UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

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 9, 2005, the number of outstanding shares of Common Stock, par value $1.00 per share, was 7,322,627.

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

See accompanying notes to condensed consolidated financial statements

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

METROCORP BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Three Months Ended March 31, 2005
(In thousands)
(Unaudited)

See accompanying notes to condensed consolidated financial statements

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METROCORP BANCSHARES, INC
CONDENSED CONSOLIDATED 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 thirteen branches in Houston and Dallas, Texas. The Company considers itself one reporting segment. All material intercompany accounts and transactions have been eliminated in consolidation.

     The accompanying unaudited condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for Form 10-Q. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal and recurring adjustments, necessary for a fair statement of the Company’s financial position at March 31, 2005, results of operations for the three months ended March 31, 2005 and 2004, and cash flows for the three months ended March 31, 2005 and 2004. Interim period results are not necessarily indicative of results for a full-year period.

     Certain amounts applicable to the prior periods have been reclassified to conform to the classifications currently used. Such reclassifications had no effect on net income, total assets or shareholders’ equity.

     These financial statements and the notes thereto should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2004.

Stock Compensation

     The Company grants stock options under several stock-based incentive compensation plans. The Company utilizes the intrinsic value method for its stock compensation plans. No compensation cost is recognized for fixed stock options in which the exercise price is equal to or greater than the estimated market price on the date of grant. In 1995, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 Accounting for Stock-Based Compensation, which if fully adopted by the Company, would change the methods the Company applies in recognizing the cost of the plans. Adoption of the expense recognition provisions of SFAS No. 123 is optional and the Company has decided not to elect these provisions of SFAS No. 123. However, pro forma disclosures as if the Company adopted the expense recognition provisions of SFAS No. 123 are required.

     If the fair value based method of accounting under SFAS No. 123 had been applied, the Company’s net income available for common shareholders and earnings per common share would have been reduced to the pro forma amounts indicated below (assuming that the fair value of options granted during the year are amortized over the vesting period) (in thousands, except per share amounts):

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METROCORP BANCSHARES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Stock Compensation (Continued)

     The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

     In December 2004, the FASB replaced the guidance in SFAS No. 123 with the issuance of SFAS No. 123R, Share-Based Payment. Of greatest significance to the Company, the revised standard establishes the fair value-based method as the exclusive method of accounting for stock-based compensation, with only limited exceptions, and eliminates the option of following APB No. 25. Under SFAS No. 123R, the grant-date fair value of equity instruments awarded to employees establishes the cost of the services received in exchange, and the cost associated with awards that are expected to vest is recognized over the required service period. The revised standard also clarifies and expands existing guidance on measuring fair value, including considerations for selecting and applying an option-pricing model, on classifying an award as equity or a liability, and on attributing compensation cost to reporting periods.

     Under the Securities and Exchange Commission’s rule, SFAS No. 123R is now effective for public companies for annual, rather than interim, periods that begins after June 15, 2005. The effect for the Company is a six-month deferral of the new standard. Until SFAS No. 123R’s amended effective date, the provisions of SFAS No. 123 remain in effect, which permit the continued use of the intrinsic value method of APB No. 25. The Company has no current plans to modify, repurchase or cancel existing awards.

2.	EARNINGS PER COMMON SHARE

     Basic earnings per share (“EPS”) is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income available to common shareholders by the weighted-average number of common shares and potentially dilutive common shares outstanding during the period. Stock options can be dilutive common shares and are therefore considered in the earnings per share calculation, if dilutive. Stock options that are antidulutive are excluded from earnings per share calculation. Stock options are antidilutive when the exercise price is higher than the current market price of the Company’s common stock. As of March 31, 2005, there are no antidilutive stock options. The number of potentially dilutive common shares is determined using the treasury stock method.

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METROCORP BANCSHARES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3.	SECURITIES AVAILABLE-FOR-SALE

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

     The following table displays the gross unrealized losses and fair value of investments as of March 31, 2005 that were in a continuous unrealized loss position for the periods indicated:

     Declines in the fair value of individual securities below their cost that are other than temporary would result in write-downs, as a realized loss, of the individual securities to their fair value. Management believes that based upon the credit quality of the equity and debt securities and the Company’s intent and ability to hold the securities until their recovery, none of the unrealized losses on securities should be considered other than temporary.

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METROCORP BANCSHARES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4.	LITIGATION

     In September 2003, Advantage Finance Corporation (“AFC”), a subsidiary of the Company that is no longer active, was served as co-defendant in connection with a lawsuit based on alleged “malicious prosecution” and “conspiracy”. The lawsuit did not seek a specified amount. Also included, as defendants in the lawsuit, were BDO Seidman LLP and the CIT Group/ Commercial Services, Inc. The plaintiff had filed this case in both Federal and State courts. The U.S. Bankruptcy Court ruled in favor of the defendants. The plaintiff filed an appeal with the U.S. Fifth Circuit Court of Appeals which upheld the U.S. Bankruptcy Court’s ruling. As of March 29, 2005, the plaintiff’s period to re-appeal to the U.S. Fifth Circuit Court of Appeals expired, thereby, upholding and re-affirming the ruling of the U.S. Bankruptcy Court in favor of the defendants. The Agreed Final Judgment ordered, adjudged and decreed that this case and all claims and causes of action of Plaintiffs against Defendants, in both Federal and State of Texas courts, are dismissed with prejudice to the refiling of same or any part thereof. As of March 31, 2005, this lawsuit was dismissed.

5.	OFF-BALANCE SHEET ACTIVITIES

     The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include various guarantees, commitments to extend credit and standby letters of credit. Additionally, these instruments may involve, to varying degrees, credit risk in excess of the amount recognized in the statement of financial condition. The Bank’s maximum exposure to credit loss under such arrangements is represented by the contractual amount of those instruments. The Bank applies the same credit policies and collateralization guidelines in making commitments and conditional obligations as it does for on-balance sheet instruments. Off-balance sheet financial instruments include commitments to extend credit and guarantees under standby and other letters of credit. Unfunded loan commitments including unfunded lines of credit at March 31, 2005 and December 31, 2004 totaled $88.8 million and $106.0 million, respectively. Commitments under standby and commercial letters of credit at March 31, 2005 and December 31, 2004 totaled $11.2 million and $15.6 million, respectively.

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

6.	ALLOWANCE FOR LOAN LOSSES

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

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METROCORP BANCSHARES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7.	NEW ACCOUNTING PRONOUNCEMENTS

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

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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.

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     Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company analyzes the major elements of the Company’s balance sheets and statements of income. This section should be read in conjunction with the Company’s Consolidated Financial Statements and accompanying notes and other detailed information appearing elsewhere in this document.

Overview

     The Company recorded net income of $2.3 million for the three months ended March 31, 2005, up approximately $97,000 compared with net income of $2.2 million for the same quarter in 2004. The Company’s diluted earnings per share (“EPS”) for the three months ended March 31, 2005 was $0.31, up $0.01 per diluted share compared with diluted EPS of $0.30 for the same quarter in 2004.

     Total assets were $890.5 million at March 31, 2005, down approximately $23.4 million or 2.6% from $914.0 million at December 31, 2004. Investment securities at March 31, 2005 were $255.7 million, down approximately $18.0 million or 6.6% from $273.7 million at December 31, 2004. Net loans, both held-for-investment and held-for-sale, at March 31, 2005 were $582.9 million, down approximately $771,000 or 0.1% from $583.7 million at December 31, 2004. Total deposits at March 31, 2005 were $742.1 million, down approximately $13.0 million or 1.7% from $755.1 million at December 31, 2004. Other borrowings at March 31, 2005 were $55.1 million, down approximately $5.7 million or 9.4% from $60.8 million at December 31, 2004. The Company’s return on average assets (“ROAA”) for the three months ended March 31, 2005 and 2004 was both 1.01%. The Company’s return on average equity (“ROAE”) for the three months ended March 31, 2005 and 2004 was 10.54% and 11.03%, respectively.

     Shareholders’ equity at March 31, 2005 was $86.0 million compared to $85.7 million at December 31, 2004, an increase of approximately $272,000 or 0.3%.

Results of Operations

     Net Interest Income and the Net Interest Margin. For the three months ended March 31, 2005, net interest income, before the provision for loan losses, was $9.4 million, up approximately $1.4 million or 17.8% from $8.0 million for the same period in 2004. The increase was primarily due to a $2.1 million increase in interest income that was partially offset by a $700,000 increase in interest expense. Average interest-earning assets for the three months ended March 31, 2005 were $871.6 million, up approximately $49.6 million or 6.0% from $822.0 million for the same period in 2004. The increase in net interest income primarily reflects the impact of the Federal Reserve’s interest rate increases since June 2004. The weighted average yield on interest-earning assets for the first quarter 2005 was 5.94%, up 74 basis points from 5.20% for the same quarter in 2004. Average interest-bearing liabilities for the three months ended March 31, 2005 were $648.7 million, up approximately $41.0 million or 6.8% from $607.6 million for the same period in 2004. The weighted average interest rate paid on interest-bearing liabilities for the first quarter 2005 was 2.08%, up 34 basis points from 1.74% for the same quarter in 2004.

     The net interest margin for the three months ended March 31, 2005 was 4.39%, up 47 basis points from 3.92% for the same period in 2004. The increase was primarily the result of an increase in the yield on earning assets of 74 basis points that was partially offset by an increase in the cost of earning assets of 27 basis points. The increase in yield and cost was primarily a result of the Federal Reserve’s seven interest rate increases since June 2004.

     Total Interest Income. Total interest income for the three months ended March 31, 2005 was $12.8 million, up approximately $2.1 million or 20.0% from $10.6 million for the same period in 2004. The increase was primarily the result of higher volume of and higher yield on interest-earning assets.

     Interest Income from Loans. Interest income from loans for the three months ended March 31, 2005 was $10.1 million, up approximately $1.9 million or 23.1% from $8.2 million for the same quarter in 2004. The increase was primarily due to higher loan yields as a result of the current interest rate environment. The majority of the Bank’s loan portfolio is comprised of variable and adjustable rate loans that benefit the Company during periods of increases in the prime rate. Average total loans for the three months ended March 31, 2005 were $595.8 million compared to average total loans for the same period in 2004 of $563.3 million, an increase of approximately $32.5 million or 5.8%. For the first quarter 2005, the average yield on total loans was 6.85% compared to 5.84% for the same quarter in 2004, an increase of 101 basis points.

     Approximately $539.4 million or 90.5 % of the loans in the loan portfolio are variable rate loans that reprice as the prime rate moves and are therefore, sensitive to interest rate movement. At March 31, 2005, the average yield on total loans was approximately 110 basis points above the prime rate, which was supported by variable rate loans with interest rate floors that consisted of approximately $425.7 million or 71.4% of the total loan portfolio. At March 31, 2005, these loans carried a weighted average interest rate of 6.99%. At March 31, 2004, these loans represented 66.8% of the total loan portfolio and carried a weighted average interest rate of 5.78%. Future increases in market interest rates, especially the prime rate, may not immediately impact the loan portfolio yield because some of the floor rates are higher than the current prime rate. Other factors that have impacted interest

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income from loans include refinancing pressures on existing loans and new loans added to the portfolio at lower interest rates.

     Interest Income from Investments. Interest income from investments (which includes investment securities, Federal funds sold, and other investments) for the three months ended March 31, 2005 was $2.7 million, up approximately $235,000 or 9.6% compared to $2.5 million for the same period in 2004, primarily due to a higher yield on total investments. Average total investments for the three months ended March 31, 2005 were $275.7 million compared to average total investments for the same period in 2004 of $258.7 million, an increase of approximately $17.1 million or 6.6%. For the first quarter 2005, the average yield on total investments was 3.96% compared to 3.82% for the same quarter in 2004, an increase of 14 basis points.

     Total Interest Expense. Total interest expense for the three months ended March 31, 2005 was $3.3 million, up approximately $701,000 or 26.6% compared to $2.6 million for the same period in 2004. The increase primarily reflected higher interest rates and an increase in interest-bearing liabilities.

     Interest Expense on Deposits. Interest expense on interest-bearing deposits for the three months ended March 31, 2005 was $2.8 million, up approximately $564,000 or 25.7% compared to $2.2 million for the same period in 2004. The increase was primarily due to higher interest rates paid for interest-bearing deposits. Average interest-bearing deposits for the three months ended March 31, 2005 were $582.5 million compared to average interest-bearing deposits for the same period in 2004 of $546.9 million, an increase of $35.6 million or 6.5%. The average interest rate paid on interest-bearing deposits for the first quarter 2005 was 1.92% compared to 1.62% for the same quarter in 2004, an increase of 30 basis points.

     Interest Expense on Other Borrowings. Interest expense on other borrowings for the three months ended March 31, 2005 was $573,000, up approximately $137,000 or 31.4% compared to $436,000 for the same period in 2004. The increase was primarily due to higher borrowed funds and higher interest rates paid for borrowed funds. Average borrowed funds for the three months ended March 31, 2005 were $66.2 million compared to average borrowed funds for the same quarter in 2004 of $60.7 million, an increase of $5.5 million. The average interest rate paid on borrowed funds for the first quarter 2005 was 3.51%, compared to 2.89% for the same quarter in 2004, an increase of 62 basis points.

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     The following table presents, for each major category of interest-earning assets and interest-bearing liabilities, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates for the periods indicated. No tax-equivalent adjustments were made and all average balances are daily average balances. Nonaccruing loans have been included in the table as loans having a zero yield, with income, if any, recognized at the end of the loan term.

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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, 2005 compared with the three months ended March 31, 2004. For purposes of this table, changes attributable to both rate and volume have been allocated to each accordingly. Changes related to the leap year in 2004 of approximately $70,000 have been included in volume.

     Provision for Loan Losses. Provisions for loan losses are charged to income to bring the Company’s allowance for loan losses to a level which management considers adequate to absorb probable losses inherent in the loan portfolio. The provision for loan losses for the three months ended March 31, 2005 was $400,000, down approximately $150,000, compared to $550,000 for the same period in 2004. The decrease was primarily due to a reduction in nonperforming loans compared with same period last year. The allowance for loan losses as a percent of total loans (net of unearned discounts, interest, and deferred fees) at March 31, 2005 and 2004 was 1.86% and 1.89%, respectively.

     Noninterest Income. Noninterest income for the three months ended March 31, 2005 was stable compared to the same period in 2004. Other noninterest income increased $116,000 compared to the same period in 2004 primarily due to $99,000 in income relating to changes on ATM network arrangements. The increase was partially offset by decrease in other loan-related fees and service fees and a lower gain on the sale of loans.

     Noninterest Expense. Total noninterest expense for the three months ended March 31, 2005 was $7.8 million, up approximately $1.4 million or 22.1 % compared to $6.3 million for the same quarter in 2004. The increase was primarily due to a combination of a write-down on foreclosed property for sale of approximately $391,000 in the first quarter of 2005, and a $900,000 on gain from the sale of foreclosed properties during first quarter of 2004. Salaries and employee benefits for the three months ended March 31, 2005 was $4.1 million, up $322,000 compared with $3.8 million for the same period in 2004 primarily due to increased incentive bonus accruals for 2005. Occupancy and equipment expense for the three months ended March 31, 2005 was down approximately $62,000 compared to the same period in 2004. Other non-interest expense for the three months ended March 31, 2005 was up approximately $69,000 compared to the same period in 2004, primarily due to $100,000 of expenses associated with a branch consolidation in Dallas, Sarbanes-Oxley compliance costs, and donations made to Tsunami victims.

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Financial Condition

     Loan Portfolio. Total loans at March 31, 2005 were $594.0 million, down $559,000 or 0.1% from $594.5 million at December 31, 2004. Compared to the loan level at December 31, 2004, commercial and industrial loans decreased $11.8 million and real estate loans increased $12.2 million during the three months ended March 31, 2005. As of March 31, 2005, the Company had approximately $52.8 million or 8.9% of its loan portfolio concentrated in the hospitality industry, compared to $56.0 million or 9.4 % of its loan portfolio at December 31, 2004, and $64.6 million or 11.0% at March 31, 2004. At March 31, 2005 and December 31, 2004, the ratio of total loans to total deposits was 80.04%, and 78.74% respectively. At the same dates, total loans represented 66.7% and 65.1% of total assets, respectively.

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

     Nonperforming Assets. Total nonperforming assets at March 31, 2005 were $21.1 million, up approximately $2.9 million or 15.7%, compared to $18.3 million at December 31, 2004. As of March 31, 2005, nonperforming assets primarily consisted of $17.2 million in nonaccrual loans, $2.7 million in accruing loans that were 90 days or more past due, and $1.2 million in other real estate. The increase in accruing loans 90 days or more past due compared to December 31, 2004 was primarily due to two loans, which are currently in the process of collection. Net nonperforming assets at March 31, 2005 were $18.2 million compared to $15.2 million at December 31, 2004, an increase of $3.0 million or 19.5%. Approximately $12.4 million of such nonaccrual loans are collateralized by real estate, which represented 72.2% of total nonaccrual loans at March 31, 2005.

     The ratios for net nonperforming assets to total loans and other real estate at March 31, 2005 and December 31, 2004 were 3.05% and 2.55%, respectively. The ratios for net nonperforming assets to total assets were 2.04% and 1.67% for the same periods, respectively. These ratios take into consideration guarantees from the United States Department of Commerce’s Small Business Administration (the “SBA”), the Export Import Bank of the United States (the “Ex-Im Bank”), an independent agency of the United States Government, and the Overseas Chinese Community Guaranty Fund (“OCCGF”), an agency sponsored by the government of Taiwan, which were $2.9 million at March 31, 2005 compared to $3.0 million at December 31, 2004.

     The Company is actively involved in the origination and sale of certain federally guaranteed loans into the secondary market with servicing retained. Under the terms of the SBA program, the Company is required to repurchase any loan that may become nonperforming. As a result of this requirement, the Company’s nonperforming loans may increase during the period of time in which any loan repurchased is either restored to an accrual status or the Company files a claim with the SBA for the guaranteed portion of the loan.

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

     A loan is considered impaired, based on current information and events, if management believes that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. All amounts due according to the contractual terms means that both the contractual interest payments and the contractual principal payments of a loan will be collected as scheduled in the loan agreement. An insignificant delay or insignificant shortfall in the amount of payment does not require a loan to be considered impaired. If the measure of the impaired loan is less than the recorded investment in the loan, a specific reserve is established for the shortfall as a component of the Bank’s allowance for loan loss methodology. The Company considers all nonaccrual loans to be impaired.

     The following is a summary of loans considered to be impaired as of the dates indicated:

     The average recorded investment in impaired loans during the three months ended March 31, 2005 and the year ended December 31, 2004 was $19.4 million and $20.8 million, respectively. Interest income on impaired loans of $ 58,000 was recognized for cash payments received during the three months ended March 31, 2005.

     Allowance for Loan Losses. At March 31, 2005 and 2004, the allowance for loan losses was $11.1 million and 10.9 million, respectively, or 1.86% and 1.89% of total loans, respectively. At December 31, 2004, the allowance for loan losses was $10.7 million, or 1.83% of total loans. Net charge-offs for the three months ended March 31, 2005 were $188,000 compared with $148,000 for the same period in 2004.

     The allowance for loan losses is established through a provision for loan losses based on management’s evaluation of known and inherent risk in the loan portfolio. The allowance for loan losses is increased by provisions charged against current earnings and is reduced by net charge-offs. Loans are charged off when they are deemed to be uncollectible in whole or in part. Recoveries are recorded when cash payments are received. The Company employs a systematic methodology for determining the allowance for loan losses that includes a review of the changes in the quality of the loan portfolio as determined by loan quality grades assigned to each loan. The loan quality grades are administered by ongoing reviews by loan officers, credit administration and the loan review department. This includes an assessment of known problem loans, potential problem loans, and other loans that exhibit weaknesses or deterioration. Specific review factors include, but are not limited to, the general economic environment in the Company’s markets as well as the national economy, particularly the real estate markets, value of the collateral securing loans, payment history, cash flow analysis of borrowers and other historical information. After the aforementioned assessment of the loan portfolio, the general economic environment and other relevant factors, changes are implemented in the allowance for loan losses.

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While this methodology is consistently followed, future changes in circumstances, economic conditions or other factors could cause management to reevaluate the level of the allowance for loan losses.

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

     Securities. At March 31, 2005, the securities portfolio was $255.7 million, a decrease of $18.0 million or 6.6% from $273.7 million at December 31, 2004. The decrease was primarily due to prepayments in mortgage-backed securities that exceeded portfolio reinvestment. The securities portfolio is primarily comprised of mortgage-backed securities, collateralized mortgage obligations, tax-free municipal bonds, and U.S. government agency securities. The securities portfolio has historically been funded primarily by the liquidity created from deposit growth and loan prepayments in excess of loan funding requirements. However, as of March 31, 2005 approximately $29.2 million in short-term borrowings from the FHLB have been utilized to fund approximately of mortgage-backed securities to increase interest-earning assets.

     Deposits. At March 31, 2005, total deposits were $742.1 million, down $13.0 million or 1.7% from $755.1 million at December 31, 2004. However, noninterest-bearing demand deposits at March 31, 2005 increased $9.3 million or 5.7% to $172.5 million from $163.2 million at December 31, 2004. The Company’s ratios of noninterest-bearing demand deposits to total deposits at March 31, 2005 and December 31, 2004 were 23.2% and 21.6%, respectively. Interest-bearing deposits at March 31, 2005 were $569.6 million, down $22.3 million or 3.8% compared with $591.9 million at December 31, 2004.

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     Other Borrowings. Other borrowings at March 31, 2005 were $55.1 million, down approximately $5.7 million, or 9.4% compared to other borrowings of $60.8 million at December 31, 2004. The Company has two ten-year loans totaling $25.0 million from the FHLB of Dallas, maturing in September 2008, to diversify its funding sources. The ten-year loans bear interest at an average rate of 4.99% per annum and are callable quarterly at the discretion of the FHLB. The Company also has several FHLB advances totaling $29.2 million with weighted average fixed rates of 2.86% and scheduled to mature in the second quarter of 2005. These borrowings were part of a strategic plan to continue the growth of interest-earning assets. The funds were invested primarily in mortgage-related instruments with durations of approximately three years. Other short-term borrowings at March 31, 2005 consisted of approximately $937,000 in U.S. Treasury tax note option accounts.

     The following table provides an analysis of the Company’s other borrowings as of the dates and for the periods indicated:

     Liquidity. The Company’s loan to deposit ratio at March 31, 2005 was 80.04%. As of this same date, the Company had commitments to fund loans in the amount of $88.8 million. At March 31, 2005, the Company had stand-by letters of credit of $4.3 million, of which, the Company has recorded a liability of $7,182. Available sources to fund these commitments and other cash demands of the Company come from loan and investment securities repayments, deposit inflows, and unsecured lines of credit. With its current level of collateral, the Company has the ability to borrow an additional $357.9 million from the FHLB. Additionally, the Company had several unused, unsecured lines of credit with correspondent banks totaling $5.0 million at March 31, 2005.

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     Capital Resources. Shareholders’ equity at March 31, 2005 was $86.0 million compared to $85.7 million at December 31, 2004, an increase of approximately $272,000. This increase was primarily the combined result of $2.3 million net income, a decrease in accumulated other comprehensive income of $1.8 million, and an increase in paid-in capital of $153,000 that reflected the effect of dividend reinvestment that was partially offset by dividend payments of approximately $431,000.

     The following table provides a comparison of the Company’s and the Bank’s leverage and risk-weighted capital ratios as of March 31, 2005 to the minimum and well-capitalized regulatory standards:

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.”

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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

     In September 2003, Advantage Finance Corporation (“AFC”), a subsidiary of the Company that is no longer active, was served as co-defendant in connection with a lawsuit based on alleged “malicious prosecution” and “conspiracy”. The lawsuit did not seek a specified amount. Also included, as defendants in the lawsuit, were BDO Seidman LLP and the CIT Group/ Commercial Services, Inc. The plaintiff had filed this case in both Federal and State courts. The U.S. Bankruptcy Court ruled in favor of the defendants. The plaintiff filed an appeal with the U.S. Fifth Circuit Court of Appeals which upheld the U.S. Bankruptcy Court’s ruling. As of March 29, 2005, the plaintiff’s period to re-appeal to the U.S. Fifth Circuit Court of Appeals expired, thereby, upholding and re-affirming the ruling of the U.S. Bankruptcy Court in favor of the defendants. The Agreed Final Judgment ordered, adjudged and decreed that this case and all claims and causes of action of Plaintiffs against Defendants, in both Federal and State of Texas courts, are dismissed with prejudice to the refiling of same or any part thereof. As of March 31, 2005, this lawsuit was dismissed.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     Not applicable

Item 3. Defaults Upon Senior Securities

     Not applicable

Item 4. Submission of Matters to a Vote of Security Holders

     Not applicable

Item 5. Other Information

     Not applicable

Item 6. Exhibits

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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: May 13, 2005		George M. Lee
		Chief Executive Office (principal executive officer)

Date: May 13, 2005	By:	/s/ David C. Choi
		David C. Choi
		Chief Financial Officer (principal financial officer/ principal accounting officer)

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EXHIBIT INDEX