    
    
    357Other noninterest expense
    
    
    2,406
    
    
    
    2,066
    
    
    
    7,586
    
    
    
    5,851Total noninterest expenses
    
    
    9,820
    
    
    
    7,648
    
    
    
    28,985
    
    
    
    22,597Income before provision for income taxes
    
    
    5,578
    
    
    
    4,108
    
    
    
    15,794
    
    
    
    11,441Provision for income taxes
    
    
    2,032
    
    
    
    1,272
    
    
    
    5,625
    
    
    
    3,575Net income
    
    $
    3,546
    
    
    $
    2,836
    
    
    $
    10,169
    
    
    $
    7,866Earnings per common share*:Basic
    
    $
    0.32
    
    
    $
    0.26
    
    
    $
    0.93
    
    
    $
    0.73Diluted
    
    $
    0.32
    
    
    $
    0.26
    
    
    $
    0.92
    
    
    $
    0.72Weighted average shares outstanding*:Basic
    
    
    10,924
    
    
    
    10,814
    
    
    
    10,895
    
    
    
    10,805Diluted
    
    
    11,153
    
    
    
    10,968
    
    
    
    11,097
    
    
    
    10,938Dividends per common share*
    
    $
    0.04
    
    
    $
    0.04
    
    
    $
    0.12
    
    
    $
    0.12
 
 *
    
    The share and per share information presented above has been adjusted retroactively for the
3-for-2 stock split effected in the form of a 50% stock dividend on September 1, 2006.  3




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METROCORP BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
 For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    3,546
    
    
    $
    2,836
    
    
    $
    10,169
    
    
    $
    7,866Other comprehensive income (loss), net of tax:Unrealized gain (loss) on investment securities, net:Unrealized holding gain (loss) arising during
the period
    
    
    1,567
    
    
    
    (891
    )
    
    
    (236
    )
    
    
    (2,188
    )Less: reclassification adjustment for gain
included
in net income
    
    
    6
    
    
    
    
    
    
    
    8
    
    
    
    Other comprehensive income (loss)
    
    
    1,561
    
    
    
    (891
    )
    
    
    (244
    )
    
    
    (2,188
    )Total comprehensive income
    
    $
    5,107
    
    
    $
    1,945
    
    
    $
    9,925
    
    
    $
    5,678
 METROCORP BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
For the Nine Months Ended September 30, 2006
(In thousands)
(Unaudited)
 AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    TreasuryCommon Stock
    
    
    Paid-In
    
    
    Retained
    
    
    Comprehensive
    
    
    StockShares
    
    
    At Par
    
    
    Capital
    
    
    Earnings
    
    
    Loss
    
    
    At Cost
    
    
    TotalBalance at December 31, 2005
    
    
    7,232
    
    
    $
    7,330
    
    
    $
    28,576
    
    
    $
    60,023
    
    
    $
    (2,783
    )
    
    $
    (918
    )
    
    $
    92,228Re-issuance of treasury stock
    
    
    53
    
    
    
    
    
    
    
    579
    
    
    
    
    
    
    
    
    
    
    
    392
    
    
    
    971Stock-based compensation
expense recognized in
earnings
    
    
    
    
    
    
    
    
    
    
    257
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    257Tax benefit related to stock-
based compensation
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    123-for-2 stock split in the form
of a 50% stock dividend
    
    
    3,642
    
    
    
    3,665
    
    
    
    (3,665
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,169
    
    
    
    
    
    
    
    
    
    
    
    10,169Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (244
    )
    
    
    
    
    
    
    (244
    )Cash dividends ($0.12 per
share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,307
    )
    
    
    
    
    
    
    
    
    
    
    (1,307
    )Balance at September 30, 2006
    
    
    10,927
    
    
    $
    10,995
    
    
    $
    25,759
    
    
    $
    68,885
    
    
    $
    (3,027
    )
    
    $
    (526
    )
    
    $
    102,086
  4




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METROCORP BANCSHARES, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 For the Nine Months EndedSeptember 30,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    10,169
    
    
    $
    7,866Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    1,044
    
    
    
    1,031Provision for loan losses
    
    
    560
    
    
    
    1,396Gain on sale or call of securities, net
    
    
    (11
    )
    
    
    Loss on foreclosed assets
    
    
    98
    
    
    
    316Loss on sale and disposal of premises and equipment
    
    
    
    
    
    
    100Amortization of premiums and discounts on securities
    
    
    64
    
    
    
    189Amortization of deferred loan fees and discounts
    
    
    (1,880
    )
    
    
    (1,351
    )Amortization of core deposit intangibles
    
    
    360
    
    
    
    Stock-based compensation
    
    
    257
    
    
    
    Excess tax benefits from stock-based compensation
    
    
    (12
    )
    
    
    Changes in:Accrued interest receivable
    
    
    (165
    )
    
    
    (194
    )Other assets
    
    
    2,143
    
    
    
    (633
    )Accrued interest payable
    
    
    203
    
    
    
    31Other liabilities
    
    
    2,566
    
    
    
    3,036Net cash provided by operating activities
    
    
    15,396
    
    
    
    11,787Cash flows from investing activities:Purchases of securities available-for-sale
    
    
    (1,183
    )
    
    
    (26,953
    )Proceeds from sales, maturities and principal paydowns of securities
available-for-sale
    
    
    42,664
    
    
    
    51,029Net change in loans
    
    
    (71,065
    )
    
    
    (19,308
    )Proceeds from sale of foreclosed assets
    
    
    
    
    
    
    2,450Proceeds from sale of premises and equipment
    
    
    
    
    
    
    4Purchases of premises and equipment
    
    
    (1,911
    )
    
    
    (884
    )Cash obtained from acquisition, net of cash paid
    
    
    17,065
    
    
    
    Net cash (used in) provided by investing activities
    
    
    (14,430
    )
    
    
    6,338Cash flows from financing activities:Net change in:Deposits
    
    
    64,945
    
    
    
    33,494Other borrowings
    
    
    (22
    )
    
    
    (16,815
    )Proceeds from issuance of common stock
    
    
    
    
    
    
    109Re-issuance of treasury stock
    
    
    971
    
    
    
    273Dividends paid
    
    
    (1,307
    )
    
    
    (1,296
    )Excess tax benefits from stock-based compensation
    
    
    12
    
    
    
    Net cash provided by financing activities
    
    
    64,599
    
    
    
    15,765Net increase in cash and cash equivalents
    
    
    65,565
    
    
    
    33,890Cash and cash equivalents at beginning of period
    
    
    81,812
    
    
    
    32,073Cash and cash equivalents at end of period
    
    $
    147,377
    
    
    $
    65,963
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METROCORP BANCSHARES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. BASIS OF PRESENTATION
    2. STOCK SPLIT
   3. ACQUISITION
  6




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METROCORP BANCSHARES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   Cash
    
    $
    17,603Premises and equipment, net
    
    
    220Goodwill
    
    
    220Core deposit intangibles
    
    
    170Other assets
    
    
    9Deposits
    
    
    (17,536
    )Accrued interest payable
    
    
    (76
    )Deferred taxes and other liabilities
    
    
    (72
    )Purchase price including
capitalized costs
    
    $
    538
 4. STOCK-BASED COMPENSATION
     7




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METROCORP BANCSHARES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   For the Three
    
    For the NineMonths Ended
    
    Months EndedSeptember 30,
    
    September 30,2005
    
    2005Net income:As
reported
    
    $
    2,836
    
    
    $
    7,866Pro
forma
    
    
    2,742
    
    
    
    7,585Stock-based compensation cost, net of income taxes:As
reported
    
    
    
    
    
    
    Pro
forma
    
    
    94
    
    
    
    281Basic earnings per common share:As
reported
    
    
    0.26
    
    
    
    0.73Pro
forma
    
    
    0.25
    
    
    
    0.70Diluted earnings per common share:As
reported
    
    
    0.26
    
    
    
    0.72Pro
forma
    
    
    0.25
    
    
    
    0.69
  Stock Incentive Plan
  For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,Assumptions
    
    2006
    
    2006Expected term (in years)
    
    
    4.55
    
    
    
    4.55Expected stock price volatility
    
    
    23.54
    %
    
    
    22.73
    %Expected dividend yield
    
    
    0.80
    %
    
    
    0.80
    %Risk-free interest rate
    
    
    5.01
    %
    
    
    4.94
    %Estimated fair value per
option granted
    
    $
    5.58
    
    
    $
    4.90
 8




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METROCORP BANCSHARES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    WeightedAverageNumber of
    
    
    Weighted
    
    
    Remaining
    
    
    AggregateOptions
    
    
    Average
    
    
    Contractual
    
    
    Intrinsic ValueOutstanding
    
    
    Exercise Price
    
    
    Life
    
    
    (in thousands)Outstanding options
at December 31,
2005
    
    
    673,725
    
    
    $
    12.12Options
granted
    
    
    238,000
    
    
    
    18.71Options
exercised
    
    
    (60,225
    )
    
    
    10.55Options
forfeited
    
    
    (30,000
    )
    
    
    16.22Outstanding options
at September 30,
2006
    
    
    821,500
    
    
    
    13.99
    
    
    
    5.81
    
    
    $
    7,144Exercisable options
at September 30,
2006
    
    
    468,150
    
    
    $
    11.37
    
    
    
    5.28
    
    
    $
    6,300
  Stock Purchase Plan
  9




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METROCORP BANCSHARES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Number of SubscribedShares OutstandingOutstanding subscribed shares at December 31,
2005
    
    
    12,303Subscribed shares issued
    
    
    (4,584
    )Subscribed shares withdrawn from
plan
    
    
    (599
    )Fractional shares adjustment
    
    
    (3
    )Outstanding subscribed shares at September 30,
2006
    
    
    7,117
  5. SECURITIES AVAILABLE-FOR-SALE
  As of September 30, 2006
    
    
    As of December 31, 2005Gross
    
    
    Gross
    
    
    
    
    
    
    
    
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair
    
    
    Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value
    
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Value(In thousands)U.S. Government
agencies
    
    $
    29
    
    
    $
    1
    
    
    $
    
    
    
    $
    30
    
    
    $
    32
    
    
    $
    
    
    
    $
    
    
    
    $
    32U.S. Government
sponsored
enterprises
    
    
    36,896
    
    
    
    
    
    
    
    (594
    )
    
    
    36,302
    
    
    
    36,869
    
    
    
    
    
    
    
    (526
    )
    
    
    36,343Obligations of state
and political
subdivisions
    
    
    7,425
    
    
    
    186
    
    
    
    
    
    
    
    7,611
    
    
    
    17,162
    
    
    
    551
    
    
    
    
    
    
    
    17,713Mortgage-backed
securities and
collateralized
mortgage
obligations
    
    
    129,760
    
    
    
    48
    
    
    
    (3,968
    )
    
    
    125,840
    
    
    
    162,294
    
    
    
    112
    
    
    
    (3,974
    )
    
    
    158,432Other debt securities
    
    
    182
    
    
    
    2
    
    
    
    (1
    )
    
    
    183
    
    
    
    292
    
    
    
    3
    
    
    
    
    
    
    
    295Investment in ARM and
CRA funds
    
    
    19,609
    
    
    
    
    
    
    
    (432
    )
    
    
    19,177
    
    
    
    19,419
    
    
    
    17
    
    
    
    (412
    )
    
    
    19,024FHLB/Federal Reserve
Bank stock
    
    
    3,811
    
    
    
    
    
    
    
    
    
    
    
    3,811
    
    
    
    3,178
    
    
    
    
    
    
    
    
    
    
    
    3,178Investment in
subsidiary
trust
    
    
    1,083
    
    
    
    
    
    
    
    
    
    
    
    1,083
    
    
    
    1,083
    
    
    
    
    
    
    
    
    
    
    
    1,083Total securities
    
    $
    198,795
    
    
    $
    237
    
    
    $
    (4,995
    )
    
    $
    194,037
    
    
    $
    240,329
    
    
    $
    683
    
    
    $
    (4,912
    )
    
    $
    236,100
  Less Than 12 Months
    
    
    Greater Than 12 Months
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses(In thousands)U. S. Government
sponsored
enterprises.
    
    $
    
    
    
    $
    
    
    
    $
    36,302
    
    
    $
    (594
    )
    
    $
    36,302
    
    
    $
    (594
    )Mortgage-backed
securities and
collateralized
mortgage
obligations
    
    
    36,655
    
    
    
    (798
    )
    
    
    85,023
    
    
    
    (3,170
    )
    
    
    121,678
    
    
    
    (3,968
    )Other debt
securities
    
    
    45
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    45
    
    
    
    (1
    )Investment in ARM
and CRA funds
    
    
    4,417
    
    
    
    (15
    )
    
    
    14,761
    
    
    
    (417
    )
    
    
    19,178
    
    
    
    (432
    )Total
securities
    
    $
    41,117
    
    
    $
    (814
    )
    
    $
    136,086
    
    
    $
    (4,181
    )
    
    $
    177,203
    
    
    $
    (4,995
    )
 10




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##### Table of Contents



METROCORP BANCSHARES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  6. ALLOWANCE FOR LOAN LOSSES
  As of and for the Three Months
    
    
    As of and for the Nine MonthsEnded September 30,
    
    
    Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Allowance for loan losses at beginning of period
    
    $
    12,905
    
    
    $
    10,372
    
    
    $
    13,169
    
    
    $
    10,501Provision for loan losses
    
    
    114
    
    
    
    468
    
    
    
    560
    
    
    
    1,396Charge-offs
    
    
    (1,251
    )
    
    
    (72
    )
    
    
    (3,488
    )
    
    
    (1,266
    )Recoveries
    
    
    84
    
    
    
    38
    
    
    
    1,611
    
    
    
    175Allowance for loan losses at end of period
    
    $
    11,852
    
    
    $
    10,806
    
    
    $
    11,852
    
    
    $
    10,806
 7. EARNINGS PER COMMON SHARE
  As of and for the Three Months
    
    
    As of and for the Nine MonthsEnded September 30,
    
    
    Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands, except per share amounts)Net income available to common
shareholders
    
    $
    3,546
    
    
    $
    2,836
    
    
    $
    10,169
    
    
    $
    7,866Weighted average common shares outstanding:Basic
    
    
    10,924
    
    
    
    10,814
    
    
    
    10,895
    
    
    
    10,805Shares issuable under stock option and
purchase plans
    
    
    229
    
    
    
    154
    
    
    
    202
    
    
    
    133Diluted
    
    
    11,153
    
    
    
    10,968
    
    
    
    11,097
    
    
    
    10,938Earnings per common share:Basic
    
    $
    0.32
    
    
    $
    0.26
    
    
    $
    0.93
    
    
    $
    0.73Diluted
    
    $
    0.32
    
    
    $
    0.26
    
    
    $
    0.92
    
    
    $
    0.72
 8. LITIGATION
  11




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##### Table of Contents



METROCORP BANCSHARES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 9. OFF-BALANCE SHEET ACTIVITIES
   As of
    
    
    As ofSeptember 30, 2006
    
    
    December 31, 2005Unfunded loan commitments including unfunded lines of credit
    
    $
    202,529
    
    
    $
    152,190Standby letters of credit
    
    
    7,542
    
    
    
    4,589Commercial letters of credit
    
    
    12,437
    
    
    
    6,593Operating leases
    
    
    10,045
    
    
    
    5,467Total financial instruments with off-balance sheet risk
    
    $
    232,553
    
    
    $
    168,839
 10. OPERATING SEGMENT INFORMATION
   For the three months ended September 30, 2006ConsolidatedMetroBank
    
    
    Metro United
    
    
    Other
    
    
    CompanyTotal interest income
    
    $
    18,429
    
    
    $
    4,119
    
    
    $
    18
    
    
    $
    22,566Total interest expense
    
    
    6,442
    
    
    
    1,983
    
    
    
    532
    
    
    
    8,957Net interest income
    
    
    11,987
    
    
    
    2,136
    
    
    
    (514
    )
    
    
    13,609Provision for loan losses
    
    
    105
    
    
    
    9
    
    
    
    
    
    
    
    114Net interest income after provision
for loan losses
    
    
    11,882
    
    
    
    2,127
    
    
    
    (514
    )
    
    
    13,495Noninterest income
    
    
    1,818
    
    
    
    85
    
    
    
    
    
    
    
    1,903Noninterest expense
    
    
    8,387
    
    
    
    1,715
    
    
    
    (282
    )
    
    
    9,820Income before income tax provision
    
    
    5,313
    
    
    
    497
    
    
    
    (232
    )
    
    
    5,578Provision for income taxes
    
    
    1,881
    
    
    
    227
    
    
    
    (76
    )
    
    
    2,032Net income
    
    $
    3,432
    
    
    $
    270
    
    
    $
    (156
    )
    
    $
    3,546
 12




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##### Table of Contents



METROCORP BANCSHARES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 For the nine months ended September 30, 2006ConsolidatedMetroBank
    
    
    Metro United
    
    
    Other
    
    
    CompanyTotal interest income
    
    $
    52,128
    
    
    $
    11,153
    
    
    $
    51
    
    
    $
    63,332Total interest expense
    
    
    17,107
    
    
    
    5,093
    
    
    
    1,577
    
    
    
    23,777Net interest income
    
    
    35,021
    
    
    
    6,060
    
    
    
    (1,526
    )
    
    
    39,555Provision for loan losses
    
    
    441
    
    
    
    119
    
    
    
    
    
    
    
    560Net interest income after provision
for loan losses
    
    
    34,580
    
    
    
    5,941
    
    
    
    (1,526
    )
    
    
    38,995Noninterest income
    
    
    5,553
    
    
    
    231
    
    
    
    
    
    
    
    5,784Noninterest expense
    
    
    24,456
    
    
    
    4,102
    
    
    
    427
    
    
    
    28,985Income before income tax provision
    
    
    15,677
    
    
    
    2,070
    
    
    
    (1,953
    )
    
    
    15,794Provision for income taxes
    
    
    5,475
    
    
    
    806
    
    
    
    (656
    )
    
    
    5,625Net income
    
    $
    10,202
    
    
    $
    1,264
    
    
    $
    (1,297
    )
    
    $
    10,169
 As of September 30, 2006ConsolidatedMetroBank
    
    
    Metro United
    
    
    Other
    
    
    CompanyNet loans
    
    $
    671,467
    
    
    $
    156,953
    
    
    $
    
    
    
    $
    828,420Assets
    
    
    975,177
    
    
    
    249,727
    
    
    
    1,197
    
    
    
    1,226,101Deposits
    
    
    840,229
    
    
    
    206,505
    
    
    
    (2,503
    )
    
    
    1,044,231
 11. NEW ACCOUNTING PRONOUNCEMENTS
     13




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14




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Special Cautionary Notice Regarding Forward-looking Statements
  
    
    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.
  15




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##### Table of Contents



Overview
      Results of Operations
 Net Interest Income and Net Interest Margin.
  16




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##### Table of Contents











Total Interest Income.




Interest Income from Loans.






Interest Income from Investments.




17



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##### Table of Contents



Total Interest Expense.
 Interest Expense on Deposits.
  Interest Expense on Junior Subordinated Debentures.
 Interest Expense on Other Borrowings.
  18




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##### Table of Contents



For The Three Months Ended September 30,2006
    
    
    2005Average
    
    
    Interest
    
    
    Average
    
    
    Average
    
    
    Interest
    
    
    AverageOutstanding
    
    
    Earned/
    
    
    Yield/
    
    
    Outstanding
    
    
    Earned/
    
    
    Yield/Balance
    
    
    Paid
    
    
    Rate(1)
    
    
    Balance
    
    
    Paid
    
    
    Rate(1)(Dollars in thousands)AssetsInterest-earning assets:Total loans
    
    $
    833,943
    
    
    $
    19,103
    
    
    
    9.09
    %
    
    $
    603,225
    
    
    $
    11,552
    
    
    
    7.60
    %Taxable securities
    
    
    192,211
    
    
    
    2,113
    
    
    
    4.36
    
    
    
    235,171
    
    
    
    2,382
    
    
    
    4.02Tax-exempt securities
    
    
    14,657
    
    
    
    179
    
    
    
    4.85
    
    
    
    17,162
    
    
    
    211
    
    
    
    4.88Federal funds sold and other
short-term investments
    
    
    91,179
    
    
    
    1,171
    
    
    
    5.10
    
    
    
    24,659
    
    
    
    207
    
    
    
    3.33Total interest-earning
assets
    
    
    1,131,990
    
    
    
    22,566
    
    
    
    7.91
    
    
    
    880,217
    
    
    
    14,352
    
    
    
    6.47Allowance for loan losses
    
    
    (12,603
    )
    
    
    
    
    
    
    
    
    
    
    (10,631
    )Total interest-earning assets,
net of allowance for loan
losses
    
    
    1,119,387
    
    
    
    
    
    
    
    
    
    
    
    869,586Noninterest-earning assets
    
    
    86,913
    
    
    
    
    
    
    
    
    
    
    
    50,030Total assets
    
    $
    1,206,300
    
    
    
    
    
    
    
    
    
    
    $
    919,616Liabilities and shareholders equityInterest-bearing liabilities:Interest-bearing demand
deposits
    
    $
    71,404
    
    
    
    217
    
    
    
    1.21
    %
    
    $
    80,472
    
    
    
    160
    
    
    
    0.79
    %Savings and money market
accounts
    
    
    166,926
    
    
    
    1,225
    
    
    
    2.91
    
    
    
    124,052
    
    
    
    476
    
    
    
    1.52Time deposits
    
    
    595,467
    
    
    
    6,665
    
    
    
    4.44
    
    
    
    409,782
    
    
    
    3,214
    
    
    
    3.11Junior subordinated
debentures
    
    
    36,083
    
    
    
    532
    
    
    
    5.76
    
    
    
    
    
    
    
    
    
    
    
    Other borrowings
    
    
    25,669
    
    
    
    318
    
    
    
    4.91
    
    
    
    31,026
    
    
    
    365
    
    
    
    4.67Total interest-bearing
liabilities
    
    
    895,549
    
    
    
    8,957
    
    
    
    3.97
    
    
    
    645,332
    
    
    
    4,215
    
    
    
    2.59Noninterest-bearing liabilities:Noninterest-bearing demand
deposits
    
    
    191,196
    
    
    
    
    
    
    
    
    
    
    
    173,953Other liabilities
    
    
    19,422
    
    
    
    
    
    
    
    
    
    
    
    10,178Total liabilities
    
    
    1,106,167
    
    
    
    
    
    
    
    
    
    
    
    829,463Shareholders equity
    
    
    100,133
    
    
    
    
    
    
    
    
    
    
    
    90,153Total liabilities and
shareholders
equity
    
    $
    1,206,300
    
    
    
    
    
    
    
    
    
    
    $
    919,616Net interest income
    
    
    
    
    
    $
    13,609
    
    
    
    
    
    
    
    
    
    
    $
    10,137Net interest spread
    
    
    
    
    
    
    
    
    
    
    3.94
    %
    
    
    
    
    
    
    
    
    
    
    3.88
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.77
    %
    
    
    
    
    
    
    
    
    
    
    4.57
    %
 
 (1)
    
    Annualized. 19




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##### Table of Contents



For The Nine Months Ended September 30,2006
    
    
    2005Average
    
    
    Interest
    
    
    Average
    
    
    Average
    
    
    Interest
    
    
    AverageOutstanding
    
    
    Earned/
    
    
    Yield/
    
    
    Outstanding
    
    
    Earned/
    
    
    Yield/Balance
    
    
    Paid
    
    
    Rate(1)
    
    
    Balance
    
    
    Paid
    
    
    Rate(1)(Dollars in thousands)AssetsInterest-earning assets:Total loans
    
    $
    803,553
    
    
    $
    53,357
    
    
    
    8.88
    %
    
    $
    598,577
    
    
    $
    32,279
    
    
    
    7.21
    %Taxable securities
    
    
    202,520
    
    
    
    6,573
    
    
    
    4.34
    
    
    
    240,467
    
    
    
    7,163
    
    
    
    3.98Tax-exempt securities
    
    
    15,538
    
    
    
    572
    
    
    
    4.92
    
    
    
    17,327
    
    
    
    641
    
    
    
    4.95Federal funds sold and other
short-term investments
    
    
    79,412
    
    
    
    2,830
    
    
    
    4.76
    
    
    
    15,340
    
    
    
    343
    
    
    
    2.99Total interest-earning
assets
    
    
    1,101,023
    
    
    
    63,332
    
    
    
    7.69
    
    
    
    871,711
    
    
    
    40,426
    
    
    
    6.20Allowance for loan losses
    
    
    (13,437
    )
    
    
    
    
    
    
    
    
    
    
    (10,977
    )Total interest-earning assets,
net of allowance for loan
losses
    
    
    1,087,586
    
    
    
    
    
    
    
    
    
    
    
    860,734Noninterest-earning assets
    
    
    85,400
    
    
    
    
    
    
    
    
    
    
    
    47,557Total assets
    
    $
    1,172,986
    
    
    
    
    
    
    
    
    
    
    $
    908,291Liabilities and shareholders equityInterest-bearing liabilities:Interest-bearing demand
deposits
    
    $
    75,500
    
    
    
    608
    
    
    
    1.08
    %
    
    $
    85,111
    
    
    
    507
    
    
    
    0.80
    %Savings and money market
accounts
    
    
    159,975
    
    
    
    3,142
    
    
    
    2.63
    
    
    
    113,572
    
    
    
    942
    
    
    
    1.11Time deposits
    
    
    572,854
    
    
    
    17,493
    
    
    
    4.08
    
    
    
    392,305
    
    
    
    8,274
    
    
    
    2.82Junior subordinated
debentures
    
    
    36,083
    
    
    
    1,577
    
    
    
    5.76
    
    
    
    
    
    
    
    
    
    
    
    Other borrowings
    
    
    26,021
    
    
    
    957
    
    
    
    4.92
    
    
    
    48,213
    
    
    
    1,420
    
    
    
    3.94Total interest-bearing
liabilities
    
    $
    870,433
    
    
    
    23,777
    
    
    
    3.65
    
    
    
    639,201
    
    
    
    11,143
    
    
    
    2.33Noninterest-bearing liabilities:Noninterest-bearing demand
deposits
    
    
    189,545
    
    
    
    
    
    
    
    
    
    
    
    172,651Other liabilities
    
    
    15,806
    
    
    
    
    
    
    
    
    
    
    
    8,049Total liabilities
    
    
    1,075,784
    
    
    
    
    
    
    
    
    
    
    
    819,901Shareholders equity
    
    
    97,202
    
    
    
    
    
    
    
    
    
    
    
    88,390Total liabilities and
shareholders
equity
    
    $
    1,172,986
    
    
    
    
    
    
    
    
    
    
    $
    908,291Net interest income
    
    
    
    
    
    $
    39,555
    
    
    
    
    
    
    
    
    
    
    $
    29,283Net interest spread
    
    
    
    
    
    
    
    
    
    
    4.04
    %
    
    
    
    
    
    
    
    
    
    
    3.87
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.80
    %
    
    
    
    
    
    
    
    
    
    
    4.49
    %
 
 (1)
    
    Annualized. 20




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##### Table of Contents



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006 vs 2005
    
    
    2006 vs 2005Increase (Decrease)
    
    
    
    
    
    
    Increase (Decrease)Due to
    
    
    
    
    
    
    Due toVolume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    Total(Dollars in thousands)Interest-earning assets:Loans
    
    $
    4,418
    
    
    $
    3,133
    
    
    $
    7,551
    
    
    $
    11,054
    
    
    $
    10,024
    
    
    $
    21,078Taxable
securities
    
    
    (435
    )
    
    
    166
    
    
    
    (269
    )
    
    
    (1,130
    )
    
    
    540
    
    
    
    (590
    )Tax-exempt
securities
    
    
    (31
    )
    
    
    (1
    )
    
    
    (32
    )
    
    
    (66
    )
    
    
    (3
    )
    
    
    (69
    )Federal funds sold and
other short-term
investments
    
    
    558
    
    
    
    406
    
    
    
    964
    
    
    
    1,433
    
    
    
    1,054
    
    
    
    2,487Total increase in
interest income
    
    
    4,510
    
    
    
    3,704
    
    
    
    8,214
    
    
    
    11,291
    
    
    
    11,615
    
    
    
    22,906Interest-bearing liabilities:Interest-bearing demand
deposits
    
    
    (18
    )
    
    
    75
    
    
    
    57
    
    
    
    (57
    )
    
    
    158
    
    
    
    101Savings and money market
accounts
    
    
    165
    
    
    
    584
    
    
    
    749
    
    
    
    385
    
    
    
    1,815
    
    
    
    2,200Time
deposits
    
    
    1,456
    
    
    
    1,995
    
    
    
    3,451
    
    
    
    3,808
    
    
    
    5,411
    
    
    
    9,219Junior subordinated
debentures
    
    
    532
    
    
    
    
    
    
    
    532
    
    
    
    1,577
    
    
    
    
    
    
    
    1,577Other
borrowings
    
    
    (63
    )
    
    
    16
    
    
    
    (47
    )
    
    
    (654
    )
    
    
    191
    
    
    
    (463
    )Total increase in
interest
expense
    
    
    2,072
    
    
    
    2,670
    
    
    
    4,742
    
    
    
    5,059
    
    
    
    7,575
    
    
    
    12,634Increase in net interest
income
    
    $
    2,438
    
    
    $
    1,034
    
    
    $
    3,472
    
    
    $
    6,232
    
    
    $
    4,040
    
    
    $
    10,272
 Provision for Loan Losses.
 Noninterest Income.
 Noninterest Expenses. 21
    Table of Contents       Income Taxes.
 Financial Condition
 Loan Portfolio.
 22    Table of Contents  As of September 30, 2006
    
    
    As of December 31, 2005Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Commercial and industrial
    
    $
    355,507
    
    
    
    42.15
    %
    
    $
    331,869
    
    
    
    42.84
    %Real estate mortgageResidential
    
    
    6,098
    
    
    
    0.72
    
    
    
    7,739
    
    
    
    1.00Commercial
    
    
    405,963
    
    
    
    48.14
    
    
    
    368,508
    
    
    
    47.57412,061
    
    
    
    48.86
    
    
    
    376,247
    
    
    
    48.57Real estate constructionResidential
    
    
    21,271
    
    
    
    2.52
    
    
    
    12,095
    
    
    
    1.56Commercial
    
    
    47,068
    
    
    
    5.58
    
    
    
    44,315
    
    
    
    5.7268,339
    
    
    
    8.10
    
    
    
    56,410
    
    
    
    7.28Consumer and other
    
    
    7,445
    
    
    
    0.89
    
    
    
    10,172
    
    
    
    1.31Gross loans
    
    
    843,352
    
    
    
    100.00
    %
    
    
    774,698
    
    
    
    100.00
    %Unearned discounts, interest and
deferred fees
    
    
    (3,080
    )
    
    
    
    
    
    
    (3,225
    )Total loans
    
    
    840,272
    
    
    
    
    
    
    
    771,473Allowance for loan losses
    
    
    (11,852
    )
    
    
    
    
    
    
    (13,169
    )Loans, net
    
    $
    828,420
    
    
    
    
    
    
    $
    758,304
 Nonperforming Assets.
   23
    Table of Contents  As of
    
    
    As ofSeptember 30, 2006
    
    
    December 31, 2005(Dollars in thousands)Nonaccrual
loans
    
    $
    9,820
    
    
    $
    15,606Accruing loans 90
days or more past
due
    
    
    128
    
    
    
    32Other real estate
(ORE) and other
assets repossessed
(OAR)
    
    
    6,038
    
    
    
    3,866Total
nonperforming
assets
    
    
    15,986
    
    
    
    19,504Nonperforming loans
guaranteed by the
SBA, Ex-Im Bank and
OCCGF
    
    
    (2,400
    )
    
    
    (2,210
    )Total net
nonperforming
assets
    
    $
    13,586
    
    
    $
    17,294Total nonperforming
assets to total
assets
    
    
    1.30
    %
    
    
    1.73
    %Total nonperforming
assets to total
loans and
ORE/OAR
    
    
    1.89
    %
    
    
    2.52
    %Net nonperforming
assets to total
assets
(1)
    
    
    1.11
    %
    
    
    1.53
    %Net nonperforming
assets to total
loans and ORE/OAR
(1)
    
    
    1.61
    %
    
    
    2.23
    %
 
 (1)
    
    Net nonperforming assets are net of the loan portions guaranteed by the SBA, Ex-Im Bank and OCCGF.   As of
    
    
    As ofSeptember 30, 2006
    
    
    December 31, 2005(Dollars in thousands)Impaired loans with
no SFAS No. 114
valuation
reserve
    
    $
    5,911
    
    
    $
    11,865Impaired loans with
a SFAS No. 114
valuation
reserve
    
    
    3,909
    
    
    
    6,468Total recorded
investment in
impaired
loans
    
    $
    9,820
    
    
    $
    18,333Valuation allowance
related to impaired
loans
    
    $
    1,425
    
    
    $
    1,783
  Allowance for Loan Losses and Reserve for Unfunded Lending Commitments.
   24
    Table of Contents      25




---



##### Table of Contents



As of and for theThree Months Ended September 30,2006
    
    
    2005(Dollars in thousands)Average total loans outstanding for the period
    
    $
    833,943
    
    
    $
    603,225Total loans outstanding at end of period
    
    $
    840,272
    
    
    $
    612,904Allowance for loan losses at beginning of period
    
    $
    12,905
    
    
    $
    10,372Provision for loan losses
    
    
    114
    
    
    
    468Charge-offs:Commercial and industrial
    
    
    (1,192
    )
    
    
    (19
    )Real estate mortgage
    
    
    
    
    
    
    Real estate construction
    
    
    
    
    
    
    Consumer and other
    
    
    (59
    )
    
    
    (53
    )Total charge-offs
    
    
    (1,251
    )
    
    
    (72
    )Recoveries:Commercial and industrial
    
    
    83
    
    
    
    34Real estate mortgage
    
    
    
    
    
    
    Real estate construction
    
    
    
    
    
    
    Consumer and other
    
    
    1
    
    
    
    4Total recoveries
    
    
    84
    
    
    
    38Net charge-offs
    
    
    (1,167
    )
    
    
    (34
    )Allowance for loan losses at end of period
    
    
    11,852
    
    
    
    10,806Reserve for unfunded lending commitments at beginning of period
    
    
    552
    
    
    
    334Provision for unfunded lending commitments
    
    
    96
    
    
    
    82Reserve for unfunded lending commitments at end of period
    
    
    648
    
    
    
    416Allowance for credit losses at end of period
    
    $
    12,500
    
    
    $
    11,222Ratio of net charge-offs to end of period total loans
    
    
    0.14
    %
    
    
    0.01
    %
 26
    Table of Contents   As of and for theNine Months Ended September 30,2006
    
    
    2005(Dollars in thousands)Average total loans outstanding for the period
    
    $
    803,553
    
    
    $
    598,577Total loans outstanding at end of period
    
    $
    840,272
    
    
    $
    612,904Allowance for loan losses at beginning of period
    
    $
    13,169
    
    
    $
    10,501Provision for loan losses
    
    
    560
    
    
    
    1,396Charge-offs:Commercial and industrial
    
    
    (3,296
    )
    
    
    (1,033
    )Real estate mortgage
    
    
    (21
    )
    
    
    Real estate construction
    
    
    
    
    
    
    (5
    )Consumer and other
    
    
    (171
    )
    
    
    (228
    )Total charge-offs
    
    
    (3,488
    )
    
    
    (1,266
    )Recoveries:Commercial and industrial
    
    
    678
    
    
    
    139Real estate mortgage
    
    
    851
    
    
    
    1Real estate construction
    
    
    
    
    
    
    Consumer and other
    
    
    82
    
    
    
    35Total recoveries
    
    
    1,611
    
    
    
    175Net charge-offs
    
    
    (1,877
    )
    
    
    (1,091
    )Allowance for loan losses at end of period
    
    
    11,852
    
    
    
    10,806Reserve for unfunded lending commitments at beginning of period
    
    
    546
    
    
    
    362Provision for unfunded lending commitments
    
    
    102
    
    
    
    54Reserve for unfunded lending commitments at end of period
    
    
    648
    
    
    
    416Allowance for credit losses at end of period
    
    $
    12,500
    
    
    $
    11,222Ratio of allowance for loan losses to end of period total
loans
    
    
    1.41
    %
    
    
    1.76
    %Ratio of net charge-offs to end of period total loans
    
    
    0.22
    %
    
    
    0.18
    %Ratio of allowance for loan losses to end of period total
nonperforming loans (1)
    
    
    119.14
    %
    
    
    55.02
    %Ratio of allowance for loan losses to end of period net
nonperforming loans (2)
    
    
    157.02
    %
    
    
    61.61
    %
 
 (1)
    
    Total nonperforming loans are nonaccrual loans plus loans over 90 days past due.(2)
    
    Net nonperforming loans are nonaccrual loans plus loans over 90 days past due,
less loan portion guaranteed by the SBA, Ex-Im Bank and OCCGF. Securities.
 Deposits 27
    Table of Contents    Junior Subordinated Debentures.
 Other Borrowings.
  As of and for the
    
    As of and for theNine Months Ended
    
    Year EndedSeptember 30, 2006
    
    December 31, 2005(Dollars in thousands)Federal funds purchased:at end of period
    
    $
    
    
    
    $
    average during the period
    
    
    
    
    
    
    11maximum month-end balance during the period
    
    
    
    
    
    
    FHLB notes:at end of period
    
    $
    25,000
    
    
    $
    25,000average during the period
    
    
    25,329
    
    
    
    42,138maximum month-end balance during the period
    
    
    25,000
    
    
    
    72,500Interest rate at end of period
    
    
    4.99
    %
    
    
    4.99
    %Interest rate during the period
    
    
    5.05
    
    
    
    4.23Federal Reserve TT&L:at end of period
    
    $
    1,032
    
    
    $
    1,054average during the period
    
    
    692
    
    
    
    705maximum month-end balance during the period
    
    
    1,032
    
    
    
    1,054
 Liquidity.
 Capital Resources.
 28




---



##### Table of Contents



Minimum
    
    To Be Categorized asRequired For
    
    Well Capitalized UnderCapital Adequacy
    
    Prompt Corrective
    
    Actual Ratio AtPurposes
    
    Action Provisions
    
    September 30, 2006The CompanyLeverage
ratio
    
    
    4.00
    %(1)
    
    
    N/A
    %
    
    
    9.20
    %Tier 1 risk-based
capital
ratio
    
    
    4.00
    
    
    
    N/A
    
    
    
    11.30Risk-based capital
ratio
    
    
    8.00
    
    
    
    N/A
    
    
    
    13.46MetroBankLeverage
ratio
    
    
    4.00
    %(2)
    
    
    5.00
    %
    
    
    9.77
    %Tier 1 risk-based
capital
ratio
    
    
    4.00
    
    
    
    6.00
    
    
    
    12.09Risk-based capital
ratio
    
    
    8.00
    
    
    
    10.00
    
    
    
    13.28Metro United BankLeverage
ratio
    
    
    4.00
    %(3)
    
    
    5.00
    %
    
    
    8.32
    %Tier 1 risk-based
capital
ratio
    
    
    4.00
    
    
    
    6.00
    
    
    
    10.65Risk-based capital
ratio
    
    
    8.00
    
    
    
    10.00
    
    
    
    11.90
 
 (1)
    
    The Federal Reserve Board may require the Company to maintain a leverage ratio above the required minimum.(2)
    
    The OCC may require MetroBank to maintain a leverage ratio above the required minimum.(3)
    
    The FDIC may require Metro United to maintain a leverage ratio above the required minimum. Critical Accounting Policies.
 Allowance for Loan Losses and Reserve for Unfunded Lending
Commitments.
   29




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk.
  
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures.
 Changes in Internal Control over Financial Reporting.
 30




---



##### Table of Contents



PART II
 OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity 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
  31




---



##### Table of Contents



Item 6. Exhibits
 ExhibitNumber
    
    Identification of Exhibit3.1
    
     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
    
     Articles of Amendment to Amended and Restated Articles of
Incorporation. (incorporated herein by reference to Exhibit 3.2 to
the Companys Quarterly Report on Form 10-Q for the quarter ended
March 31, 2006)3.3
    
     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).11
    
     Computation of Earnings Per Common Share, included as Note (7)
to the unaudited Condensed Consolidated Financial Statements on
Page 11 of this Form 10-Q.31.1
    
     Certification of the Chief Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended.31.2
    
     Certification of the Chief Financial Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended.32.1*
    
     Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2*
    
     Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 *
    
    This exhibit shall not be deemed filed for purposes of Section 18 of the Securities Exchange
Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed
incorporated by reference into any filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934. 32




---



##### Table of Contents



SIGNATURES
  METROCORP BANCSHARES, INC.By:
    
    /s/ George M. LeeDate: November 8, 2006
    
    
    
    George M. LeeChief Executive Officer (principal executive officer)Date: November 8, 2006
    
    By:
    
    /s/ David C. ChoiDavid C. ChoiChief Financial Officer (principal financial officer/principal accounting officer)
 33




---



##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    
    
    Identification of Exhibit3.1
    
    
    
    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
    
    
    
     Articles of Amendment to Amended and Restated
Articles of Incorporation. (incorporated herein by
reference to Exhibit 3.2 to the Companys Quarterly
Report on Form 10-Q for the quarter ended March 31,
2006)3.3
    
    
    
    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).11
    
    
    
    Computation of Earnings Per Common Share, included as
Note (7) to the unaudited Condensed Consolidated
Financial Statements on Page 11 of this Form 10-Q.31.1
    
    
    
    Certification of the Chief Executive Officer pursuant
to Rule 13a-14(a) of the Securities Exchange Act of
1934, as amended.31.2
    
    
    
    Certification of the Chief Financial Officer pursuant
to Rule 13a-14(a) of the Securities Exchange Act of
1934, as amended.32.1*
    
    
    
    Certification of the Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2*
    
    
    
    Certification of the Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    This exhibit shall not be deemed filed for purposes of Section 18 of the Securities Exchange
Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed
incorporated by reference into any filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934.