MetroCorp Bancshares 10-Q 2005 Q2 Quarterly report

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 JUNE 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.

(Exact name of registrant as specified in its charter)

Texas
(State or other jurisdiction of
incorporation or organization) 76-0579161
(I.R.S. Employer Identification No.)

9600 Bellaire Boulevard, Suite 252
Houston, Texas 77036
(Address of principal executive offices including zip code)

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

     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. Yesþ Noo.

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ.

     As of August 10, 2005, the number of outstanding shares of Common Stock, par value $1.00 per share, was 7,210,235.

1

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION
	Item 1. Condensed Consolidated Financial Statements
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
	Item 4. Controls and Procedures
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
	Item 6. Exhibits
SIGNATURES
EXHIBIT INDEX
Certification of CEO Pursuant to Rule 13a-14(a)
Certification of CFO Pursuant to Rule 13a-14(a)
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

PART I

FINANCIAL INFORMATION

Item 1.Condensed Consolidated Financial Statements.

METROCORP BANCSHARES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)

	June 30,			December 31,
	2005			2004
ASSETS
Cash and due from banks	$	29,067		$	26,285
Federal funds sold and other temporary investments		13,536			5,788
Total cash and cash equivalents		42,603			32,073
Securities available-for-sale, at fair value		248,580			273,720
Loans, net of allowance for loan losses of $10,706 and $10,863, respectively		599,132			581,774
Loans, held-for-sale		–			1,899
Accrued interest receivable		3,439			3,308
Premises and equipment, net		6,347			6,512
Customers’ liability on acceptances		1,626			6,669
Foreclosed assets, net		–			1,566
Other assets		7,483			6,429
Total assets	$	909,210		$	913,950
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	172,706		$	163,191
Interest-bearing		602,303			591,862
Total deposits		775,009			755,053
Other borrowings		36,445			60,849
Accrued interest payable		710			649
Acceptances outstanding		1,626			6,669
Other liabilities		6,541			5,007
Total liabilities		820,331			828,227
Commitments 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 7,205,956 and 7,187,446 shares outstanding at June 30, 2005 and December 31, 2004, respectively		7,323			7,313
Additional paid-in capital		28,069			27,859
Retained earnings		55,142			50,976
Accumulated other comprehensive (loss) income		(587	)		710
Treasury stock, at cost		(1,068	)		(1,135	)
Total shareholders’ equity		88,879			85,723
Total liabilities and shareholders’ equity	$	909,210		$	913,950

See accompanying notes to condensed consolidated financial statements

2

METROCORP BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)

	For the Three Months					For the Six Months
	Ended June 30,					Ended June 30,
	2005		2004			2005		2004
Interest income:
Loans	$	10,657	$	8,281		$	20,727	$	16,459
Securities:
Taxable		2,359		2,153			4,781		4,370
Tax-exempt		212		232			430		466
Federal funds sold and other temporary investments		82		23			136		31
Total interest income		13,310		10,689			26,074		21,326
Interest expense:
Time deposits		2,685		1,850			5,060		3,751
Demand and savings deposits		427		294			813		590
Other borrowings		482		440			1,055		876
Total interest expense		3,594		2,584			6,928		5,217
Net interest income		9,716		8,105			19,146		16,109
Provision for loan losses		500		300			900		850
Net interest income after provision for loan losses		9,216		7,805			18,246		15,259
Noninterest income:
Service fees		1,633		1,627			3,261		3,286
Other loan-related fees		172		169			317		377
Letters of credit commissions and fees		133		124			275		239
Gain on sale of loans		23		514			31		569
Other noninterest income		53		11			180		22
Total noninterest income		2,014		2,445			4,064		4,493
Noninterest expenses:
Salaries and employee benefits		3,868		3,699			8,004		7,513
Occupancy and equipment		1,398		1,430			2,736		2,830
Foreclosed assets, net		14		(251	)		424		(914	)
Other noninterest expense		1,947		1,730			3,813		3,527
Total noninterest expenses		7,227		6,608			14,977		12,956
Income before provision for income taxes		4,003		3,642			7,333		6,796
Provision for income taxes		1,233		1,135			2,303		2,126
Net income	$	2,770	$	2,507		$	5,030	$	4,670
Earnings per common share:
Basic	$	0.38	$	0.35		$	0.70	$	0.65
Diluted	$	0.38	$	0.35		$	0.69	$	0.64
Weighted average shares outstanding:
Basic		7,205		7,172			7,200		7,167
Diluted		7,271		7,262			7,282		7,258
Dividends per common share	$	0.06	$	0.06		$	0.06	$	0.06

See accompanying notes to condensed consolidated financial statements

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METROCORP BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)

	For the Three Months					For the Six Months
	Ended June 30,					Ended June 30,
	2005		2004			2005			2004
Net income	$	2,770	$	2,507		$	5,030		$	4,670
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on investment securities, net:
Unrealized holding gain (loss) arising during the period		456		(4,788	)		(1,297	)		(3,423	)
Other comprehensive income (loss)		456		(4,788	)		(1,297	)		(3,423	)
Total comprehensive income (loss)	$	3,226	$	(2,281	)	$	3,733		$	1,247

METROCORP BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Six Months Ended June 30, 2005
(In thousands)
(Unaudited)

										Accumulated
					Additional					Other			Treasury
	Common Stock				Paid-In		Retained			Comprehensive			Stock
	Shares		At Par		Capital		Earnings			Income (Loss)			At Cost			Total
Balance at December 31, 2004		7,188	$	7,313	$	27,859	$	50,976		$	710		$	(1,135	)	$	85,723
Issuance of common stock		10		10		95		–			–			–			105
Re-issuance of treasury stock		8		–		115		–			–			67			182
Net income		–		–		–		5,030			–			–			5,030
Other comprehensive loss		–		–		–		–			(1,297	)		–			(1,297	)
Cash dividends ($0.12 per share)		–		–		–		(864	)		–			–			(864	)
Balance at June 30, 2005		7,206	$	7,323	$	28,069	$	55,142		$	(587	)	$	(1,068	)	$	88,879

See accompanying notes to condensed consolidated financial statements

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METROCORP BANCSHARES, INC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

	For the Six Months Ended
	June 30,
	2005			2004
Cash flows from operating activities:
Net income	$	5,030		$	4,670
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		701			664
Provision for loan losses		900			850
Loss (gain) on foreclosed assets		384			(1,130	)
Loss on sale and disposal of premises and equipment		100			–
Gain on sale of loans		(31	)		(569	)
Amortization of premiums and discounts on securities		137			1,490
Amortization of net deferred loan fees		(919	)		(411	)
Changes in:
Loans held-for-sale		1,899			3,486
Accrued interest receivable		(131	)		135
Other assets		(388	)		(650	)
Accrued interest payable		61			(31	)
Other liabilities		1,534			733
Net cash provided by operating activities		9,277			9,237
Cash flows from investing activities:
Purchases of securities available-for-sale		(10,304	)		(83,851	)
Proceeds from sales, maturities and principal paydowns of securities available-for-sale		33,344			53,854
Net change in loans		(17,308	)		(261	)
Proceeds from sale of foreclosed assets		1,182			3,113
Proceeds from sale of premises and equipment		4			–
Purchases of premises and equipment		(640	)		(1,448	)
Net cash provided by (used in) investing activities		6,278			(28,593	)
Cash flows from financing activities:
Net change in:
Deposits		19,956			(7,956	)
Other borrowings		(24,404	)		20,678
Proceeds from issuance of common stock		105			50
Re-issuance of treasury stock		182			188
Dividends paid		(864	)		(860	)
Net cash provided by (used in) financing activities		(5,025	)		12,100
Net increase (decrease) in cash and cash equivalents		10,530			(7,256	)
Cash and cash equivalents at beginning of period		32,073			36,927
Cash and cash equivalents at end of period	$	42,603		$	29,671

See accompanying notes to condensed consolidated financial statements

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METROCORP BANCSHARES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

     The unaudited condensed consolidated financial statements include the accounts of MetroCorp Bancshares, Inc. (the “Company”) and its wholly-owned subsidiary MetroBank, National Association (the “Bank”). 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 presentation of the Company’s financial position at June 30, 2005, results of operations for the three and six months ended June 30, 2005 and 2004, and cash flows for the six months ended June 30, 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.

2. SIGNIFICANT ACCOUNTING POLICIES

Stock-Based 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. 123Accounting 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):

	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2005		2004		2005		2004
	(In thousands, except per share amounts)
Net income:
As reported	$	2,770	$	2,507	$	5,030	$	4,670
Pro forma		2,676		2,464		4,843		4,584
Stock-based compensation cost, net of income taxes:
As reported		–		–		–		–
Pro forma		94		43		187		86
Basic earnings per common share:
As reported		0.38		0.35		0.70		0.65
Pro forma		0.37		0.34		0.67		0.64
Diluted earnings per common share:
As reported		0.38		0.35		0.69		0.64
Pro forma		0.37		0.34		0.67		0.63

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METROCORP BANCSHARES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Stock-Based 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 issued SFAS No. 123R,Share-Based Payment.This Statement supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees, and its related implementation guidance, is a revision of SFAS No. 123,Accounting for Stock-Based Compensationand amends SFAS No. 95,Statement of Cash Flows. This revision of SFAS No. 123 eliminates the ability for public companies to measure share-based compensation transactions at the intrinsic value as allowed by APB Opinion No. 25, and requires that such transactions be accounted for based on the grant date fair value of the award. This Statement also amends SFAS No. 95, to require that excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid. Under the intrinsic value method allowed under APB Opinion No. 25, the difference between the quoted market price as of the date of the grant and the contractual purchase price of the share is charged to operations over the vesting period, and no compensation expense is recognized for fixed stock options with exercise prices equal to the market price of the stock on the dates of grant. Under the fair value based method as prescribed by SFAS No. 123R, the Company is required to charge the value of all stock-based compensation to expense over the vesting period based on the computed fair value on the grant date of the award. The Statement does not specify a valuation technique to be used to estimate the fair value but states that the use of option-pricing models such as a lattice model (i.e. a binomial model) or a closed-end model (i.e. the Black-Scholes model) would be acceptable.

     The Company will adopt this Standard effective January 1, 2006, using the modified prospective method, recording compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. Currently, the Company does not recognize compensation expense for stock-based compensation. Had the Company adopted SFAS No. 123R in prior periods, the impact on net income and earnings per share would have been similar to the pro forma net income and earnings per share in accordance with SFAS No. 123 as disclosed above.

New Accounting Pronouncements

     In December 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 became effective for loans or debt securities beginning January 1, 2005. Upon adoption on January 1, 2005, there was no impact on the Company’s financial position, results of operations, or cash flows. The Company does not expect SOP 03-3 to have a material impact on its future financial condition, results of operations, or cash flows.

     In May 2005, the FASB issued SFAS No. 154,Accounting Changes and Error Corrections, that addresses accounting for changes in accounting principle, changes in accounting estimates and changes required by an accounting pronouncement in the instance that the pronouncement does not include specific transition provisions and error correction. SFAS No. 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle and error correction unless impracticable to do so. SFAS No. 154 states an exception to retrospective application when a change in accounting principle, or the method of applying it, may be inseparable from the effect of a change in accounting estimate. When a change in principle is inseparable from a change in estimate, such as depreciation, amortization or depletion, the change to the financial statements is to be presented in a prospective manner. SFAS No. 154 and the required disclosures are effective for accounting changes and error corrections in fiscal years beginning after December 15, 2005.

7

METROCORP BANCSHARES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

New Accounting Pronouncements (Continued)

     In June 2005, the FASB decided not to provide additional guidance on the meaning of other-than-temporary impairment, and directed the staff to issue proposed FASB Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) 03-1-a,Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1, as final. The final FSP will supersede EITF Issue No. 03-1,The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, and EITF Topic No. D-44,Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value. The final FSP (retitled FSP FAS 115-1,The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments) will replace the guidance set forth in paragraphs 10-18 of EITF Issue 03-1 with references to existing other-than-temporary impairment guidance, such as SFAS No. 115,Accounting for Certain Investments in Debt and Equity Securities, SEC Staff Accounting Bulletin No. 59,Accounting for Noncurrent Marketable Equity Securities, and APB Opinion No. 18, TheEquity Method of Accounting for Investments in Common Stock.FSP FAS 115-1 will codify the guidance set forth in EITF Topic D-44 and clarify that an investor should recognize an impairment loss no later than when the impairment is deemed other than temporary, even if a decision to sell has not been made. FSP FAS 115-1 will be effective for other-than-temporary impairment analysis conducted in periods beginning after September 15, 2005.

3. 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 the 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 June 30, 2005, there are no antidilutive stock options. The number of potentially dilutive common shares is determined using the treasury stock method.

	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2005		2004		2005		2004
	(In thousands, except per share amounts)
Net income available to common shareholders	$	2,770	$	2,507	$	5,030	$	4,670
Weighted average common shares outstanding:
Basic		7,205		7,172		7,200		7,167
Shares issuable under stock option plans		66		90		82		91
Diluted		7,271		7,262		7,282		7,258
Earnings per common share:
Basic	$	0.38	$	0.35	$	0.70	$	0.65
Diluted	$	0.38	$	0.35	$	0.69	$	0.64

4. AGREEMENT TO ACQUIRE FIRST UNITED BANK

     On June 7, 2005, the Company entered into an Agreement and Plan of Reorganization to acquire First United Bank (“First United”), a commercial bank headquartered in San Diego, California. Following the transaction, First United will be operated as a separate subsidiary of MetroCorp. Under the terms of the Agreement, First United shareholders will receive $51.5057 in cash for each share of First United common stock they own, subject to adjustment. First United is a state chartered commercial bank with two branches located in San Diego and Los Angeles, California that focuses on small and medium-sized commercial and retail customers in the Asian community. At June 30, 2005, First United had total assets of $174.3 million, total loans of $133.8 million and total deposits of $158.2 million. The acquisition is expected to close in the fourth quarter of 2005, pending shareholder and regulatory approvals.

8

5. SECURITIES AVAILABLE-FOR-SALE

     The amortized cost and approximate fair value of securities classified as available-for-sale is as follows:

	As of June 30, 2005									As of December 31, 2004
			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gain		Loss			Value		Cost		Gain		Loss			Value
	(Dollars in thousands)
U.S. Government agencies	$	33	$	1	$	—		$	34	$	35	$	—	$	—		$	35
U.S. Government sponsored entities		14,905		—		(50	)		14,855		4,970		—		(18	)		4,952
Obligations of state and political subdivisions		17,161		781		(4	)		17,938		18,105		1,030		—			19,135
Mortgage-backed securities and collateralized mortgage obligations		191,624		388		(1,829	)		190,183		222,977		1,344		(1,179	)		223,142
Other debt securities		1,547		7		(1	)		1,553		1,979		14		—			1,993
Investment in ARM and CRA funds		19,074		122		(303	)		18,893		18,772		89		(205	)		18,656
FHLB/Federal Reserve Bank Stock		5,124		—		—			5,124		5,807		—		—			5,807
Total securities	$	249,468	$	1,299	$	(2,187	)	$	248,580	$	272,645	$	2,477	$	(1,402	)	$	273,720

     The following table displays the gross unrealized losses and fair value of investments as of June 30, 2005 that were in a continuous unrealized loss position for the periods indicated:

	Less Than 12 Months					Greater Than 12 Months					Total
			Gross					Gross					Gross
			Unrealized					Unrealized					Unrealized
	Fair Value		Loss			Fair Value		Loss			Fair Value		Loss
	(Dollars in thousands)
U.S. Government sponsored entities	$	14,855	$	(50	)	$	—	$	—		$	14,855	$	(50	)
Obligations of state and political subdivisions		264		(4	)		—		—			264		(4	)
Mortgage-backed securities and collateralized mortgage obligations		79,958		(677	)		57,398		(1,152	)		137,356		(1,829	)
Other debt securities		200		(1	)		—		—			200		(1	)
Investment in ARM and CRA funds		—		—			14,566		(303	)		14,566		(303	)
Total securities	$	95,277	$	(732	)	$	71,964	$	(1,455	)	$	167,241	$	(2,187	)

     Declines in the fair value of individual securities below their cost that are other than temporary would result in realized losses as the individual securities are written down to their fair value. Management believes that based upon the credit quality of the 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.

6. LITIGATION

     Neither the Company nor the Bank is involved in any material legal proceedings at June 30, 2005. The Bank, from time to time, is a party to litigation which arises in the ordinary course of business, such as claims to enforce liens, claims involving the origination and servicing of loans, and other issues related to the business of the Bank. After taking into consideration information furnished by counsel to the Company and the Bank, management believes that that the resolution of such issues will not have a material adverse impact on the financial condition, or result of operations of the Company or the Bank.

9

7. 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 June 30, 2005 and December 31, 2004 totaled $95.8 million and $106.0 million, respectively. Commitments under standby and commercial letters of credit at June 30, 2005 and December 31, 2004 totaled $12.7 million and $15.6 million, respectively.

     The contractual amount of the Company’s financial instruments with off-balance sheet risk at June 30, 2005 and December 31, 2004 is presented below (in thousands):

	As of		As of
	June 30, 2005		December 31, 2004
Unfunded loan commitments including unfunded lines of credit	$	95,804	$	105,975
Standby letters of credit		5,415		3,852
Commercial letters of credit		7,280		11,756
Operating leases		3,180		4,060
Total financial instruments with off-balance sheet risk	$	111,679	$	125,643

8. ALLOWANCE FOR LOAN LOSSES

     The following table presents an analysis of the allowance for loan losses for the periods indicated:

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2005			2004			2005			2004
	(In thousands, except per share amounts)
Allowance for loan losses at beginning of period	$	11,075		$	10,850		$	10,863		$	10,448
Provision for loan losses		500			300			900			850
Charge-offs		(954	)		(807	)		(1,194	)		(1,175	)
Recoveries		85			690			137			910
Allowance for loan losses at end of period	$	10,706		$	11,033		$	10,706		$	11,033

10

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

     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 $2.8 million for the three months ended June 30, 2005, up approximately $263,000 compared with net income of $2.5 million for the same quarter in 2004. The Company’s diluted earnings per share (“EPS”) for the three months ended June 30, 2005 was $0.38, up $0.03 per diluted share compared with diluted EPS of $0.35 for the same quarter in 2004. Net income for the six months ended June 30, 2005 was $5.0 million, up approximately $360,000 compared with $4.7 million for the same period in 2004. The Company’s diluted EPS for the six months ended June 30, 2005 was $0.69, up $0.05 from $0.64 for the same period in 2004. The increase in net income and diluted EPS was mainly the result of growth in loans and deposits as well as an increase in the net interest margin compared with the same period of 2004.

     Total assets were $909.2 million at June 30, 2005, down approximately $4.7 million or 0.5% from $914.0 million at December 31, 2004. Investment securities at June 30, 2005 were $248.6 million, down approximately $25.1 million or 9.2% from $273.7 million at December 31, 2004. Total loans, both held-for-investment and held-for-sale, at June 30, 2005 were $609.8 million, up approximately $15.3 million or 2.6% from $594.5 million at December 31, 2004. Total deposits at June 30, 2005 were $775.0 million, up approximately $20.0 million or 2.6% from $755.1 million at December 31, 2004. Other borrowings at June 30, 2005 were $36.4 million, down approximately $24.4 million or 40.1% from $60.8 million at December 31, 2004. The Company’s return on average assets (“ROAA”) for the three months ended June 30, 2005 and 2004 was 1.24% and 1.17%, respectively. The Company’s ROAA for the six months ended June 30, 2005 and 2004 was 1.12% and 1.09%, respectively.

     Shareholders’ equity at June 30, 2005 was $88.9 million compared with $85.7 million at December 31, 2004, an increase of approximately $3.2 million or 3.7%. The Company’s return on average equity (“ROAE”) for the three months ended June 30, 2005 and 2004 was 12.62% and 12.94%, respectively. The Company’s ROAE for the six months ended June 30, 2005 and 2004 was 11.59% and 11.98%, respectively.

Results of Operations

     Net Interest Income and Net Interest Margin.For the three months ended June 30, 2005, net interest income, before the provision for loan losses, was $9.7 million, up approximately $1.6 million or 19.9% from $8.1 million for the same quarter in 2004. The increase was primarily due to a $2.6 million increase in interest income that was partially offset by a $1.0 million increase in interest expense. Average interest-earning asset balances for the three months ended June 30, 2005 were $863.3 million, up approximately $42.3 million or 5.2% from $821.0 million for the same quarter in 2004. The weighted average yield on interest-earning assets for the three months ended June 30, 2005 was 6.18%, up 94 basis points from 5.24% for the same quarter in 2004. Average interest-bearing liability balances for the three months ended June 30, 2005 were $623.6 million, up approximately $22.4 million or 3.7% from $601.2 million for the same quarter in 2004. The weighted average rate paid on interest-bearing liabilities for the three months ended June 30, 2005 was 2.31%, up 58 basis points from 1.73% for the same quarter in 2004.

     For the six months ended June 30, 2005, net interest income, before the provision for loan losses, was $19.1 million, up approximately $3.0 million or 18.9% from $16.1 million for the same period in 2004. The increase was primarily due to a $4.7 million increase in interest income that was partially offset by a $1.7 million increase in interest expense. Average interest-earning asset balances for the six months ended June 30, 2005 were $867.4 million, up approximately $45.9 million or 5.6% from $821.5 million for the same period in 2004. The weighted average yield on interest-earning assets for the six months ended June 30, 2005 was 6.06%, up 84 basis points from 5.22% for the same period in 2004. Average interest-bearing liability balances for the six months ended June 30, 2005 were $636.1 million, up approximately $31.7 million or 5.2% from $604.4 million for the same period in 2004. The weighted average rate paid on interest-bearing liabilities for the six months ended June 30, 2005 was 2.20%, up 46 basis points from 1.74% for the same period in 2004.

     The net interest margin for the three months ended June 30, 2005 was 4.51%, up 54 basis points from 3.97% for the same quarter in 2004. The increase was primarily the result of a 94 basis points increase in the yield on earning assets that resulted from higher loan yields. The yield on loans for the second quarter of 2005 was 7.16% compared with 6.00% for the second quarter of 2004, an increase of 116 basis points. The increase in net interest margin was partially offset by an increase in the cost of earning assets of 40 basis points. However, the effect of higher interest rates on the cost of interest-bearing liabilities was limited by lower other borrowings and an increase in noninterest-bearing deposits.

     The net interest margin for the six months ended June 30, 2005 was 4.45%, up 51 basis points from 3.94% for the same period in 2004. The increase resulted primarily from an increase in the yield on earning assets of 84 basis points that was partially offset by a 33 basis points increase in the cost of earning assets.

12

     Total Interest Income.Total interest income for the three months ended June 30, 2005 was $13.3 million, up approximately $2.6 million or 24.5% from $10.7 million for the same period in 2004. Total interest income for the six months ended June 30, 2005 was $26.1 million, up approximately $4.7 million or 22.3% from $21.3 million for the same period in 2004. The higher interest income in the second quarter of 2005, compared with the same quarter in 2004, was primarily the result of an increase in both average earning assets and average yield. The increase in average earning assets came primarily from loan growth. The yield on average earning assets for the second quarter of 2005 was 6.18% compared with 5.24% for the second quarter of 2004, an increase of 94 basis points. The Federal Reserve’s nine interest rate increases between June 2004 and June 2005 contributed positively to the loan yield. 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.

     Interest Income from Loans.Interest income from loans for the three months ended June 30, 2005 was $10.7 million, up approximately $2.4 million or 28.7% from $8.3 million for the same quarter in 2004 primarily due to loan growth and increase in loan yield. Average total loans for the three months ended June 30, 2005 were $596.6 million compared with average total loans for the same quarter in 2004 of $555.3 million, an increase of approximately $41.3 million or 7.4%. For the three months ended June 30, 2005, the average yield on total loans was 7.16%, compared with 6.00% for the same quarter in 2004, an increase of 116 basis points.

     Approximately $554.6 million or 90.6% 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. The average yield on total loans for the three months ended June 30, 2005 was approximately 125 basis points above the prime rate, which was supported by variable rate loans with interest rate floors that consisted of approximately $498.5 million or 81.3% of the total loan portfolio. At June 30, 2005, these loans carried a weighted average interest rate of 7.30%. At June 30, 2004, these loans represented 68.7% of the total loan portfolio and carried a weighted average interest rate of 5.70%. 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.

     Interest income from loans for the six months ended June 30, 2005 was $20.7 million, up approximately $4.3 million or 25.9% from $16.5 million for the same period in 2004, primarily due to the higher loan yields resulting from the rising interest rate environment and the higher average loan balances. Average total loans for the six months ended June 30, 2005 were $596.2 million compared with average total loans for the same period in 2004 of $559.3 million, an increase of approximately $36.9 million or 6.6%. For the six months ended June 30, 2005, the average yield on total loans was 7.01%, compared with 5.92% for the same period in 2004, an increase of 109 basis points.

     Interest Income from Investments.Interest income from investments (which includes investment securities, Federal Funds sold, and other investments) for the three months ended June 30, 2005 was $2.7 million, up approximately $245,000 or 10.2% compared with $2.4 million for the same quarter in 2004, primarily due to higher market interest rates. Average total investments for the three months ended June 30, 2005, were $266.7 million compared with average total investments for the same quarter in 2004 of $265.7 million, an increase of approximately $909,000 or 0.3%. For the three months ended June 30, 2005, the average yield on investments was 3.99% compared with 3.64% for the same quarter in 2004, an increase of 35 basis points.

     Interest income from investments for the six months ended June 30, 2005 was $5.3 million, up approximately $480,000 or 9.9% compared with $4.9 million for the same period in 2004, primarily due to a higher yield in total investments. Average total investments for the six months ended June 30, 2005 were $271.2 million compared with average total investments for the same period in 2004 of $262.2 million, an increase of approximately $9.0 million or 3.4%. For the six months ended June 30, 2005, the average yield on investments was 3.98% compared with 3.73% for the same period in 2004, an increase of 25 basis points.

     Total Interest Expense.Total interest expense for the three months ended June 30, 2005 was $3.6 million, up approximately $1.0 million or 39.1% compared with $2.6 million for the same quarter in 2004. Total interest expense for the six months ended June 30, 2005 was $6.9 million, up approximately $1.7 million or 32.8% from $5.2 million for the same period in 2004. The higher interest expense for both periods in 2005, compared with 2004, primarily reflected an increase in interest-bearing deposits and higher interest rates.

     Interest Expense on Deposits.Interest paid on interest-bearing deposits for the three months ended June 30, 2005 was $3.1 million, up approximately $968,000 or 45.1% compared with $2.1 million for the same period in 2004, The increase was primarily due to higher interest rates paid for interest-bearing deposits and higher interest-bearing deposit balances. Average interest-bearing deposits for the three months ended June 30, 2005 were $575.8 million compared with average interest-bearing deposits for the same quarter in 2004 of $537.6 million, an increase of $38.2 million or 7.1%. The average interest rate paid on interest-bearing deposits for the three months ended June 30, 2005 was 2.17% compared with 1.60% for the same quarter in 2004, an increase of 57 basis points. The increase in rates primarily reflected the impact of the Federal Reserve’s interest rate increases.

     Interest paid on interest-bearing deposits for the six months ended June 30, 2005 was $5.9 million, up approximately $1.5 million or 35.3% compared with $4.3 million for the same period in 2004 and was primarily due to higher interest rates paid for interest-bearing deposits and higher interest-bearing deposit balances. Average interest-bearing deposits for the six months ended June 30, 2005 were $579.1 million compared with average interest-bearing deposits for the same period in 2004 of $542.3 million, an increase

13

of $36.9 million or 6.8%. The average interest rate paid on interest-bearing deposits for the six months ended June 30, 2005 was 2.05% compared with 1.61% for the same period in 2004, an increase of 44 basis points.

     Interest Expense on Other Borrowed Funds.Interest paid on other borrowed funds for the three months ended June 30, 2005 was $482,000, up approximately $42,000 compared with $440,000 for the same period in 2004 and was primarily due to higher interest rates paid for borrowed funds that were partially offset by lower average borrowed funds balances. Average borrowed funds for the three months ended June 30, 2005 were $47.8 million compared with average borrowed funds for the same quarter in 2004 of $63.6 million, a decrease of $15.8 million. The decrease in borrowed funds reflected higher deposits obtained to repay advances from the Federal Home Loan Bank (“FHLB”). The average interest rate paid on borrowed funds for the three months ended June 30, 2005 was 4.04%, compared with 2.78% for the same quarter in 2004, an increase of 126 basis points.

     Interest paid on other borrowed funds for the six months ended June 30, 2005 was $1.1 million, up approximately $179,000 compared with $876,000 million for the same period in 2004 and was primarily due to higher interest rate paid on borrowed funds offset by lower average borrowings. Average borrowed funds for the six months ended June 30, 2005 were $56.9 million compared with average borrowed funds for the same period in 2004 of $62.2 million, a decrease of $5.2 million. The average interest rate paid on other borrowings for the six months ended June 30, 2005 was 3.74%, compared with 2.83% for the same period in 2004, an increase of 91 basis points.

14

     The following tables present the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars 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 tables as loans having a zero yield with income, if any, recognized at the end of the loan term.

	For The Three Months Ended June 30,
	2005								2004
	Average			Interest		Average			Average			Interest		Average
	Outstanding			Earned/		Yield/			Outstanding			Earned/		Yield/
	Balance			Paid		Rate(1)			Balance			Paid		Rate(1)
	(Dollars in thousands)
Assets
Interest-earning assets:
Total loans	$	596,615		$	10,657		7.16	%	$	555,274		$	8,281		6.00	%
Taxable securities		237,633			2,359		3.98			236,764			2,153		3.66
Tax-exempt securities		17,161			212		4.96			18,742			232		4.98
Federal funds sold and other temporary investments		11,856			82		2.77			10,235			23		0.90
Total interest-earning assets		863,265			13,310		6.18			821,015			10,689		5.24
Less allowance for loan losses		(11,263	)							(10,872	)
Total interest-earning assets, net of allowance for loan losses		852,002								810,143
Noninterest-earning assets		44,890								48,715
Total assets	$	896,892							$	858,858
Liabilities and shareholders’ equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	85,946			172		0.80	%	$	75,915			119		0.63	%
Savings and money market accounts		104,127			255		0.98			106,850			175		0.66
Time deposits		385,755			2,685		2.79			354,846			1,850		2.10
Other borrowings		47,813			482		4.04			63,589			440		2.78
Total interest-bearing liabilities		623,641			3,594		2.31			601,200			2,584		1.73
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		178,249								172,368
Other liabilities		6,968								7,354
Total liabilities		808,858								780,922
Shareholders’ equity		88,034								77,936
Total liabilities and shareholders’ equity	$	896,892							$	858,858
Net interest income				$	9,716							$	8,105
Net interest spread							3.87	%							3.51	%
Net interest margin							4.51	%							3.97	%

(1) Annualized.

15

	For The Six Months Ended June 30,
	2005								2004
	Average			Interest		Average			Average			Interest		Average
	Outstanding			Earned/		Yield/			Outstanding			Earned/		Yield/
	Balance			Paid		Rate(1)			Balance			Paid		Rate(1)
	(Dollars in thousands)
Assets
Interest-earning assets:
Total loans	$	596,214		$	20,727		7.01	%	$	559,292		$	16,459		5.92	%
Taxable securities		243,159			4,781		3.96			236,435			4,370		3.72
Tax-exempt securities		17,411			430		4.98			18,789			466		4.99
Federal funds sold and other temporary investments		10,603			136		2.59			6,982			31		0.89
Total interest-earning assets		867,387			26,074		6.06			821,498			21,326		5.22
Less allowance for loan losses		(11,153	)							(10,763	)
Total interest-earning assets, net of allowance for loan losses		856,234								810,735
Noninterest-earning assets		46,300								47,972
Total assets	$	902,534							$	858,707
Liabilities and shareholders’ equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	87,469			347		0.80	%	$	74,028			218		0.59	%
Savings and money market accounts		108,245			466		0.87			112,212			372		0.67
Time deposits		383,422			5,060		2.66			356,020			3,751		2.12
Other borrowings		56,949			1,055		3.74			62,152			876		2.83
Total interest-bearing liabilities		636,085			6,928		2.20			604,412			5,217		1.74
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		171,989								169,171
Other liabilities		6,966								6,723
Total liabilities		815,040								780,306
Shareholders’ equity		87,494								78,401
Total liabilities and shareholders’ equity	$	902,534							$	858,707
Net interest income				$	19,146							$	16,109
Net interest spread							3.86	%							3.48	%
Net interest margin							4.45	%							3.94	%

(1) Annualized.

16

     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 and six months ended June 30, 2005 compared with the three and six months ended June 30, 2004. For purposes of this table, changes attributable to both rate and volume have been allocated to each accordingly.

	Three Months Ended June 30,									Six Months Ended June 30,
	2005 vs 2004									2005 vs 2004
	Increase (Decrease)									Increase (Decrease)
	Due to									Due to
	Volume			Rate			Total			Volume			Rate			Total
	(Dollars in thousands)
Interest-earning assets:
Loans (including loans held-for-sale)	$	641		$	1,735		$	2,376		$	1,038		$	3,230		$	4,268
Taxable securities		14			192			206			112			299			411
Tax-exempt securities		(19	)		(1	)		(20	)		(35	)		(1	)		(36	)
Federal funds sold and other temporary investments		4			55			59			16			89			105
Total increase in interest income		640			1,981			2,621			1,131			3,617			4,748
Interest-bearing liabilities:
Interest-bearing demand deposits		16			37			53			39			90			129
Savings and money market accounts		(4	)		84			80			(14	)		108			94
Time deposits		167			668			835			278			1,031			1,309
Other borrowings		(108	)		150			42			(76	)		255			179
Total increase in interest expense		71			939			1,010			227			1,484			1,711
Increase in net interest income	$	569		$	1,042		$	1,611		$	904		$	2,133		$	3,037

     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 June 30, 2005 was $500,000, up approximately $200,000, compared with $300,000 for the same period in 2004, as a result of higher loan loss recoveries during the second quarter of 2004. The provision for loan losses for the six months ended June 30, 2005 was $900,000, compared with the $850,000 provision for the same period in 2004.

     Noninterest Income.Noninterest income for the three months ended June 30, 2005 was $2.0 million, down approximately $431,000 or 17.6% compared with the same three months in 2004. The decrease was primarily a result of lower gain on the sale of loans. Gain on sale of loans was down approximately $491,000 because of the sale of hospitality loans during the second quarter of 2004 that did not occur in 2005.

     Noninterest income for the six months ended June 30, 2005 was $4.1 million, down approximately $429,000 or 9.5% compared with the same period in 2004. The decrease was primarily a result of lower gain on sale of loans as discussed above.

     Noninterest Expense.Noninterest expense for the three months ended June 30, 2005 was $7.2 million, up approximately $619,000 or 9.4% compared with $6.6 million for the same period in 2004. The increase was a result of Sarbanes-Oxley compliance costs during the second quarter of 2005, and a $251,000 net gain on sale of foreclosed assets during the second quarter of 2004 that did not occur in 2005.

     Noninterest expense for the six months ended June 30, 2005 was $15.0 million, up $2.0 million or 15.6% compared with $13.0 million for the same period in 2004, primarily due to a combination of a write-down on foreclosed assets of approximately $391,000 in the first quarter of 2005, and a $914,000 net gain on the sale of foreclosed assets for the six months ended June 30, 2004. Salaries and benefits expense for the six months ended June 30, 2005 was $8.0 million, up $491,000 compared with $7.5 million for the same period in 2004, primarily due to increased incentive bonus accruals for 2005. Other noninterest expense for the six months ended June 30, 2005 was up approximately $286,000 compared with the same period in 2004, primarily due to a combination of expenses associated with First United Bank acquisition, a branch consolidation in Dallas and Sarbanes-Oxley compliance costs.

17

     The Company’s efficiency ratio for the three months ended June 30, 2005 was 61.61%, a decrease from 62.64% for the same quarter in 2004. The Company’s efficiency ratio for the six months ended June 30, 2005 was 64.53%, an increase from 62.89% for the same period in 2004 and was primarily due to an increase in noninterest expenses.

     Income Taxes.Income tax expense for the six months ended June 30, 2005 was $2.3 million, compared with $2.1 million for the same period in 2004. The Company’s effective tax rate was 31.41% and 31.28% for the six months ended June 30, 2005 and 2004, respectively. The effective tax rate is affected by the amount of tax-exempt income in relation to taxable income.

Financial Condition

     Loan Portfolio.Total loans at June 30, 2005 were $609.8 million, up $15.3 million or 2.6% from $594.5 million at December 31, 2004. Compared with the loan level at December 31, 2004, commercial and industrial loans decreased $9.0 million and real estate loans increased $25.3 million during the six months ended June 30, 2005. At June 30, 2005, the Company had approximately $52.3 million or 8.6% of its loan portfolio concentrated in the hospitality industry, compared with $56.0 million or 9.4 % of its loan portfolio at December 31, 2004, and $59.6 million or 10.7% at June 30, 2004. At June 30, 2005 and December 31, 2004, the ratio of total loans to total deposits was 78.69% and 78.74% respectively. At the same dates, total loans represented 67.1% and 65.1% of total assets, respectively.

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

	As of June, 2005						As of December 31, 2004
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
Commercial and industrial	$	336,563			54.98	%	$	345,570			57.88	%
Real estate mortgage
Residential		8,661			1.42			11,199			1.87
Commercial		222,599			36.36			188,121			31.51
		231,260			37.78			199,320			33.38
Real estate construction
Residential		8,135			1.33			9,761			1.64
Commercial		27,891			4.55			32,868			5.50
		36,026			5.88			42,629			7.14
Consumer and other		8,332			1.36			9,556			1.60
Gross loans		612,181			100.00	%		597,075			100.00	%
Less: unearned discounts, interest and deferred fees		(2,343	)					(2,539	)
Total loans		609,838						594,536
Less: allowance for loan losses		(10,706	)					(10,863	)
Loans, net	$	599,132					$	583,673

     Nonperforming Assets.Total nonperforming assets at June 30, 2005 were $19.4 million, an increase of $1.1 million compared with $18.3 million at December 31, 2004. The increase was primarily due to one nonperforming loan relationship in the first quarter of 2005. At June 30, 2005, nonperforming assets primarily consisted of $19.3 million in nonaccrual loans, and $108,000 in accruing loans that were 90 days or more past due. Net nonperforming assets at June 30, 2005 were $16.8 million compared with $15.2 million at December 31, 2004, an increase of $1.6 million or 10.5%. Approximately $12.3 million of such nonaccrual loans are collateralized by real estate, which represented 63.9% of total nonaccrual loans at June 30, 2005.

     The ratios for net nonperforming assets to total loans and other real estate at June 30, 2005 and December 31, 2004 were 2.76% and 2.55%, respectively. The ratios for net nonperforming assets to total assets were 1.85% 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 $2.6 million at June 30, 2005 and $3.0 million at December 31, 2004.

     The Company is 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 may repurchase any loan that may become nonperforming. 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.

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

	As of			As of
	June 30, 2005			December 31, 2004
	(Dollars in thousands)
Nonaccrual loans	$	19,259		$	16,504
Accruing loans 90 days or more past due		108			181
Other real estate (“ORE”) and other assets repossessed (“OAR”)		—			1,566
Total nonperforming assets		19,367			18,251
Less: Nonperforming loans guaranteed by the SBA, Ex-Im Bank and OCCGF		(2,553	)		(3,032	)
Total net nonperforming assets	$	16,814		$	15,219
Total nonperforming assets to total assets		2.13	%		2.00	%
Total nonperforming assets to total loans and ORE/OAR		3.18	%		3.06	%
Net nonperforming assets to total assets (1)		1.85	%		1.67	%
Net nonperforming assets to total loans and ORE/OAR (1)		2.76	%		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 Company’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 of
	June 30, 2005		December 31, 2004
	(Dollars in thousands)
Impaired loans with no SFAS No. 114 valuation reserve	$	19,131	$	15,339
Impaired loans with a SFAS No. 114 valuation reserve		2,891		3,967
Total recorded investment in impaired loans	$	22,022	$	19,306
Valuation allowance related to impaired loans	$	1,426	$	1,751

     The average recorded investment in impaired loans during the six months ended June 30, 2005 and the year ended December 31, 2004 was $20.2 million and $20.8 million, respectively. Interest income on impaired loans of $106,000 was recognized for cash payments received during the six months ended June 30, 2005.

     Allowance for Loan Losses.At June 30, 2005 and 2004, the allowance for loan losses was $10.7 million and $11.0 million, respectively, or 1.76% and 1.99% of total loans, respectively. At December 31, 2004, the allowance for loan losses was $10.9 million, or 1.83% of total loans. Net charge-offs for the three months ended June 30, 2005 were $869,000 compared with $117,000 for the same period in 2004. Charge-offs for the three months ended June 30, 2005 primarily consisted of an $800,000 charge-off on one non-performing credit, taken against the specific reserve. The charge-off was done in connection with the pending sale of the company to match the sales price. Net charge-offs for the six months ended June 30, 2005 were $1.1 million compared with $265,000 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

19

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. 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:

	As of and for the
	Three Months Ended June 30,
	2005			2004
	(Dollars in thousands)
Average year-to-date total loans outstanding	$	596,615		$	555,274
Total loans outstanding at end of period	$	609,838		$	554,163
Allowance for loan losses at beginning of period	$	11,075		$	10,850
Provision for loan losses		500			300
Charge-offs:
Commercial and industrial		(889	)		(784	)
Real estate mortgage		–			–
Real estate construction		–			–
Consumer and other		(65	)		(23	)
Total charge-offs		(954	)		(807	)
Recoveries:
Commercial and industrial		58			683
Real estate mortgage		–			5
Real estate construction		–			–
Consumer and other		27			2
Total recoveries		85			690
Net charge-offs		(869	)		(117	)
Allowance for loan losses at end of period	$	10,706		$	11,033
Ratio of allowance to end of period total loans		1.76	%		1.99	%
Ratio of net charge-offs to end of period total loans		0.14	%		0.02	%
Ratio of allowance to end of period total nonperforming loans (1)		55.28	%		53.20	%
Ratio of allowance to end of period net nonperforming loans (2)		63.68	%		62.28	%

(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.

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	As of and for the
	Six Months Ended June 30,
	2005			2004
	(Dollars in thousands)
Average year-to-date total loans outstanding	$	596,214		$	559,292
Total loans outstanding at end of period	$	609,838		$	554,163
Allowance for loan losses at beginning of period	$	10,863		$	10,448
Provision for loan losses		900			850
Charge-offs:
Commercial and industrial		(1,014	)		(1,126	)
Real estate mortgage		–			–
Real estate construction		(5	)
Consumer and other		(175	)		(49	)
Total charge-offs		(1,194	)		(1,175	)
Recoveries:
Commercial and industrial		105			796
Real estate mortgage		1			102
Real estate construction		–			–
Consumer and other		31			12
Total recoveries		137			910
Net charge-offs		(1,057	)		(265	)
Allowance for loan losses at end of period	$	10,706		$	11,033
Ratio of allowance to end of period total loans		1.76	%		1.99	%
Ratio of net charge-offs to end of period total loans		0.17	%		0.05	%
Ratio of allowance to end of period total nonperforming loans (1)		55.28	%		53.20	%
Ratio of allowance to end of period net nonperforming loans (2)		63.68	%		62.28	%

(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.

     Securities.At June 30, 2005, the securities portfolio was $248.6 million, a decrease of $25.1 million or 9.2% from $273.7 million at December 31, 2004. The decrease was primarily due to prepayments in mortgage-backed securities and collateralized mortgage obligations 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 June 30, 2005 approximately $10.9 million in short-term borrowings from the FHLB have been utilized to fund certain mortgage-backed securities to increase interest-earning assets.

     Deposits. At June 30, 2005, total deposits were $775.0 million, up $20.0 million or 2.6% from $755.1 million at December 31, 2004. Noninterest-bearing demand deposits at June 30, 2005 increased $9.5 million or 5.8% to $172.7 million from $163.2 million at December 31, 2004. Interest-bearing deposits at June 30, 2005 increased $10.4 million or 1.8% to $602.3 million from $591.9 million at December 31, 2004. The Company’s ratios of noninterest-bearing demand deposits to total deposits at June 30, 2005 and December 31, 2004 were 22.3% and 21.6%, respectively.

     Other Borrowings.Other borrowings at June 30, 2005 were $36.4 million, down approximately $24.4 million, or 40.1% compared with other borrowings of $60.8 million at December 31, 2004. The company used growth in deposits to repay other borrowings. 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 $10.9 million with weighted average fixed rates of 3.20% and scheduled to mature in the third quarter of 2005. These borrowings were part of a strategic plan to continue the growth of interest-

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earning assets. The funds were invested primarily in mortgage-related instruments with durations of approximately three years. Other short-term borrowings at June 30, 2005 consisted of approximately $545,000 in U.S. Treasury tax and loan accounts.

     The following table provides an analysis of the Company’s other borrowings:

	As of and for the			As of and for the
	Six Months Ended			Year Ended
	June, 2005			December 31, 2004
	(Dollars in thousands)
Federal funds purchased:
at end of period	$	–		$	–
average during the period		22			–
maximum month-end balance during the period		–			–
FHLB notes:
at end of period	$	35,900		$	59,900
average during the period		56,231			63,288
maximum month-end balance during the period		72,500			74,300
Interest rate at end of period		4.45	%		3.46	%
Interest rate during the period		3.74			2.93
Other short-term borrowings:
at end of period	$	545		$	949
average during the period		695			734
maximum month-end balance during the period		937			1,057

     Liquidity.The Company’s loan to deposit ratio at June 30, 2005 was 78.69%. As of this same date, the Company had commitments to fund loans in the amount of $95.8 million. At June 30, 2005, the Company had stand-by letters of credit of $5.4 million, for which the Company has recorded a liability of $11,094 at June 30, 2005, for the fair value of the Company’s potential obligations. 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 $337.7 million from the FHLB. Additionally, the Company had an unused, unsecured line of credit with a correspondent bank totaling $5.0 million at June 30, 2005.

     Capital Resources.Shareholders’ equity at June 30, 2005 was $88.9 million compared with $85.7 million at December 31, 2004, an increase of approximately $3.2 million. This increase was primarily the combined result of $5.0 million net income, a decrease in accumulated other comprehensive income of $1.3 million, and partially offset by dividend payments of approximately $864,000.

     The following table provides a comparison of the Company’s and the Bank’s leverage and risk-weighted capital ratios as of June 30, 2005 to the minimum and well-capitalized regulatory standards:

	Minimum			To Be Categorized as
	Required For			Well Capitalized Under
	Capital Adequacy			Prompt Corrective			Actual Ratio At
	Purposes			Action Provisions			June 30, 2005
The Company
Leverage ratio		4.00	%(1)		N/A	%		9.87	%
Tier 1 risk-based capital ratio		4.00			N/A			13.48
Risk-based capital ratio		8.00			N/A			14.74
The Bank
Leverage ratio		4.00	%(2)		5.00	%		9.61	%
Tier 1 risk-based capital ratio		4.00			6.00			13.13
Risk-based capital ratio		8.00			10.00			14.39

(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.

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     Critical Accounting Policies.The Company has established various accounting policies which govern the application of accounting principles generally accepted in the United States 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”.

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.

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PART II

OTHER INFORMATION

Item 1.Legal Proceedings

     The Company’s wholly owned subsidiary, MetroBank, N.A., is a party to litigation incidental to various aspects of its operations, in the ordinary course of business. Management is not currently aware of any litigation that will have a material adverse impact on the Company’s consolidated financial condition, results of operations, or cash flows.

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

     The Company’s 2005 Annual Meeting of Shareholders was held on April 29, 2005. At the meeting, the shareholders considered and acted upon the proposals listed below.

     1. Helen F. Chen, Shirley L. Clayton, George M. Lee, David Tai, and Daniel B. Wright were elected as Class I directors, and John E. Peterson was elected as a Class II director. The Class I directors were elected to serve until the Company’s 2008 annual meeting of shareholders and the Class II director was elected to serve until the Company’s 2006 annual meeting of shareholders, and each until their successors are duly elected and qualified. The votes cast with respect to each director were as follows:

Director	For		Withheld
Helen F. Chen		6,132,244		516,485
Shirley L. Clayton		6,596,015		52,714
George M. Lee		6,585,275		63,454
John E. Peterson		6,587,171		61,558
David Tai		6,566,011		82,718
Daniel B. Wright		6,574,775		73,954

     The following Class II and Class III directors continued in office after the 2005 Annual Meeting of Shareholders: Tiong Loi Ang, Tommy F. Chen, May P. Chu, John Lee, Edward A. Monto, Charles L. Roff, Joe Ting, and Don J. Wang.

     2. The shareholders ratified the appointment of PricewaterhouseCoopers LLP as the independent registered public accounting firm to audit the financial statements of the Company for the year ending December 31, 2005. A total of 6,599,640 shares were voted in favor of the proposal, 47,489 shares were voted against the proposal and 1,600 shares abstained from voting on the proposal.

Item 5.Other Information

          Not applicable

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Item 6.Exhibits

Exhibit
Number	Identification of Exhibit
11	- Computation of Earnings Per Common Share, included as Note (3) to the unaudited Condensed Consolidated Financial Statements on Page 8 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.

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SIGNATURES

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

	METROCORP BANCSHARES, INC.
	By:	/s/ George M. Lee
Date: August 12, 2005		George M. Lee
		Chief Executive Office (principal executive officer)
Date: August 12, 2005	By:	/s/ David C. Choi
		David C. Choi
		Chief Financial Officer (principal financial officer/ principal accounting officer)

26

EXHIBIT INDEX

Exhibit
Number		Identification of Exhibit
11	-	Computation of Earnings Per Common Share, included as Note (3) to the unaudited Condensed Consolidated Financial Statements on Page 8 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.

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