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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 MARCH 31, 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
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 9600 Bellaire Boulevard, Suite 252
Houston, Texas 77036
(Address of principal executive offices including zip code) (713) 776-3876
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.   Yes  þ  No  o. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange
Act).   Yes  o  No  þ. As of May 9, 2005, the number of outstanding shares of Common Stock, par value $1.00 per
share, was 7,322,627.




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TABLE OF CONTENTS  PART I FINANCIAL INFORMATIONItem 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 II OTHER INFORMATIONItem 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) March 31,
    
    
    December 31,2005
    
    
    2004ASSETSCash and due from banks
    
    $
    22,104
    
    
    $
    26,285Federal funds sold and other temporary investments
    
    
    10,802
    
    
    
    5,788Total cash and cash equivalents
    
    
    32,906
    
    
    
    32,073Securities available for sale, at fair value
    
    
    255,656
    
    
    
    273,720Loans, net of allowance for loan losses of $11,075 and $10,863,
respectively
    
    
    581,016
    
    
    
    581,774Loans, held for sale
    
    
    1,886
    
    
    
    1,899Accrued interest receivable
    
    
    3,185
    
    
    
    3,308Premises and equipment, net
    
    
    6,460
    
    
    
    6,512Customers liability on acceptances
    
    
    974
    
    
    
    6,669Foreclosed assets, net
    
    
    1,175
    
    
    
    1,566Other assets
    
    
    7,283
    
    
    
    6,429Total assets
    
    $
    890,541
    
    
    $
    913,950LIABILITIES AND SHAREHOLDERS EQUITYDeposits:Noninterest-bearing
    
    $
    172,463
    
    
    $
    163,191Interest-bearing
    
    
    569,603
    
    
    
    591,862Total deposits
    
    
    742,066
    
    
    
    755,053Other borrowings
    
    
    55,137
    
    
    
    60,849Accrued interest payable
    
    
    687
    
    
    
    649Acceptances outstanding
    
    
    974
    
    
    
    6,669Other liabilities
    
    
    5,682
    
    
    
    5,007Total liabilities
    
    
    804,546
    
    
    
    828,227Commitments and contingencies
    
    
    
    
    
    
    Shareholders equity:Common stock, $1 00 par value, 20,000,000 shares authorized; 7,322,627 and
7,312,627 shares issued and 7,201,576 and 7,187,446 shares outstanding
at March 31, 2005 and December 31, 2004, respectively
    
    
    7,323
    
    
    
    7,313Additional paid in capital
    
    
    28,012
    
    
    
    27,859Retained earnings
    
    
    52,805
    
    
    
    50,976Accumulated other comprehensive (loss) income
    
    
    (1,043
    )
    
    
    710Treasury stock, at cost
    
    
    (1,102
    )
    
    
    (1,135
    )Total shareholders equity
    
    
    85,995
    
    
    
    85,723Total liabilities and shareholders equity
    
    $
    890,541
    
    
    $
    913,950
 See accompanying notes to condensed consolidated financial statements 2




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METROCORP BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited) For the Three MonthsEnded March 31,2005
    
    
    2004Interest income:Loans
    
    $
    10,070
    
    
    $
    8,178Securities:Taxable
    
    
    2,422
    
    
    
    2,187Tax-exempt
    
    
    218
    
    
    
    234Federal funds sold and other temporary investments
    
    
    54
    
    
    
    38Total interest income
    
    
    12,764
    
    
    
    10,637Interest expense:Time deposits
    
    
    2,375
    
    
    
    1,901Demand and savings deposits
    
    
    386
    
    
    
    296Other borrowings
    
    
    573
    
    
    
    436Total interest expense
    
    
    3,334
    
    
    
    2,633Net interest income
    
    
    9,430
    
    
    
    8,004Provision for loan losses
    
    
    400
    
    
    
    550Net interest income after provision for loan losses
    
    
    9,030
    
    
    
    7,454Noninterest income:Service fees
    
    
    1,628
    
    
    
    1,659Other loan-related fees
    
    
    145
    
    
    
    208Letters of credit commissions and fees
    
    
    142
    
    
    
    115Gain on sale of loans
    
    
    8
    
    
    
    55Other noninterest income
    
    
    127
    
    
    
    11Total noninterest income
    
    
    2,050
    
    
    
    2,048Noninterest expenses:Salaries and employee benefits
    
    
    4,136
    
    
    
    3,814Occupancy and equipment
    
    
    1,338
    
    
    
    1,400Foreclosed assets, net
    
    
    410
    
    
    
    (663
    )Other noninterest expense
    
    
    1,866
    
    
    
    1,797Total noninterest expenses
    
    
    7,750
    
    
    
    6,348Income before provision for income taxes
    
    
    3,330
    
    
    
    3,154Provision for income taxes
    
    
    1,070
    
    
    
    991Net income
    
    $
    2,260
    
    
    $
    2,163Earnings per common share:Basic
    
    $
    0.31
    
    
    $
    0.30Diluted
    
    $
    0.31
    
    
    $
    0.30Weighted average shares outstanding:Basic
    
    
    7,194
    
    
    
    7,161Diluted
    
    
    7,292
    
    
    
    7,254Dividends per common share
    
    $
    0.06
    
    
    $
    0.06
 See accompanying notes to condensed consolidated financial statements 3




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METROCORP BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited) For the Three MonthsEnded March 31,2005
    
    
    2004Net income
    
    $
    2,260
    
    
    $
    2,163Other comprehensive income (loss), net of tax:Unrealized gain (loss) on investment securities, net:Unrealized holding (loss) gain arising during
the period
    
    
    (1,753
    )
    
    
    1,365Less: reclassification adjustment for gain
included in net income
    
    
    
    
    
    
    Other comprehensive (loss)
income
    
    
    (1,753
    )
    
    
    1,365Total comprehensive income
    
    $
    507
    
    
    $
    3,528
 METROCORP BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
For the Three Months Ended March 31, 2005
(In thousands)
(Unaudited) AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    TreasuryCommon Stock
    
    
    Paid-In
    
    
    Retained
    
    
    Comprehensive
    
    
    Stock, AtShares
    
    
    At Par
    
    
    Capital
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Cost
    
    
    TotalBalance at December 31, 2004
    
    
    7,188
    
    
    $
    7,313
    
    
    $
    27,859
    
    
    $
    50,976
    
    
    $
    710
    
    
    $
    (1,135
    )
    
    $
    85,723Issuance of common stock
    
    
    10
    
    
    
    10
    
    
    
    95
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105Re-issuance of treasury stock
    
    
    4
    
    
    
    
    
    
    
    58
    
    
    
    
    
    
    
    
    
    
    
    33
    
    
    
    91Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,260
    
    
    
    
    
    
    
    
    
    
    
    2,260Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,753
    )
    
    
    
    
    
    
    (1,753
    )Cash
dividends ($0.06 per
share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (431
    )
    
    
    
    
    
    
    
    
    
    
    (431
    )Balance at March 31, 2005
    
    
    7,202
    
    
    $
    7,323
    
    
    $
    28,012
    
    
    $
    52,805
    
    
    $
    (1,043
    )
    
    $
    (1,102
    )
    
    $
    85,995
 See accompanying notes to condensed consolidated financial statements 4




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METROCORP BANCSHARES, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) For the Three Months EndedMarch 31,2005
    
    
    2004Cash flows from operating activities:Net Income
    
    $
    2,260
    
    
    $
    2,163Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    347
    
    
    
    328Provision for loan losses
    
    
    400
    
    
    
    550Loss (gain) on foreclosed assets
    
    
    391
    
    
    
    (892
    )Loss on sale and disposal of premises and equipment
    
    
    99
    
    
    
    Gain on sale of loans
    
    
    (8
    )
    
    
    (55
    )Amortization of premiums and discounts on securities
    
    
    75
    
    
    
    166Amortization of net deferred loan fees
    
    
    (498
    )
    
    
    (191
    )Changes in:Loans held-for-sale
    
    
    13
    
    
    
    1,710Accrued interest receivable
    
    
    123
    
    
    
    244Other assets
    
    
    47
    
    
    
    118Accrued interest payable
    
    
    38
    
    
    
    (34
    )Other liabilities
    
    
    675
    
    
    
    (317
    )Net cash provided by operating activities
    
    
    3,962
    
    
    
    3,790Cash flows from investing activities:Purchases of securities available-for-sale
    
    
    (185
    )
    
    
    (6,818
    )Proceeds from sales, maturities and principal paydowns of securities
available-for-sale
    
    
    15,520
    
    
    
    25,299Net change in loans
    
    
    864
    
    
    
    (20,340
    )Proceeds from sale of foreclosed assets
    
    
    
    
    
    
    2,700Proceeds from sale of premises and equipment
    
    
    4
    
    
    
    Purchases of premises and equipment
    
    
    (398
    )
    
    
    (1,007
    )Net cash provided by investing activities
    
    
    15,805
    
    
    
    (166
    )Cash flows from financing activities:Net change in:Deposits
    
    
    (12,987
    )
    
    
    (16,148
    )Other borrowings
    
    
    (5,712
    )
    
    
    4,620Proceeds from issuance of common stock
    
    
    105
    
    
    
    Re-issuance of treasury stock
    
    
    91
    
    
    
    94Dividends paid
    
    
    (431
    )
    
    
    (429
    )Net cash used in financing activities
    
    
    (18,934
    )
    
    
    (11,863
    )Net increase (decrease) in cash and cash equivalents
    
    
    833
    
    
    
    (8,239
    )Cash and cash equivalents at beginning of period
    
    
    32,073
    
    
    
    36,927Cash and cash equivalents at end of period
    
    $
    32,906
    
    
    $
    28,688
 See accompanying notes to condensed consolidated financial statements 5




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METROCORP BANCSHARES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  1.
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The unaudited condensed consolidated financial statements include the accounts of MetroCorp
Bancshares, Inc. (the Company) and its wholly-owned subsidiary, MetroBank, National Association
(the Bank). The Bank was formed in 1987 and is engaged in commercial banking activities through
its thirteen branches in Houston and Dallas, Texas. The Company considers itself one reporting
segment. All material intercompany accounts and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements were prepared in
accordance with accounting principles generally accepted in the United States of America for
interim financial information and with the instructions for Form 10-Q. In the opinion of
management, the unaudited condensed consolidated financial statements reflect all adjustments,
consisting only of normal and recurring adjustments, necessary for a fair statement of the
Companys financial position at March 31, 2005, results of operations for the three months ended
March 31, 2005 and 2004, and cash flows for the three months ended March 31, 2005 and 2004. Interim
period results are not necessarily indicative of results for a full-year period. Certain amounts applicable to the prior periods have been reclassified to conform to the
classifications currently used. Such reclassifications had no effect on net income, total assets or
shareholders equity. These financial statements and the notes thereto should be read in conjunction with the
Companys annual report on Form 10-K for the year ended December 31, 2004. Stock Compensation The Company grants stock options under several stock-based incentive compensation plans. The
Company utilizes the intrinsic value method for its stock compensation plans. No compensation cost
is recognized for fixed stock options in which the exercise price is equal to or greater than the
estimated market price on the date of grant. In 1995, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 Accounting for
Stock-Based Compensation,which if fully adopted by the Company, would change the methods the
Company applies in recognizing the cost of the plans. Adoption of the expense recognition
provisions of SFAS No. 123 is optional and the Company has decided not to elect these provisions of
SFAS No. 123. However, pro forma disclosures as if the Company adopted the expense recognition
provisions of SFAS No. 123 are required. If the fair value based method of accounting under SFAS No. 123 had been applied, the
Companys net income available for common shareholders and earnings per common share would have
been reduced to the pro forma amounts indicated below (assuming that the fair value of options
granted during the year are amortized over the vesting period) (in thousands, except per share
amounts): For the Three MonthsEnded March 31,2005
    
    
    2004Net income:As reported
    
    $
    2,260
    
    
    $
    2,163Pro forma
    
    $
    2,166
    
    
    $
    2,120Stock-based compensation cost,
net of income taxes:As reported
    
    $
    
    
    
    $
    Pro forma
    
    $
    94
    
    
    $
    43Basic earnings per common share:As reported
    
    $
    0.31
    
    
    $
    0.30Pro forma
    
    $
    0.30
    
    
    $
    0.30Diluted earnings per common share:As reported
    
    $
    0.31
    
    
    $
    0.30Pro forma
    
    $
    0.30
    
    
    $
    0.29
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METROCORP BANCSHARES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Stock Compensation (Continued) The Black-Scholes option valuation model was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions including the expected stock
price volatility. Because the Companys employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options. In December 2004, the FASB replaced the guidance in SFAS No. 123 with the issuance of SFAS No.
123R, Share-Based Payment.Of greatest significance to the Company, the revised standard
establishes the fair value-based method as the exclusive method of accounting for stock-based
compensation, with only limited exceptions, and eliminates the option of following APB No. 25.
Under SFAS No. 123R, the grant-date fair value of equity instruments awarded to employees
establishes the cost of the services received in exchange, and the cost associated with awards that
are expected to vest is recognized over the required service period. The revised standard also
clarifies and expands existing guidance on measuring fair value, including considerations for
selecting and applying an option-pricing model, on classifying an award as equity or a liability,
and on attributing compensation cost to reporting periods. Under the Securities and Exchange Commissions rule, SFAS No. 123R is now effective for public
companies for annual, rather than interim, periods that begins after June 15, 2005. The effect for
the Company is a six-month deferral of the new standard. Until SFAS No. 123Rs amended effective
date, the provisions of SFAS No. 123 remain in effect, which permit the continued use of the
intrinsic value method of APB No. 25. The Company has no current plans to modify, repurchase or
cancel existing awards.  2.
    EARNINGS PER COMMON SHARE Basic earnings per share (EPS) is computed by dividing net income available to common
shareholders by the weighted-average number of common shares outstanding during the period. Diluted
EPS is computed by dividing net income available to common shareholders by the weighted-average
number of common shares and potentially dilutive common shares outstanding during the period. Stock
options can be dilutive common shares and are therefore considered in the earnings per share
calculation, if dilutive. Stock options that are antidulutive are excluded from earnings per share
calculation. Stock options are antidilutive when the exercise price is higher than the current
market price of the Companys common stock. As of March 31, 2005, there are no antidilutive stock
options. The number of potentially dilutive common shares is determined using the treasury stock
method. For the Three MonthsEnded March 31,2005
    
    
    2004(In thousands, except per share amounts)Net income available to common
shareholders
    
    $
    2,260
    
    
    $
    2,163Weighted average common shares outstanding:Basic
    
    
    7,194
    
    
    
    7,161Shares issuable under stock option
plans
    
    
    98
    
    
    
    93Diluted
    
    
    7,292
    
    
    
    7,254Earnings per common share:Basic
    
    $
    0.31
    
    
    $
    0.30Diluted
    
    $
    0.31
    
    
    $
    0.30
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METROCORP BANCSHARES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)  3.
    SECURITIES AVAILABLE-FOR-SALE The amortized cost and approximate fair value of securities classified as available-for-sale
is as follows: As of March 31, 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)Available-for-SaleU.S. Treasury
securities and
obligations of U.S.
Government agencies
    
    $
    5,005
    
    
    $
    1
    
    
    $
    (98
    )
    
    $
    4,908
    
    
    $
    5,005
    
    
    $
    
    
    
    $
    (18
    )
    
    $
    4,987Obligations of state
and political
subdivisions
    
    
    17,160
    
    
    
    777
    
    
    
    
    
    
    
    17,937
    
    
    
    18,105
    
    
    
    1,030
    
    
    
    
    
    
    
    19,135Mortgage-backed
securities and
collateralized mortgage
obligations
    
    
    208,557
    
    
    
    475
    
    
    
    (2,520
    )
    
    
    206,512
    
    
    
    222,977
    
    
    
    1,344
    
    
    
    (1,179
    )
    
    
    223,142Other debt securities
    
    
    1,749
    
    
    
    12
    
    
    
    (1
    )
    
    
    1,760
    
    
    
    1,979
    
    
    
    14
    
    
    
    
    
    
    
    1,993Investment in ARM and
CRA funds
    
    
    18,922
    
    
    
    34
    
    
    
    (260
    )
    
    
    18,696
    
    
    
    18,772
    
    
    
    89
    
    
    
    (205
    )
    
    
    18,656FHLB/Federal Reserve
Bank Stock
    
    
    5,843
    
    
    
    
    
    
    
    
    
    
    
    5,843
    
    
    
    5,807
    
    
    
    
    
    
    
    
    
    
    
    5,807Total Securities
    
    $
    257,236
    
    
    $
    1,299
    
    
    $
    (2,879
    )
    
    $
    255,656
    
    
    $
    272,645
    
    
    $
    2,477
    
    
    $
    (1,402
    )
    
    $
    273,720
 The following table displays the gross unrealized losses and fair value of investments as of
March 31, 2005 that were in a continuous unrealized loss position for the periods indicated: Less Than 12 Months
    
    
    Greater Than 12 Months
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Loss
    
    
    Fair Value
    
    
    Loss
    
    
    Fair Value
    
    
    Loss(Dollars in thousands)U.S. Treasury
securities and
obligations of U.S.
Government
agencies
    
    $
    4,873
    
    
    $
    (98
    )
    
    $
    
    
    
    $
    
    
    
    $
    4,873
    
    
    $
    (98
    )Mortgage-backed
securities and
collateralized
mortgage
obligations
    
    
    99,329
    
    
    
    (1,224
    )
    
    
    49,054
    
    
    
    (1,296
    )
    
    
    148,383
    
    
    
    (2,520
    )Other debt
securities
    
    
    364
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    364
    
    
    
    (1
    )Investment in ARM
and CRA funds
    
    
    
    
    
    
    
    
    
    
    14,496
    
    
    
    (260
    )
    
    
    14,496
    
    
    
    (260
    )Total
securities
    
    $
    104,566
    
    
    $
    (1,323
    )
    
    $
    63,550
    
    
    $
    (1,556
    )
    
    $
    168,116
    
    
    $
    (2,879
    )
 Declines in the fair value of individual securities below their cost that are other than
temporary would result in write-downs, as a realized loss, of the individual securities to their
fair value. Management believes that based upon the credit quality of the equity and debt
securities and the Companys intent and ability to hold the securities until their recovery, none
of the unrealized losses on securities should be considered other than temporary. 8




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##### Table of Contents



METROCORP BANCSHARES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)  4.
    LITIGATION In September 2003, Advantage Finance Corporation (AFC), a subsidiary of the Company that is
no longer active, was served as co-defendant in connection with a lawsuit based on alleged
malicious prosecution and conspiracy. The lawsuit did not seek a specified amount. Also
included, as defendants in the lawsuit, were BDO Seidman LLP and the CIT Group/ Commercial
Services, Inc. The plaintiff had filed this case in both Federal and State courts. The U.S.
Bankruptcy Court ruled in favor of the defendants. The plaintiff filed an appeal with the U.S.
Fifth Circuit Court of Appeals which upheld the U.S. Bankruptcy Courts ruling. As of March 29,
2005, the plaintiffs period to re-appeal to the U.S. Fifth Circuit Court of Appeals expired,
thereby, upholding and re-affirming the ruling of the U.S. Bankruptcy Court in favor of the
defendants. The Agreed Final Judgment ordered, adjudged and decreed that this case and all claims
and causes of action of Plaintiffs against Defendants, in both Federal and State of Texas courts,
are dismissed with prejudice to the refiling of same or any part thereof. As of March 31, 2005,
this lawsuit was dismissed.  5.
    OFF-BALANCE SHEET ACTIVITIES The Bank is party to financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers. These financial instruments include various
guarantees, commitments to extend credit and standby letters of credit. Additionally, these
instruments may involve, to varying degrees, credit risk in excess of the amount recognized in the
statement of financial condition. The Banks maximum exposure to credit loss under such
arrangements is represented by the contractual amount of those instruments. The Bank applies the
same credit policies and collateralization guidelines in making commitments and conditional
obligations as it does for on-balance sheet instruments. Off-balance sheet financial instruments
include commitments to extend credit and guarantees under standby and other letters of credit.
Unfunded loan commitments including unfunded lines of credit at March 31, 2005 and December 31,
2004 totaled $88.8 million and $106.0 million, respectively. Commitments under standby and
commercial letters of credit at March 31, 2005 and December 31, 2004 totaled $11.2 million and
$15.6 million, respectively. The contractual amount of the Companys financial instruments with off-balance sheet risk at
March 31, 2005 and December 31, 2004 is presented below (in thousands): As of
    
    
    As ofMarch 31, 2005
    
    
    December 31, 2004Unfunded loan commitments including unfunded lines of credit
    
    $
    88,832
    
    
    $
    105,975Standby letters of credit
    
    
    4,253
    
    
    
    3,852Commercial letters of credit
    
    
    6,977
    
    
    
    11,756Operating leases
    
    
    3,423
    
    
    
    4,060Total financial instruments with off-balance sheet risk
    
    $
    103,485
    
    
    $
    125,643
  6.
    ALLOWANCE FOR LOAN LOSSES The following table presents an analysis of the allowance for loan losses for the periods
indicated: As of and for theThree Months Ended March 31,2005
    
    
    2004(Dollars in thousands)Allowance for loan
losses at beginning
of period
    
    $
    10,863
    
    
    $
    10,448Provision for loan
losses
    
    
    400
    
    
    
    550Charge-offs
    
    
    (240
    )
    
    
    (368
    )Recoveries
    
    
    52
    
    
    
    220Allowance for loan
losses at end of
period
    
    $
    11,075
    
    
    $
    10,850
 9




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##### Table of Contents



METROCORP BANCSHARES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)  7.
    NEW ACCOUNTING PRONOUNCEMENTS On December 16, 2003, the American Institute of Certified Public Accountants (AICPA) issued
Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer
(SOP 03-3). SOP 03-3 provides guidance on the accounting for differences between contractual and
expected cash flows from the purchaser's initial investment in loans or debt securities acquired in
a transfer, if those differences are attributable, at least in part, to credit quality. Among other
things, SOP 03-3: (1) prohibits the recognition of the excess of contractual cash flows over
expected cash flows as an adjustment of yield, loss accrual, or valuation allowance at the time of
purchase; (2) requires that subsequent increases in expected cash flows be recognized prospectively
through an adjustment of yield; and (3) requires the subsequent decreases in expected cash flows be
recognized as an impairment. In addition, SOP 03-3 prohibits the creation or carrying over of a
valuation allowance in the initial accounting of all loans within its scope that are acquired in a
transfer. SOP 03-3 becomes effective for loans or debt securities acquired in fiscal years
beginning after December 15, 2004. The Company does not expect the requirements of SOP 03-3 to have
a material impact on its financial condition or results of operations. 10




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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 The statements and financial discussion and analysis contained in this Quarterly Report on
Form 10-Q that are not historical facts and are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
The Company intends such forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and
are including this statement for purposes of invoking these safe harbor provisions. These
forward-looking statements include information about possible or assumed future results of the
Companys operations or performance. When the Company uses any of the words believe, expect,
anticipate, estimate, continue, intend, may, will, should, or similar expressions,
identifies these forward-looking statements. Many possible factors or events could affect the
future financial results and performance of the Company and could cause those financial results or
performance to differ materially from those expressed in the forward-looking statement. These
possible events or factors include, without limitation:  
    changes in interest rates and market prices, which could reduce the Companys net
interest margins, asset valuations and expense expectations;
    changes in the levels of loan prepayments and the resulting effects on the value of the
Companys loan portfolio;
    changes in local economic and business conditions which adversely affect the ability of
the Companys customers to transact profitable business with the Company, including the
ability of borrowers to repay their loans according to their terms or a change in the value
of the related collateral;
    increased competition for deposits and loans adversely affecting rates and terms;
    the Companys ability to identify suitable acquisition candidates;
    the timing, impact and other uncertainties of the Companys ability to enter new markets
successfully and capitalize on growth opportunities;
    increased credit risk in the Companys assets and increased operating risk caused by a
material change in commercial, consumer and/or real estate loans as a percentage of the
total loan portfolio;
    the failure of assumptions underlying the establishment of and provisions made to the allowance for loan losses;
    changes in the availability of funds resulting in increased costs or reduced liquidity;
    increased asset levels and changes in the composition of assets and the resulting impact
on our capital levels and regulatory capital ratios;
    the Companys ability to acquire, operate and maintain cost effective and efficient
systems without incurring unexpectedly difficult or expensive but necessary technological
changes;
    the loss of senior management or operating personnel and the potential inability to hire
qualified personnel at reasonable compensation levels; and
    changes in statutes and government regulations or their interpretations applicable to
bank holding companies and our present and future banking and other subsidiaries, including
changes in tax requirements and tax rates. All written or oral forward-looking statements attributable to the Company are expressly
qualified in their entirety by these cautionary statements. The Company undertakes no obligation to
publicly update or otherwise revise any forward-looking statements, whether as a result of new
information, future events or otherwise, unless the securities laws require it to do so. 11




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##### Table of Contents



Managements Discussion and Analysis of Financial Condition and Results of Operations of the
Company analyzes the major elements of the Companys balance sheets and statements of income. This
section should be read in conjunction with the Companys Consolidated Financial Statements and
accompanying notes and other detailed information appearing elsewhere in this document. Overview The Company recorded net income of $2.3 million for the three months ended March 31, 2005, up
approximately $97,000 compared with net income of $2.2 million for the same quarter in 2004. The
Companys diluted earnings per share (EPS) for the three months ended March 31, 2005 was $0.31,
up $0.01 per diluted share compared with diluted EPS of $0.30 for the same quarter in 2004. Total assets were $890.5 million at March 31, 2005, down approximately $23.4 million or 2.6%
from $914.0 million at December 31, 2004. Investment securities at March 31, 2005 were $255.7
million, down approximately $18.0 million or 6.6% from $273.7 million at December 31, 2004. Net
loans, both held-for-investment and held-for-sale, at March 31, 2005 were $582.9 million, down
approximately $771,000 or 0.1% from $583.7 million at December 31, 2004. Total deposits at March
31, 2005 were $742.1 million, down approximately $13.0 million or 1.7% from $755.1 million at
December 31, 2004. Other borrowings at March 31, 2005 were $55.1 million, down approximately $5.7
million or 9.4% from $60.8 million at December 31, 2004. The Companys return on average assets
(ROAA) for the three months ended March 31, 2005 and 2004 was both 1.01%. The Companys return on
average equity (ROAE) for the three months ended March 31, 2005 and 2004 was 10.54% and 11.03%,
respectively. Shareholders equity at March 31, 2005 was $86.0 million compared to $85.7 million at December
31, 2004, an increase of approximately $272,000 or 0.3%. Results of Operations Net Interest Income and the Net Interest Margin.For the three months ended March 31, 2005,
net interest income, before the provision for loan losses, was $9.4 million, up approximately $1.4
million or 17.8% from $8.0 million for the same period in 2004. The increase was primarily due to a
$2.1 million increase in interest income that was partially offset by a $700,000 increase in
interest expense. Average interest-earning assets for the three months ended March 31, 2005 were
$871.6 million, up approximately $49.6 million or 6.0% from $822.0 million for the same period in
2004. The increase in net interest income primarily reflects the impact of the Federal Reserves
interest rate increases since June 2004. The weighted average yield on interest-earning assets for
the first quarter 2005 was 5.94%, up 74 basis points from 5.20% for the same quarter in 2004.
Average interest-bearing liabilities for the three months ended March 31, 2005 were $648.7 million,
up approximately $41.0 million or 6.8% from $607.6 million for the same period in 2004. The
weighted average interest rate paid on interest-bearing liabilities for the first quarter 2005 was
2.08%, up 34 basis points from 1.74% for the same quarter in 2004. The net interest margin for the three months ended March 31, 2005 was 4.39%, up 47 basis
points from 3.92% for the same period in 2004. The increase was primarily the result of an increase
in the yield on earning assets of 74 basis points that was partially offset by an increase in the
cost of earning assets of 27 basis points. The increase in yield and cost was primarily a result of
the Federal Reserves seven interest rate increases since June 2004. Total Interest Income.Total interest income for the three months ended March 31, 2005 was
$12.8 million, up approximately $2.1 million or 20.0% from $10.6 million for the same period in
2004. The increase was primarily the result of higher volume of and higher yield on
interest-earning assets. Interest Income from Loans.Interest income from loans for the three months ended March 31,
2005 was $10.1 million, up approximately $1.9 million or 23.1% from $8.2 million for the same
quarter in 2004. The increase was primarily due to higher loan yields as a result of the current
interest rate environment. The majority of the Banks loan portfolio is comprised of variable and
adjustable rate loans that benefit the Company during periods of increases in the prime rate.
Average total loans for the three months ended March 31, 2005 were $595.8 million compared to
average total loans for the same period in 2004 of $563.3 million, an increase of approximately
$32.5 million or 5.8%. For the first quarter 2005, the average yield on total loans was 6.85%
compared to 5.84% for the same quarter in 2004, an increase of 101 basis points. Approximately $539.4 million or 90.5 % of the loans in the loan portfolio are variable rate
loans that reprice as the prime rate moves and are therefore, sensitive to interest rate movement.
At March 31, 2005, the average yield on total loans was approximately 110 basis points above the
prime rate, which was supported by variable rate loans with interest rate floors that consisted of
approximately $425.7 million or 71.4% of the total loan portfolio. At March 31, 2005, these loans
carried a weighted average interest rate of 6.99%. At March 31, 2004, these loans represented 66.8%
of the total loan portfolio and carried a weighted average interest rate of 5.78%. Future increases
in market interest rates, especially the prime rate, may not immediately impact the loan portfolio
yield because some of the floor rates are higher than the current prime rate. Other factors that
have impacted interest 12




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##### Table of Contents



income from loans include refinancing pressures on existing loans and new loans added to the
portfolio at lower interest rates. Interest Income from Investments.Interest income from investments (which includes investment
securities, Federal funds sold, and other investments) for the three months ended March 31, 2005
was $2.7 million, up approximately $235,000 or 9.6% compared to $2.5 million for the same period in
2004, primarily due to a higher yield on total investments. Average total investments for the three
months ended March 31, 2005 were $275.7 million compared to average total investments for the same
period in 2004 of $258.7 million, an increase of approximately $17.1 million or 6.6%. For the first
quarter 2005, the average yield on total investments was 3.96% compared to 3.82% for the same
quarter in 2004, an increase of 14 basis points. Total Interest Expense.Total interest expense for the three months ended March 31, 2005 was
$3.3 million, up approximately $701,000 or 26.6% compared to $2.6 million for the same period in
2004. The increase primarily reflected higher interest rates and an increase in interest-bearing
liabilities. Interest Expense on Deposits.Interest expense on interest-bearing deposits for the three
months ended March 31, 2005 was $2.8 million, up approximately $564,000 or 25.7% compared to $2.2
million for the same period in 2004. The increase was primarily due to higher interest rates paid
for interest-bearing deposits. Average interest-bearing deposits for the three months ended March
31, 2005 were $582.5 million compared to average interest-bearing deposits for the same period in
2004 of $546.9 million, an increase of $35.6 million or 6.5%. The average interest rate paid on
interest-bearing deposits for the first quarter 2005 was 1.92% compared to 1.62% for the same
quarter in 2004, an increase of 30 basis points. Interest Expense on Other Borrowings.Interest expense on other borrowings for the three
months ended March 31, 2005 was $573,000, up approximately $137,000 or 31.4% compared to $436,000
for the same period in 2004. The increase was primarily due to higher borrowed funds and higher
interest rates paid for borrowed funds.Average borrowed funds for the three months ended March 31,
2005 were $66.2 million compared to average borrowed funds for the same quarter in 2004 of $60.7
million, an increase of $5.5 million. The average interest rate paid on borrowed funds for the
first quarter 2005 was 3.51%, compared to 2.89% for the same quarter in 2004, an increase of 62
basis points. 13




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##### Table of Contents



The following table presents, for each major category of interest-earning assets and
interest-bearing liabilities, the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest expense on average
interest-bearing liabilities, expressed both in dollars and rates for the periods indicated. No
tax-equivalent adjustments were made and all average balances are daily average balances.
Nonaccruing loans have been included in the table as loans having a zero yield, with income, if
any, recognized at the end of the loan term. For The Three Months Ended March 31,2005
    
    
    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:Loans (including loans
held-for-sale)
    
    $
    595,808
    
    
    $
    10,070
    
    
    
    6.85
    %
    
    $
    563,309
    
    
    $
    8,178
    
    
    
    5.84
    %Taxable securities
    
    
    248,746
    
    
    
    2,422
    
    
    
    3.95
    
    
    
    230,661
    
    
    
    2,187
    
    
    
    3.81Tax-exempt securities
    
    
    17,664
    
    
    
    218
    
    
    
    5.01
    
    
    
    18,836
    
    
    
    234
    
    
    
    5.00Federal funds sold and other
temporary investments
    
    
    9,336
    
    
    
    54
    
    
    
    2.35
    
    
    
    9,174
    
    
    
    38
    
    
    
    1.67Total interest-earning
assets
    
    
    871,554
    
    
    
    12,764
    
    
    
    5.94
    
    
    
    821,980
    
    
    
    10,637
    
    
    
    5.20Less allowance for loan
losses
    
    
    (11,042
    )
    
    
    
    
    
    
    
    
    
    
    (10,654
    )Total interest-earning assets,
net of allowance for loan
losses
    
    
    860,512
    
    
    
    
    
    
    
    
    
    
    
    811,326Noninterest-earning
assets
    
    
    47,726
    
    
    
    
    
    
    
    
    
    
    
    47,230Total assets
    
    $
    908,238
    
    
    
    
    
    
    
    
    
    
    $
    858,556Liabilities and shareholders equityInterest-bearing liabilities:Interest-bearing demand
deposits
    
    $
    89,009
    
    
    $
    175
    
    
    
    0.80
    %
    
    $
    72,141
    
    
    $
    99
    
    
    
    0.55
    %Savings and money market
accounts
    
    
    112,409
    
    
    
    211
    
    
    
    0.76
    
    
    
    117,574
    
    
    
    197
    
    
    
    0.67Time deposits
    
    
    381,063
    
    
    
    2,375
    
    
    
    2.53
    
    
    
    357,194
    
    
    
    1,901
    
    
    
    2.14Other borrowings
    
    
    66,187
    
    
    
    573
    
    
    
    3.51
    
    
    
    60,715
    
    
    
    436
    
    
    
    2.89Total interest-bearing
liabilities
    
    
    648,668
    
    
    
    3,334
    
    
    
    2.08
    
    
    
    607,624
    
    
    
    2,633
    
    
    
    1.74Noninterest-bearing liabilities:Noninterest-bearing demand
deposits
    
    
    165,659
    
    
    
    
    
    
    
    
    
    
    
    165,974Other
liabilities
    
    
    6,963
    
    
    
    
    
    
    
    
    
    
    
    6,092Total
liabilities
    
    
    821,290
    
    
    
    
    
    
    
    
    
    
    
    779,690Shareholders equity
    
    
    86,948
    
    
    
    
    
    
    
    
    
    
    
    78,866Total liabilities and
shareholders equity
    
    $
    908,238
    
    
    
    
    
    
    
    
    
    
    $
    858,556Net interest income
    
    
    
    
    
    $
    9,430
    
    
    
    
    
    
    
    
    
    
    $
    8,004Net interest spread
    
    
    
    
    
    
    
    
    
    
    3.86
    %
    
    
    
    
    
    
    
    
    
    
    3.46
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.39
    %
    
    
    
    
    
    
    
    
    
    
    3.92
    %
   (1)
    
    Annualized. 14




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##### Table of Contents



The following table presents the dollar amount of changes in interest income and interest
expense for the major components of interest-earning assets and interest-bearing liabilities and
distinguishes between changes in outstanding balances and changes in interest rates for the three
months ended March 31, 2005 compared with the three months ended March 31, 2004. For purposes of
this table, changes attributable to both rate and volume have been allocated to each accordingly.
Changes related to the leap year in 2004 of approximately $70,000 have been included in volume. Three Months Ended March 31,2005 vs 2004Increase (Decrease)Due toVolume
    
    
    Rate
    
    
    Total(Dollars in thousands)Interest-earning assets:Loans (including loans
held-for-sale)
    
    $
    400
    
    
    $
    1,492
    
    
    $
    1,892Taxable
securities
    
    
    152
    
    
    
    83
    
    
    
    235Tax-exempt
securities
    
    
    (16
    )
    
    
    
    
    
    
    (16
    )Federal funds sold and
other temporary
investments
    
    
    
    
    
    
    16
    
    
    
    16Total increase in
interest
income
    
    
    536
    
    
    
    1,591
    
    
    
    2,127Interest-bearing liabilities:Interest-bearing demand
deposits
    
    
    22
    
    
    
    54
    
    
    
    76Savings and money market
accounts
    
    
    (10
    )
    
    
    24
    
    
    
    14Time
deposits
    
    
    110
    
    
    
    364
    
    
    
    474Other
borrowings
    
    
    35
    
    
    
    102
    
    
    
    137Total increase in
interest
expense
    
    
    157
    
    
    
    544
    
    
    
    701Increase in net interest
income
    
    $
    379
    
    
    $
    1,047
    
    
    $
    1,426
 Provision for Loan Losses.Provisions for loan losses are charged to income to bring the
Companys allowance for loan losses to a level which management considers adequate to absorb
probable losses inherent in the loan portfolio. The provision for loan losses for the three months
ended March 31, 2005 was $400,000, down approximately $150,000, compared to $550,000 for the same
period in 2004. The decrease was primarily due to a reduction in nonperforming loans compared with
same period last year. The allowance for loan losses as a percent of total loans (net of unearned
discounts, interest, and deferred fees) at March 31, 2005 and 2004 was 1.86% and 1.89%,
respectively. Noninterest Income.Noninterest income for the three months ended March 31, 2005 was stable
compared to the same period in 2004. Other noninterest income increased $116,000 compared to the
same period in 2004 primarily due to $99,000 in income relating to changes on ATM network
arrangements. The increase was partially offset by decrease in other loan-related fees and service
fees and a lower gain on the sale of loans. Noninterest Expense.Total noninterest expense for the three months ended March 31, 2005 was
$7.8 million, up approximately $1.4 million or 22.1 % compared to $6.3 million for the same quarter
in 2004. The increase was primarily due to a combination of a write-down on foreclosed property for
sale of approximately $391,000 in the first quarter of 2005, and a $900,000 on gain from the sale
of foreclosed properties during first quarter of 2004. Salaries and employee benefits for the
three months ended March 31, 2005 was $4.1 million, up $322,000 compared with $3.8 million for the
same period in 2004 primarily due to increased incentive bonus accruals for 2005. Occupancy and
equipment expense for the three months ended March 31, 2005 was down approximately $62,000 compared
to the same period in 2004. Other non-interest expense for the three months ended March 31, 2005
was up approximately $69,000 compared to the same period in 2004, primarily due to $100,000 of
expenses associated with a branch consolidation in Dallas, Sarbanes-Oxley compliance costs, and
donations made to Tsunami victims. 15




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##### Table of Contents



Financial Condition Loan Portfolio.Total loans at March 31, 2005 were $594.0 million, down $559,000 or 0.1% from
$594.5 million at December 31, 2004. Compared to the loan level at December 31, 2004, commercial
and industrial loans decreased $11.8 million and real estate loans increased $12.2 million during
the three months ended March 31, 2005. As of March 31, 2005, the Company had approximately $52.8
million or 8.9% of its loan portfolio concentrated in the hospitality industry, compared to $56.0
million or 9.4 % of its loan portfolio at December 31, 2004, and $64.6 million or 11.0% at March
31, 2004. At March 31, 2005 and December 31, 2004, the ratio of total loans to total deposits was
80.04%, and 78.74% respectively. At the same dates, total loans represented 66.7% and 65.1% of
total assets, respectively. The following table summarizes the loan portfolio, including loans held-for-sale, by type of
loan at the dates indicated: As of March 31, 2005
    
    
    As of December 31, 2004Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Commercial and
industrial
    
    
    333,731
    
    
    
    55.96
    %
    
    
    345,570
    
    
    
    57.88
    %Real estate mortgageResidential
    
    
    8,569
    
    
    
    1.44
    
    
    
    11,199
    
    
    
    1.87Commercial
    
    
    215,592
    
    
    
    36.15
    
    
    
    188,121
    
    
    
    31.51224,161
    
    
    
    37.59
    
    
    
    199,320
    
    
    
    33.38Real estate constructionResidential
    
    
    6,983
    
    
    
    1.17
    
    
    
    9,761
    
    
    
    1.64Commercial
    
    
    22,963
    
    
    
    3.85
    
    
    
    32,868
    
    
    
    5.5029,946
    

    
    
    5.02
    
    
    
    42,629
    
    
    
    7.14Consumer and
other
    
    
    8,511
    
    
    
    1.43
    
    
    
    9,556
    
    
    
    1.60Gross
loans
    
    
    596,349
    
    
    
    100.00
    %
    
    
    597,075
    
    
    
    100.00
    %Less: unearned
discounts, interest and
deferred
fees
    
    
    (2,372
    )
    
    
    
    
    
    
    (2,539
    )Total
loans
    
    
    593,977
    
    
    
    
    
    
    
    594,536Less: allowance for
loan losses
    
    
    (11,075
    )
    
    
    
    
    
    
    (10,863
    )Loans, net
    
    
    582,902
    
    
    
    
    
    
    
    583,673
 Nonperforming Assets.Total nonperforming assets at March 31, 2005 were $21.1 million, up
approximately $2.9 million or 15.7%, compared to $18.3 million at December 31, 2004. As of March
31, 2005, nonperforming assets primarily consisted of $17.2 million in nonaccrual loans, $2.7
million in accruing loans that were 90 days or more past due, and $1.2 million in other real
estate. The increase in accruing loans 90 days or more past due compared to December 31, 2004 was
primarily due to two loans, which are currently in the process of collection. Net nonperforming
assets at March 31, 2005 were $18.2 million compared to $15.2 million at December 31, 2004, an
increase of $3.0 million or 19.5%. Approximately $12.4 million of such nonaccrual loans are
collateralized by real estate, which represented 72.2% of total nonaccrual loans at March 31, 2005. The ratios for net nonperforming assets to total loans and other real estate at March 31, 2005
and December 31, 2004 were 3.05% and 2.55%, respectively. The ratios for net nonperforming assets
to total assets were 2.04% and 1.67% for the same periods, respectively. These ratios take into
consideration 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 of Taiwan, which were $2.9 million at March
31, 2005 compared to $3.0 million at December 31, 2004. 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 the SBA program, the
Company is required to repurchase any loan that may become nonperforming. As a result of this
requirement, the Companys nonperforming loans may increase during the period of time in which any
loan repurchased is either restored to an accrual status or the Company files a claim with the SBA
for the guaranteed portion of the loan. 16




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##### Table of Contents



The following table presents information regarding nonperforming assets at the dates
indicated: As of
    
    
    As ofMarch 31, 2005
    
    
    December 31, 2004(Dollars in thousands)Nonaccrual
loans
    
    $
    17,232
    
    
    $
    16,504Accruing loans 90
days or more past
due
    
    
    2,715
    
    
    
    181Other real estate
(ORE) and other
assets repossessed
(OAR)
    
    
    1,175
    
    
    
    1,566Total
nonperforming
assets
    
    
    21,122
    
    
    
    18,251Less: Nonperforming
loans guaranteed by
the SBA, Ex-Im Bank
an OCCGF
    
    
    (2,942
    )
    
    
    (3,032
    )Total net
nonperforming
assets
    
    $
    18,180
    
    
    $
    15,219Total nonperforming
assets to total
assets
    
    
    2.37
    %
    
    
    2.00
    %Total nonperforming
assets to total
loans and
ORE/OAR
    
    
    3.55
    %
    
    
    3.06
    %Net nonperforming
assets to total
assets
(1)
    
    
    2.04
    %
    
    
    1.67
    %Net nonperforming
assets to total
loans and ORE/OAR
(1)
    
    
    3.05
    %
    
    
    2.55
    %
   (1)
    
    Net nonperforming assets are net of the loan portions guaranteed by the SBA, Ex-Im Bank and OCCGF. A loan is considered impaired, based on current information and events, if management believes
that the Company will be unable to collect all amounts due according to the contractual terms of
the loan agreement. All amounts due according to the contractual terms means that both the
contractual interest payments and the contractual principal payments of a loan will be collected as
scheduled in the loan agreement. An insignificant delay or insignificant shortfall in the amount of
payment does not require a loan to be considered impaired. If the measure of the impaired loan is
less than the recorded investment in the loan, a specific reserve is established for the shortfall
as a component of the Banks allowance for loan loss methodology. The Company considers all
nonaccrual loans to be impaired. The following is a summary of loans considered to be impaired as of the dates indicated: As of
    
    
    As ofMarch 31, 2005
    
    
    December 31, 2004(Dollars in thousands)Impaired loans with no
SFAS No. 114 valuation
reserve
    
    $
    16,277
    
    
    $
    15,339Impaired loans with a
SFAS No. 114 valuation
reserve
    
    
    3,748
    
    
    
    3,967Total recorded investment
in impaired
loans
    
    $
    20,025
    
    
    $
    19,306Valuation allowance
related to impaired
loans
    
    $
    2,186
    
    
    $
    1,751
 The average recorded investment in impaired loans during the three months ended March 31, 2005
and the year ended December 31, 2004 was $19.4 million and $20.8 million, respectively. Interest
income on impaired loans of $ 58,000 was recognized for cash payments received during the three
months ended March 31, 2005. Allowance for Loan Losses.At March 31, 2005 and 2004, the allowance for loan losses was $11.1
million and 10.9 million, respectively, or 1.86% and 1.89% of total loans, respectively. At
December 31, 2004, the allowance for loan losses was $10.7 million, or 1.83% of total loans. Net
charge-offs for the three months ended March 31, 2005 were $188,000 compared with $148,000 for the
same period in 2004. The allowance for loan losses is established through a provision for loan losses based on
managements evaluation of known and inherent risk in the loan portfolio. The allowance for loan
losses is increased by provisions charged against current earnings and is reduced by net
charge-offs. Loans are charged off when they are deemed to be uncollectible in whole or in part.
Recoveries are recorded when cash payments are received. The Company employs a systematic
methodology for determining the allowance for loan losses that includes a review of the changes in
the quality of the loan portfolio as determined by loan quality grades assigned to each loan. The
loan quality grades are administered by ongoing reviews by loan officers, credit administration and
the loan review department. This includes an assessment of known problem loans, potential problem
loans, and other loans that exhibit weaknesses or deterioration. Specific review factors include,
but are not limited to, the general economic environment in the Companys markets as well as the
national economy, particularly the real estate markets, value of the collateral securing loans,
payment history, cash flow analysis of borrowers and other historical information. After the
aforementioned assessment of the loan portfolio, the general economic environment and other
relevant factors, changes are implemented in the allowance for loan losses. 17




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##### Table of Contents



While this methodology is consistently followed, future changes in circumstances, economic
conditions or other factors could cause management to reevaluate the level of the allowance for
loan losses. The following table presents an analysis of the allowance for loan losses and other related
data for the periods indicated: As of and for theThree Months Ended March 31,2005
    
    
    2004(Dollars in thousands)Average
year-to-date total
loans
outstanding
    
    $
    595,808
    
    
    $
    563,309Total loans
outstanding at end
of
period
    
    $
    593,977
    
    
    $
    575,401Allowance for loan
losses at beginning
of period
    
    $
    10,863
    
    
    $
    10,448Provision for loan
losses
    
    
    400
    
    
    
    550Charge-offs:Commercial
and
industrial
    
    
    (125
    )
    
    
    (342
    )Real estate
mortgage
    
    
    
    
    
    
    Real estate
construction
    
    
    (5
    )
    
    
    Consumer and
other
    
    
    (110
    )
    
    
    (26
    )Total
charge-offs
    
    
    (240
    )
    
    
    (368
    )Recoveries:Commercial
and
industrial
    
    
    47
    
    
    
    113Real estate
mortgage
    
    
    1
    
    
    
    97Real estate
construction
    
    
    
    
    
    
    Consumer and
other
    
    
    4
    
    
    
    10Total
recoveries
    
    
    52
    
    
    
    220Net
charge-offs
    
    
    (188
    )
    
    
    (148
    )Allowance for loan
losses at end of
period
    
    $
    11,075
    
    
    $
    10,850Ratio of allowance
to end of period
total
loans
    
    
    1.86
    %
    
    
    1.89
    %Ratio of net
charge-offs to end
of period total
loans
    
    
    0.03
    %
    
    
    0.03
    %Ratio of allowance
to end of period
total nonperforming
loans (1)
    
    
    55.52
    %
    
    
    42.35
    %Ratio of allowance
to end of period
net nonperforming
loans (2)
    
    
    65.13
    %
    
    
    48.84
    %
   (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,
net of the loan portions guaranteed by the SBA, Ex-Im Bank and OCCGF. Securities.At March 31, 2005, the securities portfolio was $255.7 million, a decrease of
$18.0 million or 6.6% from $273.7 million at December 31, 2004. The decrease was primarily due to
prepayments in mortgage-backed securities that exceeded portfolio reinvestment. The securities
portfolio is primarily comprised of mortgage-backed securities, collateralized mortgage
obligations, tax-free municipal bonds, and U.S. government agency securities. The securities
portfolio has historically been funded primarily by the liquidity created from deposit growth and
loan prepayments in excess of loan funding requirements. However, as of March 31, 2005
approximately $29.2 million in short-term borrowings from the FHLB have been utilized to fund
approximately of mortgage-backed securities to increase interest-earning assets. Deposits. At March 31, 2005, total deposits were $742.1 million, down $13.0 million or 1.7%
from $755.1 million at December 31, 2004. However, noninterest-bearing demand deposits at March 31,
2005 increased $9.3 million or 5.7% to $172.5 million from $163.2 million at December 31, 2004. The
Companys ratios of noninterest-bearing demand deposits to total deposits at March 31, 2005 and
December 31, 2004 were 23.2% and 21.6%, respectively. Interest-bearing deposits at March 31, 2005
were $569.6 million, down $22.3 million or 3.8% compared with $591.9 million at December 31, 2004. 18




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##### Table of Contents



Other Borrowings.Other borrowings at March 31, 2005 were $55.1 million, down approximately
$5.7 million, or 9.4% compared to other borrowings of $60.8 million at December 31, 2004. The
Company has two ten-year loans totaling $25.0 million from the FHLB of Dallas, maturing in
September 2008, to diversify its funding sources. The ten-year loans bear interest at an average
rate of 4.99% per annum and are callable quarterly at the discretion of the FHLB. The Company also
has several FHLB advances totaling $29.2 million with weighted average fixed rates of 2.86% and
scheduled to mature in the second quarter of 2005. These borrowings were part of a strategic plan
to continue the growth of interest-earning assets. The funds were invested primarily in
mortgage-related instruments with durations of approximately three years. Other short-term
borrowings at March 31, 2005 consisted of approximately $937,000 in U.S. Treasury tax note option
accounts. The following table provides an analysis of the Companys other borrowings as of the dates and
for the periods indicated: As of and for the
    
    
    As of and for theThree Months Ended
    
    
    Year EndedMarch 31, 2005
    
    
    December 31, 2004(Dollars in thousands)Federal funds purchased:at end of period
    
    $
    
    
    
    $
    average during the period
    
    
    
    
    
    
    maximum month-end balance during the period
    
    
    
    
    
    
    FHLB notes:at end of period
    
    $
    54,200
    
    
    $
    59,900average during the period
    
    
    65,493
    
    
    
    63,288maximum month-end balance during the period
    
    
    72,500
    
    
    
    74,300Interest rate at end of period
    
    
    3.84
    %
    
    
    3.46
    %Interest rate during the period
    
    
    3.51
    
    
    
    2.93Other short-term borrowings:at end of period
    
    $
    937
    
    
    $
    949average during the period
    
    
    694
    
    
    
    734maximum month-end balance during the period
    
    
    937
    
    
    
    1,057
 Liquidity.The Companys loan to deposit ratio at March 31, 2005 was 80.04%. As of this same
date, the Company had commitments to fund loans in the amount of $88.8 million. At March 31, 2005,
the Company had stand-by letters of credit of $4.3 million, of which, the Company has recorded a
liability of $7,182. Available sources to fund these commitments and other cash demands of the
Company come from loan and investment securities repayments, deposit inflows, and unsecured lines
of credit. With its current level of collateral, the Company has the ability to borrow an
additional $357.9 million from the FHLB. Additionally, the Company had several unused, unsecured
lines of credit with correspondent banks totaling $5.0 million at March 31, 2005. 19




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##### Table of Contents



Capital Resources.Shareholders equity at March 31, 2005 was $86.0 million compared to $85.7
million at December 31, 2004, an increase of approximately $272,000. This increase was primarily
the combined result of $2.3 million net income, a decrease in accumulated other comprehensive
income of $1.8 million, and an increase in paid-in capital of $153,000 that reflected the effect of
dividend reinvestment that was partially offset by dividend payments of approximately $431,000. The following table provides a comparison of the Companys and the Banks leverage and
risk-weighted capital ratios as of March 31, 2005 to the minimum and well-capitalized regulatory
standards: Minimum
    
    
    To Be Categorized asRequired For
    
    
    Well Capitalized UnderCapital Adequacy
    
    
    Prompt Corrective
    
    
    Actual Ratio AtPurposes
    
    
    Action Provisions
    
    
    March 31, 2005The CompanyLeverage
ratio
    
    
    4.00
    %(1)
    
    
    N/A
    %
    
    
    9.55
    %Tier 1 risk-based
capital
ratio
    
    
    4.00
    
    
    
    N/A
    
    
    
    13.54Risk-based capital
ratio
    
    
    8.00
    
    
    
    N/A
    
    
    
    14.79The BankLeverage
ratio
    
    
    4.00
    %(2)
    
    
    5.00
    %
    
    
    9.31
    %Tier 1 risk-based
capital
ratio
    
    
    4.00
    
    
    
    6.00
    
    
    
    13.19Risk-based capital
ratio
    
    
    8.00
    
    
    
    10.00
    
    
    
    14.45
   (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 The Company has established various accounting policies which govern the application of
accounting principles generally accepted in the United States of America in the preparation of the
Companys financial statements. Certain accounting policies involve significant judgments and
assumptions by management which have a material impact on the carrying value of certain assets and
liabilities; management considers such accounting policies to be critical accounting policies. The
judgments and assumptions used by management are based on historical experience and other factors,
which are believed to be reasonable under the circumstances. Because of the nature of the judgments
and assumptions made by management, actual results could differ from these judgments and estimates
which could have a material impact on the carrying values of assets and liabilities and the results
of operations of the Company. The Company believes the allowance for loan losses is a critical accounting policy that
requires the most significant judgments and estimates used in the preparation of its consolidated
financial statements. In estimating the allowance for loan losses, management reviews effect of
changes in the local real estate market on collateral values, the effect of current economic
indicators on the loan portfolio and their probable impact on borrowers and increases or decreases
in nonperforming and impaired loans. Changes in these factors may cause managements estimate of
the allowance to increase or decrease and result in adjustments to the Companys provision for loan
losses. SeeFinancial Condition  Allowance for Loan Losses. 20




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##### Table of Contents



Item 3.Quantitative and Qualitative Disclosures about Market Risk. There have been no material changes in the market risk information previously disclosed in the
Companys Form 10-K for the year ended December 31, 2004. See Form 10-K, Item 7 Managements
Discussion and Analysis of Financial Condition and Results of Operations  Financial Condition 
Interest Rate Sensitivity and Liquidity. 
 Item 4.Controls and Procedures Evaluation of Disclosure Controls and Procedures.As of the end of the period covered by this
report, the Company carried out an evaluation, under the supervision and with the participation of
its management, including its Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Companys disclosure controls and procedures.
Based on this evaluation, the Companys Chief Executive Officer and Chief Financial Officer
concluded that the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) are effective. Changes in Internal Control over Financial Reporting.There were no changes in the Companys
internal control over financial reporting that occurred during the Companys most recent fiscal
quarter that have materially affected, or are reasonably likely to materially affect, the Companys
internal control over financial reporting. 21




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##### Table of Contents



PART IIOTHER INFORMATION 
 Item 1.Legal Proceedings In September 2003, Advantage Finance Corporation (AFC), a subsidiary of the Company that is
no longer active, was served as co-defendant in connection with a lawsuit based on alleged
malicious prosecution and conspiracy. The lawsuit did not seek a specified amount. Also
included, as defendants in the lawsuit, were BDO Seidman LLP and the CIT Group/ Commercial
Services, Inc. The plaintiff had filed this case in both Federal and State courts. The U.S.
Bankruptcy Court ruled in favor of the defendants. The plaintiff filed an appeal with the U.S.
Fifth Circuit Court of Appeals which upheld the U.S. Bankruptcy Courts ruling. As of March 29,
2005, the plaintiffs period to re-appeal to the U.S. Fifth Circuit Court of Appeals expired,
thereby, upholding and re-affirming the ruling of the U.S. Bankruptcy Court in favor of the
defendants. The Agreed Final Judgment ordered, adjudged and decreed that this case and all claims
and causes of action of Plaintiffs against Defendants, in both Federal and State of Texas courts,
are dismissed with prejudice to the refiling of same or any part thereof. As of March 31, 2005,
this lawsuit was dismissed. 
 Item 2.Unregistered Sales of Equity 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 6.Exhibits ExhibitNumber
    
    Identification of Exhibit3.1
    
    -  Amended and Restated Articles of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to
the Companys Registration Statement on Form S-1 (Registration No. 333-62667) (the Registration Statement)).3.2
    
    -  Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 to the Registration
Statement).4
    
    -  Specimen form of certificate evidencing the Common Stock (incorporated herein by reference to Exhibit 4 to the
Registration Statement).11
    
    -  Computation of Earnings Per Common Share, included as Note (2) to the unaudited Condensed Consolidated Financial
Statements on Page 7 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.
 22




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##### Table of Contents



ExhibitNumber
    
    Identification of Exhibit31.2*
    
    - 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.
   *
    
    Filed herewith. 23




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##### Table of Contents



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.By:
    /s/ George M. LeeDate: May 13, 2005
    
    George M. LeeChief Executive Office (principal
executive officer) Date: May 13, 2005
    By:
    /s/ David C. ChoiDavid C. ChoiChief Financial Officer (principal
financial officer/ principal
accounting officer) 24




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##### Table of Contents



EXHIBIT INDEX ExhibitNumber
    
    
    
    Identification of Exhibit3.1
    
    -
    
    Amended and Restated Articles of Incorporation of the
Company (incorporated herein by reference to Exhibit
3.1 to the Companys Registration Statement on Form
S-1 (Registration No. 333-62667) (the Registration
Statement)).3.2
    
    -
    
    Amended and Restated Bylaws of the Company
(incorporated herein by reference to Exhibit 3.2 to
the Registration Statement).4
    
    -
    
    Specimen form of certificate evidencing the Common
Stock (incorporated herein by reference to Exhibit 4
to the Registration Statement).11
    
    -
    
    Computation of Earnings Per Common Share, included as
Note (3) to the unaudited Condensed Consolidated
Financial Statements on Page 7 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.
   *
    
    Filed herewith.