MetroCorp Bancshares 10-Q 2008 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 (Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-25141

METROCORP BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

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

9600 Bellaire Boulevard, Suite 252

Houston, Texas 77036

(Address of principal executive offices including zip code)

(713) 776-3876

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes R     No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer £	Accelerated Filer R
Non-accelerated Filer £  (Do not check if a smaller reporting company)	Smaller Reporting Company £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes £    No R

As of August 4, 2008, the number of outstanding shares of Common Stock, par value $1.00 per share, was 10,860,034.

PART I

FINANCIAL INFORMATION

 Item 1. Condensed Consolidated Financial Statements.

METROCORP BANCSHARES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

	June 30,			December 31,
	2008			2007
ASSETS
Cash and due from banks	$	32,190		$	28,889
Federal funds sold and other short-term investments		37,473			17,381
Total cash and cash equivalents		69,663			46,270
Securities available-for-sale, at fair value		115,600			137,749
Other investments		9,204			6,886
Loans, net of allowance for loan losses of  $15,520 and $13,125, respectively		1,296,045			1,188,786
Accrued interest receivable		6,054			6,462
Premises and equipment, net		8,223			8,795
Goodwill		21,827			21,827
Core deposit intangibles		631			756
Customers' liability on acceptances		11,813			5,967
Foreclosed assets, net		2,230			1,474
Other assets		37,188			34,734
Total assets	$	1,578,478		$	1,459,706
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing	$	224,935		$	209,223
Interest-bearing		1,017,766			981,820
Total deposits		1,242,701			1,191,043
Junior subordinated debentures		36,083			36,083
Other borrowings		156,598			99,796
Accrued interest payable		1,344			1,727
Acceptances outstanding		11,813			5,967
Other liabilities		8,195			7,680
Total liabilities		1,456,734			1,342,296
Commitments and contingencies		–			–
Shareholders' equity:
Common stock, $1.00 par value, 50,000,000 shares authorized; 10,994,965 shares issued and 10,851,496 shares and 10,825,837 shares outstanding at June 30, 2008 and December 31, 2007, respectively		10,995			10,995
Additional paid-in-capital		27,832			27,386
Retained earnings		85,848			82,211
Accumulated other comprehensive loss		(949	)		(786	)
Treasury stock, at cost, 143,469 and 169,128 shares at June 30, 2008 and December 31, 2007, respectively		(1,982	)		(2,396	)
Total shareholders' equity		121,744			117,410
Total liabilities and shareholders' equity	$	1,578,478		$	1,459,706

See accompanying notes to condensed consolidated financial statements

2

METROCORP BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2008			2007			2008			2007
Interest income:
Loans	$	23,020		$	22,908		$	46,420		$	43,529
Securities:
Taxable		1,276			1,768			2,648			3,632
Tax-exempt		64			76			137			161
Other investments		95			70			182			138
Federal funds sold and other short-term investments		146			850			283			1,818
Total interest income		24,601			25,672			49,670			49,278
Interest expense:
Time deposits		6,830			8,162			14,431			15,763
Demand and savings deposits		1,902			2,503			3,967			4,028
Junior subordinated debentures		520			525			1,040			1,045
Subordinated debentures and other borrowings		880			265			1,768			589
Total interest expense		10,132			11,455			21,206			21,425
Net interest income		14,469			14,217			28,464			27,853
Provision for loan losses		1,465			468			3,049			605
Net interest income after provision for loan losses		13,004			13,749			25,415			27,248
Noninterest income:
Service fees		1,206			1,262			2,449			2,478
Loan-related fees		183			151			364			328
Letters of credit commissions and fees		295			203			562			407
Gain on securities transactions, net		124			–			148			–
Gain on sale of loans		194			251			245			251
Other noninterest income		376			132			739			201
Total noninterest income		2,378			1,999			4,507			3,665
Noninterest expenses:
Salaries and employee benefits		5,931			6,251			12,417			11,997
Occupancy and equipment		1,982			2,042			3,941			4,012
Foreclosed assets, net		(389	)		(132	)		(332	)		(90	)
Impairment write-down on securities		1,540			–			1,540			–
Other noninterest expense		2,734			2,725			5,195			5,192
Total noninterest expenses		11,798			10,886			22,761			21,111
Income before provision for income taxes		3,584			4,862			7,161			9,802
Provision for income taxes		1,316			1,789			2,658			3,639
Net income	$	2,268		$	3,073		$	4,503		$	6,163
Earnings per common share:
Basic	$	0.21		$	0.28		$	0.42		$	0.56
Diluted	$	0.21		$	0.28		$	0.41		$	0.55
Weighted average shares outstanding:
Basic		10,819			10,962			10,815			10,957
Diluted		10,899			11,171			10,900			11,167
Dividends per common share	$	0.04		$	0.04		$	0.08		$	0.08

See accompanying notes to condensed consolidated financial statements

3

METROCORP BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2008			2007			2008			2007
Net income	$	2,268		$	3,073		$	4,503		$	6,163
Other comprehensive loss, net of tax:
Unrealized loss on investment securities, net:
Unrealized holding  loss arising during the period		(629	)		(603	)		(68	)		(236	)
Less: reclassification adjustment for gain included in net income		79			–			95			–
Other comprehensive loss		(708	)		(603	)		(163	)		(236	)
Total comprehensive income	$	1,560		$	2,470		$	4,340		$	5,927

METROCORP BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Six Months Ended June 30, 2008

(In thousands)

(Unaudited)

					Additional						Accumulated Other			Treasury
	Common Stock				Paid-In			Retained			Comprehensive			Stock
	Shares		At Par		Capital			Earnings			Income (Loss)			At Cost			Total
Balance at December 31, 2007		10,826	$	10,995	$	27,386		$	82,211		$	(786	)	$	(2,396	)	$	117,410
Re-issuance of treasury stock		26		–		(107	)		–			–			414			307
Stock-based compensation expense recognized in earnings		–		–		553			–			–			–			553
Net income		–		–		–			4,503			–			–			4,503
Other comprehensive income (loss)		–		–		–			–			(163	)		–			(163	)
Cash dividends ($0.08 per share)		–		–		–			(866	)		–			–			(866	)
Balance at June 30, 2008		10,852	$	10,995	$	27,832		$	85,848		$	(949	)	$	(1,982	)	$	121,744

See accompanying notes to condensed consolidated financial statements

4

METROCORP BANCSHARES, INC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	For the Six Months Ended June 30,
	2008			2007
Cash flows from operating activities:
Net income	$	4,503		$	6,163
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,062			895
Provision for loan losses		3,049			605
Impairment write-down on securities		1,540			–
Gain on sale or call of securities, net		(148	)		–
Gain on foreclosed assets		(447	)		(268	)
Loss on sale and disposal of premises and equipment		9			–
Gain on sale of loans		(245	)		(251	)
Amortization of premiums and discounts on securities		29			35
Amortization of deferred loan fees and discounts		(1,269	)		(1,345	)
Amortization of core deposit intangibles		125			173
Stock-based compensation		553			458
Changes in:
Accrued interest receivable		408			(485	)
Other assets		(2,364	)		(1,664	)
Accrued interest payable		(383	)		132
Other liabilities		514			1,507
Net cash provided by operating activities		6,936			5,955
Cash flows from investing activities:
Purchases of securities available-for-sale		(17,968	)		(378	)
Purchase of bank owned life insurance		–			(25,000	)
Proceeds from sales of securities available-for-sale		4,849			–
Proceeds from maturities, principal paydowns and calls of securities available-for-sale		31,276			17,242
Net change in loans		(111,024	)		(191,503	)
Proceeds from sale of foreclosed assets		1,921			551
Proceeds from sale of premises and equipment		7			–
Purchases of premises and equipment		(506	)		(1,811	)
Net cash used in investing activities		(91,445	)		(200,899	)
Cash flows from financing activities:
Net change in:
Deposits		51,658			123,006
Other borrowings		56,802			(15,577	)
Proceeds from stock option exercises		–			108
Re-issuance of treasury stock		307			273
Dividends paid		(865	)		(875	)
Net cash provided by financing activities		107,902			106,935
Net increase (decrease) in cash and cash equivalents		23,393			(88,009	)
Cash and cash equivalents at beginning of period		46,270			151,358
Cash and cash equivalents at end of period	$	69,663		$	63,349

See accompanying notes to condensed consolidated financial statements

5

METROCORP BANCSHARES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements include the accounts of MetroCorp Bancshares, Inc. (the “Company”) and wholly-owned subsidiaries, MetroBank, National Association (“MetroBank”) and Metro United Bank (“Metro United”), in Texas and California, respectively (collectively, the “Banks”).  MetroBank is engaged in commercial banking activities through its thirteen branches in the greater Houston and Dallas, Texas metropolitan areas, and Metro United is engaged in commercial banking activities through its six branches in the San Diego, Los Angeles and San Francisco, California metropolitan areas. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain principles which significantly affect the determination of financial position, results of operations and cash flows are summarized below.

The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity under accounting principles generally accepted in the United States of America.  Voting interest entities are entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities.  The Company consolidates voting interest entities in which it has all, or at least a majority of, the voting interest.  As defined in applicable accounting standards, variable interest entities, (“VIEs”) are entities that lack one or more of the characteristics of a voting interest entity.  A controlling financial interest is present when an enterprise has a variable interest, or a combination of variable interests, that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both.  The enterprise with a controlling financial interest, known as the primary beneficiary, consolidates the VIE.  The Company’s wholly owned subsidiary, MCBI Statutory Trust I, is a VIE for which the Company is not the primary beneficiary.  Accordingly, the accounts of this entity are not consolidated in the Company’s financial statements.

The accompanying unaudited condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for Form 10-Q. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal and recurring adjustments, necessary for a fair statement of the Company’s financial position at June 30, 2008, results of operations for the three and six months ended June 30, 2008 and 2007, and cash flows for the six months ended June 30, 2008 and 2007. Interim period results are not necessarily indicative of results for a full-year or any other period.  The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

These financial statements and the notes thereto should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

6

METROCORP BANCSHARES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. SECURITIES

The amortized cost and approximate fair value of securities is as follows:

	As of June 30, 2008									As of December 31, 2007
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Securities available for sale
US Government agencies	$	23	$	1	$	(1	)	$	23	$	24	$	2	$	(1	)	$	25
US Government sponsored enterprises		16,397		1		(539	)		15,859		20,473		10		(10	)		20,473
Obligations of state and political subdivisions		3,852		35	─				3,887		5,936		162		(7	)		6,091
Mortgage-backed securities and collateralized mortgage obligations		78,405		269		(1,234	)		77,440		92,673		173		(1,123	)		91,723
Other debt securities		6		1		(1	)		6		33	─		─				33
Investment in ARM and CRA funds		18,419	─			(34	)		18,385		19,858		39		(493	)		19,404
Total available for sale securities	$	117,102	$	307	$	(1,809	)	$	115,600	$	138,997	$	386	$	(1,634	)	$	137,749
Other investments
FHLB/Federal Reserve Bank stock	$	8,121	$	─	$	─		$	8,121	$	5,803	$	─	$	─			5,803
Investment in subsidiary trust		1,083		─		─			1,083		1,083		─		─			1,083
Total other investments	$	9,204	$	─	$	─		$	9,204	$	6,886	$	─	$	─		$	6,886

The following table displays the gross unrealized losses and fair value of investments as of June 30, 2008 that were in a continuous unrealized loss position for the periods indicated:

	Less Than 12 Months					Greater Than 12 Months					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Securities available for sale	(In thousands)
US Government agencies	$	10	$	(1	)	$	─	$	─		$	10	$	(1	)
U S Government sponsored enterprises		14,358		(539	)	─		─				14,358		(539	)
Mortgage-backed securities and collateralized mortgage obligations		25,605		(449	)		19,500		(785	)		45,105		(1,234	)
Other debt securities		6		(1	)	─		─				6		(1	)
Investment in ARM and CRA funds		4,747		(34	)	─		─				4,747		(34	)
Total securities	$	44,726	$	(1,024	)	$	19,500	$	(785	)	$	64,226	$	(1,809	)

Declines in the fair value of individual securities below their cost that are other-than-temporary would result in write-downs, as a realized loss, of the individual securities to their fair value. Management believes that based upon the credit quality of the debt securities and the Company’s intent and ability to hold the securities until their recovery, none of the unrealized losses on the securities as of June 30, 2008 should be considered other-than-temporary.

The Company recognized an other-than-temporary impairment charge of approximately $1.5 million pre-tax, or $953,000 net of tax, on its $14.2 million investment in the AMF Ultra Short Mortgage Fund (the “Fund”) as of June 30, 2008.   The Fund is a mutual fund investing primarily in adjustable rate agency and private label mortgage-backed securities.  The Company reclassified the unrealized mark-to-market loss on these investment grade securities to an other-than-temporary impairment charge because of the significant decline in the net asset value of the Fund, and because the Fund manager activated the redemption-in-kind provision on May 6, 2008 to protect shareholders against forced liquidation of Fund holdings to satisy cash redemptions. The decline is not attributable to credit losses of the underlying securities of the Fund, but is instead a reflection of downgrades of the securities in the Fund's portfolio by one or more of the three major rating agencies, and general market conditions for private label mortgage-backed securities.

7

METROCORP BANCSHARES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In July 2008, the Company redeemed its shares in the Fund for approximately $2.2 million in cash, with the remaining value of approximately $10.5 million, net of a $57,000 loss, distributed in the form of securities held by the Fund that approximates the Company's respective interest in each of the underlying securities.

The redemption of securities from the Fund will result in the Company receiving all of the principal payments, including prepayments, made each month on the securities and will eliminate the 45 basis point fund management fee currently assessed on the securities held in the Fund. The redemption also eliminated the non-maturity characteristic associated with investments in a mutual fund since each individual security has a final maturity date.

The Company also reviewed the impairment related to two other mutual funds with a total book value of approximately $5.7 million as of June 30, 2008 and determined that the impairment on one fund was other-than-temporary. Accordingly, the Company recorded a non-cash impairment charge of $74,000 pre-tax, or $48,000 net of tax. The unrealized loss on the remaining fund was approximately $34,000 at June 30, 2008 and such impairment was determined to not be other-than-temporary.

3.  ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses are as follows:

	As of and for the Three Months						As of and for the Six Months
	Ended June 30,						Ended June 30,
	2008			2007			2008			2007
	(In thousands)
Allowance for loan losses at beginning of period	$	14,588		$	11,900		$	13,125		$	11,436
Provision for loan losses		1,465			468			3,049			605
Charge-offs		(623	)		(301	)		(759	)		(527	)
Recoveries		90			594			105			1,147
Allowance for loan losses at end of period	$	15,520		$	12,661		$	15,520		$	12,661

4.  INCOME TAXES

The Company had no unrecognized income taxes as of June 30, 2008, and as a result there is no impact on the Company's effective tax rate. Additionally, the Company does not anticipate a significant change in the balance of unrecognized income taxes within the next 12 months. As of June 30, 2008, the Company has not accrued any interest and penalties related to unrecognized income taxes.

The Company is subject to taxation in the United States as well as Texas and California.  State income tax returns are generally subject to examination for a period of three to five years after filing.  The state impact of any changes made to the federal return remains subject to examination by various states for a period up to one year after formal notification to the state.  The Company is open to federal tax authority examinations for the tax years ended December 31, 2004 through December 31, 2007.

8

METROCORP BANCSHARES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5. EARNINGS PER COMMON SHARE

Basic earnings per share (“EPS”) is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income available to common shareholders by the weighted-average number of common shares and potentially dilutive common shares outstanding during the period. Stock options and restricted common shares can be dilutive common shares and are therefore considered in the earnings per share calculation, if dilutive.  Stock options and restricted common shares that are antidilutive are excluded from earnings per share calculation.  Stock options are antidilutive when the exercise price is higher than the current market price of the Company’s common stock.  Restricted common shares are antidilutive when the value at grant date is greater than the current market price of the Company’s common stock.  As of June 30, 2008 and 2007, there were 285,342 and 48,865 antidilutive common shares, respectively.  The number of potentially dilutive common shares is determined using the treasury stock method.

	As of and for the Three Months				As of and for the Six Months
	Ended June 30,				Ended June 30,
	2008		2007		2008		2007
	(In thousands, except per share amounts)
Net income available to common shareholders	$	2,268	$	3,073	$	4,503	$	6,163
Weighted average common shares in basic EPS		10,819		10,962		10,815		10,957
Effect of dilutive securities		80		209		85		210
Weighted average common and potentially dilutive common shares used in diluted EPS		10,899		11,171		10,900		11,167
Earnings per common share:
Basic	$	0.21	$	0.28	$	0.42	$	0.56
Diluted	$	0.21	$	0.28	$	0.41	$	0.55

6.  LITIGATION

The Company is involved in various litigation that arises from time to time in the normal course of business. In the opinion of management, after consultations with its legal counsel, such litigation is not expected to have a material adverse effect of the Company’s consolidated financial position, result of operations or cash flows.

7. OFF-BALANCE SHEET ACTIVITIES

The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include various guarantees, commitments to extend credit and standby letters of credit. Additionally, these instruments may involve, to varying degrees, credit risk in excess of the amount recognized in the statement of financial condition. The Company’s maximum exposure to credit loss under such arrangements is represented by the contractual amount of those instruments. The Company applies the same credit policies and collateralization guidelines in making commitments and conditional obligations as it does for on-balance sheet instruments. Off-balance sheet financial instruments include commitments to extend credit and guarantees under standby and other letters of credit.

9

METROCORP BANCSHARES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The contractual amount of the Company’s financial instruments with off-balance sheet risk as of June 30, 2008 and December 31, 2007 is presented below:

	As of June 30, 2008		As of December 31, 2007
	(In thousands)
Unfunded loan commitments including unfunded lines of credit	$	319,075	$	315,370
Standby letters of credit		11,884		9,290
Commercial letters of credit		11,621		12,853
Operating leases		8,894		9,754
Total financial instruments with off-balance sheet risk	$	351,474	$	347,267

8.  OPERATING SEGMENT INFORMATION

The Company operates two community banks in distinct geographical areas, and manages its operations and prepares management reports and other information with a primary focus on these geographical areas.  Performance assessment and resource allocation are based upon this geographical structure.  The operating segment identified as “Other” includes the parent company and eliminations of transactions between segments. The accounting policies of the individual operating segments are the same as those of the Company as described in Note 1. Transactions between operating segments are primarily conducted at fair value, resulting in profits that are eliminated for reporting consolidated results of operations.  Operating segments pay for centrally provided services based upon estimated or actual usage of those services.

The following is a summary of selected operating segment information as of and for the three and six months ended June 30, 2008 and 2007:

	For the three months ended June 30, 2008									For the three months ended June 30, 2007
	MetroBank		Metro United		Other			Consolidated Company		MetroBank		Metro United		Other			Consolidated Company
	(In thousands)
Total interest income	$	18,187	$	6,398	$	16		$	24,601	$	19,551	$	6,105	$	16		$	25,672
Total interest expense		6,644		2,966		522			10,132		7,773		3,157		525			11,455
Net interest income		11,543		3,432		(506	)		14,469		11,778		2,948		(509	)		14,217
Provision for loan losses		914		551	─				1,465		19		449	─				468
Net interest income after provision for loan losses		10,629		2,881		(506	)		13,004		11,759		2,499		(509	)		13,749
Noninterest income		2,567		149		(338	)		2,378		2,060		134		(195	)		1,999
Noninterest expenses		9,070		2,431		297			11,798		8,218		2,410		258			10,886
Income before income tax provision		4,126		599		(1,141	)		3,584		5,601		223		(962	)		4,862
Provision for income taxes		1,469		199		(352	)		1,316		1,926		120		(257	)		1,789
Net income	$	2,657	$	400	$	(789	)	$	2,268	$	3,675	$	103	$	(705	)	$	3,073

10

METROCORP BANCSHARES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	For the six months ended June 30, 2008									For the six months ended June 30, 2007
	MetroBank		Metro United		Other			Consolidated Company		MetroBank		Metro United		Other			Consolidated Company
	(In thousands)
Total interest income	$	36,743	$	12,894	$	33		$	49,670	$	38,140	$	11,104	$	34		$	49,278
Total interest expense		13,886		6,278		1,042			21,206		14,652		5,727		1,046			21,425
Net interest income		22,857		6,616		(1,009	)		28,464		23,488		5,377		(1,012	)		27,853
Provision for loan losses		1,604		1,445	─				3,049		19		586	─				605
Net interest income after provision for loan losses		21,253		5,171		(1,009	)		25,415		23,469		4,791		(1,012	)		27,248
Noninterest income		4,929		254		(676	)		4,507		3,683		210		(228	)		3,665
Noninterest expenses		17,068		5,158		535			22,761		16,074		4,502		535			21,111
Income before income tax provision		9,114		267		(2,220	)		7,161		11,078		499		(1,775	)		9,802
Provision for income taxes		3,169		138		(649	)		2,658		3,898		245		(504	)		3,639
Net income	$	5,945	$	129	$	(1,571	)	$	4,503	$	7,180	$	254	$	(1,271	)	$	6,163
	As of June 30, 2008									As of June 30, 2007
	MetroBank		Metro United		Other			Consolidated Company		MetroBank		Metro United		Other			Consolidated Company
	(In thousands)
Net loans	$	932,030	$	364,015	$	–		$	1,296,045	$	779,941	$	287,673	$	–		$	1,067,614
Total assets		1,145,890		433,386		(798	)		1,578,478		1,047,647		335,561		1,320			1,384,528
Deposits		922,798		323,519		(3,616	)		1,242,701		939,625		272,071		(7,026	)		1,204,670

9. FAIR VALUE

Effective January 1, 2008, the Company adopted FASB Statement No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  In accordance with Financial Accounting Standards Board Staff Position (FSP) No. 157-2, “Effective Date of FASB Statement No. 157,” the Company will delay application of SFAS 157 for non-financial assets and non-financial liabilities until January 1, 2009.

SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The standard describes three levels of inputs that may be used to measure fair value:

· Level 1 – Quoted prices in active markets for identical assets or liabilities.

· Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

· Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.  Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

11

Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Securities.  Where quoted prices are available in an active market, securities are reported at fair value utilizing Level 1 inputs.  Level 1 securities are comprised of bond funds.  If quoted market prices are not available, the Company obtains fair values from an independent pricing service.  The fair value measurements consider observable data that may include pricing models, quoted prices of securities with similar characteristics, or discounted cash flows.  Level 2 securities are comprised of highly liquid government bonds, and collateralized mortgage and debt obligations.

Impaired Loans.  Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral.  Collateral values are estimated using Level 3 inputs based on the fair value of the underlying collateral determined by independent appraisals.

The following table presents the financial instruments carried at fair value as of June 30, 2008, by caption on the consolidated balance sheets and by SFAS 157 valuation hierarchy (as described above):

Assets measured at fair value on a recurring basis

	Fair Value Measurements at June 30, 2008, Using
	(In thousands)
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value Measurements June 30, 2008
Securities available-for-sale	$	18,385	$	97,215	$	–	$	115,600

Certain non-financial assets measured at fair value on a recurring basis include reporting units measured at fair value in the first step of a goodwill impairment test. Certain non-financial assets measured at fair value on a non-recurring basis include non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, as well as intangible assets measured at fair value for impairment assessment. As stated above, SFAS 157 will be applicable to these fair value measurements beginning January 1, 2009.

Certain financial assets are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets measured at fair value on a non-recurring basis were not significant at June 30, 2008.

Effective January 1, 2008, the Company adopted the provisions of SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115” (“SFAS 159”).  SFAS 159 permits an entity to choose to measure eligible items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value measurement option has been elected are reported in earnings at each subsequent reporting date. The fair value option (i) may be applied instrument by instrument, with certain exceptions, (ii) is irrevocable (unless a new election date occurs) and (iii) is applied only to entire instruments and not to portions of instruments. The Company did not elect to measure any instruments at fair value and as a result, adoption of SFAS 159 on January 1, 2008 did not have a significant impact on the Company’s financial statements.

10.  RELATED PARTY TRANSACTIONS

In June 2008, the Company issued an aggregate of $4.0 million of its 2008 Subordinated Debentures through a private placement, with $2.0 million sold to the Company’s Chairman of the Board and $2.0 million sold to an affiliate of a Company Director.  The debentures accrue interest at a fixed rate of 5% payable quarterly commencing on September 30, 2008, and mature in December 2008.    The proceeds from issuance of the 2008 Subordinated Debentures were used to contribute capital to the Banks.

11.  NEW ACCOUNTING PRONOUNCEMENTS

In May 2008, the FASB issued Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles”.  Statement No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy).  Statement No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The adoption of Statement No. 162 is not expected to have a material impact on the financial condition, results of operations, or cash flows of the Company.

12

In March 2008, the FASB issued Statement No. 161, “Disclosures About Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133”. Statement No. 161 amends Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” to amend and expand the disclosure requirements of Statement No. 133 to provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under Statement No. 133 and its related interpretations, and (iii) how derivative instruments and related hedged items affect an entity's financial position, results of operations and cash flows. To meet those objectives, Statement No. 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. Statement No. 161 is effective for the Company beginning January 1, 2009.  The adoption of Statement No. 161 is not expected to have a material impact on the financial condition, results of operations, or cash flows of the Company.

In December 2007, the FASB issued Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB No. 51”, which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary, and clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements.  The statement will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary.  Statement No. 160 is effective for the Company beginning January 1, 2009. The adoption of Statement No. 160 is not expected to have a material impact on the financial condition, results of operations, or cash flows of the Company.

In December 2007, the FASB issued Statement No. 141(R), “Business Combinations”, which replaces FASB Statement No. 141, “Business Combinations”, and retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. By applying the same method of accounting—the acquisition method—to all transactions and other events in which one entity obtains control over one or more other businesses, the Statement is intended to improve the comparability of the information about business combinations provided in financial reports.  Statement No. 141(R) is effective for the Company beginning January 1, 2009. The adoption of Statement No. 141(R) is not expected to have a material impact on the financial condition, results of operations, or cash flows of the Company.

13

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Special Cautionary Notice Regarding Forward-looking Statements

Statements and financial discussion and analysis contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is including this statement for purposes of invoking these safe harbor provisions. These forward-looking statements include information about possible or assumed future results of the Company’s operations or performance. Words such as “believe”, “expect”, “anticipate”, “estimate”, “continue”, “intend”, “may”, “will”, “should”, or similar expressions, identifies these forward-looking statements. Many possible factors or events could affect the future financial results and performance of the Company and could cause those financial results or performance to differ materially from those expressed in the forward-looking statement. These possible events or factors include, without limitation:

• changes in interest rates and market prices, which could reduce the Company’s net interest margins, asset valuations and expense expectations;

• changes in the levels of loan prepayments and the resulting effects on the value of the Company’s loan portfolio;

• changes in local economic and business conditions which adversely affect the ability of the Company’s customers to transact profitable business with the Company, including the ability of borrowers to repay their loans according to their terms or a change in the value of the related collateral;

• increased competition for deposits and loans adversely affecting rates and terms;

• the Company’s ability to identify suitable acquisition candidates;

• the timing, impact and other uncertainties of the Company’s ability to enter new markets successfully and capitalize on growth opportunities;

• increased credit risk in the Company’s assets and increased operating risk caused by a material change in commercial, consumer and/or real estate loans as a percentage of the total loan portfolio;

• the failure of assumptions underlying the establishment of and provisions made to the allowance for loan losses;

• changes in the availability of funds resulting in increased costs or reduced liquidity;

• a deterioration or downgrade in the credit quality and credit agency ratings of the securities in the Company’s securities portfolio;

• increased asset levels and changes in the composition of assets and the resulting impact on our capital levels and regulatory capital ratios;

• the Company’s ability to acquire, operate and maintain cost effective and efficient systems without incurring unexpectedly difficult or expensive but necessary technological changes;

• the loss of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensation levels; and

• changes in statutes and government regulations or their interpretations applicable to bank holding companies and our present and future banking and other subsidiaries, including changes in tax requirements and tax rates.

All written or oral forward-looking statements attributable to the Company are expressly qualified in their entirety by these cautionary statements. The Company undertakes no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise.

14

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

Overview

The Company recorded net income of $2.3 million for the three months ended June 30, 2008, down approximately $805,000 compared with net income of $3.1 million for the same quarter in 2007. The Company’s diluted earnings per share (“EPS”) for the three months ended June 30, 2008 was $0.21, a decrease of $0.07 per diluted share compared with diluted EPS of $0.28 for the same quarter in 2007. Net income for the six months ended June 30, 2008 was $4.5 million, a decrease of approximately $1.7 million compared with $6.2 million for the same period in 2007. The Company’s diluted EPS for the six months ended June 30, 2008 was $0.41, a decrease of $0.14 compared with $0.55 for the same period in 2007.  Details of the changes in the various components of net income are further discussed below.

Total assets were $1.58 billion at June 30, 2008, up approximately $118.8 million or 8.1% compared with $1.46 billion at December 31, 2007. Investment securities at June 30, 2008 were $115.6 million, down approximately $22.1 million or 16.1% compared with $137.7 million at December 31, 2007.  Net loans at June 30, 2008 were $1.30 billion, up approximately $107.3 million or 9.0% compared with $1.19 billion at December 31, 2007. Total deposits at June 30, 2008 were $1.24 billion, up approximately $51.7 million or 4.3% compared with $1.19 billion at December 31, 2007. The Company’s return on average assets (“ROAA”) for the three months ended June 30, 2008 and 2007 was 0.59% and 0.91%, respectively.  The Company’s ROAA for the six months ended June 30, 2008 and 2007 was 0.60% and 0.95%, respectively.

Shareholders’ equity at June 30, 2008 was $121.7 million compared with $117.4 million at December 31, 2007, an increase of approximately $4.3 million or 3.7%.  The Company’s return on average equity (“ROAE”) for the three months ended June 30, 2008 and 2007 was 7.46% and 11.04%, respectively.  The Company’s ROAE for the six months ended June 30, 2008 and 2007 was 7.49% and 11.31%, respectively.

The Company recognized an other-than-temporary impairment charge of $1.5 million pre-tax, or $953,000 net of tax, on its $14.2 million investment in the AMF Ultra Short Mortgage Fund (the “Fund”) as of June 30, 2008.   The Fund is a mutual fund investing primarily in adjustable rate agency and private label mortgage backed securities.  The Company reclassified the unrealized mark-to-market loss on these investment grade securities to an other-than-temporary impairment charge because of the significant decline in the net asset value of the Fund and because the Fund manager activated the redemption-in-kind provision on May 6, 2008 to protect shareholders against forced liquidation of Fund holdings to satisfy cash redemptions. In July 2008, the Company redeemed its shares in the Fund for approximately $2.2 million in cash, with the remaining value of approximately $10.5 million, net of a $57,000 loss distributed in the form of securities held by the Fund that approximates the Company's respective interest in each of the underlying securities.

In June 2008, the Company issued an aggregate of $4.0 million in subordinated debentures through a private placement to the Company’s Chairman of the Board and an affiliate of a Company Director.  The proceeds from issuance of the subordinated debentures were used to contribute capital to the Banks.

During the second quarter of 2008, the Company opened a new branch in Garland, Texas as a part of the strategy to expand its presence in the greater Dallas metropolitan area.

Results of Operations

Net Interest Income and Net Interest Margin. For the three months ended June 30, 2008, net interest income, before the provision for loan losses, was $14.5 million, up approximately $252,000 or 1.8% compared with $14.2 million for the same quarter in 2007. The increase was due primarily to increased loan volume partially offset by lower yields on average earning assets due to interest rate cuts by the Federal Reserve.  The increase in net interest income reflects a $1.1 million decrease in interest income that was offset by a $1.3 million decrease in interest expense. Average interest-earning assets for the three months ended June 30, 2008 were $1.46 billion, up approximately $178.8 million or 14.0% compared with $1.28 billion for the same quarter in 2007. The weighted average yield on interest-earning assets for the three months ended June 30, 2008 was 6.80%, down 127 basis points compared with 8.07% for the same quarter in 2007. Average interest-bearing liabilities for the three months ended June 30, 2008 were $1.19 billion, up approximately $169.4 million or 16.6% compared with $1.02 billion for the same quarter in 2007. The weighted average rate paid on interest-bearing liabilities for the three months ended June 30, 2008 was 3.43%, down 108 basis points compared with 4.51% for the same quarter in 2007.  Interest rate cuts by the Federal Reserve resulted in a decrease in all yields and costs for the three and six months ended June 30, 2008, compared with the same period in 2007.

For the six months ended June 30, 2008, net interest income, before the provision for loan losses, was $28.5 million, up approximately $611,000 or 2.2% compared with $27.9 million for the same period in 2007. The increase was due primarily to increased loan volume partially offset by lower yields on average earning assets.  The increase reflects a $392,000 increase in interest income and a $219,000 decrease in interest expense.  Average interest-earning assets for the six months ended June 30, 2008 were $1.42 billion, up approximately $179.1 million or 14.5% compared with $1.24 billion for the same period in 2007. The weighted average yield on interest-earning assets for the six months ended June 30, 2008 was 7.06%, down 98 basis points compared with 8.04% for the same period in 2007.  Average interest-bearing liabilities for the six months ended June 30, 2008 were $1.16 billion, up approximately $182.4 million or 18.7% compared with $977.0 million for the same period in 2007. The weighted average rate paid on interest-bearing liabilities for the six months ended June 30, 2008 was 3.68%, down 74 basis points compared with 4.42% for the same period in 2007.

15

The net interest margin for the three months ended June 30, 2008 was 4.00%, down 47 basis points compared with 4.47% for the same quarter in 2007.  The yield on average earning assets decreased 127 basis points, which was partially offset by a decrease in the cost of average earning assets of 80 basis points.

The net interest margin for the six months ended June 30, 2008 was 4.04%, down 50 basis points compared with 4.54% for the same period in 2007.  For the six months ended June 30, 2008, the yield on average earning assets decreased 98 basis points, which was partially offset by a decrease in the cost of average earning assets of 48 basis points.

Total Interest Income. Total interest income for the three months ended June 30, 2008 was $24.6 million, down approximately $1.1 million or 4.2% compared with $25.7 million for the same period in 2007. Although total interest earning assets increased, the impact of interest rate cuts during the second quarter 2008 offset the effect of volume increases.  Total interest income for the six months ended June 30, 2008 was $49.7 million, up approximately $392,000 or 0.8% compared with $49.3 million for the same period in 2007, primarily due to loan growth but partially offset by decreases in average yield.

Interest Income from Loans. Interest income from loans for the three months ended June 30, 2008 was $23.0 million, up approximately $112,000 or 0.5% compared with $22.9 million for the same quarter in 2007. The increase was the result of a higher volume of loans, partially offset by decreases in average yield.   Average total loans for the three months ended June 30, 2008 were $1.29 billion compared with average total loans for the same quarter in 2007 of $1.03 billion, an increase of approximately $259.6 million or 25.2%. For the three months ended June 30, 2008, the yield on average total loans was 7.17%, down 173 basis points compared with 8.90% for the same quarter in 2007.

Interest income from loans for the six months ended June 30, 2008 was $46.4 million, up approximately $2.9 million or 6.6% compared with $43.5 million for the same period in 2007. The increase was the result of a higher volume of loans, partially offset by a lower yield on loans.   Average total loans for the six months ended June 30, 2008 were $1.25 billion compared with average total loans for the same period in 2007 of $983.1 million, an increase of approximately $270.5 million or 27.5%. For the six months ended June 30, 2008, the yield on average total loans was 7.45%, down 148 basis points compared with 8.93% for the same period in 2007.

Approximately $926.7 million or 70.5% of the total loan portfolio at June 30, 2008 were variable rate loans that periodically reprice and are sensitive to changes in market interest rates.  For the three months ended June 30, 2008, the yield on average total loans was approximately 209 basis points above the average prime rate over the period.  To lessen interest rate sensitivity in the event of a falling interest rate environment, the Company originates variable rate loans with interest rate floors.  At June 30, 2008, approximately $647.7 million in loans or 49.3% of the total loan portfolio were variable rate loans with interest rate floors that carried a weighted average interest rate of 6.92%.  At June 30, 2007, variable rate loans with interest rate floors carried a weighted average interest rate of 8.93% and comprised 47.2% of the total loan portfolio.

Interest Income from Investments. Interest income from investments (which includes investment securities, Federal Funds sold, and other investments) for the three months ended June 30, 2008 was $1.6 million, a decrease of approximately $1.2 million or 42.8% compared with $2.8 million for the same quarter in 2007.  Average total investments for the three months ended June 30, 2008 were $163.7 million compared with average total investments for the same quarter in 2007 of $244.5 million, a decrease of approximately $80.8 million or 33.0%. The decreases in interest income from investments and in average total investments were primarily the result of declining interest rates, and maturities, sales and paydowns on the investment portfolio.  For the three months ended June 30, 2008, the average yield on investments was 3.88% compared with 4.53% for the same quarter in 2007, a decrease of 65 basis points.

Interest income from investments for the six months ended June 30, 2008 was $3.3 million, down approximately $2.4 million or 43.5% compared with $5.7 million for the same period in 2007.  Average total investments for the six months ended June 30, 2008 were $161.9 million compared with average total investments for the same quarter in 2007 of $253.3 million, a decrease of approximately $91.4 million or 36.1%. The decreases in interest income from investments and in average total investments were primarily the result of declining interest rates, and maturities, sales and paydowns on the investment portfolio.   For the six months ended June 30, 2008, the average yield on investments was 4.04% compared with 4.58% for the same quarter in 2008, a decrease of 54 basis points.

Total Interest Expense. Total interest expense for the three months ended June 30, 2008 was $10.1 million, down approximately $1.4 million or 11.5% compared with $11.5 million for the same quarter in 2007. Total interest expense for the six months ended June 30, 2008 was $21.2 million, down approximately $219,000 or 1.0% compared with $21.4 million for the same period in 2007. Interest expense decreased for both the three and six months ended June 30, 2008 primarily due to decreases in interest rates paid on deposits, partially offset by growth in other borrowings and deposits.

Interest Expense on Deposits. Interest expense on interest-bearing deposits for the three months ended June 30, 2008 was $8.7 million, down approximately $2.0 million or 18.1% compared with $10.7 million for the same period in 2007. The decrease was primarily due to lower interest rates incurred for interest-bearing deposits partially offset by growth in savings and money market deposits.  Average interest-bearing deposits for the three months ended June 30, 2008 were $1.0 billion compared with average interest-bearing deposits for the same quarter in 2007 of $960.9 million, an increase of $41.0 million or 4.3%. The average interest rate incurred on interest-bearing deposits for the three months ended June 30, 2008 was 3.51% compared with 4.45% for the same quarter in 2007, a decrease of 94 basis points. The decrease in interest rates primarily reflected the impact of market rate decreases.

16

Interest expense on interest-bearing deposits for the six months ended June 30, 2008 was $18.4 million, down approximately $1.4 million or 7.0% compared with $19.8 million for the same period in 2007.  The decrease was primarily due to lower interest rates incurred for interest-bearing deposits partially offset by growth in savings and money market deposits.  Average interest-bearing deposits for the six months ended June 30, 2008 were $991.4 million compared with average interest-bearing deposits for the same period in 2007 of $916.7 million, an increase of $74.7 million or 8.2%. The average interest rate incurred on interest-bearing deposits for the six months ended June 30, 2008 was 3.73% compared with 4.35% for the same period in 2007, a decrease of 62 basis points.  The decrease in interest rates primarily reflected the impact of market rate decreases.

Interest Expense on Junior Subordinated Debentures.  Interest expense on junior subordinated debentures for the three months ended June 30, 2008 and 2007 was $520,000, and $525,000, respectively. Interest expense on junior subordinated debentures for the six months ended June 30, 2008 and 2007 was $1.0 million. Average junior subordinated debentures for the three and six months ended June 30, 2008 and 2007 were $36.1 million. The average interest rate incurred on junior subordinated debentures for the three and six months ended June 30, 2008 and 2007 was 5.76%. The junior subordinated debentures accrue interest at a fixed rate of 5.7625% until December 15, 2010, at which time the debentures will accrue interest at a floating rate equal to the 3-month LIBOR plus 1.55%.

Interest Expense on Other Borrowings. Interest expense on other borrowed funds for the three months ended June 30, 2008 was $880,000, up approximately $615,000 compared with $265,000 for the same period in 2007.   Interest expense on other borrowed funds for the six months ended June 30, 2008 was $1.8 million, up approximately $1.2 million compared with $589,000 for the same period in 2007.   The increase in interest expense for both the three and six months ended June 30, 2008 was due to increases in Federal Home Loan Bank (“FHLB”) advances and security repurchases agreements, which were partially offset by lower interest rates paid. As part of its strategy to control interest expense, the Company took advantage of lower cost wholesale funding in lieu of higher cost deposits.  Average other borrowed funds for the three months ended June 30, 2008 were $150.1 million compared with average other borrowed funds for the same quarter in 2007 of $21.7 million, an increase of $128.4 million.  The average interest rate incurred on borrowed funds for the three months ended June 30, 2008 was 2.36%, compared with 4.89% for the same quarter in 2007, a decrease of 253 basis points.  Average other borrowed funds for the six months ended June 30, 2008 were $131.9 million compared with average other borrowed funds for the same period in 2007 of $24.2 million, an increase of $107.7 million.  The average interest rate incurred on borrowed funds for the six months ended June 30, 2008 was 2.70%, compared with 4.91% for the same period in 2007, a decrease of 221 basis points.

17

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

	For The Three Months Ended June 30,
	2008								2007
	Average			Interest		Average			Average			Interest		Average
	Outstanding			Earned/		Yield/			Outstanding			Earned/		Yield/
	Balance			Paid		Rate(1)			Balance			Paid		Rate(1)
	(Dollars in thousands)
Assets
Interest-earning assets:
Total loans	$	1,291,494		$	23,020		7.17	%	$	1,031,921		$	22,908		8.90	%
Taxable securities		119,572			1,276		4.29			167,679			1,768		4.23
Tax-exempt securities		5,202			64		4.95			6,205			76		4.91
Other investments (2)		8,801			95		4.34			4,856			70		5.78
Federal funds sold and other short-term investments		30,155			146		1.95			65,774			850		5.18
Total interest-earning assets		1,455,224			24,601		6.80			1,276,435			25,672		8.07
Allowance for loan losses		(15,065	)							(12,490	)
Total interest-earning assets, net of allowance for loan losses		1,440,159								1,263,945
Noninterest-earning assets		109,378								86,565
Total assets	$	1,549,537							$	1,350,510
Liabilities and shareholders' equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	58,892			114		0.78	%	$	64,065			187		1.17	%
Savings and money market accounts		281,310			1,788		2.56			237,231			2,316		3.92
Time deposits		661,655			6,830		4.15			659,576			8,162		4.96
Junior subordinated debentures		36,083			520		5.76			36,083			525		5.76
Other borrowings		150,136			880		2.36			21,748			265		4.89
Total interest-bearing liabilities		1,188,076			10,132		3.43			1,018,703			11,455		4.51
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		219,318								203,075
Other liabilities		19,935								17,057
Total liabilities		1,427,329								1,238,835
Shareholders' equity		122,208								111,675
Total liabilities and shareholders' equity	$	1,549,537							$	1,350,510
Net interest income				$	14,469							$	14,217
Net interest spread							3.37	%							3.56	%
Net interest margin							4.00	%							4.47	%

(1) Annualized.

(2) Other investments include Federal Reserve Bank stock, Federal Home Loan Bank stock and investment in subsidiary trust.

18

		For The Six Months Ended June 30,
		2008								2007
		Average			Interest		Average			Average			Interest		Average
		Outstanding			Earned/		Yield/			Outstanding			Earned/		Yield/
		Balance			Paid		Rate(1)			Balance			Paid		Rate(1)
		(Dollars in thousands)
Assets
Interest-earning assets:
Total loans		$	1,253,615		$	46,420		7.45	%	$	983,146		$	43,529		8.93	%
Taxable securities			124,048			2,648		4.29			171,236			3,632		4.28
Tax-exempt securities			5,569			137		4.95			6,548			161		4.96
Other investments (2)			8,181			182		4.47			4,897			138		5.68
Federal funds sold and other short-term investments			24,090			283		2.36			70,598			1,818		5.19
Total interest-earning assets			1,415,503			49,670		7.06			1,236,425			49,278		8.04
Allowance for loan losses			(14,499	)							(12,068	)
Total interest-earning assets, net of allowance for loan losses			1,401,004								1,224,357
Noninterest-earning assets			108,996								81,917
Total assets		$	1,510,000							$	1,306,274
Liabilities and shareholders' equity
Interest-bearing liabilities:
Interest-bearing demand deposits		$	58,943			257		0.88	%	$	66,191			392		1.19	%
Savings and money market accounts			276,898			3,710		2.69			204,557			3,636		3.58
Time deposits			655,553			14,431		4.43			645,923			15,763		4.92
Junior subordinated debentures			36,083			1,040		5.76			36,083			1,045		5.76
Other borrowings			131,867			1,768		2.70			24,208			589		4.91
Total interest-bearing liabilities		$	1,159,344			21,206		3.68		$	976,962			21,425		4.42
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits			209,567								202,668
Other liabilities			20,155								16,725
Total liabilities			1,389,066								1,196,355
	��
Shareholders' equity			120,934								109,919
Total liabilities and shareholders' equity		$	1,510,000							$	1,306,274
Net interest income					$	28,464							$	27,853
Net interest spread								3.38	%							3.61	%
Net interest margin								4.04	%							4.54	%

(1) Annualized.

(2) Other investments include Federal Reserve Bank stock, Federal Home Loan Bank stock and investment in subsidiary trust.

19

The following table presents the dollar amount of changes in interest income and interest expense for the major components of interest-earning assets and interest-bearing liabilities and distinguishes between changes in outstanding balances and changes in interest rates for the three and six months ended June 30, 2008 compared with the three and six months ended June 30, 2007. For purposes of this table, changes attributable to both rate and volume have been allocated to each accordingly.

	Three Months Ended June 30,									Six Months Ended June 30,
	2008 vs 2007									2008 vs 2007
	Increase (Decrease)									Increase (Decrease)
	Due to									Due to
	Volume			Rate			Total			Volume			Rate			Total
	(Dollars in thousands)
Interest-earning assets:
Loans	$	5,699		$	(5,587	)	$	112		$	12,104		$	(9,213	)	$	2,891
Taxable securities		(511	)		19			(492	)		(994	)		10			(984	)
Tax-exempt securities		(12	)		–			(12	)		(24	)		–			(24	)
Other investments		57			(32	)		25			93			(49	)		44
Federal funds sold and other short-term investments		(461	)		(243	)		(704	)		(1,197	)		(338	)		(1,535	)
Total increase (decrease) in interest income		4,772			(5,843	)		(1,071	)		9,982			(9,590	)		392
Interest-bearing liabilities:
Interest-bearing demand deposits		(15	)		(58	)		(73	)		(42	)		(93	)		(135	)
Savings and money market accounts		425			(953	)		(528	)		1,296			(1,222	)		74
Time deposits		7			(1,339	)		(1,332	)		275			(1,607	)		(1,332	)
Junior subordinated debentures		(5	)		–			(5	)		(5	)		–			(5	)
Other borrowings		1,562			(947	)		615			2,624			(1,445	)		1,179
Total increase (decrease) in interest expense		1,974			(3,297	)		(1,323	)		4,148			(4,367	)		(219	)
Increase (decrease) in net interest income	$	2,798		$	(2,546	)	$	252		$	5,834		$	(5,223	)	$	611

Provision for Loan Losses. Provisions for loan losses are charged to income to bring the Company’s allowance for loan losses to a level which management considers adequate to absorb probable losses inherent in the loan portfolio. The provision for loan losses for the three months ended June 30, 2008 was $1.5 million, up approximately $997,000, compared with $468,000 for the same period in 2007.  The provision for loan losses for the six months ended June 30, 2008 was $3.0 million, up approximately $2.4 million, compared with $605,000 for the same period in 2007. The increase for the three months ended June 30, 2008 was primarily due to loan growth and to increase the allowance for loan losses due to charge-offs.  The increase for the six months ended June 30, 2008 was primarily due to loan growth and to increase the allowance for loan losses due to charge-offs and because of concerns about the general economic conditions in California.  The allowance for loan losses as a percent of total loans (net of unearned discounts, interest, and deferred fees) at June 30, 2008 and 2007 was 1.18% and 1.17%, respectively. The allowance for loan losses as a percent of total loans at December 31, 2007 was 1.09%.

Noninterest Income. Noninterest income for the three months ended June 30, 2008 was $2.4 million, up approximately $379,000 or 19.0% compared with the same three months in 2007.   Noninterest income for the six months ended June 30, 2008 was $4.5 million, up approximately $842,000 or 23.0% compared with the same period in 2007. The increase in noninterest income for the three and six months ended June 30, 2008 was primarily due to an increase in the cash value of bank owned life insurance, the net gain on sale of securities, and an increase in letter of credit commissions and fees.

Noninterest Expenses. Noninterest expenses for the three months ended June 30, 2008 were $11.8 million, up approximately $912,000 or 8.4% compared with $10.9 million for the same period in 2007.  Noninterest expenses for the six months ended June 30, 2008 were $22.8 million, up $1.7 million or 7.8% compared with $21.1 million for the same period in 2007.  Changes in the components of noninterest expenses are discussed below.

Salaries and benefits expense for the three months ended June 30, 2008 was $5.9 million, a decrease of $320,000 compared with $6.3 million for the same period in 2007.  The decrease was primarily due to decreases in employee health care benefits, bonus accrual, and salary expense due to a reduction in headcount in both Texas and California, which were partially offset by an increase in stock-based compensation expense.

Salaries and benefits expense for the six months ended June 30, 2008 was $12.4 million, an increase of $420,000 compared with $12.0 million for the same period in 2007 primarily due to increases in bonus accrual, stock-based compensation expense, and severance expenses.

20

Occupancy and equipment expense for the three months ended June 30, 2008 and 2007 was $2.0 million.  Occupancy and equipment expense for the six months ended June 30, 2008 was $3.9 million, down $71,000 or 1.8% compared with $4.0 million for the same period in 2007.

Other noninterest expense, excluding the $1.5 million impairment write-down for securities, for the three months ended June 30, 2008 and 2007 was $2.7 million. Other noninterest expense, excluding the impairment write-down for securities, for the six months ended June 30, 2008 and 2007 was $5.2 million. 

The Company’s efficiency ratio is calculated by dividing total noninterest expense, excluding credit loss provisions and impairment write-down on available for sale securities, by net interest income plus non-inerest income.  The Company’s efficiency ratio for the three months ended June 30, 2008 was 60.89% compared with 67.13% for the same quarter in 2007, and was primarily due to the decrease in noninterest expense, excluding the impairment write-down, combined with the increases in noninterest income and net interest income previously discussed above.  The Company’s efficiency ratio for the six months ended June 30, 2008 was 64.36%, compared with 66.98% for the same period in 2007.

Income Taxes. Income tax expense for the three months ended June 30, 2008 and 2007 was $1.3 million and $1.8 million, respectively. The Company’s effective tax rate was 36.72% and 36.80% for the three months ended June 30, 2008 and 2007, respectively.  Income tax expense for the six months ended June 30, 2008 and 2007 was $2.7 million and $3.6 million, respectively. The Company’s effective tax rate was 37.12% and 37.13% for the six months ended June 30, 2008 and 2007, respectively. 

Financial Condition

Loan Portfolio. Total loans at June 30, 2008 were $1.31 billion, up $109.7 million or 9.1% compared with $1.20 billion at December 31, 2007. Compared with the loan level at December 31, 2007, commercial and industrial loans increased $9.0 million and real estate loans increased $101.8 million during the six months ended June 30, 2008.  At June 30, 2008 and December 31, 2007, the ratio of total loans to total deposits was 105.54% and 100.91% respectively. At the same dates, total loans represented 83.1% and 82.3% of total assets, respectively.

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

	As of June 30, 2008						As of December 31, 2007
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
Commercial and industrial	$	467,096			35.52	%	$	458,117			38.01	%
Real estate mortgage
Residential		11,527			0.88			5,306			0.44
Commercial		664,217			50.51			596,618			49.50
		675,744			51.39			601,924			49.94
Real estate construction
Residential		53,115			4.04			58,971			4.89
Commercial		114,021			8.67			80,208			6.65
		167,136			12.71			139,179			11.54
Consumer and other		4,988			0.38			6,132			0.51
Gross loans		1,314,964			100.00	%		1,205,352			100.00	%
Unearned discounts, interest and deferred fees		(3,399	)					(3,441	)
Total loans		1,311,565						1,201,911
Allowance for loan losses		(15,520	)					(13,125	)
Loans, net	$	1,296,045					$	1,188,786

Nonperforming Assets. Total nonperforming assets, which includes nonaccrual loans, loans 90 days or more past due and still accruing interest and other real estate, at June 30, 2008 were $10.7 million, an increase of $1.6 million or 18.0% compared with $9.1 million at December 31, 2007.  The increase was primarily due to a commercial real estate loan and a commercial loan in California, and three commercial real estate loan relationships in Texas, which were partially offset by the sale of two other real estate properties in Texas.   At June 30, 2008, nonperforming assets primarily consisted of $7.7 million in nonaccrual loans, $801,000 in accruing loans that were 90 days or more past due, and $2.2 million in other real estate. Approximately $4.2 million of the nonaccrual loans are collateralized by real estate, which represented 54.1% of total nonaccrual loans at June 30, 2008.  Other real estate increased $756,000 to $2.2 million at June 30, 2008 compared with $1.5 million at December 31, 2007.  The increase was due to the addition of one commercial real estate property in Texas in the amount of $1.2 million and one commercial real estate property in California in the amount of $1.0 million, partially offset by the sale of two commercial real estate properties in Texas totaling $1.5 million.  Net nonperforming assets at June 30, 2008 were $8.5 million compared with $6.8 million at December 31, 2007, an increase of $1.7 million or 24.9%.

21

The ratios for net nonperforming assets to total loans and other real estate at June 30, 2008 and December 31, 2007 were 0.64% and 0.56%, respectively. The ratios for net nonperforming assets to total assets were 0.54% and 0.46% for the same periods, respectively. These ratios take into consideration guarantees from the United States Department of Commerce’s Small Business Administration (the “SBA”), the Export Import Bank of the United States (the “Ex-Im Bank”), an independent agency of the United States Government, and the Overseas Chinese Community Guaranty Fund (“OCCGF”), an agency sponsored by the government of Taiwan, which were $2.3 million at June 30, 2008 and December 31, 2007.

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

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

	As of June 30, 2008			As of December 31, 2007
	(Dollars in thousands)
Nonaccrual loans	$	7,696		$	6,336
Accruing loans 90 days or more past due		801			1,284
Other real estate (“ORE”)		2,230			1,474
Total nonperforming assets		10,727			9,094
Nonperforming loans guaranteed by the SBA, Ex-Im Bank and OCCGF		(2,255	)		(2,309	)
Net nonperforming assets	$	8,472		$	6,785
Total nonperforming assets to total assets		0.68	%		0.62	%
Total nonperforming assets to total loans and ORE		0.82	%		0.76	%
Net nonperforming assets to total assets (1)		0.54	%		0.46	%
Net nonperforming assets to total loans and ORE (1)		0.64	%		0.56	%

(1) Net nonperforming assets are net of the loan portions guaranteed by the SBA, Ex-Im Bank and OCCGF.

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

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

	As of June 30, 2008		As of December 31, 2007
	(Dollars in thousands)
Impaired loans with no SFAS No 114 valuation reserve	$	6,855	$	3,721
Impaired loans with a SFAS No 114 valuation reserve		841		2,615
Total recorded investment in impaired loans	$	7,696	$	6,336
Valuation allowance related to impaired loans	$	1,049	$	1,131

The average recorded investment in impaired loans during the six months ended June 30, 2008 and the year ended December 31, 2007 was $8.4 million and $6.7 million, respectively.  No interest income on impaired loans was recognized for cash payments received during the three and six months ended June 30, 2008.

22

 Allowance for Loan Losses and Reserve for Unfunded Lending Commitments. At June 30, 2008 and 2007, the allowance for loan losses was $15.5 million and $12.7 million, respectively, or 1.18% and 1.17% of total loans, respectively.  At December 31, 2007, the allowance for loan losses was $13.1 million, or 1.09% of total loans.  Net charge-offs for the three months ended June 30, 2008 were $533,000 compared with net recoveries of $293,000 for the same period in 2007, with the charge-offs during the second quarter of 2008 primarily the result of a $292,000 charge-off of a commercial loan in California and a $210,000 charge-off on a commercial real estate loan in Texas.  Net charge-offs for the six months ended June 30, 2008 were $654,000 compared with net recoveries of $620,000 for the same period in 2007.

The Company maintains a reserve for unfunded commitments to provide for the risk of loss inherent in its unfunded lending related commitments. The process used in determining the reserve is consistent with the process used for the allowance for loan losses discussed below.

The allowance for loan losses provides for the risk of losses inherent in the lending process. The allowance for loan losses is increased by provisions charged against current earnings and is reduced by net charge-offs. Loans are charged off when they are deemed to be uncollectible in whole or in part. Recoveries are recorded when cash payments are received. In developing the assessment, the Company relies on estimates and exercises judgment regarding matters where the ultimate outcome is uncertain. Circumstances may change and future assessments of credit risk may yield materially different results, resulting in an increase or decrease in the allowance for credit losses.

The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments and is maintained at levels that the Company believes are adequate to absorb probable losses inherent in the loan portfolio and unfunded lending commitments as of the date of the financial statements. The Company employs a systematic methodology for determining the allowance for credit losses that consists of four components: (1) a component for individual loan impairment recognized and measured pursuant to FASB Statement No. 114, (2) one or more components of collective loan impairment recognized pursuant to FASB Statement No. 5 – Accounting for Contingencies, (3) a component that assesses the impact of current conditions and determines how estimated future credit losses might be expected to deviate from historical trends, and (4) a reserve for unfunded lending commitments. Policies and procedures have been developed to assess the adequacy of the allowance for loan losses and the reserve for unfunded lending commitments that include the monitoring of qualitative and quantitative trends including changes in past due levels, criticized and nonperforming loans, and charge-offs.

In setting the general reserve portion of the allowance for loan losses, the factors the Company may consider include, but are not limited to, changes in the quality of the loan portfolio as determined by loan quality grades assigned to each loan, an assessment of known problem loans, potential problem loans, and other loans that exhibit weaknesses or deterioration, the general economic environment in the Company’s markets as well as the national economy, particularly the real estate markets, value of the collateral securing loans, payment history, cash flow analysis of borrowers and other historical information. After the aforementioned assessment of the loan portfolio, the general economic environment and other relevant factors, changes are implemented in the allowance for loan losses.  While this methodology is consistently followed, future changes in circumstances, economic conditions or other factors could cause management to reevaluate the level of the allowance for loan losses.

23

The following tables present, for the periods indicated, an analysis of the allowance for credit losses and other related data for the periods indicated:

	As of and for the Three Months Ended June 30,
	2008			2007
	(Dollars in thousands)
Average total loans outstanding for the period	$	1,291,494		$	1,031,921
Total loans outstanding at end of period	$	1,311,565		$	1,080,275
Allowance for loan losses at beginning of period	$	14,588		$	11,900
Provision for loan losses		1,465			468
Charge-offs:
Commercial and industrial		(370	)		(301	)
Real estate mortgage		(1	)		–
Real estate construction		(210	)		–
Consumer and other		(42	)		–
Total charge-offs		(623	)		(301	)
Recoveries:
Commercial and industrial		88			592
Real estate mortgage		–			–
Real estate construction		–			–
Consumer and other		2			2
Total recoveries		90			594
Net (charge-offs)/recoveries		(533	)		293
Allowance for loan losses at end of period		15,520			12,661
Reserve for unfunded lending commitments at beginning of period		907			919
Provision for unfunded lending commitments		10			107
Reserve for unfunded lending commitments at end of period		917			1,026
Allowance for credit losses at end of period	$	16,437		$	13,687
Ratio of net (charge-offs)/recoveries to end of period total loans		(0.04	) %		0.03	%

24

	As of and for the Six Months Ended June 30,
	2008			2007
	(Dollars in thousands)
Average total loans outstanding for the period	$	1,253,615		$	983,146
Total loans outstanding at end of period	$	1,311,565		$	1,080,275
Allowance for loan losses at beginning of period	$	13,125		$	11,436
Provision for loan losses		3,049			605
Charge-offs:
Commercial and industrial		(417	)		(520	)
Real estate mortgage		(90	)		–
Real estate construction		(210	)		–
Consumer and other		(42	)		(7	)
Total charge-offs		(759	)		(527	)
Recoveries:
Commercial and industrial		101			1,044
Real estate mortgage		–			99
Real estate construction		–			–
Consumer and other		4			4
Total recoveries		105			1,147
Net (charge-offs)/recoveries		(654	)		620
Allowance for loan losses at end of period		15,520			12,661
Reserve for unfunded lending commitments at beginning of period		816			793
Provision for unfunded lending commitments		101			233
Reserve for unfunded lending commitments at end of period		917			1,026
Allowance for credit losses at end of period	$	16,437		$	13,687
Ratio of allowance for loan losses to end of period total loans		1.18	%		1.17	%
Ratio of net (charge-offs)/recoveries to end of period total loans		(0.05	) %		0.06	%
Ratio of allowance for loan losses to end of period total nonperforming loans (1)		182.65	%		215.14	%
Ratio of allowance for loan losses to end of period net nonperforming loans (2)		248.64	%		403.35	%

(1) Total nonperforming loans are nonaccrual loans plus loans 90 days or more past due.

(2) Net nonperforming loans are nonaccrual loans plus loans 90 days or more past due, less loan portions guaranteed by the SBA, Ex-Im Bank and OCCGF.

Securities. At June 30, 2008, the available-for-sale securities portfolio was $115.6 million, a decrease of $22.1 million or 16.1% compared with $137.7 million at December 31, 2007. The decrease was primarily due to principal payments, sales and maturities on mortgage-backed securities and collateralized mortgage obligations (“CMOs”), U.S. Government sponsored enterprises and tax-free municipal bonds (“municipals”).  The securities portfolio is primarily comprised of mortgage-backed securities, collateralized mortgage obligations, obligations of U.S. government sponsored enterprises, and tax-free municipal bonds. Other investments, which include Federal Reserve Bank (“FRB”) and Federal Home Loan Bank (“FHLB”) stock and the investment in subsidiary trust, were $9.2 million at June 30, 2008 and $6.9 million at December 31, 2007.  A non-cash impairment charge of $1.5 million pre-tax was recognized as a result of an other-than-temporary impairment in the value of the $14.2 million investment in the AMF Ultra Short Mortgage Fund, and a $74,000 pre-tax non-cash impairment charge was recognized on another mutual fund.

Deposits. At June 30, 2008, total deposits were $1.24 billion, up $51.7 million or 4.3% compared with $1.19 billion at December 31, 2007, primarily due to growth in money market  and savings accounts. Noninterest-bearing demand deposits at June 30, 2008 increased $15.7 million or 7.5% to $224.9 million compared with $209.2 million at December 31, 2007. Interest-bearing deposits at June 30, 2008 increased $35.9 million or 3.7% to $1.02 billion compared with $981.8 million at December 31, 2007. The Company’s ratios of noninterest-bearing demand deposits to total deposits at June 30, 2008 and December 31, 2007 were 18.1% and 17.6%, respectively.

25

Junior Subordinated Debentures.  Junior subordinated debentures were $36.1 million at June 30, 2008 and December 31, 2007. The junior subordinated debentures accrue interest at a fixed rate of 5.7625% until December 15, 2010, at which time the debentures will accrue interest at a floating rate equal to the 3-month LIBOR plus 1.55%. The debentures mature on December 15, 2035, but are redeemable at the Company’s option at par plus accrued and unpaid interest on or after December 15, 2010. The net proceeds to the Company from the sale of the debentures to the Company’s subsidiary trust, MCBI Statutory Trust I, were used to fund the Company’s acquisition of Metro United.

Other Borrowings. Other borrowings are comprised of FHLB notes, security repurchase agreements, the 2008 Subordinated Debentures, and Federal Reserve TT&L.   Other borrowings at June 30, 2008 were $156.6 million, an increase of $56.8 million compared with $99.8 million at December 31, 2007.  The increase in other borrowings is due to $37.5 million of additional short-term borrowings from the FHLB of Dallas, $15.0 of additional short-term borrowings from FHLB of San Francisco, and the issuance of $4.0 million in 2008 Subordinated Debentures.

In June 2008, the Company issued an aggregate of $4.0 million in its 2008 Subordinated Debentures to related parties.  The debentures accrue interest at a fixed rate of 5.0%, payable quarterly commencing on September 30, 2008 and mature in December 2008.  The proceeds from issuance of the 2008 Subordinated Debentures were used to contribute capital to the Banks.

The notes from the FHLB of Dallas bear interest at an average rate of 2.27% and have maturities ranging from one week to three months. The notes from the FHLB of San Francisco bear interest at 2.43% and are callable daily at the discretion of the FHLB, and can be repaid at any time with a one-day notice. Maturities of any advances from the FHLBs since June 30, 2008 have been renewed with similar terms.  The security repurchase agreements bear interest at an average rate of 2.90% and mature on December 31, 2014.  The securities collateralizing the repurchase agreements are transferred to the applicable counterparty.  The counterparty, in certain instances, is contractually entitled to sell or repledge securities accepted as collateral.

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

	As of and for the Six Months Ended June 30, 2008			As of and for the Year Ended December 31, 2007
	(Dollars in thousands)
FHLB Notes:
at end of period	$	126,500		$	74,000
average during the period		106,100			25,516
maximum month-end balance during the period		133,000			74,000
Interest rate at end of period		2.34	%		4.07	%
Interest rate during the period		2.66			4.89
Security Repurchase Agreements:
at end of period	$	25,000		$	25,000
average during the period		25,000			68
maximum month-end balance during the period		25,000			25,000
Interest rate at end of period		2.87	%		2.87	%
Interest rate during the period		2.87			2.87
Subordinated Debentures:
at end of period	$	4,000		$	–
average during the period		99			–
maximum month-end balance during the period		4,000			–
Interest rate at end of period		5.00	%		–
Interest rate during the period		5.00			–
Federal Reserve TT&L:
at end of period	$	1,098		$	796
average during the period		667			819
maximum month-end balance during the period		1,098			1,067

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Liquidity. The Company’s loan to deposit ratio at June 30, 2008 was 105.54%. As of this same date, the Company had commitments to fund loans in the amount of $319.1 million. At June 30, 2008, the Company had stand-by letters of credit of $11.9 million for which the Company has recorded a liability of $33,000 at June 30, 2008, representing the fair value of the Company’s probable obligations.  Available sources to fund these commitments and other cash demands of the Company come from loan and investment securities repayments, deposit inflows, and lines of credit from the FHLB of Dallas and San Francisco (“FHLBs”) as well as the Federal Reserve Bank (“FRB”) discount window. With its current level of collateral, the Company has the ability to borrow an additional $249.4 million from the FHLBs, $9.3 million from the FRB discount window, and $20.5 million from other correspondent banks.

Capital Resources. Shareholders’ equity at June 30, 2008 was $121.7 million compared with $117.4 million at December 31, 2007, an increase of approximately $4.3 million. This increase was primarily the combined result of $4.5 million in net income, and a net increase in additional paid-in capital of $446,000 due to the effect of stock-based compensation expense net of the issuance of restricted stock and dividend reinvestment, partially offset by dividend payments of approximately $866,000, and an increase in accumulated other comprehensive loss of $163,000.

The following table provides a comparison of the Company’s and the Banks’ leverage and risk-based capital ratios as of June 30, 2007 to the minimum and well-capitalized regulatory standards:

	Minimum Required For Capital Adequacy Purposes			To Be Categorized as Well Capitalized Under Prompt Corrective Action Provisions			Actual Ratio At June 30, 2008
The Company
Leverage ratio		4.00	%(1)		N/A	%		8.75	%
Tier 1 risk-based capital ratio		4.00			N/A			8.87
Risk-based capital ratio		8.00			N/A			10.07
MetroBank
Leverage ratio		4.00	%(2)		5.00	%		8.95	%
Tier 1 risk-based capital ratio		4.00			6.00			9.21
Risk-based capital ratio		8.00			10.00			10.29
Metro United Bank
Leverage ratio		4.00	%(3)		5.00	%		9.19	%
Tier 1 risk-based capital ratio		4.00			6.00			9.02
Risk-based capital ratio		8.00			10.00			10.15

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

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

(3) The FDIC may require Metro United to maintain a leverage ratio above the required minimum.

Critical Accounting Estimates

The Company has established various accounting estimates which govern the application of accounting principles generally accepted in the United States in the preparation of the Company’s consolidated financial statements. Certain accounting estimates involve significant judgments and assumptions by management which have a material impact on the carrying value of certain assets and liabilities; management considers such accounting estimates to be critical accounting estimates. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company.

The Company believes the allowance for loan losses is a critical accounting estimate that requires the most significant judgments and estimates used in the preparation of its consolidated financial statements. The Company’s allowance for possible loan loss methodology is based on guidance provided in SEC Staff Accounting Bulletin No. 102, “Selected Loan Loss Allowance Methodology and Documentation Issues” and includes allowance allocations calculated in accordance with Statement of Financial Accounting Standards (SFAS) No. 114, “Accounting by Creditors for Impairment of a Loan,” as amended by SFAS 118, and allowance allocations determined in accordance with SFAS No. 5, “Accounting for Contingencies.” In estimating the allowance for loan losses, management reviews the effect of changes in the local real estate market on collateral values, the effect of current economic indicators on the loan portfolio and their probable impact on borrowers and increases or decreases in nonperforming and impaired loans. Changes in these factors may cause management’s estimate of the allowance to increase or decrease and result in adjustments to the Company’s provision for loan losses. See — “Financial Condition — Allowance for Loan Losses and the Reserve for Unfunded Lending Commitments”.

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The Company believes goodwill is a critical accounting estimate that requires significant judgment and estimates used in the preparation of its consolidated financial statements. Goodwill is recorded for the excess of the purchase price over the fair value of identifiable net assets, including core deposit intangibles, acquired through a merger transaction.  Goodwill is not amortized, but instead will be tested for impairment at least annually using both a discounted cash flow analysis and a review of the valuation of recent bank acquisitions.  The discounted cash flow analysis utilizes a risk-free interest rate, estimates of future cash flow and probabilities as to the occurrence of the future cash flows. Other acquired intangible assets determined to have finite lives, such as core deposit intangibles, are amortized over their estimated useful lives in a manner that best reflects the economic benefits of the intangible asset.  In addition, an impairment test is performed periodically on these amortizing intangible assets.

The Company believes stock-based compensation is a critical accounting estimate that requires significant judgment and estimates used in the preparation of its consolidated financial statements. The Company accounts for stock-based compensation in accordance with the fair value recognition provisions of SFAS No. 123R. The Company uses the Black-Scholes option-pricing model which requires the input of highly subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (“expected term”), the estimated volatility of the Company’s common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements (“forfeitures”). Changes inthe subjective assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the related amount recognized on the consolidated statements of income.

The Company believes estimates of fair value is a critical accounting estimate that requires significant judgment and estimates used in the preparation of its consolidated financial statements. Certain portions of the Company’s assets are reported on a fair value basis. Fair value is used on a recurring basis for certain assets in which fair value is the primary basis of accounting. The extent to which fair value is used on a recurring basis was significantly expanded upon the adoption of SFAS No. 159 and SFAS No. 157 effective on January 1, 2008. An example of this recurring use of fair value includes available for sale securities. Additionally, fair value is used on a non-recurring basis to evaluate assets for impairment or for disclosure purposes in accordance with SFAS No. 107. Examples of these non-recurring uses of fair value include goodwill and intangible assets. Depending on the nature of the asset various valuation techniques and assumptions are used when estimating fair value. These valuation techniques and assumptions are in accordance with SFAS No. 157.

Fair value is the price that could be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value determination in accordance with SFAS No. 157 requires that a number of significant judgments are made. First, where prices for identical assets and liabilities are not available, application of the three-level hierarchy established by SFAS No. 157 would require that similar assets are identified. If observable market prices are unavailable or impracticable to obtain, then fair value is estimated using modeling techniques such as discounted cash flow analyses. These modeling techniques incorporate the Company’s assessments regarding assumptions that market participants would use in pricing the asset or the liability, including assumptions about the risks inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset, and the risk of nonperformance. Assessments with respect to assumptions that market participants would make are inherently difficult to determine and use of different assumptions could result in material changes to these fair value measurements. As required under SFAS No. 157, any use of significant, unobservable inputs would be described in Note 9, “Fair Value,” to the Condensed Consolidated Financial Statements.

In estimating the fair values for investment securities the Company believes that independent, third-party market prices are the best evidence of exit price and where available, estimates are based on such prices. If such third-party market prices are not available on the exact securities owned, fair values are based on the market prices of similar instruments, independent pricing service estimates or are estimated using industry-standard or proprietary models whose inputs may be unobservable. When market observable data is not available, the valuation of financial instruments becomes more subjective and involves substantial judgment. The need to use unobservable inputs generally results from the lack of market liquidity for certain types of loans and securities, which results in diminished observability of both actual trades and assumptions that would otherwise be available to value these instruments.

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Item 3.  Quantitative and Qualitative Disclosures about Market Risk.

There have been no material changes in the market risk information previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. See Form 10-K, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Interest Rate Sensitivity and Liquidity.”

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures.  As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,  were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting. There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings

The Company is involved in various litigation that arises from time to time in the normal course of business.  In the opinion of management, after consultations with its legal counsel, such litigation is not expected to have a material adverse effect of the Company’s consolidated financial position, results of operations or cash flows.

Item 1A. Risk Factors

There have been no material changes in the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

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

Not applicable

Item 3.  Defaults Upon Senior Securities

Not applicable

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

The Company’s 2008 Annual Meeting of Shareholders was held on May 9, 2008. At the meeting, the shareholders considered and acted upon the proposals listed below:

1. Helen Chen, Shirley Clayton, George M. Lee, and David Tai were each elected as a Class I director and Robert W. Hsueh was elected as a Class II director.  The four Class I directors were elected to serve until the Company’s 2011 annual meeting of shareholders, and the one Class II director was elected to serve until the Company’s 2009 annual meeting of shareholders, and each until their successors are duly elected and qualify.  The shares voted for or withheld with respect to each director were as follows:

Director	For	Withheld
Class I
Helen Chen	7,753,128	971,405
Shirley Clayton	8,509,716	214,817
George M. Lee	8,374,818	349,715
David Tai	8,375,349	349,184
Class II
Robert W. Hsueh	8,506,494	218,039

The following Class II and Class III directors continued in office after the 2008 Annual Meeting of Shareholders:  May P. Chu, John Lee, Edward A. Monto, Don Wang, Krishnan Balasubramanian, Charles Roff and Joe Ting.

2. The shareholders ratified the appointment of PricewaterhouseCoopers LLP as the independent registered public accounting firm of the Company for the year ending December 31, 2008. A total of 8,707,461 shares were voted in favor of the proposal, 14,021 shares were voted against the proposal and 3,051 shares abstained from voting on the proposal.

Item 5.  Other Information

Not applicable

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Item 6.  Exhibits

Exhibit
Number		Identification of Exhibit
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	-	Articles of Amendment to Amended and Restated Articles of Incorporation. (incorporated herein by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007).
3.3	-	Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on November 19, 2007).
4	-	Specimen form of certificate evidencing the Common Stock (incorporated herein by reference to Exhibit 4 to the Registration Statement).
11	-	Computation of Earnings Per Common Share, included as Note (5) to the unaudited Condensed Consolidated Financial Statements of this Form 10-Q.
31.1*	-	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2*	-	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1**	-	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**	-	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

____________________________________

* Filed herewith.

** Furnished herewith.

31

SIGNATURES

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

	METROCORP BANCSHARES, INC.
	By:	/s/ George M. Lee
Date: August 8, 2008		George M. Lee
		Vice Chairman and Chief Executive Officer (principal executive officer)
Date: August 8, 2008	By:	/s/ David C. Choi
		David C. Choi
		Chief Financial Officer (principal financial officer/ principal accounting officer)

32

EXHIBIT INDEX

Exhibit
Number		Identification of Exhibit
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	-	Articles of Amendment to Amended and Restated Articles of Incorporation. (incorporated herein by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007).
3.3	-	Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on November 19, 2007).
4	-	Specimen form of certificate evidencing the Common Stock (incorporated herein by reference to Exhibit 4 to the Registration Statement).
11	-	Computation of Earnings Per Common Share, included as Note (5) to the unaudited Condensed Consolidated Financial Statements of this Form 10-Q.
31.1*	-	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2*	-	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1**	-	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**	-	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

___________________________________

* Filed herewith.

** Furnished herewith.

33