UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

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, 2004
	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.

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 10, 2004, the number of outstanding shares of Common Stock, par value $1.00 per share, was 7,172,563.

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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)

See accompanying notes to condensed consolidated financial statements

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METROCORP BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share amounts)
(Unaudited)

See accompanying notes to condensed consolidated financial statements

3

METROCORP BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)

METROCORP BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Three Months Ended March 31, 2004
(In thousands)
(Unaudited)

See accompanying notes to condensed consolidated financial statements

4

METROCORP BANCSHARES, INC
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

See accompanying notes to condensed consolidated financial statements

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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 fourteen 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 March 31, 2004, results of operations for the three months ended March 31, 2004 and 2003, and cash flows for the three months ended March 31, 2004 and 2003. 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, 2003.

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. Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, which, if fully adopted by the Company, would change the method the Company applies in recognizing the cost of the plans to the fair value method. Adoption of the cost recognition provisions of SFAS No. 123 is optional and the Company has decided to continue to follow the intrinsic value method. However, pro forma disclosures as if the Company adopted the fair value method are required. If the fair value based method of accounting under SFAS No. 123 had been applied, the Company’s net income available to 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):

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METROCORP BANCSHARES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Stock Compensation (Continued)

          The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. SFAS No. 123 does not apply to awards prior to 1995, and the Company anticipates making awards in the future under its stock-based compensation plans. 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.

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. Potentially dilutive common shares are computed using the treasury stock method.

3.	LITIGATION

          In September 2003, Advantage Finance Corporation (“AFC”), a subsidiary of the Company that is no longer active, was served in connection with a lawsuit based on alleged “malicious prosecution” and “conspiracy”. Also included in the lawsuit are BDO Seidman LLP and the CIT Group/Commercial Services, Inc. The plaintiff has filed his case in both Federal and State courts. In December 2003, the case was dismissed from Federal; however, the plaintiff subsequently filed an appeal. Management is unable to determine whether the outcome will have a material impact on the Company’s financial statements. The lawsuit does not seek a specified amount.

4.	GUARANTEES

          The Bank enters into a stand-by letters of credit to guarantee performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved is represented by the contractual amounts of those instruments. Under the stand-by letters of credit, the Bank is required to make payments to the beneficiary of the letters of credit upon request by the beneficiary so long as all performance criteria have been met. Most guarantees extend up to one year. At March 31, 2004, the maximum potential amount of future payments was $6.9 million. The Company has recorded a liability of approximately $1,538 and $3,400 at March 31, 2004 and 2003, respectively.

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METROCORP BANCSHARES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5.	NEW ACCOUNTING PRONOUNCEMENTS

          On December 16, 2003 the American Institute of Certified Public Accountants issued Statement of Position 03-3 (“SOP 03-3”), Accounting for Certain Loans or Debt Securities Acquired in a Transfer. 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 the 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.

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 are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, which describe the Company’s future plans, strategies and expectations, are based on assumptions and involve a number of risks and uncertainties, many of which are beyond the Company’s control. The important factors that could cause actual results to differ materially from the results, performance or achievements expressed or implied by the forward-looking statements include, without limitation:

	•		Changes in interest rates and market prices, which could reduce the Company’s net interest margins, asset valuations and expense expectations;
	•		Changes in the levels of loan prepayments and the resulting effects on the value of the Company’s loan portfolio;
	•		Changes in local economic and business conditions which adversely affect the ability of the Company’s customers to transact profitable business with the Company, including the ability of borrowers to repay 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 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 the Company’s 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.

          The Company undertakes no obligation to publicly update or otherwise revise any forward-looking statements, unless the securities laws require the Company to do so. All written or oral forward-looking statements attributable to the Company are expressly qualified in their entirety by these cautionary statements.

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Overview

          For the three months ended March 31, 2004, the Company recorded net income of $2.1 million, up approximately $201,000 from net income of $1.9 million for the same quarter in 2003. The Company’s diluted earnings per share (“EPS”) for the three months ended March 31, 2004 was $0.29, up $0.02 per diluted share from diluted EPS of $0.27 for the same quarter in 2003.

          Total assets were $856.3 million at March 31, 2004, down approximately $8.5 million or 1.0% from $864.8 million at December 31, 2003. Investment securities at March 31, 2004 were $239.9 million, down approximately $17.2 million or 6.7% from $257.1 million at December 31, 2003. Net loans, both held-for-investment and held-for-sale, at March 31, 2004 were $561.1 million, up approximately $17.8 million or 3.3% from $543.3 million at December 31, 2003. Total deposits at March 31, 2004 were $708.8 million, down approximately $16.1 million or 2.2% from $724.9 million at December 31, 2003. Other borrowings at March 31, 2004 were $58.8 million, up approximately $4.6 million from other borrowings of $54.2 million at December 31, 2003. The Company’s return on average assets (“ROAA”) for the three months ended March 31, 2004 and 2003 was 0.99% and 0.93%, respectively.

          Shareholders’ equity at March 31, 2004 was $79.3 million compared to $76.2 million at December 31, 2003, an increase of approximately $3.1 million or 4.1%. The Company made a capital contribution of $3.0 million to the Bank on April 20, 2004.

Results of Operations

          Net Interest Income and the Net Interest Margin. For the three months ended March 31, 2004, net interest income, before the provision for loan losses, was $8.2 million, up approximately $406,000 or 5.2% from $7.8 million for the same quarter in 2003. The increase was primarily due to lower interest expense resulting from lower interest rates paid on deposits and other interest-bearing liabilities that was partially offset by lower interest income as a result of lower yields on higher interest-earning assets. Average interest-earning assets for the three months ended March 31, 2004 were $820.3 million, up approximately $17.3 million or 2.2% from $803.0 million for the same quarter in 2003. The weighted average yield on interest-earning assets for the three months ended March 31, 2004 was 5.34%, down 26 basis points from 5.60% for the same quarter in 2003. Average interest-bearing liabilities for the three months ended March 31, 2004 were $607.6 million, down approximately $5.5 million or 0.9% from $613.1 million for the same quarter in 2003. The weighted average interest rate paid on interest-bearing liabilities for the three months ended March 31, 2004 was 1.74%, down 41 basis points from 2.15% for the same quarter in 2003.

          The net interest margin for the three months ended March 31, 2004 was 4.04%, up 8 basis points from 3.96% for the same period in 2003. The increase was primarily the result of a decrease in the cost of earning assets of 35 basis points that was partially offset by a decline in the yield on earning assets of 27 basis points. The Company’s net interest margin may experience future pressure depending on the interest rate environment.

          Total Interest Income. Total interest income for the three months ended March 31, 2004 was $10.9 million, down approximately $210,000 or 1.9% from $11.1 million for the same quarter in 2003. The decrease was primarily the result of lower yields on interest-earning assets. The yield on average earning assets for the first quarter 2004 was 5.34% compared to 5.60% for the first quarter of 2003, a decrease of 26 basis points.

          Interest Income from Loans. Interest income from loans for the three months ended March 31, 2004 was $8.4 million, down approximately $440,000 or 5.0% from $8.9 million for the same quarter in 2003. The decrease was primarily due to lower loan yields as a result of the current interest rate environment that was partially offset by higher average total loans. Average total loans for the three months ended March 31, 2004 were $561.6 million compared to average total loans for the same quarter in 2003 of $540.3 million, an increase of approximately $21.3 million or 3.9%. For the three months ended March 31, 2004, the average yield on total loans was 6.03% compared to 6.65% for the same quarter in 2003, a decrease of 62 basis points.

          Approximately $500.1 million or 86.3% 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, 2004, the average yield on total loans was approximately 203 basis points above the prime rate, which was supported by variable rate loans with interest rate floors that consisted of approximately $386.7 million or 66.8% of the total loan portfolio. At March 31, 2004, these loans carried a weighted average interest rate of 5.78%. At March 31, 2003, these loans represented 59.9% of the total loan portfolio and carried a weighted average interest rate of 6.39%. Future increases in market interest

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rates, especially the prime rate, may not immediately impact the loan portfolio yield because of the interest rate floors. Since some of the floor rates are higher than prime, increases in the prime rate may not immediately increase interest income on these loans. Other factors that have impacted interest 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, 2004 was $2.5 million, up approximately $230,000 or 10.3% compared to $2.2 million for the same quarter in 2003, primarily due to a higher yield on total investments. Average total investments for the three months ended March 31, 2004, were $258.7 million compared to average total investments for the same quarter in 2003 of $262.6 million, a decrease of approximately $3.9 million or 1.5%. For the three months ended March 31, 2004, the average yield on total investments was 3.82% compared to 3.44% for the same quarter in 2003, an increase of 38 basis points.

          Total Interest Expense. Total interest expense for the three months ended March 31, 2004 was $2.6 million, down approximately $616,000 or 19.0% compared to $3.2 million for the same quarter in 2003. The decrease was primarily the result of lower interest rates paid on interest-bearing liabilities in addition to lower average interest-bearing liabilities.

          Interest Expense on Deposits. Interest paid on interest-bearing deposits for the three months ended March 31, 2004 was $2.2 million, down approximately $547,000 or 19.9% compared to $2.7 million for the same period in 2003. The decrease was primarily due to lower interest rates paid for interest-bearing deposits. Average interest-bearing deposits for the three months ended March 31, 2004 were $546.9 million compared to average interest-bearing deposits for the same quarter in 2003 of $544.7 million, an increase of $2.2 million or 0.4%. The average interest rate paid on interest-bearing deposits for the three months ended March 31, 2004 was 1.62% compared to 2.04% for the same quarter in 2003, a decrease of 42 basis points.

          Interest Expense on Other Borrowings. Interest paid on other borrowings for the three months ended March 31, 2004 was $436,000, down approximately $69,000 compared to $505,000 for the same period in 2003. The decrease was primarily due to lower borrowed funds and lower interest rates paid for borrowed funds. Average borrowed funds for the three months ended March 31, 2004 were $60.7 million compared to average borrowed funds for the same quarter in 2003 of $68.4 million, a decrease of $7.7 million. The average interest rate paid on borrowed funds for the three months ended March 31, 2004 was 2.89%, compared to 3.00% for the same quarter in 2003, a decrease of 11 basis points.

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          The following table presents 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.

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          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, 2004 compared with the three months ended March 31, 2003. 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 approximately $70,000 has been included in volume.

          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, 2004 was $550,000 down approximately $250,000 compared to $800,000 for the same quarter in 2003. The decrease was primarily the result of lower net charge-offs during the period. The allowance for loan losses as a percent of total loans (net of unearned interest, deferred fees, and discounts) at March 31, 2004 and 2003 was 1.90% and 1.94%, respectively.

          Noninterest Income. Noninterest income for the three months ended March 31, 2004 was $2.7 million, up approximately $416,000 or 18.1% compared to $2.3 million for the same quarter in 2003. The increase was primarily due to an increase of $662,000 in net gains on sales of foreclosed assets that was partially offset by a $163,000 decrease in the gain on sale of securities and a $67,000 decrease in the gain on sale of loans. Service fees for the three months ended March 31, 2004 were $1.7 million, up approximately $117,000 compared to $1.5 million for the same quarter in 2003, primarily due to increased nonsufficient funds (“NSF”) activity. Other loan-related fees and letters of credit commissions and fees for the three months ended March 31, 2004 were $208,000 and $115,000, respectively, down $98,000 and $19,000, respectively, compared to $306,000 and $134,000, respectively, for the same quarter in 2003.

          Noninterest Expense. Total noninterest expense for the three months ended March 31, 2004 was $7.3 million, up approximately $814,000 or 12.5% compared to $6.5 million for the same quarter in 2003. Salaries and employee benefits expense increased $298,000 primarily due to normal annual salary increases and higher employee benefits expense. Occupancy and equipment expense increased $118,000 primarily due to additional leased office space at the corporate offices and the opening of a new building for the Dulles branch in February 2004. Other noninterest expense increased approximately $398,000 and primarily reflected a litigation accrual of $200,000 and an increase in legal and professional fees of $162,000.

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Financial Condition

          Loan Portfolio. Net loans at March 31, 2004 were $561.1 million, up $17.8 million or 3.3% from $543.3 million at December 31, 2003, primarily due to new loan growth. Compared to the loan level at December 31, 2003, commercial and industrial loans increased $14.7 million and real estate loans increased $3.9 million during the three months ended March 31, 2004. At March 31, 2004 and December 31, 2003, the ratio of total loans to total deposits was 80.70%, and 76.39% respectively. At the same dates, total loans represented 66.80% and 64.04% of total assets, respectively.

          The following table summarizes the loan portfolio, including loans held-for-sale, of the Company by type of loan:

          Nonperforming Assets. Net nonperforming assets at March 31, 2004 were $23.5 million compared to $25.0 million at December 31, 2003, a decrease of $1.5 million or 6.0%. Approximately $17.0 million or 73.7% of the nonperforming loans at March 31, 2004 were loans collateralized by real estate. While further deterioration in the loan portfolio is possible, management is continuing its risk assessment and resolution program. In addition, management is focusing its attention on minimizing the Bank’s credit risk through more diversified business development. As of March 31, 2004, the Company had approximately $64.6 million or 11.0% of its loan portfolio concentrated in the hospitality industry, compared to $69.9 million or 12.0% of its loan portfolio at December 31, 2003, and $90.0 million or 16.0% at March 31, 2003.

          The ratios for net nonperforming assets to total loans and other real estate at March 31, 2004 and December 31, 2003 were 4.09% and 4.49%, respectively. The ratios for net nonperforming assets to total assets were 2.74% and 2.89% 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 $3.4 million at March 31, 2004 compared to $3.3 million at December 31, 2003.

          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.

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

          Allowance for Loan Losses. At March 31, 2004 and 2003, the allowance for loan losses was $10.9 million and $10.7 million, respectively, or 1.90% and 1.94% of total loans, respectively. Net charge-offs for the three months ended March 31, 2004 were $148,000 compared with $256,000 for the same period in 2003.

          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 uncollectable. 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. 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.

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          The following table presents an analysis of the allowance for loan losses and other related data:

          Securities. At March 31, 2004, the securities portfolio was $239.9 million, a decrease of $17.2 million or 6.7% from $257.1 million at December 31, 2003. 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, U.S. government agency securities, and equity 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, 2004 approximately $28.5 million in short-term borrowings from the FHLB have been utilized to fund approximately the same amount of mortgage-backed securities to increase interest-earning assets.

          Deposits. At March 31, 2004, total deposits were $708.8 million, down $16.1 million or 2.2% from $724.9 million at December 31, 2003. However, noninterest-bearing demand deposits at March 31, 2004 increased $6.3 million or 3.7% to $175.4 million from $169.1 million at December 31, 2003. The Company’s ratios of noninterest-bearing demand deposits to total deposits at March 31, 2004 and December 31, 2003 were 24.74% and 23.33%, respectively. Interest-bearing deposits at March 31, 2004 were $533.4 million, down $22.4 million or 4.0% compared with $555.8 million at December 31, 2003.

          Other Borrowings. Other borrowings at March 31, 2004 were $58.8 million, up approximately $4.6 million, or 8.5% compared to other borrowings of $54.2 million at December 31, 2003. The Company has two ten-year loans totaling $25.0 million from the FHLB to diversify its funding sources. The ten-year loans bear interest at an average rate of 5.00% per annum with a call option until maturity at September 2008. The Company has several FHLB advances totaling $33.5 million with weighted average fixed rates of 1.27%. Of these advances, $31.0 million are scheduled to mature in the second quarter of 2004. An advance in the amount of $2.5 million with a fixed rate of 2.74% is scheduled to mature in the third quarter of 2004. These borrowings were part of a strategic plan to continue the growth of interest-earning assets. The funds

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were invested primarily in mortgage-related instruments with durations of approximately three years. Other short-term borrowings at March 31, 2004 consisted of approximately $293,000 in U.S. Treasury tax note option accounts.

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

          Liquidity. The Company’s loan to deposit ratio at March 31, 2004 was 80.70%. As of this same date, the Company had commitments to fund loans in the amount of $90.2 million. At March 31, 2004, the Company had stand-by letters of credit of $3.0 million, of which, the Company has recorded a liability of $1,538 at March 31, 2004. 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 $157.7 million from the FHLB. Additionally, the Company had several unused, unsecured lines of credit with correspondent banks totaling $15.0 million at both March 31, 2004 and December 31, 2003.

          Capital Resources. Shareholders’ equity at March 31, 2004 was $79.3 million compared to $76.2 million at December 31, 2003, an increase of approximately $3.1 million. This increase was primarily the combined result of $2.1 million in net income, an increase in accumulated other comprehensive income of $1.4 million, a decrease in treasury stock of $50,000, and an increase in paid-in capital of $44,000 that reflected the effect of dividend reinvestment that was partially offset by dividend payments of approximately $430,000. The Company made a capital contribution of $3.0 million to the Bank on April 20, 2004.

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          The following table provides a comparison of the Company’s and the Bank’s leverage and risk-weighted capital ratios as of March 31, 2004 to the minimum and well-capitalized regulatory standards:

          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.”

          The Company believes that loans held-for-sale and the related lower of cost or market adjustment is also a critical accounting policy that requires significant judgments and estimates in preparation of its consolidated financial statements. In estimating the requirement for market adjustments, management utilizes outside sources to determine the market value of the loans held-for-sale through solicitation of market bids or indications of market value. Decreases in market value will be reflected in the consolidated statement of income under noninterest expense as “Lower of Cost or Market Adjustment.”

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, 2003. 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. The Company carried out an evaluation, under the supervision and with the participation of its management, including its President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Company’s President and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e)

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and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported to the Company’s management within the time periods specified in the Securities and Exchange Commission’s rules and forms.

          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

               In September 2003, Advantage Finance Corporation (“AFC”), a subsidiary of the Company that is no longer active, was served in connection with a lawsuit based on alleged “malicious prosecution” and “conspiracy”. Also included in the lawsuit are BDO Seidman LLP and the CIT Group/Commercial Services, Inc. The plaintiff has filed his case in both Federal and State courts. In December 2003, the case was dismissed from Federal; however, the plaintiff subsequently filed an appeal. Management is unable to determine whether the outcome will have a material impact on the Company’s financial statements. The lawsuit does not seek a specified amount.

Item 2.	Changes in Securities, Use of Proceeds and Issuer Repurchases of Equity Securities

	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

(b)

Reports on Form 8-K

			The following reports on Form 8-K were filed during the quarter ended March 31, 2004:
	(1)		Current report on Form 8-K dated January 30, 2004 announcing the release of the Company’s earnings for the fourth quarter and year ended December 31, 2003.

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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/ Allen D. Brown
Date: May 13, 2004		Allen D. Brown
		President (principal executive officer)
Date: May 13, 2004	By:	/s/ David D. Rinehart
		David D. Rinehart
		Executive Vice President and Chief Financial Officer (principal accounting officer and principal financial officer)

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EXHIBIT INDEX

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