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**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, 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 SEPTEMBER      30, 2000**        **[  ]**     **TRANSITION REPORT PURSUANT TO SECTION 13      OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**
 

**Commission file number 000-25141**
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**MetroCorp Bancshares, Inc.(Exact name of registrant as specified in its charter)**
**Texas**    **76-0579161****(State or other jurisdiction of**    **(I.R.S. Employer****incorporation or organization)**    **Identification No.)**
**9600 Bellaire Boulevard, Suite 252 Houston, Texas 77036(Address of principal executive offices including zip code)**

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

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

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

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

As of October 31, 2000, the number of outstanding shares of Common  Stock, par value $1.00 per share was 6,961,562.

 

**PART I**

**FINANCIAL INFORMATION**

**Item 1.   *****Condensed Financial Statements.***

****METROCORP BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS(In thousands, except share data)**
  **September 30,2000** **December 31,1999**  **(Unaudited)**    **Assets**Cash and cash equivalents:         Cash and due from banks    $31,585          $29,945  Federal funds sold and other temporary investments     19,734           6,471                   Total cash and cash equivalents     51,319           36,416  Investment securities available-for-sale, at fair value     113,230           74,959  Investment securities held-to-maturity, at amortized cost     32,860           35,106  Loans, net     479,392           488,132  Premises and equipment, net     7,055           8,106  Accrued interest receivable     4,009           3,855  Deferred income taxes     6,553           6,477  Due from customers on acceptances     3,081           831  Other real estate and repossessed assets, net     1,073           490  Other assets     4,970           6,217                   Total assets    $703,542          $660,589                   **Liabilities and Shareholders' Equity**Deposits:         Noninterest-bearing    $98,861          $96,253  Interest-bearing     513,501           448,183                   Total deposits     612,362           544,436  Other borrowings     25,537           55,636  Accrued interest payable     1,328           1,558  Income taxes payable      —            —   Acceptances outstanding     3,250           831  Other liabilities     6,292           5,548                   Total liabilities     648,770           608,009                   Commitments and contingencies      —            —   Shareholders' equity:          Preferred stock, $1.00 par value, 2,000,000 shares authorized, none of which are issued and outstanding      —            —   Common stock, $1.00 par value, 20,000,000 authorized, 7,162,062 and 7,122,479 shares issued and 6,961,562 and 7,102,479 shares outstanding at September 30, 2000 and December 31, 1999, respectively     7,162           7,122  Additional paid-in capital     25,891           25,646  Retained earnings     25,173           23,124  Accumulated other comprehensive income     (1,884)          (3,145)  Treasury stock, at cost     (1,569)          (167)                  Total shareholders' equity     54,773           52,580                   Total liabilities and shareholders' equity    $703,542          $660,589                   
See accompanying notes to consolidated financial statements

 

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**METROCORP BANCSHARES, INC.CONSOLIDATED STATEMENTS OF INCOME(In thousands, except share data)(Unaudited)**
  **For the three monthsended September 30,** **For the nine monthsended September 30,**  **2000** **1999** **2000** **1999**                Interest income:                 Loans        $13,089          $11,640          $39,010          $32,797  Investment securities:                 Taxable         2,133           1,615           5,425           4,977  Tax-exempt         267           295           803           824  Federal funds sold and other temporary investments         927           188           1,876           464                                           Total interest income         16,416           13,738           47,114           39,062                                           Interest expense:                 Time deposits         5,599           3,537           14,590           10,110  Demand and savings deposits         1,208           1,074           3,342           2,949  Other borrowings         582           788           1,999           2,195                                           Total interest expense         7,389           5,399           19,931           15,254                                           Net interest income         9,027           8,339           27,183           23,808  Provision for loan losses         499           1,380           6,778           3,450                                           Net interest income after provision for loanlosses          8,528           6,959           20,405           20,358                                           Non-interest income:                 Service charges on deposit accounts         1,002           974           2,815           2,933  Other loan-related fees         236           266           640           1,204  Letters of credit commissions and fees         147           129           424           334  Gain on sale of investment securities, net          —           43            —           317  Other non-interest income         447           33           1,340           165                                           Total non-interest income         1,832           1,445           5,219           4,953                                           Non-interest expense:                 Employee compensation and benefits         3,269           2,777           9,670           8,366  Occupancy         1,412           1,267           4,324           3,704  Other real estate, net         (45)          (8)          (61)          44  Data processing         42           36           128           282  Professional fees, consultants, and contract labor         760           247           2,568           963  Advertising         79           98           325           337  Other non-interest expense         1,202           993           3,519           2,669                                           Total non-interest expense         6,719           5,410           20,473           16,365                                           Income before provision for income taxes         3,641           2,994           5,151           8,946  Provision for income taxes         1,324           1,033           1,850           2,979                                           Net income        $2,317          $1,961          $3,301          $5,967                                           Earnings per common share:                 Basic        $0.33          $0.28          $0.47          $0.84  Diluted        $0.33          $0.28          $0.47          $0.84  Weighted average shares outstanding:                 Basic         6,956           7,121           6,971           7,112  Diluted         6,956           7,121           6,971           7,112  
See accompanying notes to consolidated financial statements

 

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**METROCORP BANCSHARES, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(In thousands)(Unaudited)**
  **For the three monthsended September 30,** **For the nine monthsended September 30,**  **2000** **1999** **2000** **1999**Net income   $2,317      $1,961      $3,301      $5,967                          Other comprehensive income (loss), net of tax:                 Unrealized gains (losses) on investment securities, net:                 Unrealized holding gains (losses) arising during the period    693       (269)      1,261       (2,458) Less: reclassification adjustment for gains included in net income     —       (28)       —       (209)                         Other comprehensive income (loss)    693       (297)      1,261       (2,667)                         Total comprehensive income   $3,010      $1,664      $4,562      $3,300                          
See accompanying notes to consolidated financial statements

 

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**METROCORP BANCSHARES, INC.CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITYFor the nine months ended September 30, 2000 and 1999(In thousands)(Unaudited)**
  **Common Stock**                      **Shares** **At par** **AdditionalPaid-inCapital** **RetainedEarnings** **AccumulatedOtherComprehensiveIncome (loss)** **TreasuryStockat Cost** **Total**Balance at January 1, 1999     7,005      $7,005      $24,569      $17,702      $748      $ —      $50,024  Issuance of common stock     116       116       1,066        —        —        —       1,182  Other comprehensive income (loss)      —        —        —        —       (2,667)       —       (2,667) Net Income      —        —        —       5,967        —        —       5,967  Dividend      —        —        —       (1,281)       —        —       (1,281)                                            Balance at September 30, 1999     7,121      $7,121      $25,635      $22,388      $(1,919)     $ —      $53,225                                             
 
  **Common Stock**                      **Shares** **At par** **AdditionalPaid-inCapital** **RetainedEarnings** **AccumulatedOtherComprehensiveIncome (loss)** **TreasuryStockat Cost** **Total**Balance at January 1, 2000     7,102      $7,122      $25,646      $23,124      $(3,145)     $(167)     $52,580  Issuance of common stock     40       40       245        —        —        —       285  Repurchase of common stock     (181)       —        —        —        —       (1,402)      (1,402) Other comprehensive income (loss)      —        —        —        —       1,261        —       1,261  Net Income      —        —        —       3,301        —        —       3,301  Dividend      —        —        —       (1,252)       —        —       (1,252)                                            Balance at September 30, 2000     6,961      $7,162      $25,891      $25,173      $(1,884)     $(1,569)     $54,773                                             
See accompanying notes to consolidated financial statements

 

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**METROCORP BANCSHARES, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)(Unaudited)**
  **For the nine monthsended September 30,**  **2000** **1999**Cash flows from operating activities:         Net income    $3,301          $5,967  Adjustments to reconcile net income to net cash provided by operating activities:         Depreciation     1,609           1,579  Provision for loan losses     6,778           3,450  Gain/(Loss) on sales of securities, net      —           (317) Loss/(Gain) on sale of other real estate     (45)          4  Deferred income taxes     (720)          (640) Changes in:         Accrued interest receivable     (154)          (238) Other assets     1,417           (1,672) Accrued interest payable     (230)          195  Deferred loan fees     625           603  Other liabilities     1,587           536  Income taxes payable      —           (20)                  Net cash provided by operating activities     14,168           9,447                   Cash flows from investing activities:         Purchases of securities available-for-sale     (42,937)          (28,921) Proceeds from sales, maturities, and principal paydowns of securities available-for-sale     6,558           26,647  Purchases of securities held-to-maturity      —           (2,822) Proceeds from maturities and principal paydowns of securities held-to-maturity     2,258           6,452  Net change in loans     (825)          (63,557) Proceeds from sales of other real estate     1,624           327  Purchases of premises and equipmen      (558)          (1,235)                  Net cash used by investing activities     (33,880)          (63,109)                   Cash flows from financing activities:         Net change in:         Deposits     67,926           54,155  Other borrowings     (10,099)          10,514  Federal funds purchased     (20,000)          (5,000) Net proceeds from issuance of common stock     285           1,182  Treasury stock purchased     (1,402)           —  Dividends paid     (2,095)          (1,281)                  Net cash provided by financing activities     34,615           59,570                   Net increase (decrease) in cash and cash equivalents     14,903           5,908  Cash and cash equivalents at beginning of period     36,416           35,893                   Cash and cash equivalents at end of period    $51,319          $41,801                   
See accompanying notes to consolidated financial statements

 

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**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 materialintercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements were prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q. In the opinion ofmanagement, 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 September 30, 2000, theCompany's consolidated results of operations for the three and nine months ended September 30, 2000 and 1999, respectively, consolidated cash flows for the nine months ended September 30, 2000 and 1999, and consolidated changes in shareholders'equity for the nine months ended September 30, 2000 and 1999. Interim period results are not necessarily indicative of results of operations or cash flows for a full-year period. The 1999 year-end condensed consolidated balance sheet and statementof changes in shareholders' equity data were derived from audited financial statements, but do not include all disclosures required by generally accepted accounting principles.

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, 1999.

**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 incomeavailable 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 monthsended September 30,** **For the nine monthsended September 30,**  **2000** **1999** **2000** **1999**  **(In thousands)**Net income available to common shareholders   $2,317         $1,961        $3,301         $5,967                                  Weighted-average common shares outstanding    6,956          7,121         6,971          7,112  Weighted-average common shares and potentially dilutive common shares    6,956          7,121         6,971          7,112                                  Basic EPS   $0.33         $0.28        $0.47         $0.84  Diluted EPS   $0.33         $0.28        $0.47         $0.84  
**3.   NEW ACCOUNTING PRONOUNCEMENTS**

In June 1998, the Financial Accounting Standards Board (“FASB”)  issued Statement of Financial Accounting Standards No. 133, “Accounting  for Derivative Instruments and Hedging Activities.” (“SFAS No. 133”).  SFAS No. 133 became effective for reporting periods beginning after June  15, 2000, and will not be applied retroactively. SFAS No. 133 establishes  accounting and reporting standards for derivative instruments and hedging activities.  Under the standard, all derivatives must be measured at fair value and recognized  as either assets or liabilities in the balance sheet. In addition, hedge accounting  should only be provided for transactions that meet certain specified criteria.  The accounting for changes in fair value (gains and losses) of a derivative  is dependent on the intended use of the derivative and its designation. Derivatives

 

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may be used to: 1) hedge exposure to change the fair value of a recognized  asset or liability or from a commitment, referred to as a fair value hedge,  2) hedge exposure to variable cash flow of forecasted transactions, referred  to as cash flow hedge, or 3) hedge foreign currency exposure. Management  does not expect SFAS No. 133 to have a significant impact on future operations.

**Item 2.   *****Management's Discussion and Analysis of Financial Condition and Results of OperationsSpecial 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 thesafe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements describe the Company's future plans, strategies and expectations, are based on assumptions and involve a number of risks and uncertainties, many ofwhich 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 theirloans 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 change in tax requirements and taxrates.

All written or oral forward-looking statements attributable to  the Company are expressly qualified in their entirety by these cautionary statements.

 

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*General.   *Net income for the quarters ended September 30, 2000 and 1999 was $2.3 million representing an increase of 18.16% compared with $2.0 million for same period in 1999. The increase in netincome was a combined result of higher net interest income, lower loan loss provision, and increased non-interest income, offset by higher non-interest expense. MetroCorp's basic and diluted EPS (earnings per share) for the three months endedSeptember 30, 2000 were $0.33, compared with $0.28 for the same period in 1999. For the nine months ended September 30, 2000, net income was $3.3 million or $0.47 per share, compared with $6.0 million or $0.84 per share for the sameperiod last year. The decrease in earnings for the nine-month period was due to the $5.3 million charge off of factoring receivables from Advantage Finance Corporation that occurred in May 2000. Advantage Finance Corporation is a wholly-ownedsubsidiary of theBank.

At September 30, 2000, total assets and net loans were $703.5 million and $479.4 million, compared with $660.6 million and $488.1 million, respectively, at December 31, 1999. The $42.9 million or 6.50%increase in total assets over the nine-month period ended September 30, 2000 was attributable to increases in securities investments and balances on deposit with other banks, as well as growth in deposits. The $8.7 million or 1.79% decrease innet loans was primarily the net effect of the sale of $13 million in SBA loans, offset by new net loan funding and principal pay-downs/restructuring. Total liabilities and total deposits at September 30, 2000 were $648.8 million and $612.4million, compared to $608.0 million and $544.4 million, respectively, at December 31, 1999. The $67.9 million or 12.5% increase in deposits over the nine-month period ended September 30, 2000 is a direct result of continued progressby the Bank's account officer staff in its “total relationship banking” initiatives. Management believes these efforts have had a positive impact on liquidity and have allowed the Company to continue funding loans from internally-generateddeposits. As a result of the Company's strong liquidity, in September 2000 the Company repaid a $20 million short-term loan with the Federal Home Loan Bank. The Company's liquidity remained solid with overnight Federal Fund sales and other temporaryinvestments being 204.96% higher in September 2000 compared with December 31, 1999. Shareholders' equity at September 30, 2000 was $54.8 million compared with $52.6 million at December 31, 1999, an increase of $2.2 million or4.17%. The Company's return on average assets was 1.28% for the third quarter of 2000, versus 1.23% for the same quarter in 1999. The return on average shareholders' equity was 17.34% for the third quarter of 2000, up from 14.58% for the same quarter in1999.

*Net Interest Income.   *For the three months ended September 30, 2000, net interest income, before the provision for loan losses, increased by 8.25% to $9.0 million from $8.3 million in the same periodin 1999. For the nine months ended September 30, 2000, net interest income, before the provision for loan losses, increased by 14.17% to $27.2 million compared with $23.8 million over the same period in 1999. The increase was due to higherinterest income from higher earning asset yields, higher average loan and investment volumes, as well as rising interest rates in the market. Net interest income was offset by increased interest expense to service a larger deposit base, coupled withincreased competitively priced rates paid for those deposits. Four federal interest rate hikes since September 1999, increased bank prime rate by 125 basis points. This has resulted in higher yields on earning assets offset by higher rates paid forinterest-bearing liabilities; however, increased deposit volumes have leveraged loan funding costs. For the quarters ended September 30, 2000 and 1999, the net interest margins and spreads narrowed by 17 basis points to 5.35% from 5.52% and by 24basis points to 4.39% from 4.63%, respectively. For the nine months ended September 30, 2000 and 1999, the net interest margins and spreads widened by 11 basis points to 5.64% from 5.53% and by 9 basis points to 4.71% from 4.62%, respectively. Thewidening of the net interest margin was a combined result of increased volumes in investments and loan balances bearing higher yields, while the cost of these assets increased slightly.

Interest income for the three months ended September 30, 2000  increased by 19.49% to $16.4 million from $13.7 million for the same  period in 1999. Interest income for the nine months ended September 30,  2000 increased by 20.61% to $47.1 million from $39.1 million over  the same period in 1999. The increase was driven by growth in average earning  asset volumes as well as increases in the yields on earning assets. As compared  to the three and nine month periods ended September 30, 1999, the average  total loan volumes for the three and nine month periods ended September 30,  2000 increased by $10.4 million or 2.23% and by 

 

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$41.7 million or 9.38%, respectively. For the same periods,  the average yields on average total loan volumes increased 102 basis points  to 10.89% and 85 basis points to 10.72%, respectively. As compared with the  three and nine month periods ended September 30, 1999, average total investment  volumes for the three and nine month periods ended September 30, 2000 increased  by $61.6 million or 47.06% and by $26.8 million or 20.39%, respectively.  For the same periods, the average yields on average investments increased by  114 and 106 basis points, respectively. For the three months ending September 30,  2000, as compared to the same period in 1999, the yield on total average earning  assets increased by 63 basis points to 9.73%. For the nine months ending September 30,  2000, as compared to the same period in 1999, the yield on total average earning  assets increased by 70 basis points to 9.77%.

Interest expense increased for the three months ended September 30,  2000 by $2.0 million or 36.86% to $7.4 million, compared with $5.4 million  for the same period in 1999. For the nine months ended September 30, 2000,  interest expense increased by $4.7 million or 30.66% to $19.9 million  compared with $15.3 million for the same period in 1999. The increased  interest expense was the result of higher interest-bearing deposit volumes coupled  with higher interest rates paid on those deposits. As compared to the three  and nine month periods ended September 30, 1999, average interest bearing  deposit volumes for the three and nine month periods ended September 30,  2000 increased by $91.0 million or 21.67% and by $78.2 million or  19.57%, respectively. For the same periods, the average rates paid on interest  bearing deposits have increased by 50 basis points to 4.21% and by 41 basis  points to 4.02%, respectively. The Company views time deposits as a stable means  of supporting loan growth. The Company believes, based on its historical experience,  that its large time deposits have core-type characteristics. The Company continues  to anticipate that this source of funding will continue to sustain a portion  of the Company's assets growth in the future.

 

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The following tables present the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars andrates. No tax-equivalent adjustments were made and all average balances are yearly average balances. Non-accruing loans have been included in the tables as loans having a zero yield.
  **For the three months ended September 30,**  **2000** **1999**  **AverageOutstandingBalance** **Interest Earned/Paid** **AverageYield/Rate** **AverageOutstandingBalance** **InterestEarned/Paid** **AverageYield/Rate**  **(Dollars in thousands)****Assets**                        Interest-earning assets:                          Total loans   $478,302     $13,089      10.89%    $467,871     $11,640      9.87% Taxable securities    118,980      2,133      7.13      96,369      1,615      6.65  Tax-exempt securities    21,248      267      5.00      22,592      295      5.18  Federal funds sold and other temporary investments    52,405      927      7.04      12,030      188      6.20                               Total interest earning assets    670,935      16,416      9.73%     598,862      13,738      9.10%                            Less allowance for loan losses    (8,775)             (6,942)                                    Total interest-earning assets, net of allowance for loan losses    662,160              591,920          Nonearning assets    55,711              41,692                                     Total assets   $717,871             $633,612                                     **Liabilities and shareholders' equity**                        Interest-bearing liabilities:                          Interest-bearing demand deposits   $43,704     $325      2.96%    $38,971     $294      2.99% Savings and money market accounts    96,830      883      3.63      98,970      780      3.13  Time deposits    367,958      5,599      6.03      279,997      3,537      5.01  Federal funds purchased and securities sold under repurchase agreements     —       —       —      26,154      349      5.29  Other borrowings    41,807      582      5.54      35,488      439      4.91                               Total interest-bearing liabilities    550,299      7,389      5.34%     479,580      5,399      4.47%                            Noninterest-bearing liabilities:                          Noninterest-bearing demanddeposits    108,639              93,291          Other liabilities    5,775              7,387                                     Total liabilities    644,713              580,258                                     Shareholders' equity    53,158              53,258                                     Total liabilities and shareholders' equity   $717,871             $633,612                                     Net interest income       $9,027             $8,339                                 Net interest spread            4.39%             4.63% Net interest margin            5.35%             5.52% 
 

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  **For the nine months ended September 30,**  **2000** **1999**  **AverageOutstandingBalance** **Interest Earned/Paid** **AverageYield/Rate** **AverageOutstandingBalance** **InterestEarned/Paid** **AverageYield/Rate**  **(Dollars in thousands)****Assets**                        Interest-earning assets:                         Total loans    $485,973      $39,010       10.72%     $444,297      $32,797       9.87% Taxable securities     100,555       5,425       7.21       100,410       4,977       6.63  Tax-exempt securities     21,518       803       4.98       20,944       824       5.26  Federal funds sold and other temporary investments     36,136       1,876       6.93       10,060       464       6.17                                   Total interest earning assets     644,182       47,114       9.77%      575,711       39,062       9.07%                              Less allowance for loan losses     (8,401)              (6,558)                                      Total interest-earning assets, net of allowance for loan losses     635,781               569,153          Noninterest-earning assets     55,920               39,275                                       Total assets    $691,701              $608,428                                       **Liabilities and shareholders' equity**                        Interest-bearing liabilities:                        Interest-bearing demand deposits    $42,366      $949       2.99%     $35,897      $733       2.73% Savings and money market accounts     95,991       2,393       3.33       97,321       2,216       3.04  Time deposits     339,415       14,590       5.74       266,373       10,110       5.07  Federal funds purchased and securities sold under repurchase agreements     16       1       0.00       26,383       1,000       5.07  Other borrowings     48,537       1,998       5.50       32,497       1,195       4.92                                   Total interest-bearing liabilities     526,325       19,931       5.06%      458,471       15,254       4.45%                              Noninterest-bearing liabilities:                         Noninterest-bearing demand deposits     105,425               89,382          Other liabilities     6,983               7,835                                       Total liabilities     638,733               555,688                                       Shareholders' equity     52,968               52,740                                       Total liabilities and shareholders' equity    $691,701              $608,428                                       Net interest income        $27,183              $23,808                                   Net interest spread             4.71%              4.62% Net interest margin             5.64%              5.53% 
 

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The following tables present the dollar amount of changes in interest income and interest expense for the major components of interest-earning assets and interest-bearing liabilities and distinguishes between the increase related to higheroutstanding balances and changes in interest rates for the three and nine month periods ended September 30, 2000 compared with September 30, 1999. For purposes of these tables, changes attributable to both rate and volume have been allocated torate.
****              **Three months ended September 30,2000 vs. 1999**  **Increase (Decrease)Due to**      **Volume** **Rate** **Total**  **(Dollars in thousands)**            **Interest-earning assets:**            Total loans        $(3,428)         $4,877          $1,449  Securities         68           422           490  Federal funds sold and other temporary investments         299           440           739                                 Total increase/(decrease) in interest income         (3,061)          5,739           2,678  **Interest-bearing liabilities:**            Interest-bearing demand deposits         45           (14)          31  Savings and money market accounts         (384)          487           103  Time deposits         (1,685)          3,747           2,062  Federal funds purchased         (349)           —           (349)  Other borrowings         (121)          264           1430                                 Total increase/(decrease) in interest expense         (2,494)          4,484           1,990                                 Increase/(decrease) in net interest income        $(567)         $1,255          $688                                 
 
****              **Nine months ended September 30,2000 vs. 1999**  **Increase (Decrease)Due to**      **Volume** **Rate** **Total**  **(Dollars in thousands)**            **Interest-earning assets:**            Total loans        $2,082          $4,131          $6,213  Securities         61           366           427  Federal funds sold and other temporary investments         1,137           275           1,412                                 Total increase/(decrease) in interest income         3,280           4,772           8,052  **Interest-bearing liabilities:**            Interest-bearing demand deposits         106           110           216  Savings and money market accounts         (101)          278           177  Time deposits         2,206           2,274           4,480  Federal funds purchased         (998)          (1)          (999) Other borrowings         521           282           803                                 Total increase/(decrease) in interest expense         1,734           2,943           4,677                                 Increase/(decrease) in net interest income        $1,547          $1,828          $3,375                                 
*Provision for Loan Losses.   *Provisions  for loan losses are charged to income to bring the Company's allowance for loan  losses to a level deemed appropriate by management. For the three and nine month  periods ended September 30, 2000, the provision decreased by $881,000 or  63.84% to $499,000, and 

 

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increased by $3.3 million or 96.46% to $6.8 million, respectively.  The allowance for loan losses at September 30, 2000 was $9.0 million, compared  with $7.5 million at December 31, 1999. In the last half of 1999, management  began to move the allowance for loan losses ratio upward to an amount more in  line with the historical portfolio loss experience. At September 30, 2000,  the ratio of loan loss allowance to total loans was 1.85% compared with 1.52%  at December 31, 1999. In July 2000, the loan loss allowance reached  1.80% of total loans, well above the Company's goal to maintain a floor of 1.60%.  Since the goal was achieved, the monthly provision for loan losses was lowered  from $233,000 in July to $133,000 in August and September 2000.

As of September 30, 2000, management believes the allowance for loan losses is adequate to cover losses inherent in the loan portfolio as of such date. There can be no assurance, however, that we will not sustain losses in futureperiods which could be substantial in relation to the size of the allowance at September 30, 2000.

*Non-Interest Income.   *Non-interest income for the quarters ended September 30, 2000 and 1999, was $1.8 million and $1.4 million, respectively, an increase $386,000 or 26.77%. For the nine months ended September 30,2000 and 1999, non-interest income was $5.2 million and $4.9 million, respectively, an increase of $266,000 or 5.36%. The increase in non-interest income was primarily the result of improvements made in the collection of bank services fees in addition tothe customary monthly service charges and NSF fees on deposit accounts. These bank services fees specifically relate to wire transfer, check cashing, safe deposit boxes, ACH fees, check card income, international cable fees, and other miscellaneous fees.These fees are categorized as “other non-interest income”. The majority of non-interest income comes from service charges on deposit accounts which includes NSF fees received. For the three and nine month periods ended September 30, 2000,service charges on deposit accounts represented 54.69% and 53.94% of total non-interest income, respectively.

The following table presents, for the periods indicated, the categories of non-interest income:
  **For the three monthsended September 30,** **For the nine monthsended September 30,**      **2000**          **1999**          **2000**          **1999**   **(Dollars in thousands)**Service charges on deposit accounts    $1,002          $974          $2,815          $2,933  Other loan-related fees     236           266           640           1,204  Gain on sale of securities, net      —           43            —           317  Letters of credit commissions and fees     147           129           424           334  Other non-interest income     447           33           1,340           165                                       Total non-interest income    $1,832          $1,445          $5,219          $4,953                                       
*Non-Interest Expense.   *For the three months  ended September 30, 2000, non-interest expense increased by $1.3 million or  24.20% to $6.7 million, compared to the same period in 1999. For the nine months  ended September 30, 2000, non-interest expense increased by $4.1 million or  25.10% to $20.5 million, compared to the same period in 1999. The increase in  non-interest expense from 1999 to 2000 was due to additional staff and benefit  compensation, increased occupancy, accounting and legal expenses represented  in the professional and consulting fee categories, and the implementation of  new analysis and internet banking software and other operating systems improvements,  represented in the other non-interest expense category. As a result of such  expenses, the Company's efficiency ratios softened over both the three and nine  month periods ended September 30, 2000, as compared to the same periods in 1999,  to 61.89% from 55.57% and to 63.17% from 57.53%, respectively.

 

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The following table presents, for the periods indicated, the major categories in non-interest expense:
  **For the three monthsended September 30,** **For the nine monthsended September 30,**      **2000**          **1999**          **2000**          **1999**   **(Dollars in thousands)**Employee compensation and benefits    $3,269          $2,777          $9,670          $8,366  Non-staff expenses:                 Occupancy     1,412           1,267           4,324           3,704  Other real estate, net     (45)          (8)          (61)          44  Data processing     42           36           128           282  Professional fees, consultants, and contract labor     760           247           2,568           963  Advertising     79           98           325           337  Director compensation     65           69           254           211  Printing and supplies     116           113           337           377  Telecommunications     124           120           415           380  Other non-interest expense     897           691           2,513           1,701                                       Total non-staff expenses     3,450           2,633           10,803           7,999                                       Total non-interest expense    $6,719          $5,410          $20,473          $16,365                                       
Employee compensation and benefits expenses represent 48.65% and 47.23% of total non-interest expense for the three and nine months periods ended September 30, 2000, respectively. Employee compensation and benefits expense for the quartersended September 30, 2000 and 1999, were $3.3 million and $2.8 million, respectively, reflecting an increase of $492,000 or 17.72%. For the nine months ended September 30, 2000 and 1999, employee compensation and benefits expenses were $9.7 millionand $8.4 million, respectively, reflecting an increase of $1.3 million or 15.59%. The increases for the three and nine month periods ended September 30, 2000 resulted primarily from the costs associated with the full effect of the Dulles and LongPoint branches, that opened in March and April 1999, and the Boone Road and Garland branches that opened in November 1999. Total full-time equivalent (FTE) employees at September 30, 2000 and 1999 were 326.41 and 294.17, respectively. AtSeptember 30, 2000 the FTE figures include 21.0 security guard FTE, and 5.5 part-time/temporary FTE. At December 31, 1999 security guard FTE was 19.0 with no part-time/temporary FTE. Historically, the security guards and part-time/temporary staffmembers have not been included in the calculations for FTE; although, their compensation and benefits have been included in non-interest expense in the employee compensation and benefits category. Going forward, the Company will include such staff membersin the calculations of FTE employees.

For the three months ended September 30, 2000, non-staff expenses increased by $817,000 or 31.03% compared with the same period in 1999. For the nine-month period ended September 30, 2000, non-staff expenses increased by $2.8 million or35.05% compared with the same period last year. The increased non-staff expense, both for the three and nine months periods in 2000, was due to the following: higher occupancy expense from the full effect of four additional branches opened in 2000,increased accounting and legal expenses associated with bank initiated litigation, the implementation of new analysis and internet banking software, as well as other operating systems improvements.

**Financial Condition**

*Loan Portfolio.   *Total loans decreased  by $7.2 million or 1.46%, from $495.7 million at December 31, 1999 to $488.4  million at September 30, 2000. The decrease is primarily due to the $13.0  million sale of SBA loans in July 2000, offset by new net loan funding and various  principal pay-downs and restructurings. At September 30, 2000 and December 31,  1999, the ratio of total loans to total deposits was 79.76% and 91.04%, respectively.  For the same periods, total loans represented 69.42% and 75.03% of total assets,  respectively.

 

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The following table summarizes the loan portfolio of the Company by type of loan:
   **As ofSeptember 30, 2000** **As ofDecember 31, 1999**   **Amount** **Percent** **Amount** **Percent**   **(Dollars in Thousands)**       Commercial and industrial     $298,428           60.40%         $298,150           59.55%        Real estate mortgage                        Residential     10,236           2.07           10,934           2.18         Commercial     126,559           25.61           126,363           25.24          Real estate construction                        Residential     9,769           1.98           11,348           2.27         Commercial     30,508           6.17           28,661           5.72         Consumer and other     12,013           2.43           11,550           2.31         Factored receivables     6,569           1.34           13,700           2.74                                               Gross loans     494,082           100.00%          500,706           100.00%                                      Less: unearned discounts, interest and deferred fees     (5,662)              (5,037)                                      Total loans    $488,420              $495,669                                
 

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*Nonperforming Assets.   *Nonperforming assets at June 30, 2000 and December 31, 1999 were $2.4 million and $5.2 million, respectively. The decrease of $2.8 million, or 54.29%, is due to creditpolicy changes and continual work by the special assets department and all the loan relationship officers on collection efforts. These figures are net of guarantees from the United States Department of Commerce's Small Business Administration (the “SBA”), the Export Import Bank of the United States (the “Ex-Im Bank”), an independent agency of the United States Government, and the Overseas Chinese Community Guaranty Fund (“OCCGF”) an agency sponsored by the government ofTaiwan, which were $1.8 million, at both September 30, 2000 and December 31, 1999.

The Company is actively involved in the origination and sale of certain federally guaranteed loans into the secondary market with servicing retained. Under the terms of these programs, the Company is required to repurchase any loans whichmay 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 ofSeptember 30, 2000** **As ofDecember 31, 1999**   **(Dollars in thousands)**       Nonaccrual loans    $3,155      $6,552         Accruing loans 90 days or more past due      —        —         Other real estate     882       455         Other real estate and other asset repossessions     191       35                       Total nonperforming assets    $4,228      $7,042                       Less:                Nonperforming loans guaranteed by the SBA, Ex-Im Bank, OCCGF     1,842       1,822                       Total net nonperforming assets    $2,386      $5,220                       Nonperforming assets to total assets     0.60%      1.07%        Nonperforming assets to total loans and other real estate     0.86       1.42         Nonperforming assets to total assets(1)     0.34       0.79         Nonperforming assets to total loans and other real estate(1)     0.49       1.05  

(1) Nonperforming assets are net of guarantees from the SBA,  Ex-Im Bank and OCCGF.

 

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*Allowance for Loan Losses.   *For the nine months ended September 30, 2000, net loan charge-offs were $5.3 million or 1.09% of average loans outstanding compared with $4.1 million or 0.90% for the yearended December 31, 1999. Through September 30, 2000, approximately $1.2 million or 26.94% of the 1999 loan chargeoffs have been recovered and the Company continues to seek recovery of chargeoffs through all available channels. The Companycontinues working to further strengthen its credit administration systems and loan review procedures. At September 30, 2000 and December 31, 1999, the allowance for loan losses aggregated $9.0 million and $7.5 million, or 1.85% and1.52% of total loans, respectively.

The following table presents an analysis of the allowance for loan losses and other related data:
   **As ofSeptember 30, 2000** **As ofDecember 31, 1999**   **(Dollars in thousands)**       Average total loans outstanding    $485,973      $456,653                       Total gross loans outstanding at end of period    $488,420      $495,669                       Allowance for loan losses at beginning of period    $7,537      $6,119         Provision for loan losses     6,778       5,550         Charge-offs:                Commercial and industrial     (1,065)      (3,563)        Real estate — mortgage     (11)      (32)        Real estate — construction      —        —          Consumer and other     (5,397)      (807)                      Total charge-offs     (6,473)      (4,402)                      Recoveries:                Commercial and industrial     847       94         Real estate — mortgage     8        —          Real estate — construction      —        —          Consumer and other     331       176                       Total recoveries     1,186       270                       Net loan charge-offs     (5,287)      (4,132)                      Allowance for loan losses at end of period    $9,028      $7,537                       Ratio of allowance to end of period total loans     1.85%      1.52%        Ratio of net loan charge-offs to average loans     1.09       0.90         Ratio of allowance to end of period nonperforming loans     286.15       115.03  
*Securities.   *At September 30, 2000, the securities portfolio totaled $146.1 million, reflecting an increase of $36.0 million or 32.73% from $110.1 million at December 31, 1999. This growthwas due primarily to an increase in fixed rate mortgage-backed securities and asset backed securities which were funded by the growth in deposits.

*Deposits.   *At September 30, 2000, total deposits were $612.4 million, up $67.9 million or 12.48% from $544.4 million at December 31, 1999. Noninterest-bearing deposits at September 30,2000 increased by $2.6 million or 2.71% to $98.9 million from $96.3 million at December 31, 1999. Interest-bearing deposits at September 30, 2000 increased by $65.3 million or 14.57% to $513.5 million from $448.2 million at December 31, 1999. The Company's ratios of noninterest-bearing demand deposits to total deposits for September 30, 2000 and December 31, 1999 were 16.14% and 17.68%, respectively.

*Other Borrowings.   *The Company has two  ten-year loans totaling $25.0 million and one six-month short-term loan  totaling $20 million from the Federal Home Loan Bank (FHLB) to further  leverage its balance sheet and diversify its funding sources. The ten-year loans  bear interest at the average rate of 4.99% per annum. Interest rates on the  ten-year loans are set until the their fifth year anniversary (September 

 

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2003), at which time the loans may be repaid or the interest rate  may be renegotiated. The six-month short-term loan was repaid in September 2000;  however, the Company has retained the unused $50 million credit line with  the FHLB. Other short-term borrowings principally consist of U.S. Treasury tax  note option accounts having a maturity of 14 days or less. Additionally, the  Company had several unused, unsecured lines of credit with correspondent banks  totaling $20.0 million at September 30, 2000 and at December 31,  1999.

*Capital Resources.   *Shareholders' equity increased from $52.6 million at December 31, 1999 to $54.8 million at September 30, 2000, an increase of $2.2 million or 4.17%. The increase was primarily due to a netaddition to undivided profits of $2.0 million and a $200,000 improvement in unrealized securities losses.

The following table provides a comparison of the Company's and the Bank's leverage and risk-weighted capital ratios as of September 30, 2000 to the minimum and well-capitalized regulatory standards.
   **MinimumRequired** **WellCapitalized** **Actual Ratio atSept.  30, 2000**       **The Company**                   Leverage ratio     4.00%(1)      N/A       8.19%        Tier 1 risk-based capital ratio     4.00       N/A       11.33         Risk-based capital ratio     8.00       N/A       12.59         **The Bank**                   Leverage ratio     4.00%(2)      5.00%      7.84%        Tier 1 risk-based capital ratio     4.00       8.00       10.85         Risk-based capital ratio     8.00       10.00       12.11  

(1) The Federal Reserve Board may require the Company to maintain a leverage ratio of up to 100 basis points above the required minimum.

(2) The OCC may require the Bank to maintain a leverage ratio of up to 100 basis points above the required minimum.

**Item 3.   *****Quantitative and Qualitative Disclosures About Market Risk.***

**There have been no material changes in the previously disclosed  market risk information in the Company's Form 10-K for the year ended December  31, 1999. See Form 10-K, Item 7 “Management's Discussion and Analysis  of Financial Condition and Results of Operations - Interest Rate Sensitivity.”

 

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**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***
**ExhibitNumber**  11       — Computation of Earnings Per Common Share, included as Note (2) to the Interim Consolidated Financial Statements on Page 6 of this Form 10-Q. 27       — Financial Data Schedule. The required Financial Data Schedule has been included as Exhibit 27 of the Form 10-Q filed electronically with the Securities and Exchange Commission. 
**Item 6B.   *****Reports on Form 8-K***

**Not applicable

 

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**SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
           METROCORP BANCSHARES, INC.       Date:   November 14, 2000          By:      /s/   DON      J. WANG                 **Don J. Wang      Chairman of the Board and Chief Executive Officer**       Date:   November 14, 2000                /s/   RUTH      E. RANSOM                 **Ruth E. Ransom      Chief Financial Officer**
 

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****