##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-K


|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended December 31, 2004                                                 
|  
|OR
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934




Commission file number: 0-25141





MetroCorp Bancshares, Inc.


(Exact name of registrant as specified in its charter)


|                                |  |                    
|------------------------------- |  | -------------------
|Texas                           |  | 76-0579161         
|(State or other jurisdiction of |  | (I.R.S. Employer   
|incorporation or organization)  |  | 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)





Securities registered pursuant to Section 12(b) of the
Act:


None


Securities registered pursuant to Section 12(g) of the
Act:


Common Stock, par value $1.00 per share


(Title of class)





þ o


o þ


o






DOCUMENTS INCORPORATED BY REFERENCE:












---










TABLE OF CONTENTS


|                                                |  |                                                                                                                         |    |      |    | 
|----------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                                |  |                                                                                                                         |    | Page |   
|                                                |  |                                                                                                                         |    |      |   
|PART I                                         
|Item 1.                                         |  | Business                                                                                                                |    |      | 2  | 
|Item 2.                                         |  | Properties                                                                                                              |    |      | 12 | 
|Item 3.                                         |  | Legal Proceedings                                                                                                       |    |      | 13 | 
|Item 4.                                         |  | Submission of Matters to a Vote of Security
    Holders                                                                 |    |      | 13 | 
|PART II                                        
|Item 5.                                         |  | Market for Registrants Common Equity,
    Related Shareholder Matters and Issuer of Purchases of Equity
    Securities |    |      | 13 | 
|Item 6.                                         |  | Selected Consolidated Financial Data                                                                                    |    |      | 15 | 
|Item 7.                                         |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                               |    |      | 17 | 
|Item 7A.                                        |  | Quantitative and Qualitative Disclosure
    About Market Risk                                                           |    |      | 44 | 
|Item 8.                                         |  | Financial Statements and Supplementary
    Data                                                                         |    |      | 45 | 
|Item 9.                                         |  | Changes in and Disagreements With
    Accountants on Accounting and Financial Disclosure                                |    |      | 45 | 
|Item 9A.                                        |  | Controls and Procedures                                                                                                 |    |      | 45 | 
|PART III                                       
|Item 10.                                        |  | Directors and Executive Officers of the
    Company                                                                     |    |      | 46 | 
|Item 11.                                        |  | Executive Compensation                                                                                                  |    |      | 46 | 
|Item 12.                                        |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                      |    |      | 46 | 
|Item 13.                                        |  | Certain Relationship and Related
    Transactions                                                                       |    |      | 46 | 
|Item 14.                                        |  | Principal Accountant Fees and Services                                                                                  |    |      | 47 | 
|PART IV                                        
|Item 15.                                        |  | Exhibits and Financial Statement
    Schedules                                                                          |    |      | 47 | 
|Signatures                                      |  |                                                                                                                         | 49 |     
|Employment Agreement - George M. Lee           
|Consent of PricewaterhouseCoopers LLP          
|Certification of CEO Pursuant to Rule 13a-14(a)
|Certification of CFO Pursuant to Rule 13a-14(a)
|Certification of CEO Pursuant to Section 1350  
|Certification of CFO Pursuant to Section 1350  



1



---



##### Table of Contents






PART I







|        |         
|------- | --------
|Item 1. | Business

General


www.metrobank-na.com






Business






2



---



##### Table of Contents







| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Commercial and Industrial Loans. The primary lending
    focus of the Company is to small and medium-sized businesses in
    a variety of industries. Its commercial lending emphasis
    includes loans to wholesalers, manufacturers and business
    service companies. The Company makes available to businesses a
    broad range of short and medium-term commercial lending products
    for working capital (including inventory and accounts
    receivable), purchases of equipment and machinery and business
    expansion (including acquisitions of real estate and
    improvements). As of December 31, 2004, the Companys
    commercial and industrial loan portfolio totaled
    $345.6 million or 57.9% of the gross loan portfolio. At
    that date, the Company had a concentration of loans in the hotel
    and motel industry of $56.0 million. Hotel and motel
    lending was originally targeted by the Company because of
    managements particular expertise in this industry and a
    perception that it was an under-served market. More recently,
    the Company has broadened its lending strategy in efforts to
    further diversify its portfolio to other industries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | Commercial Mortgage Loans. The Company originates
    commercial mortgage loans to finance the purchase of real
    property, which generally consists of developed real estate. The
    Companys commercial mortgage loans are collateralized by
    first liens on real estate, typically have variable rates and
    amortize over a 15 to 20 year period, with balloon payments
    due at the end of five to seven years. As of December 31,
    2004, the Company had a commercial mortgage portfolio of
    $188.1 million or 31.5% of the gross loan portfolio.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | Construction Loans. The Company originates loans to
    finance the construction of residential and non-residential
    properties. The substantial majority of the Companys
    residential construction loans are for single-family dwellings
    that are pre-sold or are under earnest money contracts. The
    Company also originates loans to finance the construction of
    commercial properties such as multi-family, office, industrial,
    warehouse and retail centers. As of December 31, 2004, the
    Company had a real estate construction portfolio of
    $42.6 million or 7.1% of the gross loan portfolio, of
    which, $9.8 million was residential and $32.9 million
    was commercial.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | Residential Mortgage Brokerage and Lending. The Company
    uses its existing branch network to offer a complete line of
    single-family residential mortgage products through third party
    mortgage companies. The Company solicits and receives a fee to
    process residential mortgage loans, which are underwritten by
    and pre-sold to third party mortgage companies. The Company does
    not fund or service the loans underwritten by third party
    mortgage companies. The Company also originates five to seven
    year balloon residential mortgage loans, primarily
    collateralized by non-owner occupied residential properties,
    with a 15-year amortization, which are retained in the
    Companys residential mortgage portfolio. As of
    December 31, 2004, the residential mortgage portfolio
    totaled $11.2 million or 1.9% of the gross loan portfolio.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | Government Guaranteed Small Business Lending. The Company
    has developed an expertise in several government guaranteed
    lending programs in order to provide credit enhancement to its
    commercial and industrial and commercial mortgage portfolios. As
    a Preferred Lender under the United States Small Business
    Administration (the SBA) federally guaranteed
    lending program, the Companys pre-approved status allows
    it to quickly respond to customers needs. Depending upon
    prevailing market conditions, the Company may sell the
    guaranteed portion of these loans into the secondary market, yet
    retain servicing of these loans. The Company specializes in SBA
    loans to minority-owned businesses. As of December 31,
    2004, the Company had $85.3 million in the retained portion
    of its SBA loans, approximately $55.7 million of which was
    guaranteed by the SBA. For the SBAs fiscal year ended
    September 30, 2004, the Company was ranked as the
    fourteenth largest SBA loan originator in the 32-county Houston
    SBA District in terms of dollar volume produced. Another source
    of government guaranteed lending provided by the Company is
    Business and Industrial loans (B&I Loans) which
    are guaranteed by the U.S. Department of Agriculture (the
    USDA) and are available to borrowers in areas with a
    population of less than 50,000. As of December 31, 2004,
    the Companys USDA portfolio totaled $2.7 million. The
    Company also offers guaranteed loans through the Overseas
    Chinese Credit Guaranty Fund (OCCGF), which is
    sponsored by the government of Taiwan. These loans are for
    people of Chinese descent or origin, who are not mainland
    Chinese by birth and who reside overseas. As of
    December 31, 2004, the Companys OCCGF portfolio
    totaled $3.2 million.

3



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Trade Finance. Since its inception in 1987, the Company
    has originated trade finance loans and letters of credit to
    facilitate export and import transactions for small and
    medium-sized businesses. In this capacity, the Company has
    worked with the Export Import Bank of the United States (the
    Ex-Im Bank), an agency of the U.S. Government
    which provides guarantees for trade finance loans. At
    December 31, 2004, the Companys aggregate trade
    finance portfolio commitments totaled approximately
    $11.8 million.





Competition




Employees




Supervision and Regulation








| |            
| | -----------
| | The Company



4



---



##### Table of Contents





Regulatory Restrictions on Dividends; Source of Strength.






Scope of Permissible Activities.






5



---



##### Table of Contents







Safe and Sound Banking Practices.




Anti-Tying Restrictions.


Capital Adequacy Requirements.






Imposition of Liability for Undercapitalized
Subsidiaries.


6



---



##### Table of Contents







Acquisitions by Bank Holding Companies.


Control Acquisitions.






| |         
| | --------
| | The Bank



Financial Modernization.


Branching.


Restrictions on Transactions with Affiliates and
Insiders.


7



---



##### Table of Contents









Restrictions on Distribution of Subsidiary Bank Dividends and
Assets.




Examinations.


Audit Reports.


8



---



##### Table of Contents



Capital Adequacy Requirements.






Corrective Measures for Capital Deficiencies.








Deposit Insurance Assessments.




9



---



##### Table of Contents







Enforcement Powers.


Brokered Deposit Restrictions.


Cross-Guarantee Provisions.


Community Reinvestment Act.


Consumer Laws and Regulations.


Privacy.


10



---



##### Table of Contents





USA Patriot Act of 2002.




| |                                    
| | -----------------------------------
| | Instability of Regulatory Structure





| |                                
| | -------------------------------
| | Expanding Enforcement Authority





| |                          
| | -------------------------
| | Effect of Monetary Policy





11



---



##### Table of Contents








|        |           
|------- | ----------
|Item 2. | Properties

Facilities




|                                    |  |        |        |  |         |                |             |                   |  |   |         | 
|----------------------------------- |  | ------ | ------ |  | ------- | -------------- | ----------- | ----------------- |  | - | ------- | 
|                                    |  | Owned/ |        |  |         |                | Deposits at |                  
|Location                            |  | Leased |        |  | Sq. Ft. |                |             | December 31, 2004 | 
|                                    |  |        |        |  |         |                |             |                   | 
|                                    |  |        |        |  |         | (In thousands) |            
|Houston Area:                       |  |        |        |  |         |                |             |                   |  |   |         | 
|Corporate Offices                   |  |        | Leased |  |         |                | 40,059      |                   |  | $ | N/A     | 
|9600 Bellaire Boulevard, Suite 252  |  |        |        |  |         |                |             |                   |  |   |         | 
|Bellaire Boulevard                  |  |        | Leased |  |         |                | 7,002       |                   |  |   | 339,294 | 
|9600 Bellaire Boulevard, Suite 100  |  |        |        |  |         |                |             |                   |  |   |         | 
|East                                |  |        | Owned  |  |         |                | 16,400      |                   |  |   | 78,310  | 
|6730 Capitol at Wayside             |  |        |        |  |         |                |             |                   |  |   |         | 
|Chinatown                           |  |        | Leased |  |         |                | 2,500       |                   |  |   | 29,742  | 
|1005 Saint Emanuel                  |  |        |        |  |         |                |             |                   |  |   |         | 
|Sugar Land                          |  |        | Owned  |  |         |                | 5,543       |                   |  |   | 40,893  | 
|15144 Southwest Freeway             |  |        |        |  |         |                |             |                   |  |   |         | 
|Harwin                              |  |        | Leased |  |         |                | 11,000      |                   |  |   | 30,853  | 
|10000 Harwin Drive                  |  |        |        |  |         |                |             |                   |  |   |         | 
|Clear Lake                          |  |        | Owned  |  |         |                | 2,255       |                   |  |   | 26,638  | 
|2424 Bay Area Boulevard             |  |        |        |  |         |                |             |                   |  |   |         | 
|Veterans Memorial                   |  |        | Owned  |  |         |                | 5,142       |                   |  |   | 33,913  | 
|13480 Veterans Memorial Boulevard   |  |        |        |  |         |                |             |                   |  |   |         | 
|Milam                               |  |        | Leased |  |         |                | 3,933       |                   |  |   | 16,236  | 
|2808 Milam Street                   |  |        |        |  |         |                |             |                   |  |   |         | 
|Boone Road                          |  |        | Leased |  |         |                | 905         |                   |  |   | 11,851  | 
|11205 Bellaire Boulevard, Suite B-9 |  |        |        |  |         |                |             |                   |  |   |         | 
|Dulles                              |  |        | Owned  |  |         |                | 3,380       |                   |  |   | 26,213  | 
|4639 Highway 6                      |  |        |        |  |         |                |             |                   |  |   |         | 
|Long Point                          |  |        | Leased |  |         |                | 3,000       |                   |  |   | 22,111  | 
|1426 Blalock                        |  |        |        |  |         |                |             |                   |  |   |         | 
|Dallas Area:                        |  |        |        |  |         |                |             |                   |  |   |         | 
|Richardson(1)                       |  |        | Leased |  |         |                | 4,948       |                   |  |   | 77,433  | 
|275 West Campbell Road              |  |        |        |  |         |                |             |                   |  |   |         | 
|Dallas (Harry Hines)                |  |        | Leased |  |         |                | 6,350       |                   |  |   | 21,566  | 
|2527 Royal Lane                     |  |        |        |  |         |                |             |                   |  |   |         | 
|Garland(2)                          |  |        | Leased |  |         |                | 2,400       |                   |  |   |        | 
|3500 West Walnut Street             |  |        |        |  |         |                |             |                   |  |   |         | 






|    |                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------
|(1) | Deposits at the Richardson location include deposits of
    $7.8 million that were previously attributed to the Garland
    location.



|    |                                                       
|--- | ------------------------------------------------------
|(2) | Closed on 9/30/04. Rent expense paid through 12/31/04.

12



---



##### Table of Contents








|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

Legal Proceedings









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






PART II







|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity, Related
    Shareholder Matters and Issuer Purchases of Equity
    Securities





|               |  |      |       |  |     |   |       | 
|-------------- |  | ---- | ----- |  | --- | - | ----- | 
|               |  | High |       |  | Low |  
|               |  |      |       |  |     |  
|2004           |  |      |       |  |     |   |       | 
|Fourth quarter |  | $    | 22.90 |  |     | $ | 18.81 | 
|Third quarter  |  |      | 19.00 |  |     |   | 14.00 | 
|Second quarter |  |      | 15.68 |  |     |   | 14.00 | 
|First quarter  |  |      | 16.00 |  |     |   | 14.65 | 
|2003           |  |      |       |  |     |   |       | 
|Fourth quarter |  | $    | 15.15 |  |     | $ | 12.50 | 
|Third quarter  |  |      | 13.08 |  |     |   | 12.10 | 
|Second quarter |  |      | 14.30 |  |     |   | 11.94 | 
|First quarter  |  |      | 13.00 |  |     |   | 11.60 | 

Dividends






|               |  |      |      |  |      |   |      | 
|-------------- |  | ---- | ---- |  | ---- | - | ---- | 
|               |  | 2004 |      |  | 2003 |  
|               |  |      |      |  |      |  
|Fourth quarter |  | $    | 0.06 |  |      | $ | 0.06 | 
|Third quarter  |  |      | 0.06 |  |      |   | 0.06 | 
|Second quarter |  |      | 0.06 |  |      |   | 0.06 | 
|First quarter  |  |      | 0.06 |  |      |   | 0.06 | 

13



---



##### Table of Contents







Recent Sales of Unregistered Securities




Issuer Purchases of Equity Securities




14



---



##### Table of Contents








|        |                                     
|------- | ------------------------------------
|Item 6. | Selected Consolidated Financial Data



|                                                        |                                                     |                                               |         |        |      |   |         |        |  |   |         |        |  |      |         |        |  |   |         |        | 
|------------------------------------------------------- | --------------------------------------------------- | --------------------------------------------- | ------- | ------ | ---- | - | ------- | ------ |  | - | ------- | ------ |  | ---- | ------- | ------ |  | - | ------- | ------ | 
|                                                        |                                                     | Years Ended December 31,                      |        
|                                                        |                                                     |                                               |        
|                                                        |                                                     | 2004                                          |         |        | 2003 |   |         | 2002   |  |   | 2001    |        |  | 2000 |        
|                                                        |                                                     |                                               |         |        |      |   |         |        |  |   |         |        |  |      |        
|                                                        |                                                     | (Dollars in thousands, except per share data) |        
|Income Statement Data:                                  |                                                     |                                               |         |        |      |   |         |        |  |   |         |        |  |      |         |        |  |   |         |       
|Interest income                                         |                                                     | $                                             | 45,304  |        |      | $ | 43,287  |        |  | $ | 47,980  |        |  | $    | 54,940  |        |  | $ | 63,036  |       
|Interest expense                                        |                                                     |                                               | 11,349  |        |      |   | 12,134  |        |  |   | 14,628  |        |  |      | 23,799  |        |  |   | 27,276  |       
|                                                        |                                                     |                                               |         |        |      |   |         |        |  |   |         |        |  |      |        
|                                                        | Net interest income                                 |                                               |         | 33,955 |      |   |         | 31,153 |  |   |         | 33,352 |  |      |         | 31,141 |  |   |         | 35,760 | 
|Provision for loan losses                               |                                                     |                                               | 1,565   |        |      |   | 5,690   |        |  |   | 3,853   |        |  |      | 3,799   |        |  |   | 7,508   |       
|                                                        |                                                     |                                               |         |        |      |   |         |        |  |   |         |        |  |      |        
|                                                        | Net interest income after provision for loan losses |                                               |         | 32,390 |      |   |         | 25,463 |  |   |         | 29,499 |  |      |         | 27,342 |  |   |         | 28,252 | 
|Noninterest income                                      |                                                     |                                               | 8,979   |        |      |   | 8,679   |        |  |   | 8,343   |        |  |      | 8,451   |        |  |   | 7,032   |       
|Noninterest expense                                     |                                                     |                                               | 28,744  |        |      |   | 28,297  |        |  |   | 24,427  |        |  |      | 24,243  |        |  |   | 26,090  |       
|                                                        |                                                     |                                               |         |        |      |   |         |        |  |   |         |        |  |      |        
|                                                        | Income before provision for income taxes            |                                               |         | 12,625 |      |   |         | 5,845  |  |   |         | 13,415 |  |      |         | 11,550 |  |   |         | 9,194  | 
|Provision for income taxes                              |                                                     |                                               | 4,031   |        |      |   | 1,735   |        |  |   | 4,445   |        |  |      | 3,696   |        |  |   | 3,242   |       
|                                                        |                                                     |                                               |         |        |      |   |         |        |  |   |         |        |  |      |        
|Net income                                              |                                                     | $                                             | 8,594   |        |      | $ | 4,110   |        |  | $ | 8,970   |        |  | $    | 7,854   |        |  | $ | 5,952   |       
|                                                        |                                                     |                                               |         |        |      |   |         |        |  |   |         |        |  |      |        
|Per Share Data:                                         |                                                     |                                               |         |        |      |   |         |        |  |   |         |        |  |      |         |        |  |   |         |       
|Net income:                                             |                                                     |                                               |         |        |      |   |         |        |  |   |         |        |  |      |         |        |  |   |         |       
|                                                        | Basic                                               |                                               | $       | 1.20   |      |   | $       | 0.58   |  |   | $       | 1.28   |  |      | $       | 1.12   |  |   | $       | 0.85   | 
|                                                        | Diluted                                             |                                               |         | 1.19   |      |   |         | 0.57   |  |   |         | 1.25   |  |      |         | 1.11   |  |   |         | 0.85   | 
|Book value                                              |                                                     |                                               | 11.95   |        |      |   | 10.95   |        |  |   | 10.84   |        |  |      | 9.52    |        |  |   | 8.60    |       
|Tangible book value                                     |                                                     |                                               | 11.95   |        |      |   | 10.95   |        |  |   | 10.84   |        |  |      | 9.52    |        |  |   | 8.60    |       
|Cash dividends                                          |                                                     |                                               | 0.24    |        |      |   | 0.24    |        |  |   | 0.24    |        |  |      | 0.24    |        |  |   | 0.24    |       
|Weighted average shares outstanding
    (in thousands): |                                                     |                                               |         |        |      |   |         |        |  |   |         |        |  |      |         |        |  |   |         |       
|                                                        | Basic                                               |                                               |         | 7,175  |      |   |         | 7,089  |  |   |         | 7,024  |  |      |         | 6,998  |  |   |         | 6,972  | 
|                                                        | Diluted                                             |                                               |         | 7,230  |      |   |         | 7,213  |  |   |         | 7,154  |  |      |         | 7,059  |  |   |         | 6,973  | 
|Balance Sheet Data (Period End):                        |                                                     |                                               |         |        |      |   |         |        |  |   |         |        |  |      |         |        |  |   |         |       
|Total assets                                            |                                                     | $                                             | 913,950 |        |      | $ | 867,016 |        |  | $ | 841,945 |        |  | $    | 743,706 |        |  | $ | 737,938 |       
|Securities                                              |                                                     |                                               | 273,720 |        |      |   | 262,264 |        |  |   | 264,418 |        |  |      | 176,230 |        |  |   | 143,759 |       
|Loans (including loans held-for-sale)                   |                                                     |                                               | 594,536 |        |      |   | 557,136 |        |  |   | 530,571 |        |  |      | 495,441 |        |  |   | 485,518 |       
|Allowance for loan losses                               |                                                     |                                               | 10,863  |        |      |   | 10,448  |        |  |   | 10,150  |        |  |      | 8,903   |        |  |   | 9,271   |       
|Total deposits                                          |                                                     |                                               | 755,053 |        |      |   | 724,941 |        |  |   | 691,361 |        |  |      | 642,751 |        |  |   | 625,906 |       
|Other borrowings                                        |                                                     |                                               | 60,849  |        |      |   | 54,173  |        |  |   | 65,774  |        |  |      | 25,195  |        |  |   | 25,573  |       
|Total shareholders equity                              |                                                     |                                               | 85,723  |        |      |   | 78,373  |        |  |   | 76,224  |        |  |      | 66,809  |        |  |   | 60,004  |       

15



---



##### Table of Contents



|                                                                |  |                                               |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|--------------------------------------------------------------- |  | --------------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                |  | Years Ended December 31,                      |        
|                                                                |  |                                               |        
|                                                                |  | 2004                                          |         |   | 2003 |   |         | 2002 |  |   | 2001    |   |  | 2000 |        
|                                                                |  |                                               |         |   |      |   |         |      |  |   |         |   |  |      |        
|                                                                |  | (Dollars in thousands, except per share data) |        
|Balance Sheet Data (Average):                                   |  |                                               |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total assets                                                    |  | $                                             | 882,017 |   |      | $ | 852,946 |      |  | $ | 791,297 |   |  | $    | 728,607 |   |  | $ | 698,800 |  
|Securities                                                      |  |                                               | 265,578 |   |      |   | 251,828 |      |  |   | 222,752 |   |  |      | 159,416 |   |  |   | 127,865 |  
|Loans (including loans held-for-sale)                           |  |                                               | 565,920 |   |      |   | 551,287 |      |  |   | 506,901 |   |  |      | 476,134 |   |  |   | 487,439 |  
|Allowance for loan losses                                       |  |                                               | 10,944  |   |      |   | 10,595  |      |  |   | 9,238   |   |  |      | 9,315   |   |  |   | 8,589   |  
|Total deposits                                                  |  |                                               | 728,683 |   |      |   | 708,575 |      |  |   | 656,824 |   |  |      | 626,970 |   |  |   | 590,217 |  
|Other borrowings                                                |  |                                               | 64,022  |   |      |   | 60,309  |      |  |   | 53,056  |   |  |      | 25,570  |   |  |   | 42,757  |  
|Total shareholders equity                                      |  |                                               | 81,044  |   |      |   | 76,333  |      |  |   | 71,452  |   |  |      | 64,329  |   |  |   | 54,114  |  
|Performance Ratios:                                             |  |                                               |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Return on average assets                                        |  |                                               | 0.97    | % |      |   | 0.48    | %    |  |   | 1.13    | % |  |      | 1.08    | % |  |   | 0.85    | %
|Return on average equity                                        |  |                                               | 10.60   |   |      |   | 5.38    |      |  |   | 12.55   |   |  |      | 12.21   |   |  |   | 11.00   |  
|Net interest margin                                             |  |                                               | 4.02    |   |      |   | 3.81    |      |  |   | 4.44    |   |  |      | 4.56    |   |  |   | 5.42    |  
|Efficiency ratio(1)                                             |  |                                               | 66.95   |   |      |   | 71.22   |      |  |   | 59.20   |   |  |      | 61.44   |   |  |   | 60.97   |  
|Asset Quality Ratios:                                           |  |                                               |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total nonperforming assets to total loans and other real estate |  |                                               | 3.06    | % |      |   | 5.05    | %    |  |   | 3.53    | % |  |      | 1.12    | % |  |   | 0.61    | %
|Total nonperforming assets to total assets                      |  |                                               | 2.00    |   |      |   | 3.26    |      |  |   | 2.23    |   |  |      | 0.75    |   |  |   | 0.40    |  
|Net charge-offs to total loans                                  |  |                                               | 0.19    |   |      |   | 0.97    |      |  |   | 0.49    |   |  |      | 0.84    |   |  |   | 1.19    |  
|Allowance for loan losses to total loans                        |  |                                               | 1.83    |   |      |   | 1.88    |      |  |   | 1.91    |   |  |      | 1.80    |   |  |   | 1.91    |  
|Allowance for loan losses to nonperforming loans(2)             |  |                                               | 65.11   |   |      |   | 40.64   |      |  |   | 57.71   |   |  |      | 196.06  |   |  |   | 416.67  |  
|Capital Ratios:                                                 |  |                                               |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Leverage ratio(3)                                               |  |                                               | 9.59    | % |      |   | 9.08    | %    |  |   | 8.78    | % |  |      | 9.11    | % |  |   | 8.56    | %
|Average shareholders equity to average total assets            |  |                                               | 9.19    |   |      |   | 8.95    |      |  |   | 9.03    |   |  |      | 8.82    |   |  |   | 7.73    |  
|Tier-1 risk-based capital ratio  period end                    |  |                                               | 12.82   |   |      |   | 12.73   |      |  |   | 12.98   |   |  |      | 12.77   |   |  |   | 11.97   |  
|Total risk-based capital ratio  period end                     |  |                                               | 14.07   |   |      |   | 13.98   |      |  |   | 14.24   |   |  |      | 14.03   |   |  |   | 13.23   |  






|    |                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Calculated by dividing total noninterest expense by net interest
    income plus noninterest income, excluding net securities
    gains/losses.



|    |                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------
|(2) | Nonperforming loans consist of nonaccrual loans, loans
    contractually past due 90 days or more and restructured
    loans.
|   
|(3) | The leverage ratio is calculated by dividing Tier 1 capital
    by average assets for the period.                            

16



---



##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

Special Cautionary Notice Regarding Forward-Looking
Statements






| |   |                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | changes in interest rates and market prices, which could reduce
    the Companys net interest margins, asset valuations and
    expense expectations;                                                                                                                                                                
|
| |  | changes in the levels of loan prepayments and the resulting
    effects on the value of the Companys loan portfolio;                                                                                                                                                                                                 
|
| |  | changes in local economic and business conditions which
    adversely affect the ability of the Companys customers to
    transact profitable business with the Company, including the
    ability of borrowers to repay their loans according to their
    terms or a change in the value of the related collateral;
|
| |  | increased competition for deposits and loans adversely affecting
    rates and terms;                                                                                                                                                                                                                                 
|
| |  | the Companys ability to identify suitable acquisition
    candidates;                                                                                                                                                                                                                                                
|
| |  | the timing, impact and other uncertainties of the Companys
    ability to enter new markets successfully and capitalize on
    growth opportunities;                                                                                                                                                                 
|
| |  | increased credit risk in the Companys assets and increased
    operating risk caused by a material change in commercial,
    consumer and/or real estate loans as a percentage of the total
    loan portfolio;                                                                                                      
|
| |  | the failure of assumptions underlying the establishment of and
    provisions made to the allowance for loan losses;                                                                                                                                                                                                  
|
| |  | changes in the availability of funds resulting in increased
    costs or reduced liquidity;                                                                                                                                                                                                                           
|
| |  | increased asset levels and changes in the composition of assets
    and the resulting impact on our capital levels and regulatory
    capital ratios;                                                                                                                                                                 
|
| |  | the Companys ability to acquire, operate and maintain cost
    effective and efficient systems without incurring unexpectedly
    difficult or expensive but necessary technological changes;                                                                                                                        
|
| |  | the loss of senior management or operating personnel and the
    potential inability to hire qualified personnel at reasonable
    compensation levels; and                                                                                                                                                           
|
| |  | changes in statutes and government regulations or their
    interpretations applicable to bank holding companies and our
    present and future banking and other subsidiaries, including
    changes in tax requirements and tax rates.                                                                              





17



---



##### Table of Contents



For the Years Ended December 31, 2004, 2003 and 2002


Overview


















18



---



##### Table of Contents





Results of Operations




| |                    
| | -------------------
| | Net Interest Income



2004 versus 2003.




2003 versus 2002.




19



---



##### Table of Contents









|                                     |                                                                 |                                            |        |         |          |   |        |         |        |  |             |      |      |          |        |         |         |   |        |             |        |  |          |      |      |         |        |         |         |   |        |        |        |  |      |      |      |  
|------------------------------------ | --------------------------------------------------------------- | ------------------------------------------ | ------ | ------- | -------- | - | ------ | ------- | ------ |  | ----------- | ---- | ---- | -------- | ------ | ------- | ------- | - | ------ | ----------- | ------ |  | -------- | ---- | ---- | ------- | ------ | ------- | ------- | - | ------ | ------ | ------ |  | ---- | ---- | ---- | -
|                                     |                                                                 | Year Ended December 31,                    |       
|                                     |                                                                 |                                            |       
|                                     |                                                                 | 2004                                       |        |         | 2003     |   |        | 2002    |       
|                                     |                                                                 |                                            |        |         |          |   |        |         |       
|                                     |                                                                 | Average                                    |        |         | Interest |   |        | Average |        |  | Average     |      |      | Interest |        |         | Average |   |        | Average     |        |  | Interest |      |      | Average |       
|                                     |                                                                 | Outstanding                                |        |         | Earned/  |   |        | Yield/  |        |  | Outstanding |      |      | Earned/  |        |         | Yield/  |   |        | Outstanding |        |  | Earned/  |      |      | Yield/  |       
|                                     |                                                                 | Balance                                    |        |         | Paid     |   |        | Rate    |        |  | Balance     |      |      | Paid     |        |         | Rate    |   |        | Balance     |        |  | Paid     |      |      | Rate    |       
|                                     |                                                                 |                                            |        |         |          |   |        |         |        |  |             |      |      |          |        |         |         |   |        |             |        |  |          |      |      |         |       
|                                     |                                                                 | (Dollars in thousands)                     |       
|Assets                               |                                                                 |                                            |        |         |          |   |        |         |        |  |             |      |      |          |        |         |         |   |        |             |        |  |          |      |      |         |        |         |         |   |        |        |        |  |      |     
|Interest-earning assets:             |                                                                 |                                            |        |         |          |   |        |         |        |  |             |      |      |          |        |         |         |   |        |             |        |  |          |      |      |         |        |         |         |   |        |        |        |  |      |     
|                                     | Loans (including loans held-for-sale)                           |                                            | $      | 565,920 |          |   | $      | 34,711  |        |  |             | 6.13 | %    |          | $      | 551,287 |         |   | $      | 34,691      |        |  |          | 6.29 | %    |         | $      | 506,901 |         |   | $      | 37,256 |        |  |      | 7.35 | %   
|                                     | Taxable securities                                              |                                            |        | 247,071 |          |   |        | 9,441   |        |  |             | 3.82 |      |          |        | 227,054 |         |   |        | 7,321       |        |  |          | 3.22 |      |         |        | 195,649 |         |   |        | 9,080  |        |  |      | 4.64 |     
|                                     | Tax-exempt securities                                           |                                            |        | 18,507  |          |   |        | 917     |        |  |             | 4.95 |      |          |        | 20,095  |         |   |        | 997         |        |  |          | 4.96 |      |         |        | 23,362  |         |   |        | 1,160  |        |  |      | 4.97 |     
|                                     | Federal funds sold and other temporary investments              |                                            |        | 13,186  |          |   |        | 235     |        |  |             | 1.78 |      |          |        | 18,854  |         |   |        | 278         |        |  |          | 1.47 |      |         |        | 25,843  |         |   |        | 484    |        |  |      | 1.87 |     
|                                     |                                                                 |                                            |        |         |          |   |        |         |        |  |             |      |      |          |        |         |         |   |        |             |        |  |          |      |      |         |       
|                                     |                                                                 | Total interest-earning assets              |        |         | 844,684  |   |        |         | 45,304 |  |             |      | 5.36 | %        |        |         | 817,290 |   |        |             | 43,287 |  |          |      | 5.30 | %       |        |         | 751,755 |   |        |        | 47,980 |  |      |      | 6.38 | %
|                                     |                                                                 |                                            |        |         |          |   |        |         |        |  |             |      |      |          |        |         |         |   |        |             |        |  |          |      |      |         |       
|                                     | Less allowance for loan losses                                  |                                            |        | (10,944 | )        |   |        |         |        |  |             |      |      |          |        | (10,595 | )       |   |        |             |        |  |          |      |      |         |        | (9,238  | )       |   |        |        |        |  |      |      |     
|                                     |                                                                 |                                            |        |         |          |   |        |         |        |  |             |      |      |          |        |         |         |   |        |             |        |  |          |      |      |         |       
|                                     | Total interest-earning assets, net of allowance for loan losses |                                            |        | 833,740 |          |   |        |         |        |  |             |      |      |          |        | 806,695 |         |   |        |             |        |  |          |      |      |         |        | 742,517 |         |   |        |        |        |  |      |      |     
|Noninterest earning assets           |                                                                 |                                            | 48,277 |         |          |   |        |         |        |  |             |      |      |          | 46,251 |         |         |   |        |             |        |  |          |      |      |         | 48,780 |         |         |   |        |        |        |  |      |     
|                                     |                                                                 |                                            |        |         |          |   |        |         |        |  |             |      |      |          |        |         |         |   |        |             |        |  |          |      |      |         |       
|                                     |                                                                 | Total assets                               |        | $       | 882,017  |   |        |         |        |  |             |      |      |          |        | $       | 852,946 |   |        |             |        |  |          |      |      |         |        | $       | 791,297 |   |        |        |        |  |      |      |      |  
|                                     |                                                                 |                                            |        |         |          |   |        |         |        |  |             |      |      |          |        |         |         |   |        |             |        |  |          |      |      |         |       
|Liabilities and shareholders equity |                                                                 |                                            |        |         |          |   |        |         |        |  |             |      |      |          |        |         |         |   |        |             |        |  |          |      |      |         |        |         |         |   |        |        |        |  |      |     
|Interest-bearing liabilities:        |                                                                 |                                            |        |         |          |   |        |         |        |  |             |      |      |          |        |         |         |   |        |             |        |  |          |      |      |         |        |         |         |   |        |        |        |  |      |     
|                                     | Interest-bearing demand deposits                                |                                            | $      | 79,327  |          |   | $      | 536     |        |  |             | 0.68 | %    |          | $      | 73,987  |         |   | $      | 460         |        |  |          | 0.62 | %    |         | $      | 71,059  |         |   | $      | 837    |        |  |      | 1.18 | %   
|                                     | Saving and money market accounts                                |                                            |        | 113,164 |          |   |        | 802     |        |  |             | 0.71 |      |          |        | 111,867 |         |   |        | 885         |        |  |          | 0.79 |      |         |        | 110,372 |         |   |        | 1,378  |        |  |      | 1.25 |     
|                                     | Time deposits                                                   |                                            |        | 367,424 |          |   |        | 8,133   |        |  |             | 2.21 |      |          |        | 371,500 |         |   |        | 8,942       |        |  |          | 2.41 |      |         |        | 342,707 |         |   |        | 10,595 |        |  |      | 3.09 |     
|                                     | Federal funds purchased                                         |                                            |        |        |          |   |        |        |        |  |             |     |      |          |        | 55      |         |   |        | 1           |        |  |          | 1.82 |      |         |        | 162     |         |   |        | 4      |        |  |      | 2.47 |     
|                                     | Other borrowings                                                |                                            |        | 64,022  |          |   |        | 1,878   |        |  |             | 2.93 |      |          |        | 60,255  |         |   |        | 1,846       |        |  |          | 3.06 |      |         |        | 52,894  |         |   |        | 1,814  |        |  |      | 3.43 |     
|                                     |                                                                 |                                            |        |         |          |   |        |         |        |  |             |      |      |          |        |         |         |   |        |             |        |  |          |      |      |         |       
|                                     |                                                                 | Total interest-bearing liabilities         |        |         | 623,937  |   |        |         | 11,349 |  |             |      | 1.82 | %        |        |         | 617,664 |   |        |             | 12,134 |  |          |      | 1.96 | %       |        |         | 577,194 |   |        |        | 14,628 |  |      |      | 2.53 | %
|                                     |                                                                 |                                            |        |         |          |   |        |         |        |  |             |      |      |          |        |         |         |   |        |             |        |  |          |      |      |         |       
|Noninterest-bearing liabilities:     |                                                                 |                                            |        |         |          |   |        |         |        |  |             |      |      |          |        |         |         |   |        |             |        |  |          |      |      |         |        |         |         |   |        |        |        |  |      |     
|                                     | Noninterest-bearing demand deposits                             |                                            |        | 168,768 |          |   |        |         |        |  |             |      |      |          |        | 151,221 |         |   |        |             |        |  |          |      |      |         |        | 132,686 |         |   |        |        |        |  |      |      |     
|                                     | Other liabilities                                               |                                            |        | 8,268   |          |   |        |         |        |  |             |      |      |          |        | 7,728   |         |   |        |             |        |  |          |      |      |         |        | 9,965   |         |   |        |        |        |  |      |      |     
|                                     |                                                                 |                                            |        |         |          |   |        |         |        |  |             |      |      |          |        |         |         |   |        |             |        |  |          |      |      |         |       
|                                     |                                                                 | Total liabilities                          |        |         | 800,973  |   |        |         |        |  |             |      |      |          |        |         | 776,613 |   |        |             |        |  |          |      |      |         |        |         | 719,845 |   |        |        |        |  |      |      |      |  
|Shareholders equity                 |                                                                 |                                            | 81,044 |         |          |   |        |         |        |  |             |      |      |          | 76,333 |         |         |   |        |             |        |  |          |      |      |         | 71,452 |         |         |   |        |        |        |  |      |     
|                                     |                                                                 |                                            |        |         |          |   |        |         |        |  |             |      |      |          |        |         |         |   |        |             |        |  |          |      |      |         |       
|                                     |                                                                 | Total liabilities and shareholders equity |        | $       | 882,017  |   |        |         |        |  |             |      |      |          |        | $       | 852,946 |   |        |             |        |  |          |      |      |         |        | $       | 791,297 |   |        |        |        |  |      |      |      |  
|                                     |                                                                 |                                            |        |         |          |   |        |         |        |  |             |      |      |          |        |         |         |   |        |             |        |  |          |      |      |         |       
|Net interest income                  |                                                                 |                                            |        |         |          | $ | 33,955 |         |        |  |             |      |      |          |        |         |         | $ | 31,153 |             |        |  |          |      |      |         |        |         |         | $ | 33,352 |        |        |  |      |     
|                                     |                                                                 |                                            |        |         |          |   |        |         |        |  |             |      |      |          |        |         |         |   |        |             |        |  |          |      |      |         |       
|Net interest spread                  |                                                                 |                                            |        |         |          |   |        |         |        |  | 3.54        | %    |      |          |        |         |         |   |        |             |        |  | 3.34     | %    |      |         |        |         |         |   |        |        |        |  | 3.85 | %   
|Net interest margin                  |                                                                 |                                            |        |         |          |   |        |         |        |  | 4.02        | %    |      |          |        |         |         |   |        |             |        |  | 3.81     | %    |      |         |        |         |         |   |        |        |        |  | 4.44 | %   

20



---



##### Table of Contents





|                                           |                                                    |                                               |       |     |              |   |                     |       |      |   |        |       |       |      |       |       |       |   |        |        |        |   |        |        |        |  
|------------------------------------------ | -------------------------------------------------- | --------------------------------------------- | ----- | --- | ------------ | - | ------------------- | ----- | ---- | - | ------ | ----- | ----- | ---- | ----- | ----- | ----- | - | ------ | ------ | ------ | - | ------ | ------ | ------ | -
|                                           |                                                    | Years Ended December 31,                      |      
|                                           |                                                    |                                               |      
|                                           |                                                    | 2004 vs 2003                                  |       |     | 2003 vs 2002 |  
|                                           |                                                    |                                               |       |     |              |  
|                                           |                                                    | 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)              |                                               | $     | 921 |              |   | $                   | (901  | )    |   | $      | 20    |       |      | $     | 3,262 |       |   | $      | (5,827 | )      |   | $      | (2,565 | )     
|                                           | Taxable securities                                 |                                               |       | 645 |              |   |                     | 1,475 |      |   |        | 2,120 |       |      |       | 1,457 |       |   |        | (3,216 | )      |   |        | (1,759 | )     
|                                           | Tax-exempt securities                              |                                               |       | (79 | )            |   |                     | (1    | )    |   |        | (80   | )     |      |       | (162  | )     |   |        | (1     | )      |   |        | (163   | )     
|                                           | Federal funds sold and other temporary investments |                                               |       | (84 | )            |   |                     | 41    |      |   |        | (43   | )     |      |       | (131  | )     |   |        | (75    | )      |   |        | (206   | )     
|                                           |                                                    |                                               |       |     |              |   |                     |       |      |   |        |       |       |      |       |       |       |  
|                                           |                                                    | Total increase (decrease) in interest income  |       |     | 1,403        |   |                     |       | 614  |   |        |       | 2,017 |      |       |       | 4,426 |   |        |        | (9,119 | ) |        |        | (4,693 | )
|Interest-bearing liabilities:              |                                                    |                                               |       |     |              |   |                     |       |      |   |        |       |       |      |       |       |       |   |        |        |        |   |        |       
|                                           | Interest-bearing demand deposits                   |                                               |       | 33  |              |   |                     | 43    |      |   |        | 76    |       |      |       | 34    |       |   |        | (411   | )      |   |        | (377   | )     
|                                           | Saving and money market accounts                   |                                               |       | 10  |              |   |                     | (93   | )    |   |        | (83   | )     |      |       | 19    |       |   |        | (512   | )      |   |        | (493   | )     
|                                           | Time deposits                                      |                                               |       | (98 | )            |   |                     | (711  | )    |   |        | (809  | )     |      |       | 890   |       |   |        | (2,543 | )      |   |        | (1,653 | )     
|                                           | Federal funds purchased                            |                                               |       | (1  | )            |   |                     |      |      |   |        | (1    | )     |      |       | (3    | )     |   |        |       |        |   |        | (3     | )     
|                                           | Other borrowings                                   |                                               |       | 115 |              |   |                     | (83   | )    |   |        | 32    |       |      |       | 252   |       |   |        | (220   | )      |   |        | 32     |       
|                                           |                                                    |                                               |       |     |              |   |                     |       |      |   |        |       |       |      |       |       |       |  
|                                           |                                                    | Total increase (decrease) in interest expense |       |     | 59           |   |                     |       | (844 | ) |        |       | (785  | )    |       |       | 1,192 |   |        |        | (3,686 | ) |        |        | (2,494 | )
|                                           |                                                    |                                               |       |     |              |   |                     |       |      |   |        |       |       |      |       |       |       |  
|Increase (decrease) in net interest income |                                                    | $                                             | 1,344 |     |              | $ | 1,458               |       |      | $ | 2,802  |       |       | $    | 3,234 |       |       | $ | (5,433 | )      |        | $ | (2,199 | )     
|                                           |                                                    |                                               |       |     |              |   |                     |       |      |   |        |       |       |      |       |       |       |  



| |                          
| | -------------------------
| | Provision for Loan Losses





21



---



##### Table of Contents





| |                   
| | ------------------
| | Noninterest Income





|                                                  |                          |                          |       |       |      |   |       |       |  |   |       |       | 
|------------------------------------------------- | ------------------------ | ------------------------ | ----- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                                                  |                          | Years Ended December 31, |      
|                                                  |                          |                          |      
|                                                  |                          | 2004                     |       |       | 2003 |   |       | 2002  | 
|                                                  |                          |                          |       |       |      |   |       |       | 
|                                                  |                          | (Dollars in thousands)   |      
|Service fees                                      |                          | $                        | 6,701 |       |      | $ | 6,544 |       |  | $ | 6,670 |      
|Other loan-related fees                           |                          |                          | 400   |       |      |   | 1,009 |       |  |   | 1,083 |      
|Letters of credit commissions and fees            |                          |                          | 577   |       |      |   | 516   |       |  |   | 610   |      
|Gain (loss) on sale of investment securities, net |                          |                          | (97   | )     |      |   | 165   |       |  |   | 34    |      
|Gain on sale of loans                             |                          |                          | 605   |       |      |   | 600   |       |  |   | 322   |      
|Foreclosed assets, net                            |                          |                          | 728   |       |      |   | (248  | )     |  |   | (624  | )    
|Other noninterest income                          |                          |                          | 65    |       |      |   | 93    |       |  |   | 248   |      
|                                                  |                          |                          |       |       |      |   |       |       | 
|                                                  | Total noninterest income |                          | $     | 8,979 |      |   | $     | 8,679 |  |   | $     | 8,343 | 
|                                                  |                          |                          |       |       |      |   |       |       | 



| |                    
| | -------------------
| | Noninterest Expense









22



---



##### Table of Contents







|                                                          |                            |                          |        |        |      |   |        |        |  |   |        |        | 
|--------------------------------------------------------- | -------------------------- | ------------------------ | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                                          |                            | Years Ended December 31, |       
|                                                          |                            |                          |       
|                                                          |                            | 2004                     |        |        | 2003 |   |        | 2002   | 
|                                                          |                            |                          |        |        |      |   |        |        | 
|                                                          |                            | (Dollars in thousands)   |       
|Salaries and employee benefits                            |                            | $                        | 16,104 |        |      | $ | 14,109 |        |  | $ | 13,520 |       
|Lower of cost or market adjustment on loans held-for-sale |                            |                          |       |        |      |   | 2,149  |        |  |   |       |       
|Occupancy and equipment                                   |                            |                          | 5,723  |        |      |   | 5,361  |        |  |   | 5,089  |       
|Data processing                                           |                            |                          | 33     |        |      |   | 99     |        |  |   | 94     |       
|Legal and professional fees                               |                            |                          | 1,145  |        |      |   | 1,555  |        |  |   | 568    |       
|Advertising                                               |                            |                          | 240    |        |      |   | 244    |        |  |   | 314    |       
|Printing and supplies                                     |                            |                          | 702    |        |      |   | 597    |        |  |   | 572    |       
|Telecommunications                                        |                            |                          | 463    |        |      |   | 500    |        |  |   | 578    |       
|Other noninterest expense                                 |                            |                          | 4,334  |        |      |   | 3,683  |        |  |   | 3,692  |       
|                                                          |                            |                          |        |        |      |   |        |        | 
|                                                          | Total noninterest expenses |                          | $      | 28,744 |      |   | $      | 28,297 |  |   | $      | 24,427 | 
|                                                          |                            |                          |        |        |      |   |        |        | 





| |             
| | ------------
| | Income Taxes







23



---



##### Table of Contents





| |                    
| | -------------------
| | Impact of Inflation



Financial Condition




| |               
| | --------------
| | Loan Portfolio







|                                                     |             |                        |         |         |         |  |        |        |  |   |         |         |  |        |        |       |         |   |         |         |  |  |         |       |  |        |         |         |         |  |        |       |  |   |         |         |  |  |        |       | 
|---------------------------------------------------- | ----------- | ---------------------- | ------- | ------- | ------- |  | ------ | ------ |  | - | ------- | ------- |  | ------ | ------ | ----- | ------- | - | ------- | ------- |  |  | ------- | ----- |  | ------ | ------- | ------- | ------- |  | ------ | ----- |  | - | ------- | ------- |  |  | ------ | ----- | 
|                                                     |             | As of December 31,     |        
|                                                     |             |                        |        
|                                                     |             | 2004                   |         |         | 2003    |  |        | 2002   |  |   | 2001    |         |  | 2000   |       
|                                                     |             |                        |         |         |         |  |        |        |  |   |         |         |  |        |       
|                                                     |             | Amount                 |         |         | Percent |  |        | Amount |  |   | Percent |         |  | Amount |        |       | Percent |   |         | Amount  |  |  | Percent |       |  | Amount |         |         | Percent | 
|                                                     |             |                        |         |         |         |  |        |        |  |   |         |         |  |        |        |       |         |   |         |         |  |  |         |       |  |        |         |         |         | 
|                                                     |             | (Dollars in thousands) |        
|Commercial and industrial                            |             | $                      | 345,570 |         |         |  | 57.88  | %      |  | $ | 332,480 |         |  |        | 59.36  | %     |         | $ | 325,424 |         |  |  | 60.94   | %     |  | $      | 312,899 |         |         |  | 62.67  | %     |  | $ | 298,134 |         |  |  | 60.92  | %    
|Real estate mortgage                                 |             |                        |         |         |         |  |        |        |  |   |         |         |  |        |        |       |         |   |         |         |  |  |         |       |  |        |         |         |         |  |        |       |  |   |         |         |  |  |        |      
|                                                     | Residential |                        |         | 11,199  |         |  |        | 1.87   |  |   |         | 14,315  |  |        |        | 2.56  |         |   |         | 7,326   |  |  |         | 1.37  |  |        |         | 7,833   |         |  |        | 1.57  |  |   |         | 10,141  |  |  |        | 2.07  | 
|                                                     | Commercial  |                        |         | 188,121 |         |  |        | 31.51  |  |   |         | 178,290 |  |        |        | 31.83 |         |   |         | 165,608 |  |  |         | 31.01 |  |        |         | 131,022 |         |  |        | 26.24 |  |   |         | 128,242 |  |  |        | 26.20 | 
|                                                     |             |                        |         |         |         |  |        |        |  |   |         |         |  |        |        |       |         |   |         |         |  |  |         |       |  |        |         |         |         | 
|                                                     |             |                        | 199,320 |         |         |  | 33.38  |        |  |   | 192,605 |         |  |        | 34.39  |       |         |   | 172,934 |         |  |  | 32.38   |       |  |        | 138,855 |         |         |  | 27.81  |       |  |   | 138,383 |         |  |  | 28.27  |      
|                                                     |             |                        |         |         |         |  |        |        |  |   |         |         |  |        |        |       |         |   |         |         |  |  |         |       |  |        |         |         |         | 
|Real estate construction                             |             |                        |         |         |         |  |        |        |  |   |         |         |  |        |        |       |         |   |         |         |  |  |         |       |  |        |         |         |         |  |        |       |  |   |         |         |  |  |        |      
|                                                     | Residential |                        |         | 9,761   |         |  |        | 1.64   |  |   |         | 12,652  |  |        |        | 2.26  |         |   |         | 10,589  |  |  |         | 1.99  |  |        |         | 5,962   |         |  |        | 1.19  |  |   |         | 7,542   |  |  |        | 1.54  | 
|                                                     | Commercial  |                        |         | 32,868  |         |  |        | 5.50   |  |   |         | 11,906  |  |        |        | 2.12  |         |   |         | 14,805  |  |  |         | 2.76  |  |        |         | 30,215  |         |  |        | 6.05  |  |   |         | 32,059  |  |  |        | 6.55  | 
|                                                     |             |                        |         |         |         |  |        |        |  |   |         |         |  |        |        |       |         |   |         |         |  |  |         |       |  |        |         |         |         | 
|                                                     |             |                        | 42,629  |         |         |  | 7.14   |        |  |   | 24,558  |         |  |        | 4.38   |       |         |   | 25,394  |         |  |  | 4.75    |       |  |        | 36,177  |         |         |  | 7.24   |       |  |   | 39,601  |         |  |  | 8.09   |      
|                                                     |             |                        |         |         |         |  |        |        |  |   |         |         |  |        |        |       |         |   |         |         |  |  |         |       |  |        |         |         |         | 
|Consumer and other                                   |             |                        | 9,556   |         |         |  | 1.60   |        |  |   | 10,447  |         |  |        | 1.87   |       |         |   | 10,286  |         |  |  | 1.93    |       |  |        | 11,364  |         |         |  | 2.28   |       |  |   | 11,986  |         |  |  | 2.45   |      
|Factored receivables                                 |             |                        |        |         |         |  |       |        |  |   |        |         |  |        |       |       |         |   |        |         |  |  |        |       |  |        |        |         |         |  |       |       |  |   | 1,297   |         |  |  | 0.27   |      
|                                                     |             |                        |         |         |         |  |        |        |  |   |         |         |  |        |        |       |         |   |         |         |  |  |         |       |  |        |         |         |         | 
|Gross loans                                          |             |                        | 597,075 |         |         |  | 100.00 | %      |  |   | 560,090 |         |  |        | 100.00 | %     |         |   | 534,038 |         |  |  | 100.00  | %     |  |        | 499,295 |         |         |  | 100.00 | %     |  |   | 489,401 |         |  |  | 100.00 | %    
|                                                     |             |                        |         |         |         |  |        |        |  |   |         |         |  |        |        |       |         |   |         |         |  |  |         |       |  |        |         |         |         | 
|Less: unearned discounts, interest and deferred fees |             |                        | (2,539  | )       |         |  |        |        |  |   | (2,954  | )       |  |        |        |       |         |   | (3,467  | )       |  |  |         |       |  |        | (3,854  | )       |         |  |        |       |  |   | (3,883  | )       |  |  |        |      
|                                                     |             |                        |         |         |         |  |        |        |  |   |         |         |  |        |        |       |         |   |         |         |  |  |         |       |  |        |         |         |         | 
|Total loans                                          |             | $                      | 594,536 |         |         |  |        |        |  | $ | 557,136 |         |  |        |        |       |         | $ | 530,571 |         |  |  |         |       |  | $      | 495,441 |         |         |  |        |       |  | $ | 485,518 |         |  |  |        |      
|                                                     |             |                        |         |         |         |  |        |        |  |   |         |         |  |        |        |       |         |   |         |         |  |  |         |       |  |        |         |         |         | 



Commercial and Industrial Loans.


24



---



##### Table of Contents





Commercial Mortgage Loans.


Construction Loans.


Residential Mortgage Brokerage and Lending.


25



---



##### Table of Contents





Government Guaranteed Small Business Lending.




Trade Finance.


Consumer Loans.






26



---



##### Table of Contents







|                                       |             |                        |         |         |      |   |         |         |  |   |         |         | 
|-------------------------------------- | ----------- | ---------------------- | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                       |             | As of December 31,     |        
|                                       |             |                        |        
|                                       |             | 2004                   |         |         | 2003 |   |         | 2002    | 
|                                       |             |                        |         |         |      |   |         |         | 
|                                       |             | (Dollars in thousands) |        
|Convenience stores/gasoline stations   |             | $                      | 42,404  |         |      | $ | 46,290  |         |  | $ | 44,147  |        
|Hotels/ Motels                         |             |                        | 55,974  |         |      |   | 69,877  |         |  |   | 86,632  |        
|Nonresidential building for rent/lease |             |                        | 179,052 |         |      |   | 131,482 |         |  |   | 118,567 |        
|Restaurants                            |             |                        | 48,370  |         |      |   | 52,902  |         |  |   | 49,769  |        
|Wholesale trade                        |             |                        | 60,782  |         |      |   | 64,181  |         |  |   | 60,538  |        
|All other                              |             |                        | 210,493 |         |      |   | 195,358 |         |  |   | 174,385 |        
|                                       |             |                        |         |         |      |   |         |         | 
|                                       | Gross loans |                        | $       | 597,075 |      |   | $       | 560,090 |  |   | $       | 534,038 | 
|                                       |             |                        |         |         |      |   |         |         | 



|                                         |             |                         |         |           |            |   |         |            |  |   |         |        |  |   |         |         | 
|---------------------------------------- | ----------- | ----------------------- | ------- | --------- | ---------- | - | ------- | ---------- |  | - | ------- | ------ |  | - | ------- | ------- | 
|                                         |             | As of December 31, 2004 |        
|                                         |             |                         |        
|                                         |             |                         |         | After One |            |   |        
|                                         |             | One Year                |         |           | Through    |   |         | After      |  |   |        
|                                         |             | or Less                 |         |           | Five Years |   |         | Five Years |  |   | Total   |       
|                                         |             |                         |         |           |            |   |         |            |  |   |         |       
|                                         |             | (Dollars in thousands)  |        
|Commercial and industrial                |             | $                       | 84,674  |           |            | $ | 170,442 |            |  | $ | 90,454  |        |  | $ | 345,570 |        
|Real estate mortgage:                    |             |                         |         |           |            |   |         |            |  |   |         |        |  |   |         |        
|                                         | Residential |                         |         | 6,265     |            |   |         | 3,430      |  |   |         | 1,504  |  |   |         | 11,199  | 
|                                         | Commercial  |                         |         | 32,804    |            |   |         | 150,214    |  |   |         | 5,103  |  |   |         | 188,121 | 
|Real estate construction:                |             |                         |         |           |            |   |         |            |  |   |         |        |  |   |         |        
|                                         | Residential |                         |         | 7,950     |            |   |         | 1,811      |  |   |         |       |  |   |         | 9,761   | 
|                                         | Commercial  |                         |         | 5,412     |            |   |         | 13,395     |  |   |         | 14,061 |  |   |         | 32,868  | 
|Consumer                                 |             |                         | 1,617   |           |            |   | 7,334   |            |  |   | 605     |        |  |   | 9,556   |        
|                                         |             |                         |         |           |            |   |         |            |  |   |         |       
|Total                                    |             | $                       | 138,722 |           |            | $ | 346,626 |            |  | $ | 111,727 |        |  | $ | 597,075 |        
|                                         |             |                         |         |           |            |   |         |            |  |   |         |       
|Loans with a predetermined interest rate |             | $                       | 24,732  |           |            | $ | 37,101  |            |  | $ | 4,818   |        |  | $ | 66,651  |        
|Loans with a floating interest rate      |             |                         | 113,990 |           |            |   | 309,525 |            |  |   | 106,909 |        |  |   | 530,424 |        
|                                         |             |                         |         |           |            |   |         |            |  |   |         |       
|Total                                    |             | $                       | 138,722 |           |            | $ | 346,626 |            |  | $ | 111,727 |        |  | $ | 597,075 |        
|                                         |             |                         |         |           |            |   |         |            |  |   |         |       



| |                     
| | --------------------
| | Nonperforming Assets



27



---



##### Table of Contents

















2004 versus 2003.


28



---



##### Table of Contents





2003 versus 2002.






|                                                                              |                            |                        |        |        |      |   |        |        |  |   |        |        |  |      |        |       |  |   |        |       | 
|----------------------------------------------------------------------------- | -------------------------- | ---------------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ |  | ---- | ------ | ----- |  | - | ------ | ----- | 
|                                                                              |                            | As of December 31,     |       
|                                                                              |                            |                        |       
|                                                                              |                            | 2004                   |        |        | 2003 |   |        | 2002   |  |   | 2001   |        |  | 2000 |       
|                                                                              |                            |                        |        |        |      |   |        |        |  |   |        |        |  |      |       
|                                                                              |                            | (Dollars in thousands) |       
|Nonaccrual loans                                                              |                            | $                      | 16,504 |        |      | $ | 25,442 |        |  | $ | 17,209 |        |  | $    | 3,758  |       |  | $ | 2,225  |      
|Accruing loans 90 days or more past due                                       |                            |                        | 181    |        |      |   | 264    |        |  |   | 380    |        |  |      | 783    |       |  |   |       |      
|Other real estate (ORE) and other assets repossessed
    (OAR)            |                            |                        | 1,566  |        |      |   | 2,585  |        |  |   | 1,190  |        |  |      | 969    |       |  |   | 757    |      
|                                                                              |                            |                        |        |        |      |   |        |        |  |   |        |        |  |      |       
|                                                                              | Total nonperforming assets |                        |        | 18,251 |      |   |        | 28,291 |  |   |        | 18,779 |  |      |        | 5,510 |  |   |        | 2,982 | 
|Less: nonperforming loans guaranteed by the SBA, Ex-Im Bank, or
    the OCCGF |                            |                        | (3,032 | )      |      |   | (3,323 | )      |  |   | (3,310 | )      |  |      | (1,833 | )     |  |   | (1,049 | )    
|                                                                              |                            |                        |        |        |      |   |        |        |  |   |        |        |  |      |       
|                                                                              | Net nonperforming assets   |                        | $      | 15,219 |      |   | $      | 24,968 |  |   | $      | 15,469 |  |      | $      | 3,677 |  |   | $      | 1,933 | 
|                                                                              |                            |                        |        |        |      |   |        |        |  |   |        |        |  |      |       
|Total nonperforming assets to total loans and ORE/ OAR                        |                            |                        | 3.06   | %      |      |   | 5.05   | %      |  |   | 3.53   | %      |  |      | 1.11   | %     |  |   | 0.61   | %    
|Total nonperforming assets to total assets                                    |                            |                        | 2.00   |        |      |   | 3.26   |        |  |   | 2.23   |        |  |      | 0.74   |       |  |   | 0.40   |      
|Net nonperforming assets to total loans and ORE/ OAR                          |                            |                        | 2.55   |        |      |   | 4.46   |        |  |   | 2.91   |        |  |      | 0.71   |       |  |   | 0.40   |      
|Net nonperforming assets to total assets                                      |                            |                        | 1.67   |        |      |   | 2.88   |        |  |   | 1.84   |        |  |      | 0.49   |       |  |   | 0.26   |      



| |                          
| | -------------------------
| | Allowance for Loan Losses



29



---



##### Table of Contents













30



---



##### Table of Contents





|                                                        |                            |                                            |         |        |        |   |         |        |        |   |         |        |        |      |         |        |        |   |         |        |        |  
|------------------------------------------------------- | -------------------------- | ------------------------------------------ | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | -
|                                                        |                            | As of and for the Years Ended December 31, |        
|                                                        |                            |                                            |        
|                                                        |                            | 2004                                       |         |        | 2003   |   |         | 2002   |        |   | 2001    |        |        | 2000 |        
|                                                        |                            |                                            |         |        |        |   |         |        |        |   |         |        |        |      |        
|                                                        |                            | (Dollars in thousands)                     |        
|Average total loans outstanding                         |                            | $                                          | 565,920 |        |        | $ | 551,287 |        |        | $ | 506,901 |        |        | $    | 476,134 |        |        | $ | 487,439 |       
|                                                        |                            |                                            |         |        |        |   |         |        |        |   |         |        |        |      |        
|Total loans outstanding at end of period                |                            | $                                          | 594,536 |        |        | $ | 557,136 |        |        | $ | 530,571 |        |        | $    | 495,441 |        |        | $ | 485,518 |       
|                                                        |                            |                                            |         |        |        |   |         |        |        |   |         |        |        |      |        
|Allowance for loan losses at beginning of period        |                            | $                                          | 10,448  |        |        | $ | 10,150  |        |        | $ | 8,903   |        |        | $    | 9,271   |        |        | $ | 7,537   |       
|Provision for loan losses                               |                            |                                            | 1,565   |        |        |   | 5,690   |        |        |   | 3,853   |        |        |      | 3,799   |        |        |   | 7,508   |       
|Charge-offs:                                            |                            |                                            |         |        |        |   |         |        |        |   |         |        |        |      |         |        |        |   |         |       
|                                                        | Commercial and industrial  |                                            |         | (2,660 | )      |   |         | (5,173 | )      |   |         | (2,721 | )      |      |         | (4,075 | )      |   |         | (1,479 | )     
|                                                        | Real estate  mortgage     |                                            |         |       |        |   |         | (755   | )      |   |         | (271   | )      |      |         |       |        |   |         | (23    | )     
|                                                        | Real estate  construction |                                            |         |       |        |   |         |       |        |   |         |       |        |      |         |       |        |   |         |       |       
|                                                        | Consumer and other         |                                            |         | (175   | )      |   |         | (193   | )      |   |         | (132   | )      |      |         | (201   | )      |   |         | (5,524 | )     
|                                                        |                            |                                            |         |        |        |   |         |        |        |   |         |        |        |      |        
|                                                        |                            | Total charge-offs                          |         |        | (2,835 | ) |         |        | (6,121 | ) |         |        | (3,124 | )    |         |        | (4,276 | ) |         |        | (7,026 | )
|                                                        |                            |                                            |         |        |        |   |         |        |        |   |         |        |        |      |        
|Recoveries:                                             |                            |                                            |         |        |        |   |         |        |        |   |         |        |        |      |         |        |        |   |         |       
|                                                        | Commercial and industrial  |                                            |         | 1,509  |        |   |         | 593    |        |   |         | 450    |        |      |         | 54     |        |   |         | 901    |       
|                                                        | Real estate  mortgage     |                                            |         | 104    |        |   |         | 100    |        |   |         | 20     |        |      |         | 11     |        |   |         | 8      |       
|                                                        | Real estate  construction |                                            |         |       |        |   |         |       |        |   |         |       |        |      |         |       |        |   |         |       |       
|                                                        | Consumer and other         |                                            |         | 72     |        |   |         | 36     |        |   |         | 48     |        |      |         | 44     |        |   |         | 343    |       
|                                                        |                            |                                            |         |        |        |   |         |        |        |   |         |        |        |      |        
|                                                        |                            | Total recoveries                           |         |        | 1,685  |   |         |        | 729    |   |         |        | 518    |      |         |        | 109    |   |         |        | 1,252  |  
|                                                        |                            |                                            |         |        |        |   |         |        |        |   |         |        |        |      |        
|Net charge-offs                                         |                            |                                            | (1,150  | )      |        |   | (5,392  | )      |        |   | (2,606  | )      |        |      | (4,167  | )      |        |   | (5,774  | )     
|                                                        |                            |                                            |         |        |        |   |         |        |        |   |         |        |        |      |        
|Allowance for loan losses at end of period              |                            | $                                          | 10,863  |        |        | $ | 10,448  |        |        | $ | 10,150  |        |        | $    | 8,903   |        |        | $ | 9,271   |       
|                                                        |                            |                                            |         |        |        |   |         |        |        |   |         |        |        |      |        
|Ratio of allowance to end of period total loans         |                            |                                            | 1.83    | %      |        |   | 1.88    | %      |        |   | 1.91    | %      |        |      | 1.80    | %      |        |   | 1.91    | %     
|Ratio of net charge-offs to end of period total loans   |                            |                                            | 0.19    |        |        |   | 0.97    |        |        |   | 0.49    |        |        |      | 0.84    |        |        |   | 1.19    |       
|Ratio of allowance to end of period nonperforming loans |                            |                                            | 65.11   |        |        |   | 40.64   |        |        |   | 57.71   |        |        |      | 196.06  |        |        |   | 416.67  |       





31



---



##### Table of Contents





|                                                            |                            |                        |        |          |       |  |        |        |          |   |        |       |  |          |        |       |       |   |          |        |  |  |        |          |   |        |       |       |       |  |        |       |   |   |       |       |  |  |        |       |  
|----------------------------------------------------------- | -------------------------- | ---------------------- | ------ | -------- | ----- |  | ------ | ------ | -------- | - | ------ | ----- |  | -------- | ------ | ----- | ----- | - | -------- | ------ |  |  | ------ | -------- | - | ------ | ----- | ----- | ----- |  | ------ | ----- | - | - | ----- | ----- |  |  | ------ | ----- | -
|                                                            |                            | As of December 31,     |       
|                                                            |                            |                        |       
|                                                            |                            | 2004                   |        |          | 2003  |  |        | 2002   |          |   | 2001   |       |  | 2000     |       
|                                                            |                            |                        |        |          |       |  |        |        |          |   |        |       |  |          |       
|                                                            |                            |                        |        | Percent  |       |  |        |        | Percent  |   |        |       |  | Percent  |        |       |       |   | Percent  |        |  |  |        | Percent  |  
|                                                            |                            |                        |        | of Loans |       |  |        |        | of Loans |   |        |       |  | of Loans |        |       |       |   | of Loans |        |  |  |        | of Loans |  
|                                                            |                            |                        |        | to Gross |       |  |        |        | to Gross |   |        |       |  | to Gross |        |       |       |   | to Gross |        |  |  |        | to Gross |  
|                                                            |                            | Amount                 |        |          | Loans |  |        | Amount |          |   | Loans  |       |  | Amount   |        |       | Loans |   |          | Amount |  |  | Loans  |          |   | Amount |       |       | Loans | 
|                                                            |                            |                        |        |          |       |  |        |        |          |   |        |       |  |          |        |       |       |   |          |        |  |  |        |          |   |        |       |       |       | 
|                                                            |                            | (Dollars in thousands) |       
|Balance of allowance
    for loan losses
    applicable to: |                            |                        |        |          |       |  |        |        |          |   |        |       |  |          |        |       |       |   |          |        |  |  |        |          |   |        |       |       |       |  |        |       |   |   |       |       |  |  |        |      
|                                                            | Commercial and industrial  |                        | $      | 6,119    |       |  |        | 57.88  | %        |   | $      | 6,281 |  |          |        | 59.36 | %     |   | $        | 6,383  |  |  |        | 60.94    | % |        | $     | 5,054 |       |  |        | 62.67 | % |   | $     | 4,814 |  |  |        | 60.92 | %
|                                                            | Real estate  mortgage     |                        |        | 2,669    |       |  |        | 33.39  |          |   |        | 2,460 |  |          |        | 34.39 |       |   |          | 2,285  |  |  |        | 32.38    |   |        |       | 1,947 |       |  |        | 27.81 |   |   |       | 758   |  |  |        | 28.27 |  
|                                                            | Real estate  construction |                        |        | 615      |       |  |        | 7.13   |          |   |        | 267   |  |          |        | 4.38  |       |   |          | 355    |  |  |        | 4.75     |   |        |       | 274   |       |  |        | 7.24  |   |   |       | 230   |  |  |        | 8.09  |  
|                                                            | Consumer and other         |                        |        | 79       |       |  |        | 1.60   |          |   |        | 101   |  |          |        | 1.87  |       |   |          | 136    |  |  |        | 1.93     |   |        |       | 686   |       |  |        | 2.28  |   |   |       | 444   |  |  |        | 2.45  |  
|                                                            | Factored receivables       |                        |        |         |       |  |        |       |          |   |        |      |  |          |        |      |       |   |          |       |  |  |        |         |   |        |       |      |       |  |        |      |   |   |       | 20    |  |  |        | 0.27  |  
|                                                            | Unallocated                |                        |        | 1,381    |       |  |        |       |          |   |        | 1,339 |  |          |        |      |       |   |          | 991    |  |  |        |         |   |        |       | 942   |       |  |        |      |   |   |       | 3,005 |  |  |        |      |  
|                                                            |                            |                        |        |          |       |  |        |        |          |   |        |       |  |          |        |       |       |   |          |        |  |  |        |          |   |        |       |       |       | 
|Total allowance for loan losses                             |                            | $                      | 10,863 |          |       |  | 100.00 | %      |          | $ | 10,448 |       |  |          | 100.00 | %     |       | $ | 10,150   |        |  |  | 100.00 | %        |   | $      | 8,903 |       |       |  | 100.00 | %     |   | $ | 9,271 |       |  |  | 100.00 | %    
|                                                            |                            |                        |        |          |       |  |        |        |          |   |        |       |  |          |        |       |       |   |          |        |  |  |        |          |   |        |       |       |       | 





| |           
| | ----------
| | Securities







32



---



##### Table of Contents





|                   |                                                                          |                         |   |         |                         |  |       |            |       |  |       |        |        |           |   |         |            |  |   |            |         |  |       |       |       |  |   |        |        |   |   |         |         | 
|------------------ | ------------------------------------------------------------------------ | ----------------------- | - | ------- | ----------------------- |  | ----- | ---------- | ----- |  | ----- | ------ | ------ | --------- | - | ------- | ---------- |  | - | ---------- | ------- |  | ----- | ----- | ----- |  | - | ------ | ------ | - | - | ------- | ------- | 
|                   |                                                                          | As of December 31, 2004 |   |         | As of December 31, 2003 | 
|                   |                                                                          |                         |   |         |                         | 
|                   |                                                                          |                         |   | Gross   |                         |  | Gross |            |       |  |       |        |        | Gross     |   |         | Gross      |  |   |           
|                   |                                                                          | Amortized               |   |         | Unrealized              |  |       | Unrealized |       |  | Fair  |        |        | Amortized |   |         | Unrealized |  |   | Unrealized |         |  | Fair  |      
|                   |                                                                          | Cost                    |   |         | Gain                    |  |       | Loss       |       |  | Value |        |        | Cost      |   |         | Gain       |  |   | Loss       |         |  | Value |      
|                   |                                                                          |                         |   |         |                         |  |       |            |       |  |       |        |        |           |   |         |            |  |   |            |         |  |       |      
|                   |                                                                          | (Dollars in thousands)  |  
|Available-for-Sale |                                                                          |                         |   |         |                         |  |       |            |       |  |       |        |        |           |   |         |            |  |   |            |         |  |       |       |       |  |   |        |        |   |   |        
|                   | U.S. Treasury securities and obligations of
    U.S. government agencies |                         | $ | 5,005   |                         |  | $     |           |       |  | $     | (18    | )      |           | $ | 4,987   |            |  | $ | 4,965      |         |  | $     |      |       |  | $ | (12    | )      |   | $ | 4,953   |        
|                   | Obligations of state and political subdivisions                          |                         |   | 18,105  |                         |  |       | 1,030      |       |  |       |       |        |           |   | 19,135  |            |  |   | 18,925     |         |  |       | 1,249 |       |  |   |       |        |   |   | 20,174  |        
|                   | Mortgage-backed securities and collateralized mortgage
    obligations   |                         |   | 222,977 |                         |  |       | 1,344      |       |  |       | (1,179 | )      |           |   | 223,142 |            |  |   | 209,323    |         |  |       | 1,170 |       |  |   | (1,254 | )      |   |   | 209,239 |        
|                   | Other debt securities                                                    |                         |   | 1,979   |                         |  |       | 14         |       |  |       |       |        |           |   | 1,993   |            |  |   | 1,096      |         |  |       | 3     |       |  |   | (10    | )      |   |   | 1,089   |        
|                   | Investment in ARM and CRA funds                                          |                         |   | 18,772  |                         |  |       | 89         |       |  |       | (205   | )      |           |   | 18,656  |            |  |   | 21,739     |         |  |       | 73    |       |  |   | (203   | )      |   |   | 21,609  |        
|                   | FHLB/ Federal Reserve Bank Stock                                         |                         |   | 5,807   |                         |  |       |           |       |  |       |       |        |           |   | 5,807   |            |  |   | 5,200      |         |  |       |      |       |  |   |       |        |   |   | 5,200   |        
|                   |                                                                          |                         |   |         |                         |  |       |            |       |  |       |        |        |           |   |         |            |  |   |            |         |  |       |      
|                   |                                                                          | Total Securities        |   | $       | 272,645                 |  |       | $          | 2,477 |  |       | $      | (1,402 | )         |   | $       | 273,720    |  |   | $          | 261,248 |  |       | $     | 2,495 |  |   | $      | (1,479 | ) |   | $       | 262,264 | 
|                   |                                                                          |                         |   |         |                         |  |       |            |       |  |       |        |        |           |   |         |            |  |   |            |         |  |       |      

|                                                                         |                  |                         |         |         |            |   |       |            |  |   |       |      |   |   |         |         | 
|------------------------------------------------------------------------ | ---------------- | ----------------------- | ------- | ------- | ---------- | - | ----- | ---------- |  | - | ----- | ---- | - | - | ------- | ------- | 
|                                                                         |                  | As of December 31, 2002 |        
|                                                                         |                  |                         |        
|                                                                         |                  |                         |         | Gross   |            |   | Gross |            |  |  
|                                                                         |                  | Amortized               |         |         | Unrealized |   |       | Unrealized |  |   | Fair  |     
|                                                                         |                  | Cost                    |         |         | Gain       |   |       | Loss       |  |   | Value |     
|                                                                         |                  |                         |         |         |            |   |       |            |  |   |       |     
|                                                                         |                  | (Dollars in thousands)  |        
|U.S. Treasury securities and obligations of
    U.S. government agencies |                  | $                       | 2,488   |         |            | $ | 50    |            |  | $ |      |      |   | $ | 2,538   |        
|Obligations of state and political subdivisions                          |                  |                         | 22,059  |         |            |   | 591   |            |  |   | (2    | )    |   |   | 22,648  |        
|Mortgage-backed securities and collateralized mortgage
    obligations   |                  |                         | 180,599 |         |            |   | 2,862 |            |  |   | (151  | )    |   |   | 183,310 |        
|Other debt securities                                                    |                  |                         | 2,378   |         |            |   | 33    |            |  |   | (20   | )    |   |   | 2,391   |        
|Investment in an ARM and CRA funds                                       |                  |                         | 48,982  |         |            |   | 169   |            |  |   |      |      |   |   | 49,151  |        
|FHLB/ Federal Reserve Bank Stock                                         |                  |                         | 4,380   |         |            |   |      |            |  |   |      |      |   |   | 4,380   |        
|                                                                         |                  |                         |         |         |            |   |       |            |  |   |       |     
|                                                                         | Total securities |                         | $       | 260,886 |            |   | $     | 3,705      |  |   | $     | (173 | ) |   | $       | 264,418 | 
|                                                                         |                  |                         |         |         |            |   |       |            |  |   |       |     

33



---



##### Table of Contents





|                                                                         |                  |                         |     |                |            |  |                  |            |   |   |                 |       |  |        |      |      |       |   |        |        |  |  |       |      |   |        |         |         |       |  |      |      |   |   |         |         |  |  |      |      |  
|------------------------------------------------------------------------ | ---------------- | ----------------------- | --- | -------------- | ---------- |  | ---------------- | ---------- | - | - | --------------- | ----- |  | ------ | ---- | ---- | ----- | - | ------ | ------ |  |  | ----- | ---- | - | ------ | ------- | ------- | ----- |  | ---- | ---- | - | - | ------- | ------- |  |  | ---- | ---- | -
|                                                                         |                  | As of December 31, 2004 |    
|                                                                         |                  |                         |    
|                                                                         |                  |                         |     | After One Year |            |  | After Five Years |            |   |  
|                                                                         |                  | Within                  |     |                | But Within |  |                  | But Within |   |   |                 |       | 
|                                                                         |                  | One Year                |     |                | Five Years |  |                  | Ten Years  |   |   | After Ten Years |       |  | Total  |     
|                                                                         |                  |                         |     |                |            |  |                  |            |   |   |                 |       |  |        |     
|                                                                         |                  | Amount                  |     |                | Yield      |  |                  | Amount     |   |   | Yield           |       |  | Amount |      |      | Yield |   |        | Amount |  |  | Yield |      |   | Amount |         |         | Yield | 
|                                                                         |                  |                         |     |                |            |  |                  |            |   |   |                 |       |  |        |      |      |       |   |        |        |  |  |       |      |   |        |         |         |       | 
|                                                                         |                  | (Dollars in thousands)  |    
|U.S. Treasury securities and obligations of
    U.S. government agencies |                  | $                       |    |                |            |  |                 |            |   | $ |                |       |  |        |     |      |       | $ | 5,005  |        |  |  | 4.38  | %    |   | $      |        |         |       |  |     |      |   | $ | 5,005   |         |  |  | 4.38 | %   
|Obligations of state and political subdivisions                          |                  |                         | 345 |                |            |  | 5.13             | %          |   |   | 2,595           |       |  |        | 5.03 | %    |       |   | 5,077  |        |  |  | 4.81  |      |   |        | 10,088  |         |       |  | 4.95 | %    |   |   | 18,105  |         |  |  | 4.93 |     
|Mortgage-backed securities and collateralized mortgage
    obligations   |                  |                         |    |                |            |  |                 |            |   |   | 1,598           |       |  |        | 5.41 |      |       |   | 57,227 |        |  |  | 4.20  |      |   |        | 165,131 |         |       |  | 2.38 |      |   |   | 223,956 |         |  |  | 2.86 |     
|Other debt securities                                                    |                  |                         |    |                |            |  |                 |            |   |   |                |       |  |        |     |      |       |   |       |        |  |  |      |      |   |        | 1,000   |         |       |  | 5.61 |      |   |   | 1,000   |         |  |  | 5.61 |     
|Investment in ARM and CRA funds                                          |                  |                         |    |                |            |  |                 |            |   |   |                |       |  |        |     |      |       |   |       |        |  |  |      |      |   |        | 18,772  |         |       |  | 3.00 |      |   |   | 18,772  |         |  |  | 3.00 |     
|FHLB/Federal Reserve Bank stock                                          |                  |                         |    |                |            |  |                 |            |   |   |                |       |  |        |     |      |       |   |       |        |  |  |      |      |   |        | 5,807   |         |       |  | 2.46 |      |   |   | 5,807   |         |  |  | 2.46 |     
|                                                                         |                  |                         |     |                |            |  |                  |            |   |   |                 |       |  |        |      |      |       |   |        |        |  |  |       |      |   |        |         |         |       | 
|                                                                         | Total Securities |                         | $   | 345            |            |  |                  | 5.13       | % |   | $               | 4,193 |  |        |      | 5.18 | %     |   | $      | 67,309 |  |  |       | 4.26 | % |        | $       | 200,798 |       |  |      | 2.58 | % |   | $       | 272,645 |  |  |      | 3.04 | %
|                                                                         |                  |                         |     |                |            |  |                  |            |   |   |                 |       |  |        |      |      |       |   |        |        |  |  |       |      |   |        |         |         |       | 







34



---



##### Table of Contents







| |         
| | --------
| | Deposits













35



---



##### Table of Contents





|                             |                                   |                                 |         |         |         |  |   |        |      |   |         |         |         |        |   |      |      |   |         |         |         |  |   |      |      |  
|---------------------------- | --------------------------------- | ------------------------------- | ------- | ------- | ------- |  | - | ------ | ---- | - | ------- | ------- | ------- | ------ | - | ---- | ---- | - | ------- | ------- | ------- |  | - | ---- | ---- | -
|                             |                                   | Years Ended December 31,        |        
|                             |                                   |                                 |        
|                             |                                   | 2004                            |         |         | 2003    |  |   | 2002   |     
|                             |                                   |                                 |         |         |         |  |   |        |     
|                             |                                   | Amount                          |         |         | Rate    |  |   | Amount |      |   | Rate    |         |         | Amount |   |      | Rate |  
|                             |                                   |                                 |         |         |         |  |   |        |      |   |         |         |         |        |   |      |      |  
|                             |                                   | (Dollars in thousands)          |        
|Interest-bearing deposits:   |                                   |                                 |         |         |         |  |   |        |      |   |         |         |         |        |   |      |      |   |         |         |         |  |   |     
|                             | Money market checking             |                                 | $       | 79,327  |         |  |   | 0.68   | %    |   | $       | 73,987  |         |        |   | 0.62 | %    |   | $       | 71,059  |         |  |   | 1.18 | %   
|                             | Savings and money market deposits |                                 |         | 113,164 |         |  |   | 0.71   |      |   |         | 111,867 |         |        |   | 0.79 |      |   |         | 110,372 |         |  |   | 1.25 |     
|                             | Time deposits less than $100,000  |                                 |         | 173,675 |         |  |   | 1.99   |      |   |         | 169,314 |         |        |   | 2.19 |      |   |         | 176,941 |         |  |   | 2.69 |     
|                             | Time deposits $100,000 and over   |                                 |         | 193,749 |         |  |   | 2.41   |      |   |         | 202,186 |         |        |   | 2.59 |      |   |         | 165,766 |         |  |   | 3.52 |     
|                             |                                   |                                 |         |         |         |  |   |        |      |   |         |         |         |        |   |      |      |  
|                             |                                   | Total interest-bearing deposits |         |         | 559,915 |  |   |        | 1.69 |   |         |         | 557,354 |        |   |      | 1.85 |   |         |         | 524,138 |  |   |      | 2.44 |  
|Noninterest-bearing deposits |                                   |                                 | 168,768 |         |         |  |  |        |      |   | 151,221 |         |         |        |  |      |      |   | 132,686 |         |         |  |  |     
|                             |                                   |                                 |         |         |         |  |   |        |      |   |         |         |         |        |   |      |      |  
|                             |                                   | Total deposits                  |         | $       | 728,683 |  |   |        | 1.30 | % |         | $       | 708,575 |        |   |      | 1.45 | % |         | $       | 656,824 |  |   |      | 1.95 | %
|                             |                                   |                                 |         |         |         |  |   |        |      |   |         |         |         |        |   |      |      |  



|                              |  |                        |         | 
|----------------------------- |  | ---------------------- | ------- | 
|                              |  | December 31, 2004      |        
|                              |  |                        |        
|                              |  | (Dollars in thousands) |        
|Three months or less          |  | $                      | 33,361  | 
|Over three through six months |  |                        | 31,730  | 
|Over six through 12 months    |  |                        | 72,013  | 
|Over 12 months                |  |                        | 67,769  | 
|                              |  |                        |        
|Total                         |  | $                      | 204,873 | 
|                              |  |                        |        



| |                 
| | ----------------
| | Other Borrowings







36



---



##### Table of Contents





|                             |                                           |                        |   |        |      |  |   |        |   |  |   |        |  
|---------------------------- | ----------------------------------------- | ---------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                             |                                           | As of December 31,     |  
|                             |                                           |                        |  
|                             |                                           | 2004                   |   |        | 2003 |  |   | 2002   |  
|                             |                                           |                        |   |        |      |  |   |        |  
|                             |                                           | (Dollars in thousands) |  
|Federal funds purchased:     |                                           |                        |   |        |      |  |   |        |   |  |   |       
|                             | on December 31,                           |                        | $ |       |      |  | $ |       |   |  | $ |       |  
|                             | average during the year                   |                        |   |       |      |  |   | 55     |   |  |   | 162    |  
|                             | maximum month end balance during the year |                        |   |       |      |  |   |       |   |  |   |       |  
|FHLB notes:                  |                                           |                        |   |        |      |  |   |        |   |  |   |       
|                             | on December 31,                           |                        | $ | 59,900 |      |  | $ | 53,300 |   |  | $ | 65,200 |  
|                             | average during the year                   |                        |   | 63,288 |      |  |   | 59,667 |   |  |   | 52,343 |  
|                             | maximum month end balance during the year |                        |   | 74,300 |      |  |   | 69,300 |   |  |   | 69,700 |  
|                             | Interest rate at end of period            |                        |   | 3.46   | %    |  |   | 3.15   | % |  |   | 3.06   | %
|                             | Interest rate during period               |                        |   | 2.93   |      |  |   | 3.06   |   |  |   | 3.43   |  
|Other short-term borrowings: |                                           |                        |   |        |      |  |   |        |   |  |   |       
|                             | on December 31,                           |                        | $ | 949    |      |  | $ | 873    |   |  | $ | 574    |  
|                             | average during the year                   |                        |   | 734    |      |  |   | 587    |   |  |   | 551    |  
|                             | maximum month end balance during the year |                        |   | 1,057  |      |  |   | 873    |   |  |   | 713    |  



| |                        
| | -----------------------
| | Contractual Obligations



|                                         |                               |                        |         |           |             |   |             |            |  |   |            |        |  |       |       |       |  |   |         |         | 
|---------------------------------------- | ----------------------------- | ---------------------- | ------- | --------- | ----------- | - | ----------- | ---------- |  | - | ---------- | ------ |  | ----- | ----- | ----- |  | - | ------- | ------- | 
|                                         |                               |                        |         | After One |             |   | After Three |            |  |   |            |       
|                                         |                               | Within                 |         |           | But Within  |   |             | But Within |  |   | After      |        |  |      
|                                         |                               | One Year               |         |           | Three Years |   |             | Five Years |  |   | Five Years |        |  | Total |      
|                                         |                               |                        |         |           |             |   |             |            |  |   |            |        |  |       |      
|                                         |                               | (Dollars in thousands) |        
|Certificates of deposit                  |                               | $                      | 277,877 |           |             | $ | 92,697      |            |  | $ | 12,850     |        |  | $     | 2     |       |  | $ | 383,426 |        
|Federal Reserve TT&L                     |                               |                        | 949     |           |             |   |            |            |  |   |           |        |  |       |      |       |  |   | 949     |        
|Short-term borrowings                    |                               |                        | 34,900  |           |             |   |            |            |  |   |           |        |  |       |      |       |  |   | 34,900  |        
|Long-term borrowings                     |                               |                        |        |           |             |   |            |            |  |   | 25,000     |        |  |       |      |       |  |   | 25,000  |        
|Interest on time deposits and borrowings |                               |                        | 6,254   |           |             |   | 2,049       |            |  |   | 4,973      |        |  |       |      |       |  |   | 13,276  |        
|                                         |                               |                        |         |           |             |   |             |            |  |   |            |        |  |       |      
|                                         | Total borrowing obligations   |                        | $       | 319,980   |             |   | $           | 94,746     |  |   | $          | 42,823 |  |       | $     | 2     |  |   | $       | 457,551 | 
|Operating lease obligations              |                               |                        | 1,008   |           |             |   | 1,076       |            |  |   | 874        |        |  |       | 1,102 |       |  |   | 4,060   |        
|                                         |                               |                        |         |           |             |   |             |            |  |   |            |        |  |       |      
|                                         | Total contractual obligations |                        | $       | 320,988   |             |   | $           | 95,822     |  |   | $          | 43,697 |  |       | $     | 1,104 |  |   | $       | 461,611 | 
|                                         |                               |                        |         |           |             |   |             |            |  |   |            |        |  |       |      



| |                                          
| | -----------------------------------------
| | Interest Rate Sensitivity and Market Risk





37



---



##### Table of Contents









38



---



##### Table of Contents





|                              |                                                                                    |                              |   |           |        |  |   |          |    |  |       |          |    |       |   |         |       |  |   |          |    |  |       |         |   |  |   |         |  |  |   |         | 
|----------------------------- | ---------------------------------------------------------------------------------- | ---------------------------- | - | --------- | ------ |  | - | -------- | -- |  | ----- | -------- | -- | ----- | - | ------- | ----- |  | - | -------- | -- |  | ----- | ------- | - |  | - | ------- |  |  | - | ------- | 
|                              |                                                                                    | Volumes Subject to Repricing |  
|                              |                                                                                    |                              |  
|                              |                                                                                    |                              |   | Greater   |        |  |  
|                              |                                                                                    | 0-30                         |   |           | 31-180 |  |   | 181-365  |    |  | 1-3   |          |    | 3-5   |   |         | 5-10  |  |   | Than     |    |  |      
|                              |                                                                                    | Days                         |   |           | Days   |  |   | Days     |    |  | Years |          |    | Years |   |         | Years |  |   | 10 Years |    |  | Total |        
|                              |                                                                                    |                              |   |           |        |  |   |          |    |  |       |          |    |       |   |         |       |  |   |          |    |  |       |        
|                              |                                                                                    | (Dollars in thousands)       |  
|Interest-earning assets:      |                                                                                    |                              |   |           |        |  |   |          |    |  |       |          |    |       |   |         |       |  |   |          |    |  |       |         |   |  |   |         |  |  |   |        
|                              | Securities                                                                         |                              | $ | 21,311    |        |  | $ | 29,451   |    |  | $     | 29,908   |    |       | $ | 94,854  |       |  | $ | 57,124   |    |  | $     | 29,602  |   |  | $ | 5,663   |  |  | $ | 267,913 | 
|                              | Total loans                                                                        |                              |   | 515,967   |        |  |   | 12,606   |    |  |       | 15,656   |    |       |   | 28,103  |       |  |   | 9,502    |    |  |       | 1,625   |   |  |   | 214     |  |  |   | 583,673 | 
|                              | Federal funds sold and other temporary investments                                 |                              |   | 32,072    |        |  |   |         |    |  |       |         |    |       |   |        |       |  |   |         |    |  |       |        |   |  |   |        |  |  |   | 32,072  | 
|                              |                                                                                    |                              |   |           |        |  |   |          |    |  |       |          |    |       |   |         |       |  |   |          |    |  |       |        
|                              | Total interest-bearing assets                                                      |                              |   | 569,350   |        |  |   | 42,057   |    |  |       | 45,564   |    |       |   | 122,957 |       |  |   | 66,626   |    |  |       | 31,227  |   |  |   | 5,877   |  |  |   | 883,658 | 
|                              |                                                                                    |                              |   |           |        |  |   |          |    |  |       |          |    |       |   |         |       |  |   |          |    |  |       |        
|Interest-bearing liabilities: |                                                                                    |                              |   |           |        |  |   |          |    |  |       |          |    |       |   |         |       |  |   |          |    |  |       |         |   |  |   |         |  |  |   |        
|                              | Demand, money market and savings deposits                                          |                              |   |          |        |  |   | 18,759   |    |  |       | 18,759   |    |       |   | 64,615  |       |  |   | 43,772   |    |  |       | 62,531  |   |  |   |        |  |  |   | 208,436 | 
|                              | Time deposits                                                                      |                              |   | 23,250    |        |  |   | 118,723  |    |  |       | 135,905  |    |       |   | 92,698  |       |  |   | 12,850   |    |  |       |        |   |  |   |        |  |  |   | 383,426 | 
|                              | Other borrowings                                                                   |                              |   | 8,249     |        |  |   | 27,600   |    |  |       |         |    |       |   |        |       |  |   | 25,000   |    |  |       |        |   |  |   |        |  |  |   | 60,849  | 
|                              |                                                                                    |                              |   |           |        |  |   |          |    |  |       |          |    |       |   |         |       |  |   |          |    |  |       |        
|                              | Total interest-bearing liabilities                                                 |                              |   | 31,499    |        |  |   | 165,082  |    |  |       | 154,664  |    |       |   | 157,313 |       |  |   | 81,622   |    |  |       | 62,531  |   |  |   |        |  |  |   | 652,711 | 
|                              |                                                                                    |                              |   |           |        |  |   |          |    |  |       |          |    |       |   |         |       |  |   |          |    |  |       |        
|                              | Period GAP                                                                         |                              | $ | 537,851   |        |  | $ | (123,025 | )  |  | $     | (109,100 | )  |       | $ | (34,356 | )     |  | $ | (14,996  | )  |  | $     | (31,304 | ) |  | $ | 5,877   |  |  | $ | 230,947 | 
|                              |                                                                                    |                              |   |           |        |  |   |          |    |  |       |          |    |       |   |         |       |  |   |          |    |  |       |        
|                              | Cumulative GAP                                                                     |                              | $ | 537,851   |        |  | $ | 414,826  |    |  | $     | 305,726  |    |       | $ | 271,370 |       |  | $ | 256,374  |    |  | $     | 225,070 |   |  | $ | 230,947 |  |  |   |         | 
|                              |                                                                                    |                              |   |           |        |  |   |          |    |  |       |          |    |       |   |         |       |  |   |          |    |  |       |        
|                              | Period GAP to total assets                                                         |                              |   | 64.03%    |        |  |   | (14.64   | )% |  |       | (12.99   | )% |       |   | (4.09   | )%    |  |   | (1.79    | )% |  |       | (3.73   | ) |  |   | 0.70%   |  |  |   |         | 
|                              | Cumulative GAP to total assets                                                     |                              |   | 64.03%    |        |  |   | 49.38%   |    |  |       | 36.39%   |    |       |   | 32.30%  |       |  |   | 30.52%   |    |  |       | 26.79   |   |  |   | 27.49%  |  |  |   |         | 
|                              | Cumulative interest-earning assets to cumulative interest-
    bearing liabilities |                              |   | 1,807.52% |        |  |   | 311.02%  |    |  |       | 187.04%  |    |       |   | 153.36% |       |  |   | 143.44%  |    |  |       | 134.48  |   |  |   | 135.38% |  |  |   |         | 





39



---



##### Table of Contents





:


|                |  |                        |        |   |                 |                  |       |           |  |  |        |   |  |  |     |     
|--------------- |  | ---------------------- | ------ | - | --------------- | ---------------- | ----- | --------- |  |  | ------ | - |  |  | --- | ----
|                |  |                        |        |   |                 | EVE as a %       |      
|                |  |                        |        |   |                 | of Present Value |      
|                |  |                        |        |   |                 | of Assets        |      
|                |  |                        |        |   |                 |                  |      
|Change in Rates |  | $ Change in EVE        |        |   | % Change in EVE |                  |       | EVE Ratio |  |  | Change |  
|                |  |                        |        |   |                 |                  |       |           |  |  |        |  
|                |  | (Dollars in thousands) |        |   |                 |                  |       |           | 
|-100 bp         |  | $                      | (7,682 | ) |                 |                  | (6.38 | )%        |  |  | 12.34  | % |  |  | (84 | ) bp
|0 bp            |  |                        |       |   |                 |                  |      |           |  |  | 13.18  | % |  |  |    |     
|+200 bp         |  | $                      | 7,595  |   |                 |                  | 6.31  | %         |  |  | 14.01  | % |  |  | 83  | bp  











| |          
| | ---------
| | Liquidity



40



---



##### Table of Contents













| |                               
| | ------------------------------
| | Off-Balance Sheet Arrangements





|                                                             |  |                        |        |           |             |   |             |            |  |   |            |  |  |       |        |  |  |   |         | 
|------------------------------------------------------------ |  | ---------------------- | ------ | --------- | ----------- | - | ----------- | ---------- |  | - | ---------- |  |  | ----- | ------ |  |  | - | ------- | 
|                                                             |  |                        |        | After One |             |   | After Three |            |  |   |            | 
|                                                             |  | Within                 |        |           | but Within  |   |             | but Within |  |   | After      |  |  |      
|                                                             |  | One Year               |        |           | Three Years |   |             | Five Years |  |   | Five Years |  |  | Total |       
|                                                             |  |                        |        |           |             |   |             |            |  |   |            |  |  |       |       
|                                                             |  | (Dollars in thousands) |       
|Unfunded loan commitments including unfunded lines of credit |  | $                      | 70,471 |           |             | $ | 8,888       |            |  | $ | 4,760      |  |  | $     | 21,856 |  |  | $ | 105,975 | 
|Standby letters of credit                                    |  |                        | 3,852  |           |             |   |            |            |  |   |           |  |  |       |       |  |  |   | 3,852   | 
|Commercial letters of credit                                 |  |                        | 11,756 |           |             |   |            |            |  |   |           |  |  |       |       |  |  |   | 11,756  | 
|Operating leases                                             |  |                        | 1,008  |           |             |   | 1,076       |            |  |   | 874        |  |  |       | 1,102  |  |  |   | 4,060   | 
|                                                             |  |                        |        |           |             |   |             |            |  |   |            |  |  |       |       
|Total financial instruments with off-balance sheet risk      |  | $                      | 87,087 |           |             | $ | 9,964       |            |  | $ | 5,634      |  |  | $     | 22,958 |  |  | $ | 125,643 | 
|                                                             |  |                        |        |           |             |   |             |            |  |   |            |  |  |       |       



| |                  
| | -----------------
| | Capital Resources



41



---



##### Table of Contents













42



---



##### Table of Contents





|            |                                 |                      |  |      |                              |  |  |                   |   |  |  |       |  
|----------- | ------------------------------- | -------------------- |  | ---- | ---------------------------- |  |  | ----------------- | - |  |  | ----- | -
|            |                                 | Minimum Required     |  |      | To Be Categorized as Well    |  |  |                  
|            |                                 | For Capital Adequacy |  |      | Capitalized Under Prompt     |  |  | Actual Ratio At   |  
|            |                                 | Purposes             |  |      | Corrective Action Provisions |  |  | December 31, 2003 |  
|            |                                 |                      |  |      |                              |  |  |                   |  
|The Company |                                 |                      |  |      |                              |  |  |                   |   |  |  |      
|            | Leverage ratio                  |                      |  | 4.00 | %(1)                         |  |  | N/A               | % |  |  | 9.59  | %
|            | Tier 1 risk-based capital ratio |                      |  | 4.00 |                              |  |  | N/A               |   |  |  | 12.82 |  
|            | Total risk-based capital ratio  |                      |  | 8.00 |                              |  |  | N/A               |   |  |  | 14.07 |  
|The Bank    |                                 |                      |  |      |                              |  |  |                   |   |  |  |      
|            | Leverage ratio                  |                      |  | 4.00 | %(2)                         |  |  | 5.00              | % |  |  | 9.37  | %
|            | Tier 1 risk-based capital ratio |                      |  | 4.00 |                              |  |  | 6.00              |   |  |  | 12.51 |  
|            | Total risk-based capital ratio  |                      |  | 8.00 |                              |  |  | 10.00             |   |  |  | 13.77 |  






|    |                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------
|(1) | The Federal Reserve Board may require the Company to maintain a
    leverage ratio above the required minimum.



|    |                                                                                          
|--- | -----------------------------------------------------------------------------------------
|(2) | The OCC may require the Bank to maintain a leverage ratio above
    the required minimum.



| |                             
| | ----------------------------
| | Critical Accounting Policies







New Accounting Pronouncements


Accounting for Certain Loans or Debt
Securities Acquired in a Transfer.


43



---



##### Table of Contents





The Meaning
of Other-Than-Temporary Impairment and Its Application to
Certain Investments. Accounting for
Certain Investments in Debt and Equity Securities, Accounting for
Noncurrent Marketable Equity Securities.


Share-Based Payment.







|         |                                                              
|-------- | -------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosure About Market
    Risk



44



---



##### Table of Contents








|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data



Quarterly Financial Data
(Unaudited)




|                                     |                                                     |         |        |       |         |   |        |         |  |   |         |       |  |         |        |       |         |   |        |         |  |   |         |       |  |   |        |        |   |   |        |       | 
|------------------------------------ | --------------------------------------------------- | ------- | ------ | ----- | ------- | - | ------ | ------- |  | - | ------- | ----- |  | ------- | ------ | ----- | ------- | - | ------ | ------- |  | - | ------- | ----- |  | - | ------ | ------ | - | - | ------ | ----- | 
|                                     |                                                     | 2004    |        |       | 2003    |  
|                                     |                                                     |         |        |       |         |  
|                                     |                                                     | Fourth  |        |       | Third   |   |        | Second  |  |   | First   |       |  | Fourth  |        |       | Third   |   |        | Second  |  |   | First   |      
|                                     |                                                     | Quarter |        |       | Quarter |   |        | Quarter |  |   | Quarter |       |  | Quarter |        |       | Quarter |   |        | Quarter |  |   | Quarter |      
|                                     |                                                     |         |        |       |         |   |        |         |  |   |         |       |  |         |        |       |         |   |        |         |  |   |         |      
|Interest income                      |                                                     | $       | 12,429 |       |         | $ | 11,549 |         |  | $ | 10,689  |       |  | $       | 10,637 |       |         | $ | 10,852 |         |  | $ | 10,695  |       |  | $ | 10,814 |        |   | $ | 10,926 |      
|Interest expense                     |                                                     |         | 3,202  |       |         |   | 2,930  |         |  |   | 2,584   |       |  |         | 2,633  |       |         |   | 2,740  |         |  |   | 2,956   |       |  |   | 3,189  |        |   |   | 3,249  |      
|                                     |                                                     |         |        |       |         |   |        |         |  |   |         |       |  |         |        |       |         |   |        |         |  |   |         |      
|                                     | Net interest income                                 |         |        | 9,227 |         |   |        | 8,619   |  |   |         | 8,105 |  |         |        | 8,004 |         |   |        | 8,112   |  |   |         | 7,739 |  |   |        | 7,625  |   |   |        | 7,677 | 
|Provision for loan losses            |                                                     |         | 500    |       |         |   | 215    |         |  |   | 300     |       |  |         | 550    |       |         |   | 300    |         |  |   | 575     |       |  |   | 4,015  |        |   |   | 800    |      
|                                     |                                                     |         |        |       |         |   |        |         |  |   |         |       |  |         |        |       |         |   |        |         |  |   |         |      
|                                     | Net interest income after provision for loan losses |         |        | 8,727 |         |   |        | 8,404   |  |   |         | 7,805 |  |         |        | 7,454 |         |   |        | 7,812   |  |   |         | 7,164 |  |   |        | 3,610  |   |   |        | 6,877 | 
|Noninterest income                   |                                                     |         | 1,803  |       |         |   | 1,769  |         |  |   | 2,696   |       |  |         | 2,711  |       |         |   | 2,034  |         |  |   | 2,429   |       |  |   | 2,170  |        |   |   | 2,294  |      
|Noninterest expense                  |                                                     |         | 7,067  |       |         |   | 7,807  |         |  |   | 6,859   |       |  |         | 7,011  |       |         |   | 7,007  |         |  |   | 7,556   |       |  |   | 7,732  |        |   |   | 6,250  |      
|                                     |                                                     |         |        |       |         |   |        |         |  |   |         |       |  |         |        |       |         |   |        |         |  |   |         |      
|                                     | Income before income taxes                          |         |        | 3,463 |         |   |        | 2,366   |  |   |         | 3,642 |  |         |        | 3,154 |         |   |        | 2,839   |  |   |         | 2,037 |  |   |        | (1,952 | ) |   |        | 2,921 | 
|Provision for income taxes           |                                                     |         | 1,143  |       |         |   | 762    |         |  |   | 1,135   |       |  |         | 991    |       |         |   | 917    |         |  |   | 568     |       |  |   | (693   | )      |   |   | 943    |      
|                                     |                                                     |         |        |       |         |   |        |         |  |   |         |       |  |         |        |       |         |   |        |         |  |   |         |      
|Net income                           |                                                     | $       | 2,320  |       |         | $ | 1,604  |         |  | $ | 2,507   |       |  | $       | 2,163  |       |         | $ | 1,922  |         |  | $ | 1,469   |       |  | $ | (1,259 | )      |   | $ | 1,978  |      
|                                     |                                                     |         |        |       |         |   |        |         |  |   |         |       |  |         |        |       |         |   |        |         |  |   |         |      
|Earnings per share:                  |                                                     |         |        |       |         |   |        |         |  |   |         |       |  |         |        |       |         |   |        |         |  |   |         |       |  |   |        |        |   |   |        |      
|                                     | Basic                                               |         | $      | 0.32  |         |   | $      | 0.22    |  |   | $       | 0.35  |  |         | $      | 0.30  |         |   | $      | 0.27    |  |   | $       | 0.21  |  |   | $      | (0.18  | ) |   | $      | 0.28  | 
|                                     | Diluted                                             |         | $      | 0.32  |         |   | $      | 0.22    |  |   | $       | 0.35  |  |         | $      | 0.30  |         |   | $      | 0.27    |  |   | $       | 0.20  |  |   | $      | (0.17  | ) |   | $      | 0.27  | 
|Weighted average shares outstanding: |                                                     |         |        |       |         |   |        |         |  |   |         |       |  |         |        |       |         |   |        |         |  |   |         |       |  |   |        |        |   |   |        |      
|                                     | Basic                                               |         |        | 7,186 |         |   |        | 7,180   |  |   |         | 7,175 |  |         |        | 7,161 |         |   |        | 7,154   |  |   |         | 7,132 |  |   |        | 7,037  |   |   |        | 7,033 | 
|                                     | Diluted                                             |         |        | 7,267 |         |   |        | 7,209   |  |   |         | 7,224 |  |         |        | 7,219 |         |   |        | 7,242   |  |   |         | 7,215 |  |   |        | 7,037  |   |   |        | 7,196 | 
|Dividends per common share           |                                                     | $       | 0.06   |       |         | $ | 0.06   |         |  | $ | 0.06    |       |  | $       | 0.06   |       |         | $ | 0.06   |         |  | $ | 0.06    |       |  | $ | 0.06   |        |   | $ | 0.06   |      






|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements With Accountants on
    Accounting and Financial Disclosure








|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Evaluation of Disclosure Controls and Procedures.


45



---



##### Table of Contents



Changes in internal controls over financial reporting.


PART III




|         |                                                
|-------- | -----------------------------------------------
|Item 10. | Directors and Executive Officers of the Company








|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation








|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters



Securities Authorized for Issuance Under Equity Compensation
Plans




EQUITY COMPENSATION PLAN INFORMATION


|                                                           |  |                      |         |  |                     |                      |                     |                          |  |  |         | 
|---------------------------------------------------------- |  | -------------------- | ------- |  | ------------------- | -------------------- | ------------------- | ------------------------ |  |  | ------- | 
|                                                           |  | (a)                  |         |  | (b)                 |                      |                     | (c)                      | 
|                                                           |  |                      |         |  |                     |                      |                     |                          | 
|                                                           |  |                      |         |  |                     | Number of Securities |                    
|                                                           |  | Number of Securities |         |  |                     |                      | Remaining Available |                         
|                                                           |  | to be Issued Upon    |         |  |                     |                      | for Future Issuance |                         
|                                                           |  | Exercise of          |         |  |                     |                      | Under Equity        |                         
|                                                           |  | Outstanding          |         |  | Weighted Average    |                      |                     | Compensation Plans       | 
|                                                           |  | Options, Warrants    |         |  | Exercise Price of   |                      |                     | (excluding securities    | 
|Plan category                                              |  | and Rights           |         |  | Outstanding Options |                      |                     | reflected in column (a)) | 
|                                                           |  |                      |         |  |                     |                      |                     |                          | 
|Equity compensation plans approved by security holders     |  |                      | 271,000 |  |                     | $                    | 14.49               |                          |  |  | 408,640 | 
|Equity compensation plans not approved by security holders |  |                      |        |  |                     |                      |                    |                          |  |  |        | 
|                                                           |  |                      |         |  |                     |                      |                     |                          | 
|Total                                                      |  |                      | 271,000 |  |                     | $                    | 14.49               |                          |  |  | 408,640 | 
|                                                           |  |                      |         |  |                     |                      |                     |                          | 






|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions



46



---



##### Table of Contents








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services






PART IV







|         |                                           
|-------- | ------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules

Consolidated Financial Statements and Financial Statement
Schedules




|                                                                                                                     |  |  |  | 
|-------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Report of Independent Registered Public Accounting Firm                                                              |  |  |  | 
|Consolidated Balance Sheets as of December 31, 2004 and 2003                                                         |  |  |  | 
|Consolidated Statements of Income for the Years Ended
    December 31, 2004, 2003, and 2002                          |  |  |  | 
|Consolidated Statements of Comprehensive Income for the Years
    Ended December 31, 2004, 2003, and 2002            |  |  |  | 
|Consolidated Statements of Changes in Shareholders Equity
    for the Years Ended December 31, 2004, 2003, and 2002 |  |  |  | 
|Consolidated Statements of Cash Flows for the Years Ended
    December 31, 2004, 2003, and 2002                      |  |  |  | 
|Notes to Consolidated Financial Statements                                                                           |  |  |  | 



Exhibits


|        |    |      |  |  |             |                                                                                                                                                                                                                                                 
|------- | -- | ---- |  |  | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |  |            
|Number  |    |      |  |  | Description
|        |    |      |  |  |            
|        | 3  | .1   |  |  |             | Amended and Restated Articles of Incorporation of the Company
    (incorporated herein by reference to Exhibit 3.1 to the
    Companys Registration Statement on Form S-1
    (Registration No. 333-62667) (the Registration
    Statement)).
|        | 3  | .2   |  |  |             | Amended and Restated Bylaws of the Company (incorporated herein
    by reference to Exhibit 3.2 to the Registration Statement).                                                                                                                 
|        | 4  |      |  |  |             | Specimen form of certificate evidencing the Common Stock
    (incorporated herein by reference to Exhibit 4 to the
    Registration Statement).                                                                                                 
|        | 10 | .1   |  |  |             | Agreement and Plan of Reorganization by and among MetroCorp
    Bancshares, Inc., MC Bancshares of Delaware, Inc. and MetroBank,
    N.A. (incorporated herein by reference to Exhibit 10.1 to
    the Registration Statement).                 
|        | 10 | .2   |  |  |             | MetroCorp Bancshares, Inc. 1998 Employee Stock Purchase Plan
    (incorporated herein by reference to Exhibit 10.4 to the
    Registration Statement).                                                                                          
|        | 10 | .3  |  |  |             | MetroCorp Bancshares, Inc. 1998 Stock Incentive Plan
    (incorporated herein by reference to Exhibit 10.5 to the
    Registration Statement).                                                                                                  
|        | 10 | .4   |  |  |             | First Amendment to the MetroCorp Bancshares, Inc. 1998 Employee
    Stock Purchase Plan (incorporated herein by reference to
    Exhibit 10.6 to the Companys Annual Report on Form
    10-K for the year ended December 31, 1998).            
|        | 10 | .5* |  |  |             | Employment Agreement between MetroCorp Bancshares, Inc. and
    George M. Lee                                                                                                                                                                   
|        | 21 |      |  |  |             | Subsidiaries of MetroCorp Bancshares, Inc. (incorporated herein
    by reference to Exhibit 21 to the Registration Statement).                                                                                                                  
|        | 23 | .1*  |  |  |             | Consent of PricewaterhouseCoopers LLP.                                                                                                                                                                                                          

47



---



##### Table of Contents



|        |    |     |  |  |             |                                                                                                                                                       |                                                                      |                                                        
|------- | -- | --- |  |  | ----------- | ----------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------- | -------------------------------------------------------
|Exhibit |    |     |  |  |            
|Number  |    |     |  |  | Description |                                                                                                                                                      
|        |    |     |  |  |             |                                                                                                                                                      
|        | 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, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|        | 32 | .2* |  |  |             | Certification of Chief Financial Officer pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.  






|  |                
|- | ---------------
|* | Filed herewith.



|  |                                                         
|- | --------------------------------------------------------
| | Management contract or compensatory plan or arrangement.

48



---



##### Table of Contents






SIGNATURES






| |                           
| | --------------------------
| | MetroCorp Bancshares, Inc.



| |     |                  
| | --- | -----------------
| | By: | /s/ George M. Lee

| |                              
| | -----------------------------
| |                              
| | George M. Lee                
| | Chief Executive Officer      
| | (principal executive officer)



|                                             |  |                                                                                            |  | 
|-------------------------------------------- |  | ------------------------------------------------------------------------------------------ |  | 
|Signature                                    |  | Title                                                                                     
|                                             |  |                                                                                           
|                                            
|/s/ Don J. WangDon
    J. Wang               |  | Chairman of the Board                                                                     
|                                            
|/s/ George M. LeeGeorge
    M. Lee           |  | Chief Executive Officer (principal executive officer)                                     
|                                            
|/s/ David TaiDavid
    Tai                   |  | Director                                                                                  
|                                            
|/s/ David C. ChoiDavid
    C. Choi           |  | Chief Financial Officer (principal financial officer and
    principal accounting officer)
|                                            
|/s/ Tiong L. AngTiong
    L. Ang             |  | Director                                                                                  
|                                            
|/s/ Helen F. ChenHelen
    F. Chen           |  | Director                                                                                  
|                                            
|/s/ Tommy F. ChenTommy
    F. Chen           |  | Director                                                                                  
|                                            
|/s/ May P. ChuMay
    P. Chu                 |  | Director                                                                                  
|                                            
|/s/ Shirley L. ClaytonShirley
    L. Clayton |  | Director                                                                                  
|                                            
|/s/ John LeeJohn
    Lee                     |  | Director                                                                                  
|                                            
|/s/ Edward A. MontoEdward
    A. Monto       |  | Director                                                                                  
|                                            
|/s/ Charles L. RoffCharles
    L. Roff       |  | Director                                                                                  
|                                            
|/s/ Joe TingJoe
    Ting                     |  | Director                                                                                  
|                                            
|/s/ Daniel B. WrightDaniel
    B. Wright     |  | Director                                                                                  

49



---



##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


METROCORP BANCSHARES, INC. AND SUBSIDIARIES


|                                                                                                                         |  |  |    |  |  |  |  | 
|------------------------------------------------------------------------------------------------------------------------ |  |  | -- |  |  |  |  | 
|Report of Independent Registered Public
    Accounting Firm                                                              |  |  | 51 |  |  |  |  | 
|Consolidated Balance Sheets as of
    December 31, 2004 and 2003                                                         |  |  | 52 |  |  |  |  | 
|Consolidated Statements of Income for the
    Years Ended
    December 31, 2004, 2003, and 2002                          |  |  | 53 |  |  |  |  | 
|Consolidated Statements of Comprehensive
    Income for the Years Ended
    December 31, 2004, 2003, and 2002            |  |  | 54 |  |  |  |  | 
|Consolidated Statements of Changes in
    Shareholders Equity for the Years Ended
    December 31, 2004, 2003, and 2002 |  |  | 55 |  |  |  |  | 
|Consolidated Statements of Cash Flows for
    the Years Ended
    December 31, 2004, 2003, and 2002                      |  |  | 56 |  |  |  |  | 
|Notes to Consolidated Financial
    Statements                                                                           |  |  | 57 |  |  |  |  | 

50



---



##### Table of Contents






REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM














51



---



##### Table of Contents






METROCORP BANCSHARES, INC.


CONSOLIDATED BALANCE SHEETS


(In thousands, except share amounts)


|                                                                                 |                                                                                                                                                                                                                         |                                            |         |         |         |   |         |         |         | 
|-------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                                                 |                                                                                                                                                                                                                         | December 31,                               |        
|                                                                                 |                                                                                                                                                                                                                         |                                            |        
|                                                                                 |                                                                                                                                                                                                                         | 2004                                       |         |         | 2003    |  
|                                                                                 |                                                                                                                                                                                                                         |                                            |         |         |         |  
|ASSETS                                                                          
|Cash and due from banks                                                          |                                                                                                                                                                                                                         | $                                          | 26,285  |         |         | $ | 26,347  |        
|Federal funds sold and other temporary investments                               |                                                                                                                                                                                                                         |                                            | 5,788   |         |         |   | 10,580  |        
|                                                                                 |                                                                                                                                                                                                                         |                                            |         |         |         |  
|                                                                                 | Total cash and cash equivalents                                                                                                                                                                                         |                                            |         | 32,073  |         |   |         | 36,927  |        
|Securities available-for-sale, at fair value                                     |                                                                                                                                                                                                                         |                                            | 273,720 |         |         |   | 262,264 |        
|Loans, net of allowance for loan losses of $10,863 and $10,448,
    respectively |                                                                                                                                                                                                                         |                                            | 581,774 |         |         |   | 540,658 |        
|Loans, held-for-sale                                                             |                                                                                                                                                                                                                         |                                            | 1,899   |         |         |   | 6,030   |        
|Accrued interest receivable                                                      |                                                                                                                                                                                                                         |                                            | 3,308   |         |         |   | 3,452   |        
|Premises and equipment, net                                                      |                                                                                                                                                                                                                         |                                            | 6,512   |         |         |   | 5,674   |        
|Deferred tax asset                                                               |                                                                                                                                                                                                                         |                                            | 5,201   |         |         |   | 4,664   |        
|Customers liability on acceptances                                              |                                                                                                                                                                                                                         |                                            | 6,669   |         |         |   | 3,352   |        
|Foreclosed assets, net                                                           |                                                                                                                                                                                                                         |                                            | 1,566   |         |         |   | 2,585   |        
|Other assets                                                                     |                                                                                                                                                                                                                         |                                            | 1,228   |         |         |   | 1,410   |        
|                                                                                 |                                                                                                                                                                                                                         |                                            |         |         |         |  
|                                                                                 |                                                                                                                                                                                                                         | Total assets                               |         | $       | 913,950 |   |         | $       | 867,016 | 
|                                                                                 |                                                                                                                                                                                                                         |                                            |         |         |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                            
|Deposits:                                                                        |                                                                                                                                                                                                                         |                                            |         |         |         |   |         |        
|                                                                                 | Noninterest-bearing                                                                                                                                                                                                     |                                            | $       | 163,191 |         |   | $       | 169,097 |        
|                                                                                 | Interest-bearing                                                                                                                                                                                                        |                                            |         | 591,862 |         |   |         | 555,844 |        
|                                                                                 |                                                                                                                                                                                                                         |                                            |         |         |         |  
|                                                                                 |                                                                                                                                                                                                                         | Total deposits                             |         |         | 755,053 |   |         |         | 724,941 | 
|Other borrowings                                                                 |                                                                                                                                                                                                                         |                                            | 60,849  |         |         |   | 54,173  |        
|Accrued interest payable                                                         |                                                                                                                                                                                                                         |                                            | 649     |         |         |   | 567     |        
|Acceptances outstanding                                                          |                                                                                                                                                                                                                         |                                            | 6,669   |         |         |   | 3,352   |        
|Other liabilities                                                                |                                                                                                                                                                                                                         |                                            | 5,007   |         |         |   | 5,610   |        
|                                                                                 |                                                                                                                                                                                                                         |                                            |         |         |         |  
|                                                                                 |                                                                                                                                                                                                                         | Total liabilities                          |         |         | 828,227 |   |         |         | 788,643 | 
|                                                                                 |                                                                                                                                                                                                                         |                                            |         |         |         |  
|Commitments and contingencies                                                    |                                                                                                                                                                                                                         |                                            |        |         |         |   |        |        
|Shareholders equity:                                                            |                                                                                                                                                                                                                         |                                            |         |         |         |   |         |        
|                                                                                 | Common stock, $1.00 par value, 20,000,000 shares
    authorized; 7,312,627 shares and 7,306,627 shares
    issued and 7,187,446 shares and 7,156,689 shares
    outstanding at December 31, 2004 and 2003, respectively |                                            |         | 7,313   |         |   |         | 7,307   |        
|Additional paid-in-capital                                                       |                                                                                                                                                                                                                         |                                            | 27,859  |         |         |   | 27,620  |        
|Retained earnings                                                                |                                                                                                                                                                                                                         |                                            | 50,976  |         |         |   | 44,105  |        
|Accumulated other comprehensive income                                           |                                                                                                                                                                                                                         |                                            | 710     |         |         |   | 671     |        
|Treasury stock, at cost                                                          |                                                                                                                                                                                                                         |                                            | (1,135  | )       |         |   | (1,330  | )      
|                                                                                 |                                                                                                                                                                                                                         |                                            |         |         |         |  
|                                                                                 |                                                                                                                                                                                                                         | Total shareholders equity                 |         |         | 85,723  |   |         |         | 78,373  | 
|                                                                                 |                                                                                                                                                                                                                         |                                            |         |         |         |  
|                                                                                 |                                                                                                                                                                                                                         | Total liabilities and shareholders equity |         | $       | 913,950 |   |         | $       | 867,016 | 
|                                                                                 |                                                                                                                                                                                                                         |                                            |         |         |         |  



52



---



##### Table of Contents






METROCORP BANCSHARES, INC.


CONSOLIDATED STATEMENTS OF INCOME


(In thousands, except per share amounts)


|                                                    |                                                           |                          |                           |        |       |        |        |        |       |        |        |        |       |        | 
|--------------------------------------------------- | --------------------------------------------------------- | ------------------------ | ------------------------- | ------ | ----- | ------ | ------ | ------ | ----- | ------ | ------ | ------ | ----- | ------ | 
|                                                    |                                                           | Years Ended December 31, |                          
|                                                    |                                                           |                          |                          
|                                                    |                                                           | 2004                     |                           |        | 2003  |        |        | 2002   |      
|                                                    |                                                           |                          |                           |        |       |        |        |        |      
|Interest income:                                    |                                                           |                          |                           |        |       |        |        |        |       |        |        |       
|                                                    | Loans                                                     |                          | $                         | 34,711 |       |        | $      | 34,691 |       |        | $      | 37,256 |      
|                                                    | Securities:                                               |                          |                           |        |       |        |        |        |       |        |        |        |      
|                                                    |                                                           | Taxable                  |                           |        | 9,441 |        |        |        | 7,321 |        |        |        | 9,080 |       
|                                                    |                                                           | Tax-exempt               |                           |        | 917   |        |        |        | 997   |        |        |        | 1,160 |       
|                                                    | Federal funds sold and other investments                  |                          |                           | 235    |       |        |        | 278    |       |        |        | 484    |      
|                                                    |                                                           |                          |                           |        |       |        |        |        |      
|                                                    |                                                           |                          | Total interest income     |        |       | 45,304 |        |        |       | 43,287 |        |        |       | 47,980 | 
|                                                    |                                                           |                          |                           |        |       |        |        |        |      
|Interest expense:                                   |                                                           |                          |                           |        |       |        |        |        |       |        |        |       
|                                                    | Time deposits                                             |                          |                           | 8,133  |       |        |        | 8,942  |       |        |        | 10,595 |      
|                                                    | Demand and savings deposits                               |                          |                           | 1,338  |       |        |        | 1,345  |       |        |        | 2,215  |      
|                                                    | Other borrowings                                          |                          |                           | 1,878  |       |        |        | 1,847  |       |        |        | 1,818  |      
|                                                    |                                                           |                          |                           |        |       |        |        |        |      
|                                                    |                                                           |                          | Total interest expense    |        |       | 11,349 |        |        |       | 12,134 |        |        |       | 14,628 | 
|                                                    |                                                           |                          |                           |        |       |        |        |        |      
|Net interest income                                 |                                                           |                          | 33,955                    |        |       |        | 31,153 |        |       |        | 33,352 |       
|Provision for loan losses                           |                                                           |                          | 1,565                     |        |       |        | 5,690  |        |       |        | 3,853  |       
|                                                    |                                                           |                          |                           |        |       |        |        |        |      
|Net interest income after provision for loan losses |                                                           |                          | 32,390                    |        |       |        | 25,463 |        |       |        | 29,499 |       
|                                                    |                                                           |                          |                           |        |       |        |        |        |      
|Noninterest income:                                 |                                                           |                          |                           |        |       |        |        |        |       |        |        |       
|                                                    | Service fees                                              |                          |                           | 6,701  |       |        |        | 6,544  |       |        |        | 6,670  |      
|                                                    | Other loan-related fees                                   |                          |                           | 400    |       |        |        | 1,009  |       |        |        | 1,083  |      
|                                                    | Letters of credit commissions and fees                    |                          |                           | 577    |       |        |        | 516    |       |        |        | 610    |      
|                                                    | Gain (loss) on sale of securities, net                    |                          |                           | (97    | )     |        |        | 165    |       |        |        | 34     |      
|                                                    | Gain on sale of loans                                     |                          |                           | 605    |       |        |        | 600    |       |        |        | 322    |      
|                                                    | Foreclosed assets, net                                    |                          |                           | 728    |       |        |        | (248   | )     |        |        | (624   | )    
|                                                    | Other noninterest income                                  |                          |                           | 65     |       |        |        | 93     |       |        |        | 248    |      
|                                                    |                                                           |                          |                           |        |       |        |        |        |      
|                                                    |                                                           |                          | Total noninterest income  |        |       | 8,979  |        |        |       | 8,679  |        |        |       | 8,343  | 
|                                                    |                                                           |                          |                           |        |       |        |        |        |      
|Noninterest expense:                                |                                                           |                          |                           |        |       |        |        |        |       |        |        |       
|                                                    | Salaries and employee benefits                            |                          |                           | 16,104 |       |        |        | 14,109 |       |        |        | 13,520 |      
|                                                    | Lower of cost or market adjustment on loans held-for-sale |                          |                           |       |       |        |        | 2,149  |       |        |        |       |      
|                                                    | Occupancy and equipment                                   |                          |                           | 5,723  |       |        |        | 5,361  |       |        |        | 5,089  |      
|                                                    | Other noninterest expense                                 |                          |                           | 6,917  |       |        |        | 6,678  |       |        |        | 5,818  |      
|                                                    |                                                           |                          |                           |        |       |        |        |        |      
|                                                    |                                                           |                          | Total noninterest expense |        |       | 28,744 |        |        |       | 28,297 |        |        |       | 24,427 | 
|                                                    |                                                           |                          |                           |        |       |        |        |        |      
|Income before provision for income taxes            |                                                           |                          | 12,625                    |        |       |        | 5,845  |        |       |        | 13,415 |       
|Provision for income taxes                          |                                                           |                          | 4,031                     |        |       |        | 1,735  |        |       |        | 4,445  |       
|                                                    |                                                           |                          |                           |        |       |        |        |        |      
|Net income                                          |                                                           | $                        | 8,594                     |        |       | $      | 4,110  |        |       | $      | 8,970  |       
|                                                    |                                                           |                          |                           |        |       |        |        |        |      
|Earnings per common share:                          |                                                           |                          |                           |        |       |        |        |        |       |        |        |       
|                                                    | Basic                                                     |                          | $                         | 1.20   |       |        | $      | 0.58   |       |        | $      | 1.28   |      
|                                                    | Diluted                                                   |                          | $                         | 1.19   |       |        | $      | 0.57   |       |        | $      | 1.25   |      
|Weighted average shares outstanding:                |                                                           |                          |                           |        |       |        |        |        |       |        |        |       
|                                                    | Basic                                                     |                          |                           | 7,175  |       |        |        | 7,089  |       |        |        | 7,024  |      
|                                                    | Diluted                                                   |                          |                           | 7,230  |       |        |        | 7,213  |       |        |        | 7,154  |      
|Dividends per common share                          |                                                           | $                        | 0.24                      |        |       | $      | 0.24   |        |       | $      | 0.24   |       



53



---



##### Table of Contents






METROCORP BANCSHARES, INC.


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


(In thousands)


|                                        |                                                                 |                                                                                 |       |       |      |   |       |        |        |   |       |        |       | 
|--------------------------------------- | --------------------------------------------------------------- | ------------------------------------------------------------------------------- | ----- | ----- | ---- | - | ----- | ------ | ------ | - | ----- | ------ | ----- | 
|                                        |                                                                 | 2004                                                                            |       |       | 2003 |   |       | 2002   |       
|                                        |                                                                 |                                                                                 |       |       |      |   |       |        |       
|Net income                              |                                                                 | $                                                                               | 8,594 |       |      | $ | 4,110 |        |        | $ | 8,970 |       
|Other comprehensive income, net of tax: |                                                                 |                                                                                 |       |       |      |   |       |        |        |   |       |       
|                                        | Unrealized gains (losses) on investment securities, net of tax: |                                                                                 |       |       |      |   |       |        |        |   |       |        |      
|                                        |                                                                 | Unrealized holding (losses) gains arising during the period                     |       |       | (24  | ) |       |        | (1,576 | ) |       |        | 2,000 | 
|                                        |                                                                 | Less: reclassification adjustment for (losses) gains included in
    net income |       |       | (63  | ) |       |        | 107    |   |       |        | 22    | 
|                                        |                                                                 |                                                                                 |       |       |      |   |       |        |       
|                                        | Other comprehensive income (loss)                               |                                                                                 |       | 39    |      |   |       | (1,683 | )      |   |       | 1,978  |      
|                                        |                                                                 |                                                                                 |       |       |      |   |       |        |       
|                                        | Total comprehensive income                                      |                                                                                 | $     | 8,633 |      |   | $     | 2,427  |        |   | $     | 10,948 |      
|                                        |                                                                 |                                                                                 |       |       |      |   |       |        |       



54



---



##### Table of Contents






METROCORP BANCSHARES, INC.


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS
EQUITY


Years Ended December 31, 2004, 2003 and 2002


(In thousands)


|                                         |  |              |       |   |            |   |       |             |  |       |               |  |          |               |        |   |      |   |        |       |  |   |        |   |  |   |        |  
|---------------------------------------- |  | ------------ | ----- | - | ---------- | - | ----- | ----------- |  | ----- | ------------- |  | -------- | ------------- | ------ | - | ---- | - | ------ | ----- |  | - | ------ | - |  | - | ------ | -
|                                         |  |              |       |   |            |   |       | Accumulated |  |       |               |  |         
|                                         |  | Common Stock |       |   | Additional |   |       |             |  | Other |               |  | Treasury |               |        |  
|                                         |  |              |       |   | Paid-In    |   |       | Retained    |  |       | Comprehensive |  |          | Stock At      |        |   |     
|                                         |  | Shares       |       |   | At Par     |   |       | Capital     |  |       | Earnings      |  |          | Income (Loss) |        |   | Cost |   |        | Total | 
|                                         |  |              |       |   |            |   |       |             |  |       |               |  |          |               |        |   |      |   |        |       | 
|Balance at December 31, 2001             |  |              | 7,017 |   |            | $ | 7,187 |             |  | $     | 26,144        |  |          | $             | 34,414 |   |      | $ | 376    |       |  | $ | (1,312 | ) |  | $ | 66,809 |  
|Issuance of common stock                 |  |              | 9     |   |            |   | 9     |             |  |       | 67            |  |          |               |       |   |      |   |       |       |  |   |       |   |  |   | 76     |  
|Re-issuance of treasury stock            |  |              | 37    |   |            |   |      |             |  |       | 133           |  |          |               |       |   |      |   |       |       |  |   | 292    |   |  |   | 425    |  
|Repurchase of common stock               |  |              | (31   | ) |            |   |      |             |  |       |              |  |          |               |       |   |      |   |       |       |  |   | (349   | ) |  |   | (349   | )
|Net income                               |  |              |      |   |            |   |      |             |  |       |              |  |          |               | 8,970  |   |      |   |       |       |  |   |       |   |  |   | 8,970  |  
|Other comprehensive income               |  |              |      |   |            |   |      |             |  |       |              |  |          |               |       |   |      |   | 1,978  |       |  |   |       |   |  |   | 1,978  |  
|Dividends ($0.24 per share)              |  |              |      |   |            |   |      |             |  |       |              |  |          |               | (1,685 | ) |      |   |       |       |  |   |       |   |  |   | (1,685 | )
|                                         |  |              |       |   |            |   |       |             |  |       |               |  |          |               |        |   |      |   |        |       | 
|Balance at December 31, 2002             |  |              | 7,032 |   |            |   | 7,196 |             |  |       | 26,344        |  |          |               | 41,699 |   |      |   | 2,354  |       |  |   | (1,369 | ) |  |   | 76,224 |  
|                                         |  |              |       |   |            |   |       |             |  |       |               |  |          |               |        |   |      |   |        |       | 
|Issuance of common stock                 |  |              | 111   |   |            |   | 111   |             |  |       | 1,075         |  |          |               |       |   |      |   |       |       |  |   |       |   |  |   | 1,186  |  
|Re-issuance of treasury stock            |  |              | 32    |   |            |   |      |             |  |       | 146           |  |          |               |       |   |      |   |       |       |  |   | 251    |   |  |   | 397    |  
|Repurchase of common stock               |  |              | (18   | ) |            |   |      |             |  |       |              |  |          |               |       |   |      |   |       |       |  |   | (212   | ) |  |   | (212   | )
|Tax benefit from stock options exercised |  |              |      |   |            |   |      |             |  |       | 55            |  |          |               |       |   |      |   |       |       |  |   |       |   |  |   | 55     |  
|Net income                               |  |              |      |   |            |   |      |             |  |       |              |  |          |               | 4,110  |   |      |   |       |       |  |   |       |   |  |   | 4,110  |  
|Other comprehensive loss                 |  |              |      |   |            |   |      |             |  |       |              |  |          |               |       |   |      |   | (1,683 | )     |  |   |       |   |  |   | (1,683 | )
|Dividends ($0.24 per share)              |  |              |      |   |            |   |      |             |  |       |              |  |          |               | (1,704 | ) |      |   |       |       |  |   |       |   |  |   | (1,704 | )
|                                         |  |              |       |   |            |   |       |             |  |       |               |  |          |               |        |   |      |   |        |       | 
|Balance at December 31, 2003             |  |              | 7,157 |   |            |   | 7,307 |             |  |       | 27,620        |  |          |               | 44,105 |   |      |   | 671    |       |  |   | (1,330 | ) |  |   | 78,373 |  
|                                         |  |              |       |   |            |   |       |             |  |       |               |  |          |               |        |   |      |   |        |       | 
|Issuance of common stock                 |  |              | 6     |   |            |   | 6     |             |  |       | 44            |  |          |               |       |   |      |   |       |       |  |   |       |   |  |   | 50     |  
|Re-issuance of treasury stock            |  |              | 25    |   |            |   |      |             |  |       | 195           |  |          |               |       |   |      |   |       |       |  |   | 195    |   |  |   | 390    |  
|Net income                               |  |              |      |   |            |   |      |             |  |       |              |  |          |               | 8,594  |   |      |   |       |       |  |   |       |   |  |   | 8,594  |  
|Other comprehensive income               |  |              |      |   |            |   |      |             |  |       |              |  |          |               |       |   |      |   | 39     |       |  |   |       |   |  |   | 39     |  
|Dividends ($0.24 per share)              |  |              |      |   |            |   |      |             |  |       |              |  |          |               | (1,723 | ) |      |   |       |       |  |   |       |   |  |   | (1,723 | )
|                                         |  |              |       |   |            |   |       |             |  |       |               |  |          |               |        |   |      |   |        |       | 
|Balance at December 31, 2004             |  |              | 7,188 |   |            | $ | 7,313 |             |  | $     | 27,859        |  |          | $             | 50,976 |   |      | $ | 710    |       |  | $ | (1,135 | ) |  | $ | 85,723 |  
|                                         |  |              |       |   |            |   |       |             |  |       |               |  |          |               |        |   |      |   |        |       | 



55



---



##### Table of Contents






METROCORP BANCSHARES, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


(In thousands)


|                                                 |                                                                                             |                                                           |                             |                                           |        |       |         |          |         |        |         |          |        |       |          |  
|------------------------------------------------ | ------------------------------------------------------------------------------------------- | --------------------------------------------------------- | --------------------------- | ----------------------------------------- | ------ | ----- | ------- | -------- | ------- | ------ | ------- | -------- | ------ | ----- | -------- | -
|                                                 |                                                                                             | Years Ended December 31,                                  |                            
|                                                 |                                                                                             |                                                           |                            
|                                                 |                                                                                             | 2004                                                      |                             |                                           | 2003   |       |         | 2002     |        
|                                                 |                                                                                             |                                                           |                             |                                           |        |       |         |          |        
|Cash flows from operating activities:            |                                                                                             |                                                           |                             |                                           |        |       |         |          |         |        |         |         
|                                                 | Net income                                                                                  |                                                           | $                           | 8,594                                     |        |       | $       | 4,110    |         |        | $       | 8,970    |       
|                                                 | Adjustments to reconcile net income to net cash provided by
    operating activities:       |                                                           |                             |                                           |        |       |         |          |         |        |         |          |       
|                                                 |                                                                                             | Depreciation                                              |                             |                                           | 1,345  |       |         |          | 1,337   |        |         |          | 1,435  |      
|                                                 |                                                                                             | Provision for loan losses                                 |                             |                                           | 1,565  |       |         |          | 5,690   |        |         |          | 3,853  |      
|                                                 |                                                                                             | Lower of cost or market adjustment on loans held-for-sale |                             |                                           |       |       |         |          | 2,149   |        |         |          |       |      
|                                                 |                                                                                             | (Gain) loss on securities sales, net                      |                             |                                           | 97     |       |         |          | (165    | )      |         |          | (34    | )    
|                                                 |                                                                                             | (Gain) loss on sale of foreclosed assets                  |                             |                                           | (1,108 | )     |         |          | (283    | )      |         |          | 640    |      
|                                                 |                                                                                             | Gain on sale of premises and equipment                    |                             |                                           | (5     | )     |         |          |        |        |         |          | (5     | )    
|                                                 |                                                                                             | Gain on sale of loans, net                                |                             |                                           | (605   | )     |         |          | (600    | )      |         |          | (322   | )    
|                                                 |                                                                                             | Amortization of premiums and discounts on securities      |                             |                                           | 547    |       |         |          | 2,251   |        |         |          | 1,332  |      
|                                                 |                                                                                             | Amortization of deferred loan fees and discounts          |                             |                                           | (1,463 | )     |         |          | (1,086  | )      |         |          | (856   | )    
|                                                 |                                                                                             | Deferred income taxes                                     |                             |                                           | (115   | )     |         |          | (208    | )      |         |          | 48     |      
|                                                 |                                                                                             | Changes in:                                               |                             |                                           |        |       |         |          |         |        |         |          |        |      
|                                                 |                                                                                             |                                                           | Loans held-for-sale         |                                           |        | 4,479 |         |          |         | (5,891 | )       |          |        |      |         
|                                                 |                                                                                             |                                                           | Accrued interest receivable |                                           |        | 144   |         |          |         | (61    | )       |          |        | 211   |         
|                                                 |                                                                                             |                                                           | Other assets                |                                           |        | (260  | )       |          |         | (614   | )       |          |        | 2,506 |         
|                                                 |                                                                                             |                                                           | Accrued interest payable    |                                           |        | 82    |         |          |         | (150   | )       |          |        | (146  | )       
|                                                 |                                                                                             |                                                           | Other liabilities           |                                           |        | (605  | )       |          |         | 1,869  |         |          |        | 329   |         
|                                                 |                                                                                             |                                                           |                             |                                           |        |       |         |          |        
|                                                 |                                                                                             |                                                           |                             | Net cash provided by operating activities |        |       | 12,692  |          |         |        | 8,348   |          |        |       | 17,961   |  
|                                                 |                                                                                             |                                                           |                             |                                           |        |       |         |          |        
|Cash flows from investing activities:            |                                                                                             |                                                           |                             |                                           |        |       |         |          |         |        |         |         
|                                                 | Purchases of securities available-for-sale                                                  |                                                           |                             | (100,998                                  | )      |       |         | (182,039 | )       |        |         | (179,932 | )     
|                                                 | Proceeds from sales, maturities and principal paydowns of
    securities available-for-sale |                                                           |                             | 88,957                                    |        |       |         | 179,591  |         |        |         | 93,406   |       
|                                                 | Net change in loans                                                                         |                                                           |                             | (42,742                                   | )      |       |         | (31,034  | )       |        |         | (38,022  | )     
|                                                 | Proceeds from sale of foreclosed assets                                                     |                                                           |                             | 3,908                                     |        |       |         | 3,391    |         |        |         | 659      |       
|                                                 | Proceeds from sale of premises and equipment                                                |                                                           |                             | 5                                         |        |       |         |         |         |        |         | 5        |       
|                                                 | Purchases of premises and equipment                                                         |                                                           |                             | (2,183                                    | )      |       |         | (1,170   | )       |        |         | (1,653   | )     
|                                                 |                                                                                             |                                                           |                             |                                           |        |       |         |          |        
|                                                 |                                                                                             |                                                           |                             | Net cash used in investing activities     |        |       | (53,053 | )        |         |        | (31,261 | )        |        |       | (125,537 | )
|                                                 |                                                                                             |                                                           |                             |                                           |        |       |         |          |        
|Cash flows from financing activities:            |                                                                                             |                                                           |                             |                                           |        |       |         |          |         |        |         |         
|                                                 | Net change in:                                                                              |                                                           |                             |                                           |        |       |         |          |         |        |         |          |       
|                                                 |                                                                                             | Deposits                                                  |                             |                                           | 30,112 |       |         |          | 33,580  |        |         |          | 48,610 |      
|                                                 |                                                                                             | Other borrowings                                          |                             |                                           | 6,676  |       |         |          | (11,601 | )      |         |          | 40,579 |      
|                                                 | Proceeds from issuance of common stock                                                      |                                                           |                             | 50                                        |        |       |         | 1,186    |         |        |         | 76       |       
|                                                 | Re-issuance of treasury stock                                                               |                                                           |                             | 390                                       |        |       |         | 397      |         |        |         | 425      |       
|                                                 | Repurchase of common stock                                                                  |                                                           |                             |                                          |        |       |         | (212     | )       |        |         | (349     | )     
|                                                 | Dividends paid                                                                              |                                                           |                             | (1,721                                    | )      |       |         | (1,696   | )       |        |         | (1,685   | )     
|                                                 |                                                                                             |                                                           |                             |                                           |        |       |         |          |        
|                                                 |                                                                                             |                                                           |                             | Net cash provided by financing activities |        |       | 35,507  |          |         |        | 21,654  |          |        |       | 87,656   |  
|                                                 |                                                                                             |                                                           |                             |                                           |        |       |         |          |        
|Net decrease in cash and cash equivalents        |                                                                                             |                                                           | (4,854                      | )                                         |        |       | (1,259  | )        |         |        | (19,920 | )       
|Cash and cash equivalents at beginning of period |                                                                                             |                                                           | 36,927                      |                                           |        |       | 38,186  |          |         |        | 58,106  |         
|                                                 |                                                                                             |                                                           |                             |                                           |        |       |         |          |        
|Cash and cash equivalents at end of period       |                                                                                             | $                                                         | 32,073                      |                                           |        | $     | 36,927  |          |         | $      | 38,186  |         
|                                                 |                                                                                             |                                                           |                             |                                           |        |       |         |          |        



56



---



##### Table of Contents






METROCORP BANCSHARES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|   |                                           
|-- | ------------------------------------------
|1. | Summary of Significant Accounting Policies







| |                 
| | ----------------
| | Use of Estimates





| |                            
| | ---------------------------
| | Principles of Consolidation





| |                          
| | -------------------------
| | Cash and Cash Equivalents





| |           
| | ----------
| | Securities







| |                                    
| | -----------------------------------
| | Loans and Allowance for Loan Losses



57



---



##### Table of Contents



METROCORP BANCSHARES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)














| |                                                                    
| | -------------------------------------------------------------------
| | Nonrefundable Fees and Costs Associated with Lending
    Activities





58



---



##### Table of Contents



METROCORP BANCSHARES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                       
| | ----------------------
| | Premises and Equipment





| |                  
| | -----------------
| | Foreclosed Assets





| |                 
| | ----------------
| | Other Borrowings





| |             
| | ------------
| | Income Taxes





| |                   
| | ------------------
| | Earnings Per Share





| |                              
| | -----------------------------
| | Interest Rate Risk Management







59



---



##### Table of Contents



METROCORP BANCSHARES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                   
| | ------------------
| | Stock Compensation

Accounting for Stock-Based Compensation,




|                                                    |             |                          |   |       |      |  |   |       |  |  |   |       | 
|--------------------------------------------------- | ----------- | ------------------------ | - | ----- | ---- |  | - | ----- |  |  | - | ----- | 
|                                                    |             | Years Ended December 31, |  
|                                                    |             |                          |  
|                                                    |             | 2004                     |   |       | 2003 |  |   | 2002  | 
|                                                    |             |                          |   |       |      |  |   |       | 
|Net income:                                         |             |                          |   |       |      |  |   |       |  |  |   |      
|                                                    | As reported |                          | $ | 8,594 |      |  | $ | 4,110 |  |  | $ | 8,970 | 
|                                                    | Pro forma   |                          | $ | 8,423 |      |  | $ | 4,000 |  |  | $ | 8,862 | 
|Stock-based compensation cost, net of income taxes: |             |                          |   |       |      |  |   |       |  |  |   |      
|                                                    | As reported |                          | $ |      |      |  | $ |      |  |  | $ |      | 
|                                                    | Pro forma   |                          | $ | 171   |      |  | $ | 110   |  |  | $ | 108   | 
|Basic earnings per common share:                    |             |                          |   |       |      |  |   |       |  |  |   |      
|                                                    | As reported |                          | $ | 1.20  |      |  | $ | 0.58  |  |  | $ | 1.28  | 
|                                                    | Pro forma   |                          | $ | 1.17  |      |  | $ | 0.56  |  |  | $ | 1.26  | 
|Diluted earnings per common share:                  |             |                          |   |       |      |  |   |       |  |  |   |      
|                                                    | As reported |                          | $ | 1.19  |      |  | $ | 0.57  |  |  | $ | 1.25  | 
|                                                    | Pro forma   |                          | $ | 1.16  |      |  | $ | 0.55  |  |  | $ | 1.24  | 



Share-Based Payment.


60



---



##### Table of Contents



METROCORP BANCSHARES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |                              
| | -----------------------------
| | Off-Balance Sheet Instruments





| |                              
| | -----------------------------
| | New Accounting Pronouncements

Share-Based Payment. Accounting for Stock-Based
Compensation.




| |                  
| | -----------------
| | Reclassifications





|   |                          
|-- | -------------------------
|2. | Cash and Cash Equivalents





|   |           
|-- | ----------
|3. | Securities



61



---



##### Table of Contents



METROCORP BANCSHARES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                    |                                                                          |                         |   |         |            |  |       |            |       |  |       |        |        |   |   |         |         | 
|------------------- | ------------------------------------------------------------------------ | ----------------------- | - | ------- | ---------- |  | ----- | ---------- | ----- |  | ----- | ------ | ------ | - | - | ------- | ------- | 
|                    |                                                                          | As of December 31, 2004 |  
|                    |                                                                          |                         |  
|                    |                                                                          |                         |   | Gross   |            |  | Gross |            |       | 
|                    |                                                                          | Amortized               |   |         | Unrealized |  |       | Unrealized |       |  | Fair  |       
|                    |                                                                          | Cost                    |   |         | Gains      |  |       | Losses     |       |  | Value |       
|                    |                                                                          |                         |   |         |            |  |       |            |       |  |       |       
|Available-for-sale: |                                                                          |                         |   |         |            |  |       |            |       |  |       |        |        |   |   |        
|                    | U.S. Treasury securities and obligations of
    U.S. government agencies |                         | $ | 5,005   |            |  | $     |           |       |  | $     | (18    | )      |   | $ | 4,987   |        
|                    | Obligations of state and political subdivisions                          |                         |   | 18,105  |            |  |       | 1,030      |       |  |       |       |        |   |   | 19,135  |        
|                    | Mortgage-backed securities and collateralized mortgage
    obligations   |                         |   | 222,977 |            |  |       | 1,344      |       |  |       | (1,179 | )      |   |   | 223,142 |        
|                    | Other debt securities                                                    |                         |   | 1,979   |            |  |       | 14         |       |  |       |       |        |   |   | 1,993   |        
|                    | Investment in ARM and CRA funds                                          |                         |   | 18,772  |            |  |       | 89         |       |  |       | (205   | )      |   |   | 18,656  |        
|                    | FHLB and Federal Reserve Bank stock(1)(2)                                |                         |   | 5,807   |            |  |       |           |       |  |       |       |        |   |   | 5,807   |        
|                    |                                                                          |                         |   |         |            |  |       |            |       |  |       |       
|                    |                                                                          | Total securities        |   | $       | 272,645    |  |       | $          | 2,477 |  |       | $      | (1,402 | ) |   | $       | 273,720 | 
|                    |                                                                          |                         |   |         |            |  |       |            |       |  |       |       

|                    |                                                                          |                         |   |         |            |  |       |            |       |  |       |        |        |   |   |         |         | 
|------------------- | ------------------------------------------------------------------------ | ----------------------- | - | ------- | ---------- |  | ----- | ---------- | ----- |  | ----- | ------ | ------ | - | - | ------- | ------- | 
|                    |                                                                          | As of December 31, 2003 |  
|                    |                                                                          |                         |  
|                    |                                                                          |                         |   | Gross   |            |  | Gross |            |       | 
|                    |                                                                          | Amortized               |   |         | Unrealized |  |       | Unrealized |       |  | Fair  |       
|                    |                                                                          | Cost                    |   |         | Gains      |  |       | Losses     |       |  | Value |       
|                    |                                                                          |                         |   |         |            |  |       |            |       |  |       |       
|Available-for-sale: |                                                                          |                         |   |         |            |  |       |            |       |  |       |        |        |   |   |        
|                    | U.S. Treasury securities and obligations of
    U.S. government agencies |                         | $ | 4,965   |            |  | $     |           |       |  | $     | (12    | )      |   | $ | 4,953   |        
|                    | Obligations of state and political subdivisions                          |                         |   | 18,925  |            |  |       | 1,249      |       |  |       |       |        |   |   | 20,174  |        
|                    | Mortgage-backed securities and collateralized mortgage
    obligations   |                         |   | 209,323 |            |  |       | 1,170      |       |  |       | (1,254 | )      |   |   | 209,239 |        
|                    | Other debt securities                                                    |                         |   | 1,096   |            |  |       | 3          |       |  |       | (10    | )      |   |   | 1,089   |        
|                    | Investment in ARM and CRA funds                                          |                         |   | 21,739  |            |  |       | 73         |       |  |       | (203   | )      |   |   | 21,609  |        
|                    | FHLB and Federal Reserve Bank stock(1)(2)                                |                         |   | 5,200   |            |  |       |           |       |  |       |       |        |   |   | 5,200   |        
|                    |                                                                          |                         |   |         |            |  |       |            |       |  |       |       
|                    |                                                                          | Total securities        |   | $       | 261,248    |  |       | $          | 2,495 |  |       | $      | (1,479 | ) |   | $       | 262,264 | 
|                    |                                                                          |                         |   |         |            |  |       |            |       |  |       |       






|    |                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | FHLB stock held by the Bank is subject to certain restrictions
    under a credit policy of the FHLB dated May 1, 1997.
    Redemption of FHLB stock is dependent upon repayment of
    borrowings from the FHLB.



|    |                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------
|(2) | Federal Reserve Bank stock held by the Bank is subject to
    certain restrictions under Federal Reserve Bank Policy.



|                      |  |                          |       |  |      |   |        |      |  |   |        | 
|--------------------- |  | ------------------------ | ----- |  | ---- | - | ------ | ---- |  | - | ------ | 
|                      |  | Years Ended December 31, |      
|                      |  |                          |      
|                      |  | 2004                     |       |  | 2003 |   |        | 2002 | 
|                      |  |                          |       |  |      |   |        |      | 
|Amortized cost        |  | $                        | 8,107 |  |      | $ | 19,818 |      |  | $ | 18,981 | 
|Proceeds              |  |                          | 8,010 |  |      |   | 19,983 |      |  |   | 19,015 | 
|Gross realized gains  |  |                          | 7     |  |      |   | 165    |      |  |   | 98     | 
|Gross realized losses |  |                          | 104   |  |      |   |       |      |  |   | 64     | 

62



---



##### Table of Contents



METROCORP BANCSHARES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                                                       |                  |           |         |         |       |   |         |         | 
|---------------------------------------------------------------------- | ---------------- | --------- | ------- | ------- | ----- | - | ------- | ------- | 
|                                                                       |                  | Amortized |         |         | Fair  |  
|                                                                       |                  | Cost      |         |         | Value |  
|                                                                       |                  |           |         |         |       |  
|Within one year                                                        |                  | $         | 345     |         |       | $ | 346     |        
|Within two to five years                                               |                  |           | 2,595   |         |       |   | 2,605   |        
|Within six to ten years                                                |                  |           | 10,082  |         |       |   | 10,404  |        
|After ten years                                                        |                  |           | 10,088  |         |       |   | 10,767  |        
|Mortgage-backed securities and collateralized mortgage
    obligations |                  |           | 224,956 |         |       |   | 225,135 |        
|                                                                       |                  |           |         |         |       |  
|Debt securities                                                        |                  |           | 248,066 |         |       |   | 249,257 |        
|Investment in ARM and CRA funds                                        |                  |           | 18,772  |         |       |   | 18,656  |        
|FHLB and Federal Reserve Bank stock                                    |                  |           | 5,807   |         |       |   | 5,807   |        
|                                                                       |                  |           |         |         |       |  
|                                                                       | Total securities |           | $       | 272,645 |       |   | $       | 273,720 | 
|                                                                       |                  |           |         |         |       |  





|                                                                         |                  |           |        |        |              |   |      |       |   |   |            |        |  |       |      |      |            |   |         |         |  |   |        |        |  
|------------------------------------------------------------------------ | ---------------- | --------- | ------ | ------ | ------------ | - | ---- | ----- | - | - | ---------- | ------ |  | ----- | ---- | ---- | ---------- | - | ------- | ------- |  | - | ------ | ------ | -
|                                                                         |                  | Less Than |        |        | Greater Than |   |      |      
|                                                                         |                  | 12 Months |        |        | 12 Months    |   |      | Total |  
|                                                                         |                  |           |        |        |              |   |      |       |  
|                                                                         |                  | Fair      |        |        | Unrealized   |   |      | Fair  |   |   | Unrealized |        |  | Fair  |      |      | Unrealized |  
|                                                                         |                  | Value     |        |        | Loss         |   |      | Value |   |   | Loss       |        |  | Value |      |      | Loss       |  
|                                                                         |                  |           |        |        |              |   |      |       |   |   |            |        |  |       |      |      |            |  
|U.S. Treasury securities and obligations of
    U.S. government agencies |                  | $         | 4,952  |        |              | $ | (18  | )     |   | $ |           |        |  | $     |     |      |            | $ | 4,952   |         |  | $ | (18    | )     
|Mortgaged-backed securities and collateralized mortgage
    obligations  |                  |           | 79,240 |        |              |   | (487 | )     |   |   | 33,861     |        |  |       | (692 | )    |            |   | 113,101 |         |  |   | (1,179 | )     
|Investment in ARM and CRA funds                                          |                  |           |       |        |              |   |     |       |   |   | 14,453     |        |  |       | (205 | )    |            |   | 14,453  |         |  |   | (205   | )     
|                                                                         |                  |           |        |        |              |   |      |       |   |   |            |        |  |       |      |      |            |  
|                                                                         | Total securities |           | $      | 84,192 |              |   | $    | (505  | ) |   | $          | 48,314 |  |       | $    | (897 | )          |   | $       | 132,506 |  |   | $      | (1,402 | )
|                                                                         |                  |           |        |        |              |   |      |       |   |   |            |        |  |       |      |      |            |  



63



---



##### Table of Contents



METROCORP BANCSHARES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|   |                                    
|-- | -----------------------------------
|4. | Loans and Allowance for Loan Losses





64



---



##### Table of Contents



METROCORP BANCSHARES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                |               |                    |         |         |      |   |         |         | 
|------------------------------- | ------------- | ------------------ | ------- | ------- | ---- | - | ------- | ------- | 
|                                |               | As of December 31, |        
|                                |               |                    |        
|                                |               | 2004               |         |         | 2003 |  
|                                |               |                    |         |         |      |  
|Commercial and industrial       |               | $                  | 345,570 |         |      | $ | 332,480 |        
|Real estate-mortgage            |               |                    | 199,320 |         |      |   | 192,605 |        
|Real estate-construction        |               |                    | 42,629  |         |      |   | 24,558  |        
|Consumer and other              |               |                    | 9,556   |         |      |   | 10,447  |        
|                                |               |                    |         |         |      |  
|                                | Gross loans   |                    |         | 597,075 |      |   |         | 560,090 | 
|Unearned discounts and interest |               |                    | (320    | )       |      |   | (864    | )      
|Deferred loan fees              |               |                    | (2,219  | )       |      |   | (2,090  | )      
|                                |               |                    |         |         |      |  
|                                | Total loans   |                    |         | 594,536 |      |   |         | 557,136 | 
|Allowance for loan losses       |               |                    | (10,863 | )       |      |   | (10,448 | )      
|                                |               |                    |         |         |      |  
|                                | Loans, net(1) |                    | $       | 583,673 |      |   | $       | 546,688 | 
|                                |               |                    |         |         |      |  
|Variable rate loans             |               | $                  | 530,424 |         |      | $ | 476,654 |        
|Fixed rate loans                |               |                    | 66,651  |         |      |   | 83,436  |        
|                                |               |                    |         |         |      |  
|                                | Gross loans   |                    | $       | 597,075 |      |   | $       | 560,090 | 
|                                |               |                    |         |         |      |  






|    |                                                         
|--- | --------------------------------------------------------
|(1) | Includes $1.9 million in commercial loans held-for-sale.



|                                       |             |                    |         |         |      |   |         |         | 
|-------------------------------------- | ----------- | ------------------ | ------- | ------- | ---- | - | ------- | ------- | 
|                                       |             | As of December 31, |        
|                                       |             |                    |        
|                                       |             | 2004               |         |         | 2003 |  
|                                       |             |                    |         |         |      |  
|Convenience stores/gasoline stations   |             | $                  | 42,404  |         |      | $ | 46,290  |        
|Hotels/motels                          |             |                    | 55,974  |         |      |   | 69,877  |        
|Nonresidential building for rent/lease |             |                    | 179,052 |         |      |   | 131,482 |        
|Restaurants                            |             |                    | 48,370  |         |      |   | 52,902  |        
|Wholesale trade                        |             |                    | 60,782  |         |      |   | 64,181  |        
|All other                              |             |                    | 210,493 |         |      |   | 195,358 |        
|                                       |             |                    |         |         |      |  
|                                       | Gross loans |                    | $       | 597,075 |      |   | $       | 560,090 | 
|                                       |             |                    |         |         |      |  



|                             |  |                    |        |   |      |   |        |      |  |   |        |  
|---------------------------- |  | ------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                             |  | As of December 31, |       
|                             |  |                    |       
|                             |  | 2004               |        |   | 2003 |   |        | 2002 | 
|                             |  |                    |        |   |      |   |        |      | 
|Balance at beginning of year |  | $                  | 10,448 |   |      | $ | 10,150 |      |  | $ | 8,903  |  
|Provision for loan losses    |  |                    | 1,565  |   |      |   | 5,690  |      |  |   | 3,853  |  
|Charge-offs                  |  |                    | (2,835 | ) |      |   | (6,121 | )    |  |   | (3,124 | )
|Recoveries                   |  |                    | 1,685  |   |      |   | 729    |      |  |   | 518    |  
|                             |  |                    |        |   |      |   |        |      | 
|Balance at end of year       |  | $                  | 10,863 |   |      | $ | 10,448 |      |  | $ | 10,150 |  
|                             |  |                    |        |   |      |   |        |      | 

65



---



##### Table of Contents



METROCORP BANCSHARES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|                                                      |                                             |                    |        |        |      |   |        |        | 
|----------------------------------------------------- | ------------------------------------------- | ------------------ | ------ | ------ | ---- | - | ------ | ------ | 
|                                                      |                                             | As of December 31, |       
|                                                      |                                             |                    |       
|                                                      |                                             | 2004               |        |        | 2003 |  
|                                                      |                                             |                    |        |        |      |  
|Impaired loans with no SFAS No. 114 valuation reserve |                                             | $                  | 15,339 |        |      | $ | 14,967 |       
|Impaired loans with SFAS No. 114 valuation reserve    |                                             |                    | 3,967  |        |      |   | 10,475 |       
|                                                      |                                             |                    |        |        |      |  
|                                                      | Total recorded investment in impaired loans |                    | $      | 19,306 |      |   | $      | 25,442 | 
|                                                      |                                             |                    |        |        |      |  
|Valuation allowance related to impaired loans         |                                             | $                  | 1,751  |        |      | $ | 2,525  |       







|   |                       
|-- | ----------------------
|5. | Premises and Equipment



|                                  |  |                  |      |                    |      |   |         |      |  |   |         |  
|--------------------------------- |  | ---------------- | ---- | ------------------ | ---- | - | ------- | ---- |  | - | ------- | -
|                                  |  |                  |      | As of December 31, |     
|                                  |  | Estimated useful |      |                    |      |  
|                                  |  | lives (in years) |      |                    | 2004 |   |         | 2003 | 
|                                  |  |                  |      |                    |      |   |         |      | 
|Furniture, fixtures and equipment |  |                  | 3-10 |                    |      | $ | 13,233  |      |  | $ | 12,382  |  
|Building and improvements         |  |                  | 3-20 |                    |      |   | 4,769   |      |  |   | 4,379   |  
|Land                              |  |                  |     |                    |      |   | 1,679   |      |  |   | 1,679   |  
|Leasehold improvements            |  |                  | 5    |                    |      |   | 3,232   |      |  |   | 2,715   |  
|                                  |  |                  |      |                    |      |   |         |      | 
|                                  |  |                  |      |                    |      |   | 22,913  |      |  |   | 21,155  |  
|Accumulated depreciation          |  |                  |      |                    |      |   | (16,401 | )    |  |   | (15,481 | )
|                                  |  |                  |      |                    |      |   |         |      | 
|Premises and equipment, net       |  |                  |      |                    |      | $ | 6,512   |      |  | $ | 5,674   |  
|                                  |  |                  |      |                    |      |   |         |      | 

66



---



##### Table of Contents



METROCORP BANCSHARES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                          
|-- | -------------------------
|6. | Interest-Bearing Deposits



|                                  |  |                    |         |  |      |   |         | 
|--------------------------------- |  | ------------------ | ------- |  | ---- | - | ------- | 
|                                  |  | As of December 31, |        
|                                  |  |                    |        
|                                  |  | 2004               |         |  | 2003 |  
|                                  |  |                    |         |  |      |  
|Interest-bearing demand deposits  |  | $                  | 91,188  |  |      | $ | 74,112  | 
|Savings and money market accounts |  |                    | 117,248 |  |      |   | 120,151 | 
|Time deposits less than $100,000  |  |                    | 178,553 |  |      |   | 167,672 | 
|Time deposits $100,000 and over   |  |                    | 204,873 |  |      |   | 193,909 | 
|                                  |  |                    |         |  |      |  
|Interest-bearing deposits         |  | $                  | 591,862 |  |      | $ | 555,844 | 
|                                  |  |                    |         |  |      |  



|           |  |   |         | 
|---------- |  | - | ------- | 
|2005       |  | $ | 277,877 | 
|2006       |  |   | 65,868  | 
|2007       |  |   | 26,829  | 
|2008       |  |   | 4,148   | 
|2009       |  |   | 8,702   | 
|After 2009 |  |   | 2       | 
|           |  |   |        
|           |  | $ | 383,426 | 
|           |  |   |        





|   |                 
|-- | ----------------
|7. | Other Borrowings



|              |  |                    |        |  |      |   |        | 
|------------- |  | ------------------ | ------ |  | ---- | - | ------ | 
|              |  | As of December 31, |       
|              |  |                    |       
|              |  | 2004               |        |  | 2003 |  
|              |  |                    |        |  |      |  
|FHLB Loans    |  | $                  | 25,000 |  |      | $ | 25,000 | 
|FHLB Advances |  |                    | 34,900 |  |      |   | 28,300 | 
|TT&L Payments |  |                    | 949    |  |      |   | 873    | 
|              |  |                    |        |  |      |  
|              |  | $                  | 60,849 |  |      | $ | 54,173 | 
|              |  |                    |        |  |      |  





67



---



##### Table of Contents



METROCORP BANCSHARES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|           |  |        |        | 
|---------- |  | ------ | ------ | 
|Year       |  | Amount |       
|           |  |        |       
|2005       |  | $      | 34,900 | 
|2006       |  |        |       | 
|2007       |  |        |       | 
|2008       |  |        | 25,000 | 
|2009       |  |        |       | 
|After 2009 |  |        |       | 
|           |  |        |       
|           |  | $      | 59,900 | 
|           |  |        |       







|   |             
|-- | ------------
|8. | Income Taxes



|                                                                  |                        |                    |       |       |      |   |       |       | 
|----------------------------------------------------------------- | ---------------------- | ------------------ | ----- | ----- | ---- | - | ----- | ----- | 
|                                                                  |                        | As of December 31, |      
|                                                                  |                        |                    |      
|                                                                  |                        | 2004               |       |       | 2003 |  
|                                                                  |                        |                    |       |       |      |  
|Deferred Tax Assets:                                              |                        |                    |       |       |      |   |       |      
|Allowance for loan losses                                         |                        | $                  | 3,693 |       |      | $ | 3,552 |      
|Deferred loan fees                                                |                        |                    | 754   |       |      |   | 740   |      
|Premises and equipment                                            |                        |                    | 915   |       |      |   | 1,044 |      
|Interest on nonaccrual loans                                      |                        |                    | 661   |       |      |   | 435   |      
|                                                                  |                        |                    |       |       |      |  
|Gross deferred tax assets                                         |                        |                    | 6,023 |       |      |   | 5,771 |      
|                                                                  |                        |                    |       |       |      |  
|Deferred Tax Liabilities:                                         |                        |                    |       |       |      |   |       |      
|Unrealized gains on investment securities available-for-sale, net |                        |                    | 365   |       |      |   | 346   |      
|FHLB stock dividends                                              |                        |                    | 432   |       |      |   | 403   |      
|Other                                                             |                        |                    | 25    |       |      |   | 358   |      
|                                                                  |                        |                    |       |       |      |  
|Gross deferred tax liabilities                                    |                        |                    | 822   |       |      |   | 1,107 |      
|                                                                  |                        |                    |       |       |      |  
|                                                                  | Net deferred tax asset |                    | $     | 5,201 |      |   | $     | 4,664 | 
|                                                                  |                        |                    |       |       |      |  



68



---



##### Table of Contents



METROCORP BANCSHARES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                |                                  |                          |       |       |      |   |       |       |  |   |       |       | 
|----------------------------------------------- | -------------------------------- | ------------------------ | ----- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                                                |                                  | Years Ended December 31, |      
|                                                |                                  |                          |      
|                                                |                                  | 2004                     |       |       | 2003 |   |       | 2002  | 
|                                                |                                  |                          |       |       |      |   |       |       | 
|Current provision for federal income taxes      |                                  | $                        | 4,146 |       |      | $ | 1,943 |       |  | $ | 4,397 |      
|Deferred federal income tax provision (benefit) |                                  |                          | (115  | )     |      |   | (208  | )     |  |   | 48    |      
|                                                |                                  |                          |       |       |      |   |       |       | 
|                                                | Total provision for income taxes |                          | $     | 4,031 |      |   | $     | 1,735 |  |   | $     | 4,445 | 
|                                                |                                  |                          |       |       |      |   |       |       | 



|                                             |                            |                          |       |       |         |  |    |        |   |   |         |       |  |        |    |    |         |   |       |       |  |  |    |    |  
|-------------------------------------------- | -------------------------- | ------------------------ | ----- | ----- | ------- |  | -- | ------ | - | - | ------- | ----- |  | ------ | -- | -- | ------- | - | ----- | ----- |  |  | -- | -- | -
|                                             |                            | Years Ended December 31, |      
|                                             |                            |                          |      
|                                             |                            | 2004                     |       |       | 2003    |  |    | 2002   |  
|                                             |                            |                          |       |       |         |  |    |        |  
|                                             |                            | Amount                   |       |       | Percent |  |    | Amount |   |   | Percent |       |  | Amount |    |    | Percent |  
|                                             |                            |                          |       |       |         |  |    |        |   |   |         |       |  |        |    |    |         |  
|Federal income tax expense at statutory rate |                            | $                        | 4,293 |       |         |  | 34 | %      |   | $ | 1,987   |       |  |        | 34 | %  |         | $ | 4,562 |       |  |  | 34 | % 
|Tax-exempt interest income                   |                            |                          | (312  | )     |         |  | (2 | )      |   |   | (315    | )     |  |        | (6 | )  |         |   | (361  | )     |  |  | (3 | ) 
|Other, net                                   |                            |                          | 50    |       |         |  |   |        |   |   | 63      |       |  |        | 1  |    |         |   | 244   |       |  |  | 2  |   
|                                             |                            |                          |       |       |         |  |    |        |   |   |         |       |  |        |    |    |         |  
|                                             | Provision for income taxes |                          | $     | 4,031 |         |  |    | 32     | % |   | $       | 1,735 |  |        |    | 29 | %       |   | $     | 4,445 |  |  |    | 33 | %
|                                             |                            |                          |       |       |         |  |    |        |   |   |         |       |  |        |    |    |         |  



|                                                                          |                            |                          |     |    |      |   |      |      |   |   |       |       | 
|------------------------------------------------------------------------- | -------------------------- | ------------------------ | --- | -- | ---- | - | ---- | ---- | - | - | ----- | ----- | 
|                                                                          |                            | Years Ended December 31, |    
|                                                                          |                            |                          |    
|                                                                          |                            | 2004                     |     |    | 2003 |   |      | 2002 |  
|                                                                          |                            |                          |     |    |      |   |      |      |  
|Unrealized gains (losses) arising during the period                       |                            | $                        | (15 | )  |      | $ | (775 | )    |   | $ | 1,020 |      
|Reclassification adjustment for gains (losses) realized in net
    income |                            |                          | (34 | )  |      |   | 58   |      |   |   | 12    |      
|                                                                          |                            |                          |     |    |      |   |      |      |  
|                                                                          | Other comprehensive income |                          | $   | 19 |      |   | $    | (833 | ) |   | $     | 1,008 | 
|                                                                          |                            |                          |     |    |      |   |      |      |  

9.     401(k) Profit Sharing Plan






|    |                     
|--- | --------------------
|10. | Shareholders Equity





69



---



##### Table of Contents



METROCORP BANCSHARES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|    |                   
|--- | ------------------
|11. | Regulatory Matters









70



---



##### Table of Contents



METROCORP BANCSHARES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                |                            |        |   |             |                   |                  |                   |                  |              |                      |       |        |  |        |  |      |       |  |   |        |  |  |  |       |  
|------------------------------- | -------------------------- | ------ | - | ----------- | ----------------- | ---------------- | ----------------- | ---------------- | ------------ | -------------------- | ----- | ------ |  | ------ |  | ---- | ----- |  | - | ------ |  |  |  | ----- | -
|                                |                            |        |   |             |                   |                  |                   |                  |              | To be Categorized as |      
|                                |                            |        |   |             |                   |                  |                   | Well Capitalized |             
|                                |                            |        |   |             |                   | Minimum Required |                   |                  | under Prompt |                     
|                                |                            |        |   | For Capital |                   |                  | Corrective Action |                 
|                                |                            | Actual |   |             | Adequacy Purposes |                  |                   | Provisions       |             
|                                |                            |        |   |             |                   |                  |                   |                  |             
|                                |                            | Amount |   |             | Ratio             |                  |                   | Amount           |              |                      | Ratio |        |  | Amount |  |      | Ratio | 
|                                |                            |        |   |             |                   |                  |                   |                  |              |                      |       |        |  |        |  |      |       | 
|As of December 31, 2004         |                            |        |   |             |                   |                  |                   |                  |              |                      |       |        |  |        |  |      |       |  |   |        |  |  |  |      
|Total risk-based capital ratio  |                            |        |   |             |                   |                  |                   |                  |              |                      |       |        |  |        |  |      |       |  |   |        |  |  |  |      
|                                | MetroCorp Bancshares, Inc. |        | $ | 93,082      |                   |                  |                   | 14.07            | %            |                      | $     | 52,914 |  |        |  | 8.00 | %     |  | $ | N/A    |  |  |  | N/A   | %
|                                | MetroBank, N.A.            |        |   | 91,061      |                   |                  |                   | 13.77            |              |                      |       | 52,912 |  |        |  | 8.00 |       |  |   | 66,140 |  |  |  | 10.00 |  
|Tier 1 risk-based capital ratio |                            |        |   |             |                   |                  |                   |                  |              |                      |       |        |  |        |  |      |       |  |   |        |  |  |  |      
|                                | MetroCorp Bancshares, Inc. |        |   | 84,782      |                   |                  |                   | 12.82            |              |                      |       | 26,457 |  |        |  | 4.00 |       |  |   | N/A    |  |  |  | N/A   |  
|                                | MetroBank, N.A.            |        |   | 82,761      |                   |                  |                   | 12.51            |              |                      |       | 26,456 |  |        |  | 4.00 |       |  |   | 39,684 |  |  |  | 6.00  |  
|Leverage ratio                  |                            |        |   |             |                   |                  |                   |                  |              |                      |       |        |  |        |  |      |       |  |   |        |  |  |  |      
|                                | MetroCorp Bancshares, Inc. |        |   | 84,782      |                   |                  |                   | 9.59             |              |                      |       | 35,352 |  |        |  | 4.00 |       |  |   | N/A    |  |  |  | N/A   |  
|                                | MetroBank, N.A.            |        |   | 82,761      |                   |                  |                   | 9.37             |              |                      |       | 35,348 |  |        |  | 4.00 |       |  |   | 44,185 |  |  |  | 5.00  |  
|                               
|As of December 31, 2003         |                            |        |   |             |                   |                  |                   |                  |              |                      |       |        |  |        |  |      |       |  |   |        |  |  |  |      
|Total risk-based capital ratio  |                            |        |   |             |                   |                  |                   |                  |              |                      |       |        |  |        |  |      |       |  |   |        |  |  |  |      
|                                | MetroCorp Bancshares, Inc. |        | $ | 85,225      |                   |                  |                   | 13.98            | %            |                      | $     | 48,758 |  |        |  | 8.00 | %     |  | $ | N/A    |  |  |  | N/A   | %
|                                | MetroBank, N.A.            |        |   | 80,637      |                   |                  |                   | 13.23            |              |                      |       | 48,757 |  |        |  | 8.00 |       |  |   | 60,947 |  |  |  | 10.00 |  
|Tier 1 risk-based capital ratio |                            |        |   |             |                   |                  |                   |                  |              |                      |       |        |  |        |  |      |       |  |   |        |  |  |  |      
|                                | MetroCorp Bancshares, Inc. |        |   | 77,572      |                   |                  |                   | 12.73            |              |                      |       | 24,379 |  |        |  | 4.00 |       |  |   | N/A    |  |  |  | N/A   |  
|                                | MetroBank, N.A.            |        |   | 72,984      |                   |                  |                   | 11.98            |              |                      |       | 24,379 |  |        |  | 4.00 |       |  |   | 36,568 |  |  |  | 6.00  |  
|Leverage ratio                  |                            |        |   |             |                   |                  |                   |                  |              |                      |       |        |  |        |  |      |       |  |   |        |  |  |  |      
|                                | MetroCorp Bancshares, Inc. |        |   | 77,572      |                   |                  |                   | 9.08             |              |                      |       | 34,186 |  |        |  | 4.00 |       |  |   | N/A    |  |  |  | N/A   |  
|                                | MetroBank, N.A.            |        |   | 72,984      |                   |                  |                   | 8.54             |              |                      |       | 34,183 |  |        |  | 4.00 |       |  |   | 42,729 |  |  |  | 5.00  |  





|    |                             
|--- | ----------------------------
|12. | Off-Balance Sheet Activities



71



---



##### Table of Contents



METROCORP BANCSHARES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                                             |  |      |         |  |      |   |         | 
|------------------------------------------------------------ |  | ---- | ------- |  | ---- | - | ------- | 
|                                                             |  | 2004 |         |  | 2003 |  
|                                                             |  |      |         |  |      |  
|Unfunded loan commitments including unfunded lines of credit |  | $    | 105,975 |  |      | $ | 87,706  | 
|Standby letters of credit                                    |  |      | 3,852   |  |      |   | 7,330   | 
|Commercial letters of credit                                 |  |      | 11,756  |  |      |   | 7,527   | 
|Operating leases                                             |  |      | 4,060   |  |      |   | 3,972   | 
|                                                             |  |      |         |  |      |  
|Total financial instruments with off-balance sheet risk      |  | $    | 125,643 |  |      | $ | 106,535 | 
|                                                             |  |      |         |  |      |  



|    |                                    
|--- | -----------------------------------
|13. | Fair Value of Financial Instruments

Disclosures About Fair Value of
Financial Instruments,








| |                                                            
| | -----------------------------------------------------------
| | Assets for Which Fair Value Approximates Carrying
    Value





| |                      
| | ---------------------
| | Investment Securities



72



---



##### Table of Contents



METROCORP BANCSHARES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |      
| | -----
| | Loans





| |                                                                 
| | ----------------------------------------------------------------
| | Liabilities for Which Fair Value Approximates Carrying
    Value





| |              
| | -------------
| | Time Deposits





| |                 
| | ----------------
| | Other Borrowings





| |                                                   
| | --------------------------------------------------
| | Commitments to Extend Credit and Letters of Credit



73



---



##### Table of Contents



METROCORP BANCSHARES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                              
|--- | -----------------------------
|14. | Commitments and Contingencies



|           |  |        |       | 
|---------- |  | ------ | ----- | 
|Year       |  | Amount |      
|           |  |        |      
|2005       |  | $      | 1,008 | 
|2006       |  |        | 568   | 
|2007       |  |        | 508   | 
|2008       |  |        | 457   | 
|2009       |  |        | 417   | 
|Thereafter |  |        | 1,102 | 
|           |  |        |      
|           |  | $      | 4,060 | 
|           |  |        |      



74



---



##### Table of Contents



METROCORP BANCSHARES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                     
|--- | ------------------------------------
|15. | Parent Company Financial Information



Condensed Balance Sheets


(In thousands, except share amounts)


|                                           |                                                                                                                                                                                                           |                    |        |        |      |   |        |        | 
|------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------ | ------ | ------ | ---- | - | ------ | ------ | 
|                                           |                                                                                                                                                                                                           | As of December 31, |       
|                                           |                                                                                                                                                                                                           |                    |       
|                                           |                                                                                                                                                                                                           | 2004               |        |        | 2003 |  
|                                           |                                                                                                                                                                                                           |                    |        |        |      |  
|Assets                                    
|Cash and due from subsidiary bank          |                                                                                                                                                                                                           | $                  | 2,372  |        |      | $ | 4,954  |       
|Investment in bank subsidiary              |                                                                                                                                                                                                           |                    | 83,728 |        |      |   | 73,794 |       
|                                           |                                                                                                                                                                                                           |                    |        |        |      |  
|                                           | Total assets                                                                                                                                                                                              |                    | $      | 86,100 |      |   | $      | 78,748 | 
|                                           |                                                                                                                                                                                                           |                    |        |        |      |  
|                                          
|Liabilities and Shareholders Equity      
|Other liabilities                          |                                                                                                                                                                                                           | $                  | 377    |        |      | $ | 375    |       
|                                           |                                                                                                                                                                                                           |                    |        |        |      |  
|                                           | Total liabilities                                                                                                                                                                                         |                    |        | 377    |      |   |        | 375    | 
|                                           |                                                                                                                                                                                                           |                    |        |        |      |  
|Shareholders equity:                      |                                                                                                                                                                                                           |                    |        |        |      |   |        |       
|                                           | Common stock, $1.00 par value, 20,000,000 shares
    authorized; 7,132,627 and 7,306,627 shares issued and
    7,187,446 and 7,156,689 shares outstanding at
    December 31, 2004 and 2003, respectively |                    |        | 7,313  |      |   |        | 7,307  | 
|Additional paid-in-capital                 |                                                                                                                                                                                                           |                    | 27,859 |        |      |   | 27,620 |       
|Retained earnings                          |                                                                                                                                                                                                           |                    | 50,976 |        |      |   | 44,105 |       
|Other comprehensive income                 |                                                                                                                                                                                                           |                    | 710    |        |      |   | 671    |       
|Treasury stock, at cost                    |                                                                                                                                                                                                           |                    | (1,135 | )      |      |   | (1,330 | )     
|                                           |                                                                                                                                                                                                           |                    |        |        |      |  
|                                           | Total shareholders equity                                                                                                                                                                                |                    |        | 85,723 |      |   |        | 78,373 | 
|                                           |                                                                                                                                                                                                           |                    |        |        |      |  
|Total liabilities and shareholders equity |                                                                                                                                                                                                           | $                  | 86,100 |        |      | $ | 78,748 |       
|                                           |                                                                                                                                                                                                           |                    |        |        |      |  

Condensed Statements of Income


(In thousands)


|                                             |            |                          |       |       |      |   |       |       |  |   |       |       | 
|-------------------------------------------- | ---------- | ------------------------ | ----- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                                             |            | Years Ended December 31, |      
|                                             |            |                          |      
|                                             |            | 2004                     |       |       | 2003 |   |       | 2002  | 
|                                             |            |                          |       |       |      |   |       |       | 
|Equity in undistributed income of subsidiary |            | $                        | 6,872 |       |      | $ | 2,406 |       |  | $ | 7,285 |      
|Dividends received from subsidiary           |            |                          | 1,722 |       |      |   | 1,704 |       |  |   | 1,685 |      
|                                             |            |                          |       |       |      |   |       |       | 
|                                             | Net income |                          | $     | 8,594 |      |   | $     | 4,110 |  |   | $     | 8,970 | 
|                                             |            |                          |       |       |      |   |       |       | 

75



---



##### Table of Contents



METROCORP BANCSHARES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Condensed Statements of Cash Flows


(In thousands)


|                                                     |                                              |                                                     |        |        |        |   |       |        |       |   |       |        |        |  
|---------------------------------------------------- | -------------------------------------------- | --------------------------------------------------- | ------ | ------ | ------ | - | ----- | ------ | ----- | - | ----- | ------ | ------ | -
|                                                     |                                              | Years Ended December 31,                            |       
|                                                     |                                              |                                                     |       
|                                                     |                                              | 2004                                                |        |        | 2003   |   |       | 2002   |      
|                                                     |                                              |                                                     |        |        |        |   |       |        |      
|Cash flow from operating activities:                 |                                              |                                                     |        |        |        |   |       |        |       |   |       |       
|                                                     | Net income                                   |                                                     | $      | 8,594  |        |   | $     | 4,110  |       |   | $     | 8,970  |       
|                                                     | Equity in undistributed income of subsidiary |                                                     |        | (6,872 | )      |   |       | (2,406 | )     |   |       | (7,285 | )     
|                                                     | Increase (decrease) in other liabilities     |                                                     |        | 2      |        |   |       |       |       |   |       | (35    | )     
|                                                     |                                              |                                                     |        |        |        |   |       |        |      
|                                                     |                                              | Net cash provided by operating activities           |        |        | 1,724  |   |       |        | 1,704 |   |       |        | 1,650  |  
|                                                     |                                              |                                                     |        |        |        |   |       |        |      
|Cash flow from investment activities:                |                                              |                                                     |        |        |        |   |       |        |       |   |       |       
|                                                     | Investment in subsidiary                     |                                                     |        | (3,025 | )      |   |       | (12    | )     |   |       |       |       
|                                                     |                                              |                                                     |        |        |        |   |       |        |      
|                                                     |                                              | Net cash provided by (used in) investing activities |        |        | (3,025 | ) |       |        | (12   | ) |       |        |       |  
|Cash flow from financing activities:                 |                                              |                                                     |        |        |        |   |       |        |       |   |       |       
|                                                     | Proceeds from issuance of common stock       |                                                     |        | 50     |        |   |       | 1,186  |       |   |       | 76     |       
|                                                     | Re-issuance of treasury stock                |                                                     |        | 390    |        |   |       | 397    |       |   |       | 425    |       
|                                                     | Repurchase of common stock                   |                                                     |        |       |        |   |       | (212   | )     |   |       | (349   | )     
|                                                     | Dividends                                    |                                                     |        | (1,721 | )      |   |       | (1,696 | )     |   |       | (1,685 | )     
|                                                     |                                              |                                                     |        |        |        |   |       |        |      
|                                                     |                                              | Net cash provided by (used in) financing activities |        |        | (1,281 | ) |       |        | (325  | ) |       |        | (1,533 | )
|                                                     |                                              |                                                     |        |        |        |   |       |        |      
|Net increase (decrease) in cash and cash equivalents |                                              |                                                     | (2,582 | )      |        |   | 1,367 |        |       |   | 117   |       
|Cash and cash equivalents at beginning of year       |                                              |                                                     | 4,954  |        |        |   | 3,587 |        |       |   | 3,470 |       
|                                                     |                                              |                                                     |        |        |        |   |       |        |      
|Cash and cash equivalents at end of year             |                                              | $                                                   | 2,372  |        |        | $ | 4,954 |        |       | $ | 3,587 |       
|                                                     |                                              |                                                     |        |        |        |   |       |        |      
|Dividends declared but not paid                      |                                              | $                                                   | 431    |        |        | $ | 429   |        |       | $ | 422   |       



|    |                           
|--- | --------------------------
|16. | Related Party Transactions





|                        |                        |      |       |        |      |   |       |        |  
|----------------------- | ---------------------- | ---- | ----- | ------ | ---- | - | ----- | ------ | -
|                        |                        | 2004 |       |        | 2003 |  
|                        |                        |      |       |        |      |  
|Balance at January 1,   |                        | $    | 2,532 |        |      | $ | 2,635 |       
|                        | New loans and advances |      |       | 497    |      |   |       | 1,790  |  
|                        | Repayments             |      |       | (2,764 | )    |   |       | (1,893 | )
|                        |                        |      |       |        |      |  
|Balance at December 31, |                        | $    | 265   |        |      | $ | 2,532 |       
|                        |                        |      |       |        |      |  



76



---



##### Table of Contents



METROCORP BANCSHARES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                        |                                             |      |        |        |      |   |       |        |  
|----------------------- | ------------------------------------------- | ---- | ------ | ------ | ---- | - | ----- | ------ | -
|                        |                                             | 2004 |        |        | 2003 |  
|                        |                                             |      |        |        |      |  
|Gross balance           |                                             | $    | 11,511 |        |      | $ | 5,268 |       
|                        | Less: participation portion sold to New Era |      |        | (4,226 | )    |   |       | (1,040 | )
|                        |                                             |      |        |        |      |  
|Net balance outstanding |                                             | $    | 7,285  |        |      | $ | 4,228 |       
|                        |                                             |      |        |        |      |  







|    |                   
|--- | ------------------
|17. | Earnings Per Share



|                                                                                       |                                |                          |       |      |      |   |       |      |  |   |       |      | 
|-------------------------------------------------------------------------------------- | ------------------------------ | ------------------------ | ----- | ---- | ---- | - | ----- | ---- |  | - | ----- | ---- | 
|                                                                                       |                                | Years Ended December 31, |      
|                                                                                       |                                |                          |      
|                                                                                       |                                | 2004                     |       |      | 2003 |   |       | 2002 | 
|                                                                                       |                                |                          |       |      |      |   |       |      | 
|Net income                                                                             |                                | $                        | 8,594 |      |      | $ | 4,110 |      |  | $ | 8,970 |     
|                                                                                       |                                |                          |       |      |      |   |       |      | 
|Weighted average common shares in basic EPS                                            |                                |                          | 7,175 |      |      |   | 7,089 |      |  |   | 7,024 |     
|                                                                                       | Effects of dilutive securities |                          |       | 55   |      |   |       | 124  |  |   |       | 130  | 
|                                                                                       |                                |                          |       |      |      |   |       |      | 
|Weighted average common and potentially dilutive common shares
    used in Diluted EPS |                                |                          | 7,230 |      |      |   | 7,213 |      |  |   | 7,154 |     
|                                                                                       |                                |                          |       |      |      |   |       |      | 
|Earnings per common share:                                                             |                                |                          |       |      |      |   |       |      |  |   |       |     
|                                                                                       | Basic                          |                          | $     | 1.20 |      |   | $     | 0.58 |  |   | $     | 1.28 | 
|                                                                                       | Diluted                        |                          | $     | 1.19 |      |   | $     | 0.57 |  |   | $     | 1.25 | 



77



---



##### Table of Contents



METROCORP BANCSHARES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                                 
|--- | ------------------------------------------------
|18. | Supplemental Statement of Cash Flow Information:

|                                                    |                             |                          |     |        |      |  |        |        |  |  |     |        | 
|--------------------------------------------------- | --------------------------- | ------------------------ | --- | ------ | ---- |  | ------ | ------ |  |  | --- | ------ | 
|                                                    |                             | Years Ended December 31, |    
|                                                    |                             |                          |    
|                                                    |                             | 2004                     |     |        | 2003 |  |        | 2002   | 
|                                                    |                             |                          |     |        |      |  |        |        | 
|                                                    |                             | (In thousands)           |    
|Cash payments during the year for:                  |                             |                          |     |        |      |  |        |        |  |  |     |       
|                                                    | Interest                    |                          | $   | 11,267 |      |  | $      | 12,284 |  |  | $   | 14,774 | 
|                                                    | Income taxes                |                          |     | 3,850  |      |  |        | 2,000  |  |  |     | 4,510  | 
|Noncash investing and financing activities:         |                             |                          |     |        |      |  |        |        |  |  |     |       
|                                                    | Dividends declared not paid |                          |     | 431    |      |  |        | 429    |  |  |     | 422    | 
|                                                    | Foreclosed assets acquired  |                          |     | 1,781  |      |  |        | 4,583  |  |  |     | 1,464  | 
|Loans to facilitate the sale of foreclosed assets   |                             |                          | 505 |        |      |  | 300    |        |  |  | 325 |       
|Transfer of loans receivable to loans held-for-sale |                             |                          |    |        |      |  | 18,322 |        |  |  |    |       



|    |              
|--- | -------------
|19. | Stock Options







78



---



##### Table of Contents



METROCORP BANCSHARES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                   |  |             |          |          |          |   |       |             |          |   |          |   |  |             |       |  |          |   |         |   |  |   |       | 
|-------------------------------------------------- |  | ----------- | -------- | -------- | -------- | - | ----- | ----------- | -------- | - | -------- | - |  | ----------- | ----- |  | -------- | - | ------- | - |  | - | ----- | 
|                                                   |  | 2004        |          |          | 2003     |   |       | 2002        |         
|                                                   |  |             |          |          |          |   |       |             |         
|                                                   |  |             |          | Weighted |          |   |       |             | Weighted |   |          |   |  | Weighted    |      
|                                                   |  | # Shares of |          |          | Average  |   |       | # Shares of |          |   | Average  |   |  | # Shares of |       |  | Average  |  
|                                                   |  | Underlying  |          |          | Exercise |   |       | Underlying  |          |   | Exercise |   |  | Underlying  |       |  | Exercise |  
|                                                   |  | Options     |          |          | Prices   |   |       | Options     |          |   | Prices   |   |  | Options     |       |  | Prices   |  
|                                                   |  |             |          |          |          |   |       |             |          |   |          |   |  |             |       |  |          |  
|Outstanding at beginning of the year               |  |             | 212,000  |          |          | $ | 11.10 |             |          |   | 300,200  |   |  | $           | 10.81 |  |          |   | 300,000 |   |  | $ | 10.78 | 
|Granted                                            |  |             | 200,000  |          |          |   | 15.91 |             |          |   | 22,500   |   |  |             | 13.07 |  |          |   | 1,100   |   |  |   | 13.05 | 
|Exercised                                          |  |             | (6,000   | )        |          |   | 8.31  |             |          |   | (110,700 | ) |  |             | 10.71 |  |          |   | (900    | ) |  |   | 8.31  | 
|Canceled                                           |  |             | (135,000 | )        |          |   | 11.56 |             |          |   |         |   |  |             |      |  |          |   |        |   |  |   |      | 
|                                                   |  |             |          |          |          |   |       |             |          |   |          |   |  |             |       |  |          |  
|Outstanding at end of the year                     |  |             | 271,000  |          |          | $ | 14.49 |             |          |   | 212,000  |   |  | $           | 11.10 |  |          |   | 300,200 |   |  | $ | 10.81 | 
|                                                   |  |             |          |          |          |   |       |             |          |   |          |   |  |             |       |  |          |  
|Exercisable at end of the year                     |  |             | 51,750   |          |          | $ | 10.13 |             |          |   | 92,500   |   |  | $           | 10.40 |  |          |   | 165,200 |   |  | $ | 10.51 | 
|                                                   |  |             |          |          |          |   |       |             |          |   |          |   |  |             |       |  |          |  
|Weighted average fair value of all options granted |  | $           | 3.39     |          |          |   |       |             |          | $ | 2.64     |   |  |             |       |  |          | $ | 2.53    |   |  |   |       | 



|                        |  |      |         |   |      |   |         |      |  |   |         |  
|----------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|Assumptions             |  | 2004 |         |   | 2003 |   |         | 2002 | 
|                        |  |      |         |   |      |   |         |      | 
|Expected term           |  |      | 3 years |   |      |   | 3 years |      |  |   | 3 years |  
|Expected volatility     |  |      | 22.00   | % |      |   | 19.00   | %    |  |   | 20.00   | %
|Expected dividend       |  | $    | 0.24    |   |      | $ | 0.24    |      |  | $ | 0.24    |  
|Risk-free interest rate |  |      | 3.25    | % |      |   | 2.28    | %    |  |   | 1.99    | %



|                         |  |                     |         |          |                     |   |       |                  |  |  |             |  |  |                |        |  |  |   |         | 
|------------------------ |  | ------------------- | ------- | -------- | ------------------- | - | ----- | ---------------- |  |  | ----------- |  |  | -------------- | ------ |  |  | - | ------- | 
|                         |  | Options Outstanding |         |          |                    
|                         |  |                     |         |          | Options Exercisable |  
|                         |  |                     |         | Weighted |                     |   |       |                 
|                         |  | Number              |         |          | Weighted            |   |       | Average          |  |  | Number      |  |  | Weighted       |       
|                         |  | Outstanding         |         |          | Average             |   |       | Remaining        |  |  | Outstanding |  |  | Average        |       
|Range of Exercise Prices |  | at 12/31/04         |         |          | Exercise Price      |   |       | Contractual Life |  |  | at 12/31/04 |  |  | Exercise Price |       
|                         |  |                     |         |          |                     |   |       |                  |  |  |             |  |  |                |       
|$7.25 - $8.31            |  |                     | 18,500  |          |                     | $ | 7.91  |                  |  |  | 2.02 years  |  |  |                | 18,500 |  |  | $ | 7.9100  | 
|$10.50 - $13.10          |  |                     | 52,500  |          |                     |   | 11.36 |                  |  |  | 4.92 years  |  |  |                | 33,250 |  |  |   | 11.1429 | 
|$14.92 - $19.08          |  |                     | 200,000 |          |                     |   | 15.91 |                  |  |  | 7.06 years  |  |  |                |       |  |  |   |        | 

79



---



##### Table of Contents



EXHIBIT INDEX


|        |    |      |             |                                                                                                                                                                                                                                                 
|------- | -- | ---- | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |            
|Number  |    |      | Description
|        |    |      |            
|        | 3  | .1   |             | Amended and Restated Articles of Incorporation of the Company
    (incorporated herein by reference to Exhibit 3.1 to the
    Companys Registration Statement on Form S-1
    (Registration No. 333-62667) (the Registration
    Statement)).
|        | 3  | .2   |             | Amended and Restated Bylaws of the Company (incorporated herein
    by reference to Exhibit 3.2 to the Registration Statement).                                                                                                                 
|        | 4  |      |             | Specimen form of certificate evidencing the Common Stock
    (incorporated herein by reference to Exhibit 4 to the
    Registration Statement).                                                                                                 
|        | 10 | .1   |             | Agreement and Plan of Reorganization by and among MetroCorp
    Bancshares, Inc., MC Bancshares of Delaware, Inc. and MetroBank,
    N.A. (incorporated herein by reference to Exhibit 10.1 to
    the Registration Statement).                 
|        | 10 | .2   |             | MetroCorp Bancshares, Inc. 1998 Employee Stock Purchase Plan
    (incorporated herein by reference to Exhibit 10.4 to the
    Registration Statement).                                                                                          
|        | 10 | .3  |             | MetroCorp Bancshares, Inc. 1998 Stock Incentive Plan
    (incorporated herein by reference to Exhibit 10.5 to the
    Registration Statement).                                                                                                  
|        | 10 | .4   |             | First Amendment to the MetroCorp Bancshares, Inc. 1998 Employee
    Stock Purchase Plan (incorporated herein by reference to
    Exhibit 10.6 to the Companys Annual Report on Form
    10-K for the year ended December 31, 1998).            
|        | 10 | .5* |             | Employment Agreement between MetroCorp Bancshares, Inc. and
    George M. Lee                                                                                                                                                                   
|        | 21 |      |             | Subsidiaries of MetroCorp Bancshares, Inc. (incorporated herein
    by reference to Exhibit 21 to the Registration Statement).                                                                                                                  
|        | 23 | .1*  |             | Consent of PricewaterhouseCoopers LLP.                                                                                                                                                                                                          
|        | 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, as adopted pursuant to Section 906
    of the Sarbanes-Oxley Act of 2002.                                                                                   
|        | 32 | .2*  |             | Certification of Chief Financial Officer pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes Oxley Act of 2002.                                                                                      






|  |                
|- | ---------------
|* | Filed herewith.



|  |                                                         
|- | --------------------------------------------------------
| | Management contract or compensatory plan or arrangement.