##### 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,
2005
 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 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 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 31,2005
    
    
    2004ASSETSCash and due from banks
    
    $
    23,044
    
    
    $
    26,285Federal funds sold and other temporary
investments
    
    
    42,919
    
    
    
    5,788Total cash and cash equivalents
    
    
    65,963
    
    
    
    32,073Securities available-for-sale, at fair value
    
    
    246,142
    
    
    
    273,720Loans, net of allowance for loan losses of $10,806 and $10,501,
respectively
    
    
    602,098
    
    
    
    582,136Loans, held-for-sale
    
    
    
    
    
    
    1,899Accrued interest receivable
    
    
    3,502
    
    
    
    3,308Premises and equipment, net
    
    
    6,261
    
    
    
    6,512Customers liability on acceptances
    
    
    2,367
    
    
    
    6,669Foreclosed assets, net
    
    
    
    
    
    
    1,566Other assets
    
    
    8,187
    
    
    
    6,429Total assets
    
    $
    934,520
    
    
    $
    914,312LIABILITIES AND SHAREHOLDERS EQUITYDeposits:Noninterest-bearing
    
    $
    171,789
    
    
    $
    163,191Interest-bearing
    
    
    616,758
    
    
    
    591,862Total deposits
    
    
    788,547
    
    
    
    755,053Other borrowings
    
    
    44,034
    
    
    
    60,849Accrued interest payable
    
    
    680
    
    
    
    649Acceptances outstanding
    
    
    2,367
    
    
    
    6,669Other liabilities
    
    
    8,405
    
    
    
    5,369Total liabilities
    
    
    844,033
    
    
    
    828,589Commitments and contingencies
    
    
    
    
    
    
    Shareholders equity:Common stock, $1.00 par value, 20,000,000 shares authorized;
7,323,127 and 7,312,627 shares issued and 7,210,735 and
7,187,446 shares outstanding at September 30, 2005 and December
31, 2004, respectively
    
    
    7,323
    
    
    
    7,313Additional paid-in capital
    
    
    28,130
    
    
    
    27,859Retained earnings
    
    
    57,546
    
    
    
    50,976Accumulated other comprehensive (loss) income
    
    
    (1,478
    )
    
    
    710Treasury stock, at cost
    
    
    (1,034
    )
    
    
    (1,135
    )Total shareholders equity
    
    
    90,487
    
    
    
    85,723Total liabilities and shareholders equity
    
    $
    934,520
    
    
    $
    914,312
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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 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Interest income:Loans
    
    $
    11,552
    
    
    $
    8,649
    
    
    $
    32,279
    
    
    $
    25,108Securities:Taxable
    
    
    2,382
    
    
    
    2,648
    
    
    
    7,163
    
    
    
    7,018Tax-exempt
    
    
    211
    
    
    
    227
    
    
    
    641
    
    
    
    693Federal funds sold and other temporary
investments
    
    
    207
    
    
    
    25
    
    
    
    343
    
    
    
    56Total interest income
    
    
    14,352
    
    
    
    11,549
    
    
    
    40,426
    
    
    
    32,875Interest expense:Time deposits
    
    
    3,214
    
    
    
    2,087
    
    
    
    8,274
    
    
    
    5,838Demand and savings deposits
    
    
    636
    
    
    
    345
    
    
    
    1,449
    
    
    
    935Other borrowings
    
    
    365
    
    
    
    498
    
    
    
    1,420
    
    
    
    1,374Total interest expense
    
    
    4,215
    
    
    
    2,930
    
    
    
    11,143
    
    
    
    8,147Net interest income
    
    
    10,137
    
    
    
    8,619
    
    
    
    29,283
    
    
    
    24,728Provision for loan losses
    
    
    468
    
    
    
    261
    
    
    
    1,396
    
    
    
    816Net interest income after provision for
loan losses
    
    
    9,669
    
    
    
    8,358
    
    
    
    27,887
    
    
    
    23,912Noninterest income:Service fees
    
    
    1,711
    
    
    
    1,656
    
    
    
    4,972
    
    
    
    4,942Letters of credit commissions and other
loan-related fees
    
    
    313
    
    
    
    139
    
    
    
    905
    
    
    
    755Other noninterest income
    
    
    63
    
    
    
    44
    
    
    
    274
    
    
    
    635Total noninterest income
    
    
    2,087
    
    
    
    1,839
    
    
    
    6,151
    
    
    
    6,332Noninterest expenses:Salaries and employee benefits
    
    
    4,225
    
    
    
    4,800
    
    
    
    12,229
    
    
    
    12,313Occupancy and equipment
    
    
    1,424
    
    
    
    1,412
    
    
    
    4,160
    
    
    
    4,242Foreclosed assets, net
    
    
    (67
    )
    
    
    70
    
    
    
    357
    
    
    
    (844
    )Other noninterest expense
    
    
    2,066
    
    
    
    1,549
    
    
    
    5,851
    
    
    
    5,371Total noninterest expenses
    
    
    7,648
    
    
    
    7,831
    
    
    
    22,597
    
    
    
    21,082Income before provision for income
taxes
    
    
    4,108
    
    
    
    2,366
    
    
    
    11,441
    
    
    
    9,162Provision for income taxes
    
    
    1,272
    
    
    
    762
    
    
    
    3,575
    
    
    
    2,888Net income
    
    $
    2,836
    
    
    $
    1,604
    
    
    $
    7,866
    
    
    $
    6,274Earnings per common share:Basic
    
    $
    0.39
    
    
    $
    0.22
    
    
    $
    1.09
    
    
    $
    0.87Diluted
    
    $
    0.39
    
    
    $
    0.22
    
    
    $
    1.08
    
    
    $
    0.87Weighted average shares outstanding:Basic
    
    
    7,209
    
    
    
    7,180
    
    
    
    7,203
    
    
    
    7,171Diluted
    
    
    7,312
    
    
    
    7,235
    
    
    
    7,292
    
    
    
    7,250Dividends per common share
    
    $
    0.06
    
    
    $
    0.06
    
    
    $
    0.18
    
    
    $
    0.18
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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 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    $
    2,836
    
    
    $
    1,604
    
    
    $
    7,866
    
    
    $
    6,274Other comprehensive income (loss), net of tax:Unrealized gain (loss) on investment securities, net:Unrealized holding gain (loss) arising during
the period
    
    
    (891
    )
    
    
    3,440
    
    
    
    (2,188
    )
    
    
    17Less: reclassification
adjustment for gain included in net income
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    5Other comprehensive income (loss)
    
    
    (891
    )
    
    
    3,435
    
    
    
    (2,188
    )
    
    
    12Total comprehensive income
    
    $
    1,945
    
    
    $
    5,039
    
    
    $
    5,678
    
    
    $
    6,286
 METROCORP BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
For the Nine Months Ended September 30, 2005
(In thousands)
(Unaudited)
 Additional
    
    
    
    
    
    
    Accumulated Other
    
    
    TreasuryCommon Stock
    
    
    Paid-In
    
    
    Retained
    
    
    Comprehensive
    
    
    StockShares
    
    
    At Par
    
    
    Capital
    
    
    Earnings
    
    
    Income (Loss)
    
    
    At Cost
    
    
    TotalBalance at December 31, 2004
    
    
    7,188
    
    
    $
    7,313
    
    
    $
    27,859
    
    
    $
    50,976
    
    
    $
    710
    
    
    $
    (1,135
    )
    
    $
    85,723Issuance of common stock
    
    
    10
    
    
    
    10
    
    
    
    99
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    109Re-issuance of treasury stock
    
    
    13
    
    
    
    
    
    
    
    172
    
    
    
    
    
    
    
    
    
    
    
    101
    
    
    
    273Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,866
    
    
    
    
    
    
    
    
    
    
    
    7,866Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,188
    )
    
    
    
    
    
    
    (2,188
    )Cash dividends ($0.18 per
share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,296
    )
    
    
    
    
    
    
    
    
    
    
    (1,296
    )Balance at September 30,
2005
    
    
    7,211
    
    
    $
    7,323
    
    
    $
    28,130
    
    
    $
    57,546
    
    
    $
    (1,478
    )
    
    $
    (1,034
    )
    
    $
    90,487
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METROCORP BANCSHARES, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 For the Nine Months EndedSeptember 30,2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    7,866
    
    
    $
    6,274Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    1,031
    
    
    
    1,002Provision for loan losses
    
    
    1,396
    
    
    
    816Gain on sale of securities
    
    
    
    
    
    
    (7
    )Loss (gain) on foreclosed assets
    
    
    316
    
    
    
    (1,115
    )Loss on sale and disposal of premises and equipment
    
    
    100
    
    
    
    Gain on sale of loans
    
    
    (42
    )
    
    
    (587
    )Amortization of premiums and discounts on securities
    
    
    189
    
    
    
    1,874Amortization of net deferred loan fees
    
    
    (1,351
    )
    
    
    (955
    )Changes in:Loans held-for-sale
    
    
    1,899
    
    
    
    3,512Accrued interest receivable
    
    
    (194
    )
    
    
    376Other assets
    
    
    (633
    )
    
    
    (487
    )Accrued interest payable
    
    
    31
    
    
    
    1Other liabilities
    
    
    3,036
    
    
    
    1,320Net cash provided by operating activities
    
    
    13,644
    
    
    
    12,024Cash flows from investing activities:Purchases of securities available-for-sale
    
    
    (26,953
    )
    
    
    (100,564
    )Proceeds from sales, maturities and principal paydowns of securities
available-for-sale
    
    
    51,029
    
    
    
    72,644Net change in loans
    
    
    (21,165
    )
    
    
    (12,084
    )Proceeds from sale of foreclosed assets
    
    
    2,450
    
    
    
    3,273Proceeds from sale of premises and equipment
    
    
    4
    
    
    
    Purchases of premises and equipment
    
    
    (884
    )
    
    
    (1,759
    )Net cash provided by (used in) investing activities
    
    
    4,481
    
    
    
    (38,490
    )Cash flows from financing activities:Net change in:Deposits
    
    
    33,494
    
    
    
    16,930Other borrowings
    
    
    (16,815
    )
    
    
    6,702Proceeds from issuance of common stock
    
    
    109
    
    
    
    50Re-issuance of treasury stock
    
    
    273
    
    
    
    276Dividends paid
    
    
    (1,296
    )
    
    
    (1,289
    )Net cash provided by financing activities
    
    
    15,765
    
    
    
    22,669Net increase (decrease) in cash and cash equivalents
    
    
    33,890
    
    
    
    (3,797
    )Cash and cash equivalents at beginning of period
    
    
    32,073
    
    
    
    36,927Cash and cash equivalents at end of period
    
    $
    65,963
    
    
    $
    33,130
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METROCORP BANCSHARES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. BASIS OF PRESENTATION
     2. SIGNIFICANT ACCOUNTING POLICIES
 Stock-Based Compensation
 Accounting for
Stock-Based Compensation,
  For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands, except per share amounts)Net income:As
reported
    
    $
    2,836
    
    
    $
    1,604
    
    
    $
    7,866
    
    
    $
    6,274Pro
forma
    
    
    2,742
    
    
    
    1,561
    
    
    
    7,585
    
    
    
    6,145Stock-based compensation cost, net of income taxes:As
reported
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Pro
forma
    
    
    94
    
    
    
    43
    
    
    
    281
    
    
    
    129Basic earnings per common share:As
reported
    
    
    0.39
    
    
    
    0.22
    
    
    
    1.09
    
    
    
    0.87Pro
forma
    
    
    0.38
    
    
    
    0.22
    
    
    
    1.05
    
    
    
    0.86Diluted earnings per common share:As
reported
    
    
    0.39
    
    
    
    0.22
    
    
    
    1.08
    
    
    
    0.87Pro
forma
    
    
    0.38
    
    
    
    0.22
    
    
    
    1.04
    
    
    
    0.85
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Stock-Based Compensation (Continued)
  Share-Based Payment. Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation Statement of Cash Flows
  New Accounting Pronouncements
 Accounting for Certain Loans or Debt Securities Acquired in a Transfer
 Accounting Changes and Error Corrections
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New Accounting Pronouncements ( Continued)
 Implementation Guidance for the Application of
Paragraph 16 of EITF Issue No. 03-1 The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security
Whose Cost Exceeds Fair Value The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments Accounting for Certain Investments
in Debt and Equity Securities Accounting for Noncurrent
Marketable Equity Securities Equity Method of Accounting for
Investments in Common Stock.
 Accounting for
Uncertain Tax Positions  an Interpretation of FASB Statement No. 109 Statement 109
 3. SECURITIES AVAILABLE-FOR-SALE
  As of September 30, 2005
    
    
    As of December 31, 2004Gross
    
    
    Gross
    
    
    
    
    
    
    
    
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair
    
    
    Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gain
    
    
    Loss
    
    
    Value
    
    
    Cost
    
    
    Gain
    
    
    Loss
    
    
    Value(Dollars in thousands)U.S. Government
agencies
    
    $
    32
    
    
    $
    1
    
    
    $
    
    
    
    $
    33
    
    
    $
    35
    
    
    $
    
    
    
    $
    
    
    
    $
    35U.S. Government sponsored
entities
    
    
    31,361
    
    
    
    
    
    
    
    (156
    )
    
    
    31,205
    
    
    
    4,970
    
    
    
    
    
    
    
    (18
    )
    
    
    4,952Obligations of state and
political subdivisions
    
    
    17,161
    
    
    
    727
    
    
    
    
    
    
    
    17,888
    
    
    
    18,105
    
    
    
    1,030
    
    
    
    
    
    
    
    19,135Mortgage-backed securities
and collateralized mortgage
obligations
    
    
    175,145
    
    
    
    178
    
    
    
    (2,655
    )
    
    
    172,668
    
    
    
    222,977
    
    
    
    1,344
    
    
    
    (1,179
    )
    
    
    223,142Other debt securities
    
    
    1,318
    
    
    
    2
    
    
    
    
    
    
    
    1,320
    
    
    
    1,979
    
    
    
    14
    
    
    
    
    
    
    
    1,993Investment in ARM and CRA
funds
    
    
    19,241
    
    
    
    41
    
    
    
    (376
    )
    
    
    18,906
    
    
    
    18,772
    
    
    
    89
    
    
    
    (205
    )
    
    
    18,656FHLB/Federal Reserve Bank
Stock
    
    
    4,122
    
    
    
    
    
    
    
    
    
    
    
    4,122
    
    
    
    5,807
    
    
    
    
    
    
    
    
    
    
    
    5,807Total securities
    
    $
    248,380
    
    
    $
    949
    
    
    $
    (3,187
    )
    
    $
    246,142
    
    
    $
    272,645
    
    
    $
    2,477
    
    
    $
    (1,402
    )
    
    $
    273,720
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Less Than 12 Months
    
    
    Greater Than 12 Months
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Loss
    
    
    Value
    
    
    Loss
    
    
    Value
    
    
    Loss(Dollars in thousands)U.S. Government
sponsored
entities
    
    $
    31,205
    
    
    $
    (156
    )
    
    $
    
    
    
    $
    
    
    
    $
    31,205
    
    
    $
    (156
    )Mortgage-backed
securities and
collateralized
mortgage
obligations
    
    
    109,978
    
    
    
    (1,205
    )
    
    
    51,176
    
    
    
    (1,450
    )
    
    
    161,154
    
    
    
    (2,655
    )Investment in ARM
and CRA funds
    
    
    
    
    
    
    
    
    
    
    14,618
    
    
    
    (376
    )
    
    
    14,618
    
    
    
    (376
    )Total
securities
    
    $
    141,183
    
    
    $
    (1,361
    )
    
    $
    65,794
    
    
    $
    (1,826
    )
    
    $
    206,977
    
    
    $
    (3,187
    )
  4. ALLOWANCE FOR LOAN LOSSES
  For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands, except per share amounts)Allowance for loan
losses at beginning
of period
    
    $
    10,372
    
    
    $
    10,598
    
    
    $
    10,501
    
    
    $
    10,308Provision for loan
losses
    
    
    468
    
    
    
    261
    
    
    
    1,396
    
    
    
    816Charge-offs
    
    
    (72
    )
    
    
    (624
    )
    
    
    (1,266
    )
    
    
    (1,799
    )Recoveries
    
    
    38
    
    
    
    221
    
    
    
    175
    
    
    
    1,131Allowance for loan
losses at end of
period
    
    $
    10,806
    
    
    $
    10,456
    
    
    $
    10,806
    
    
    $
    10,456
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5. EARNINGS PER COMMON SHARE
  For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands, except per share amounts)Net income available to common
shareholders
    
    $
    2,836
    
    
    $
    1,604
    
    
    $
    7,866
    
    
    $
    6,274Weighted average common shares outstanding:Basic
    
    
    7,209
    
    
    
    7,180
    
    
    
    7,203
    
    
    
    7,171Shares issuable under stock option
plans
    
    
    103
    
    
    
    55
    
    
    
    89
    
    
    
    79Diluted
    
    
    7,312
    
    
    
    7,235
    
    
    
    7,292
    
    
    
    7,250Earnings per common share:Basic
    
    $
    0.39
    
    
    $
    0.22
    
    
    $
    1.09
    
    
    $
    0.87Diluted
    
    $
    0.39
    
    
    $
    0.22
    
    
    $
    1.08
    
    
    $
    0.87
 6. ACQUISITION OF FIRST UNITED BANK AND ISSUANCE OF JUNIOR SUBORDINATED DEBENTURES
     7. LITIGATION
  10




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##### Table of Contents



8. OFF-BALANCE SHEET ACTIVITIES
   As of
    
    
    As ofSeptember 30, 2005
    
    
    December 31, 2004Unfunded loan commitments including unfunded lines of credit
    
    $
    121,531
    
    
    $
    105,975Standby letters of credit
    
    
    4,354
    
    
    
    3,852Commercial letters of credit
    
    
    7,298
    
    
    
    11,756Operating leases
    
    
    3,391
    
    
    
    4,060Total financial instruments with off-balance sheet risk
    
    $
    136,574
    
    
    $
    125,643
 11




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##### Table of Contents



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.
  12




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##### Table of Contents



Overview
    Results of Operations
 Net Interest Income and Net Interest Margin.
   13




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##### Table of Contents



Total Interest Income.
 Interest Income from Loans.
   Interest Income from Investments.
  Total Interest Expense.
 Interest Expense on Deposits.
 14




---



##### Table of Contents



Interest Expense on Other Borrowed Funds.
 .
 15




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##### Table of Contents



For The Three Months Ended September 30,2005
    
    
    2004Average
    
    
    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
    
    $
    603,225
    
    
    $
    11,552
    
    
    
    7.60
    %
    
    $
    559,703
    
    
    $
    8,649
    
    
    
    6.15
    %Taxable securities
    
    
    235,171
    
    
    
    2,382
    
    
    
    4.02
    
    
    
    267,539
    
    
    
    2,648
    
    
    
    3.94Tax-exempt securities
    
    
    17,162
    
    
    
    211
    
    
    
    4.88
    
    
    
    18,351
    
    
    
    227
    
    
    
    4.92Federal funds sold and other
temporary investments
    
    
    24,659
    
    
    
    207
    
    
    
    3.33
    
    
    
    13,509
    
    
    
    25
    
    
    
    0.74Total interest-earning assets
    
    
    880,217
    
    
    
    14,352
    
    
    
    6.47
    
    
    
    859,102
    
    
    
    11,549
    
    
    
    5.35Less allowance for loan losses
    
    
    (10,631
    )
    
    
    
    
    
    
    
    
    
    
    (11,183
    )Total interest-earning assets,
net of allowance for loan
losses
    
    
    869,586
    
    
    
    
    
    
    
    
    
    
    
    847,919Noninterest-earning assets
    
    
    50,030
    
    
    
    
    
    
    
    
    
    
    
    47,635Total assets
    
    $
    919,616
    
    
    
    
    
    
    
    
    
    
    $
    895,554Liabilities and shareholders equityInterest-bearing liabilities:Interest-bearing demand
deposits
    
    $
    80,472
    
    
    
    160
    
    
    
    0.79
    %
    
    $
    81,122
    
    
    
    146
    
    
    
    0.72
    %Savings and money market accounts
    
    
    124,052
    
    
    
    476
    
    
    
    1.52
    
    
    
    110,926
    
    
    
    199
    
    
    
    0.71Time deposits
    
    
    409,782
    
    
    
    3,214
    
    
    
    3.11
    
    
    
    374,959
    
    
    
    2,087
    
    
    
    2.21Other borrowings
    
    
    31,026
    
    
    
    365
    
    
    
    4.67
    
    
    
    69,750
    
    
    
    498
    
    
    
    2.84Total interest-bearing
liabilities
    
    
    645,332
    
    
    
    4,215
    
    
    
    2.59
    
    
    
    636,757
    
    
    
    2,930
    
    
    
    1.83Noninterest-bearing liabilities:Noninterest-bearing demand
deposits
    
    
    173,953
    
    
    
    
    
    
    
    
    
    
    
    169,070Other liabilities
    
    
    10,178
    
    
    
    
    
    
    
    
    
    
    
    8,267Total liabilities
    
    
    829,463
    
    
    
    
    
    
    
    
    
    
    
    814,094Shareholders equity
    
    
    90,153
    
    
    
    
    
    
    
    
    
    
    
    81,460Total liabilities and
shareholders equity
    
    $
    919,616
    
    
    
    
    
    
    
    
    
    
    $
    895,554Net interest income
    
    
    
    
    
    $
    10,137
    
    
    
    
    
    
    
    
    
    
    $
    8,619Net interest spread
    
    
    
    
    
    
    
    
    
    
    3.88
    %
    
    
    
    
    
    
    
    
    
    
    3.52
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.57
    %
    
    
    
    
    
    
    
    
    
    
    3.99
    %
 
 (1)
    
    Annualized. 16




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##### Table of Contents



For The Nine Months Ended September 30,2005
    
    
    2004Average
    
    
    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
    
    $
    598,577
    
    
    $
    32,279
    
    
    
    7.21
    %
    
    $
    559,430
    
    
    $
    25,108
    
    
    
    6.00
    %Taxable securities
    
    
    240,467
    
    
    
    7,163
    
    
    
    3.98
    
    
    
    243,224
    
    
    
    7,018
    
    
    
    3.85Tax-exempt securities
    
    
    17,327
    
    
    
    641
    
    
    
    4.95
    
    
    
    18,642
    
    
    
    693
    
    
    
    4.97Federal funds sold and other
temporary investments
    
    
    15,340
    
    
    
    343
    
    
    
    2.99
    
    
    
    12,828
    
    
    
    56
    
    
    
    0.58Total interest-earning assets
    
    
    871,711
    
    
    
    40,426
    
    
    
    6.20
    
    
    
    834,124
    
    
    
    32,875
    
    
    
    5.26Less allowance for loan losses
    
    
    (10,977
    )
    
    
    
    
    
    
    
    
    
    
    (10,904
    )Total interest-earning assets,
net of allowance for loan
losses
    
    
    860,734
    
    
    
    
    
    
    
    
    
    
    
    823,220Noninterest-earning assets
    
    
    47,557
    
    
    
    
    
    
    
    
    
    
    
    47,859Total assets
    
    $
    908,291
    
    
    
    
    
    
    
    
    
    
    $
    871,079Liabilities and shareholders equityInterest-bearing liabilities:Interest-bearing demand
deposits
    
    $
    85,111
    
    
    
    507
    
    
    
    0.80
    %
    
    $
    76,410
    
    
    
    364
    
    
    
    0.64
    %Savings and money market accounts
    
    
    113,572
    
    
    
    942
    
    
    
    1.11
    
    
    
    111,780
    
    
    
    571
    
    
    
    0.68Time deposits
    
    
    392,305
    
    
    
    8,274
    
    
    
    2.82
    
    
    
    362,379
    
    
    
    5,838
    
    
    
    2.15Other borrowings
    
    
    48,213
    
    
    
    1,420
    
    
    
    3.94
    
    
    
    64,703
    
    
    
    1,374
    
    
    
    2.84Total interest-bearing
liabilities
    
    
    639,201
    
    
    
    11,143
    
    
    
    2.33
    
    
    
    615,272
    
    
    
    8,147
    
    
    
    1.77Noninterest-bearing liabilities:Noninterest-bearing demand
deposits
    
    
    172,651
    
    
    
    
    
    
    
    
    
    
    
    169,137Other liabilities
    
    
    8,049
    
    
    
    
    
    
    
    
    
    
    
    7,242Total liabilities
    
    
    819,901
    
    
    
    
    
    
    
    
    
    
    
    791,651Shareholders equity
    
    
    88,390
    
    
    
    
    
    
    
    
    
    
    
    79,428Total liabilities and
shareholders equity
    
    $
    908,291
    
    
    
    
    
    
    
    
    
    
    $
    871,079Net interest income
    
    
    
    
    
    $
    29,283
    
    
    
    
    
    
    
    
    
    
    $
    24,728Net interest spread
    
    
    
    
    
    
    
    
    
    
    3.87
    %
    
    
    
    
    
    
    
    
    
    
    3.49
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.49
    %
    
    
    
    
    
    
    
    
    
    
    3.96
    %
 
 (1)
    
    Annualized. 17




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##### Table of Contents



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005 vs 2004
    
    
    2005 vs 2004Increase (Decrease)
    
    
    
    
    
    
    Increase (Decrease)Due to
    
    
    
    
    
    
    Due toVolume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    Total(Dollars in thousands)Interest-earning assets:Loans (including loans
held-for-sale)
    
    $
    698
    
    
    $
    2,205
    
    
    $
    2,903
    
    
    $
    1,732
    
    
    $
    5,439
    
    
    $
    7,171Taxable
securities
    
    
    (314
    )
    
    
    48
    
    
    
    (266
    )
    
    
    (86
    )
    
    
    231
    
    
    
    145Tax-exempt
securities
    
    
    (14
    )
    
    
    (2
    )
    
    
    (16
    )
    
    
    (49
    )
    
    
    (3
    )
    
    
    (52
    )Federal funds sold and
other temporary
investments
    
    
    21
    
    
    
    161
    
    
    
    182
    
    
    
    11
    
    
    
    276
    
    
    
    287Total increase in
interest income
    
    
    391
    
    
    
    2,412
    
    
    
    2,803
    
    
    
    1,608
    
    
    
    5,943
    
    
    
    7,551Interest-bearing liabilities:Interest-bearing demand
deposits
    
    
    14
    
    
    
    
    
    
    
    14
    
    
    
    41
    
    
    
    102
    
    
    
    143Savings and money market
accounts
    
    
    24
    
    
    
    253
    
    
    
    277
    
    
    
    9
    
    
    
    362
    
    
    
    371Time
deposits
    
    
    200
    
    
    
    927
    
    
    
    1,127
    
    
    
    476
    
    
    
    1,960
    
    
    
    2,436Other
borrowings
    
    
    (276
    )
    
    
    143
    
    
    
    (133
    )
    
    
    (351
    )
    
    
    397
    
    
    
    46Total increase
(decrease) in interest
expense
    
    
    (38
    )
    
    
    1,323
    
    
    
    1,285
    
    
    
    175
    
    
    
    2,821
    
    
    
    2,996Increase in net interest
income
    
    $
    429
    
    
    $
    1,089
    
    
    $
    1,518
    
    
    $
    1,433
    
    
    $
    3,122
    
    
    $
    4,555
 Provision for Loan Losses.
 Noninterest Income.
  Noninterest Expense.
  18




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##### Table of Contents



Income Taxes.
 Financial Condition
 Loan Portfolio.
  As of September 30, 2005
    
    
    As of December 31, 2004Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Commercial and
industrial
    
    $
    325,974
    
    
    
    52.97
    %
    
    $
    345,570
    
    
    
    57.88
    %Real estate mortgageResidential
    
    
    7,924
    
    
    
    1.29
    
    
    
    11,199
    
    
    
    1.87Commercial
    
    
    229,978
    
    
    
    37.37
    
    
    
    188,121
    
    
    
    31.51237,902
    
    
    
    38.66
    
    
    
    199,320
    
    
    
    33.38Real estate constructionResidential
    
    
    9,587
    
    
    
    1.56
    
    
    
    9,761
    
    
    
    1.64Commercial
    
    
    33,278
    
    
    
    5.41
    
    
    
    32,868
    
    
    
    5.5042,865
    
    
    
    6.97
    
    
    
    42,629
    
    
    
    7.14Consumer and
other
    
    
    8,604
    
    
    
    1.40
    
    
    
    9,556
    
    
    
    1.60Gross
loans
    
    
    615,345
    
    
    
    100.00
    %
    
    
    597,075
    
    
    
    100.00
    %Less: unearned
discounts, interest and
deferred
fees
    
    
    (2,441
    )
    
    
    
    
    
    
    (2,539
    )Total
loans
    
    
    612,904
    
    
    
    
    
    
    
    594,536Less: allowance for
loan losses
    
    
    (10,806
    )
    
    
    
    
    
    
    (10,501
    )Loans,
net
    
    $
    602,098
    
    
    
    
    
    
    $
    584,035
 Nonperforming Assets.
  19




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##### Table of Contents



As of
    
    
    As ofSeptember 30, 2005
    
    
    December 31, 2004(Dollars in thousands)Nonaccrual
loans
    
    $
    19,546
    
    
    $
    16,504Accruing loans 90
days or more past
due
    
    
    95
    
    
    
    181Other real estate
(ORE) and other
assets repossessed
(OAR)
    
    
    
    
    
    
    1,566Total
nonperforming
assets
    
    
    19,641
    
    
    
    18,251Less: Nonperforming
loans guaranteed by
the SBA, Ex-Im Bank
and
OCCGF
    
    
    (2,101
    )
    
    
    (3,032
    )Total net
nonperforming
assets
    
    $
    17,540
    
    
    $
    15,219Total nonperforming
assets to total
assets
    
    
    2.10
    %
    
    
    2.00
    %Total nonperforming
assets to total
loans and
ORE
    
    
    3.20
    %
    
    
    3.06
    %Net nonperforming
assets to total
assets
(1)
    
    
    1.88
    %
    
    
    1.66
    %Net nonperforming
assets to total
loans and ORE
(1)
    
    
    2.86
    %
    
    
    2.55
    %
 
 (1)
    
    Net nonperforming assets are net of the loan portions guaranteed by the SBA, Ex-Im Bank and OCCGF.   As of
    
    
    As ofSeptember 30, 2005
    
    
    December 31, 2004(Dollars in thousands)Impaired loans with
no SFAS No. 114
valuation
reserve
    
    $
    18,239
    
    
    $
    15,339Impaired loans with
a SFAS No. 114
valuation
reserve
    
    
    4,052
    
    
    
    3,967Total recorded
investment in
impaired
loans
    
    $
    22,291
    
    
    $
    19,306Valuation allowance
related to impaired
loans
    
    $
    1,714
    
    
    $
    1,751
 20




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##### Table of Contents



Allowance for Loan Losses and Reserve for Unfunded Lending Commitments.
     21




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##### Table of Contents



As of and for theThree Months Ended September 30,2005
    
    
    2004(Dollars in thousands)Average total loans outstanding for the period
    
    $
    603,225
    
    
    $
    559,703Total loans outstanding at end of
period
    
    $
    612,904
    
    
    $
    566,119Allowance for loan losses at beginning of
period
    
    $
    10,372
    
    
    $
    10,598Provision for loan losses
    
    
    468
    
    
    
    261Charge-offs:Commercial and industrial
    
    
    (19
    )
    
    
    (606
    )Real estate mortgage
    
    
    
    
    
    
    Real estate construction
    
    
    
    
    
    
    Consumer and other
    
    
    (53
    )
    
    
    (18
    )Total charge-offs
    
    
    (72
    )
    
    
    (624
    )Recoveries:Commercial and industrial
    
    
    34
    
    
    
    170Real estate mortgage
    
    
    
    
    
    
    1Real estate construction
    
    
    
    
    
    
    Consumer and other
    
    
    4
    
    
    
    50Total recoveries
    
    
    38
    
    
    
    221Net charge-offs
    
    
    (34
    )
    
    
    (403
    )Allowance for loan losses at end of
period
    
    
    10,806
    
    
    
    10,456Reserve for unfunded lending commitments at beginning
of period
    
    
    334
    
    
    
    435Provision for unfunded lending
commitments
    
    
    82
    
    
    
    (46
    )Reserve for unfunded lending commitments at end of
period
    
    
    416
    
    
    
    389Allowance for credit losses
    
    $
    11,222
    
    
    $
    10,845Ratio of allowance for loan losses to end of period
total loans
    
    
    1.76
    %
    
    
    1.85
    %Ratio of net charge-offs to average total
loans
    
    
    0.01
    %
    
    
    0.07
    %Ratio of allowance for loan losses to end of period
total nonperforming loans (1)
    
    
    55.02
    %
    
    
    52.64
    %Ratio of allowance for loan losses to end of period
net nonperforming loans (2)
    
    
    61.61
    %
    
    
    62.70
    %
 
 (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,
and less loan portion guaranteed by the SBA, Ex-Im Bank and OCCGF. 22




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##### Table of Contents



As of and for theNine Months Ended September 30,2005
    
    
    2004(Dollars in thousands)Average total loans outstanding for the period
    
    $
    598,577
    
    
    $
    559,430Total loans outstanding at end of
period
    
    $
    612,904
    
    
    $
    566,119Allowance for loan losses at beginning of
period
    
    $
    10,501
    
    
    $
    10,308Provision for loan losses
    
    
    1,396
    
    
    
    816Charge-offs:Commercial and industrial
    
    
    (1,033
    )
    
    
    (1,732
    )Real estate mortgage
    
    
    
    
    
    
    Real estate construction
    
    
    (5
    )
    
    
    Consumer and other
    
    
    (228
    )
    
    
    (67
    )Total charge-offs
    
    
    (1,266
    )
    
    
    (1,799
    )Recoveries:Commercial and industrial
    
    
    139
    
    
    
    966Real estate mortgage
    
    
    1
    
    
    
    103Real estate construction
    
    
    
    
    
    
    Consumer and other
    
    
    35
    
    
    
    62Total recoveries
    
    
    175
    
    
    
    1,131Net charge-offs
    
    
    (1,091
    )
    
    
    (668
    )Allowance for loan losses at end of
period
    
    
    10,806
    
    
    
    10,456Reserve for unfunded lending commitments at beginning
of period
    
    
    362
    
    
    
    140Provision for unfunded lending
commitments
    
    
    54
    
    
    
    249Reserve for unfunded lending commitments at end of
period
    
    
    416
    
    
    
    389Allowance for credit losses
    
    $
    11,222
    
    
    $
    10,845Ratio of allowance for loan losses to end of period
total loans
    
    
    1.76
    %
    
    
    1.85
    %Ratio of net charge-offs to average total
loans
    
    
    0.18
    %
    
    
    0.12
    %Ratio of allowance for loan losses to end of period
total nonperforming loans (1)
    
    
    55.02
    %
    
    
    52.64
    %Ratio of allowance for loan losses to end of period
net nonperforming loans (2)
    
    
    61.61
    %
    
    
    62.70
    %
 
 (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,
and less loan portion guaranteed by the SBA, Ex-Im Bank and OCCGF. 23




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##### Table of Contents



Securities.
 Deposits
 Other Borrowings.
  As of and for the
    
    
    As of and for theNine Months Ended
    
    
    Year EndedSeptember, 2005
    
    
    December 31, 2004(Dollars in thousands)Federal funds purchased:at end of period
    
    $
    
    
    
    $
    average during the period
    
    
    15
    
    
    
    maximum month-end balance during the period
    
    
    
    
    
    
    FHLB notes:at end of period
    
    $
    43,000
    
    
    $
    59,900average during the period
    
    
    47,494
    
    
    
    63,288maximum month-end balance during the period
    
    
    72,500
    
    
    
    74,300Interest rate at end of period
    
    
    4.51
    %
    
    
    3.46
    %Interest rate during the period
    
    
    4.00
    
    
    
    2.93Other short-term borrowings:at end of period
    
    $
    1,034
    
    
    $
    949average during the period
    
    
    704
    
    
    
    734maximum month-end balance during the period
    
    
    1,034
    
    
    
    1,057
 Liquidity.
 24




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##### Table of Contents



Capital Resources.
  Minimum
    
    
    To Be Categorized asRequired For
    
    
    Well Capitalized UnderCapital Adequacy
    
    
    Prompt Corrective
    
    
    Actual Ratio AtPurposes
    
    
    Action Provisions
    
    
    September 30, 2005The
CompanyLeverage
ratio
    
    
    4.00
    %(1)
    
    
    N/A
    %
    
    
    10.08
    %Tier 1 risk-based
capital
ratio
    
    
    4.00
    
    
    
    N/A
    
    
    
    13.30Risk-based capital
ratio
    
    
    8.00
    
    
    
    N/A
    
    
    
    14.56The BankLeverage
ratio
    
    
    4.00
    %(2)
    
    
    5.00
    %
    
    
    9.82
    %Tier 1 risk-based
capital
ratio
    
    
    4.00
    
    
    
    6.00
    
    
    
    12.95Risk-based capital
ratio
    
    
    8.00
    
    
    
    10.00
    
    
    
    14.21
 
 (1)
    
    The Federal Reserve Board may require the Company to maintain a leverage ratio above the required minimum.(2)
    
    The OCC may require the Bank to maintain a leverage ratio above the required minimum. Critical Accounting Policies.
 Allowance for Loan Losses and Reserve for Unfunded Lending Commitments
 25




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##### 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.
 26




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##### Table of Contents



PART II
 OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 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
  27




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##### Table of Contents



Item 6. Exhibits
 ExhibitNumber
    
    Identification of Exhibit11
    
    - Computation of Earnings Per
Common Share, included as Note (5)
to the unaudited Condensed Consolidated Financial Statements on
Page 10 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.
 
 *
    
    Furnished herewith. 28




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##### Table of Contents



SIGNATURES
  METROCORP BANCSHARES, INC.By:
    
    /s/ George M. LeeDate: November 10, 2005
    
    
    
    George M. LeeChief Executive Officer (principal executive officer)Date: November 10, 2005
    
    By:
    
    /s/ David C. ChoiDavid C. ChoiChief Financial Officer (principal financial officer/principal accounting officer)
 29




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Identification of Exhibit11
    
    - Computation of Earnings Per Common Share, included as
Note (5) to the unaudited Condensed Consolidated
Financial Statements on Page 10 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.
 
 *
    
    Furnished herewith.