MetroCorp Bancshares 10Q 2009 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009

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

Commission file number: 000-25141

________________

MetroCorp Bancshares, Inc.

(Exact name of registrant as specified in its charter)

Texas

(State or other jurisdiction of incorporation or organization)

76-0579161

(I.R.S. Employer Identification No.)

9600 Bellaire Boulevard, Suite 252

Houston, Texas 77036

(Address of principal executive offices including zip code)

(713) 776-3876

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes £ 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 Exchange Act). Yes £ No R

As of November 3, 2009, the number of outstanding shares of Common Stock was 10,926,315.

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

METROCORP BANCSHARES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

	September 30,			December 31,
	2009			2008
ASSETS

Cash and due from banks	$	41,178		$	26,383
Federal funds sold and other short-term investments		79,536			11,718
Total cash and cash equivalents		120,714			38,101
Securities available-for-sale, at fair value		90,225			102,104
Securities held-to-maturity (fair value $4,423 at September 30, 2009)		4,044			–
Other investments		25,351			29,220
Loans, net of allowance for loan losses of $25,603 and $24,235, respectively		1,285,935			1,321,813
Accrued interest receivable		4,952			5,946
Premises and equipment, net		6,235			7,368
Goodwill		21,827			21,827
Core deposit intangibles		373			506
Customers' liability on acceptances		3,219			8,012
Foreclosed assets, net		23,012			4,825
Other assets		43,845			40,516
Total assets	$	1,629,732		$	1,580,238

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing	$	211,189		$	204,107
Interest-bearing		1,180,637			1,065,046
Total deposits		1,391,826			1,269,153
Junior subordinated debentures		36,083			36,083
Other borrowings		25,118			139,046
Accrued interest payable		1,072			1,279
Acceptances outstanding		3,219			8,012
Other liabilities		8,647			7,506
Total liabilities		1,465,965			1,461,079
Commitments and contingencies		–			–

Shareholders' equity:
Preferred stock, $1.00 par value, 2,000,000 shares authorized; 45,000 shares issued and outstanding at September 30, 2009 and none at December 31, 2008		44,683			–
Common stock, $1.00 par value, 50,000,000 shares authorized; 10,994,965 shares issued and 10,926,315 and 10,885,081 shares outstanding at September 30, 2009 and December 31, 2008, respectively		10,995			10,995
Additional paid-in-capital		28,837			28,222
Retained earnings		80,431			82,311
Accumulated other comprehensive loss		(259	)		(910	)
Treasury stock, at cost, 68,650 and 109,884 shares at September 30, 2009 and December 31, 2008, respectively		(920	)		(1,459	)
Total shareholders' equity		163,767			119,159
Total liabilities and shareholders' equity	$	1,629,732		$	1,580,238

See accompanying notes to condensed consolidated financial statements

METROCORP BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2009			2008			2009			2008
Interest income:
Loans	$	20,654		$	22,295		$	61,791		$	68,715
Securities:												��
Taxable		965			1,207			3,048			3,855
Tax-exempt		85			47			210			184
Other investments		89			235			386			417
Federal funds sold and other short-term investments		29			110			150			393
Total interest income		21,822			23,894			65,585			73,564

Interest expense:
Time deposits		4,687			6,240			15,991			20,671
Demand and savings deposits		1,761			2,341			6,190			6,308
Junior subordinated debentures		519			519			1,559			1,559
Subordinated debentures and other borrowings		240			974			768			2,742
Total interest expense		7,207			10,074			24,508			31,280

Net interest income		14,615			13,820			41,077			42,284
Provision for loan losses		3,596			1,754			12,710			4,803
Net interest income after provision for loan losses		11,019			12,066			28,367			37,481

Noninterest income:
Service fees		1,134			1,241			3,309			3,690
Loan-related fees		136			174			429			538
Letters of credit commissions and fees		256			264			769			826
Gain (loss) on securities transactions, net		335			(57	)		344			91
Gain on sale of loans		–			43			–			288
Other noninterest income		442			367			1,320			1,106
Total noninterest income		2,303			2,032			6,171			6,539

Noninterest expenses:
Salaries and employee benefits		4,864			6,236			15,495			18,653
Occupancy and equipment		2,014			2,091			6,006			6,032
Foreclosed assets, net		1,320			120			2,740			(212	)
Total other-than-temporary impairments (“OTTI”) on securities		791			119			1,971			1,659
Less: Noncredit portion of “OTTI”		(453	)		–			(1,334	)		–
Net impairments on securities		338			119			637			1,659
FDIC assessment		1,027			192			2,712			375
Other noninterest expense		2,061			1,959			6,738			6,971
Total noninterest expenses		11,624			10,717			34,328			33,478

Income before provision for income taxes		1,698			3,381			210			10,542
Provision (benefit) for income taxes		560			1,305			(46	)		3,963
Net income	$	1,138		$	2,076		$	256		$	6,579

Dividends – preferred stock		563			–			1,594			–
Net income (loss) available to common shareholders	$	575		$	2,076		$	(1,338	)	$	6,579

Earnings (loss) per common share:
Basic	$	0.05		$	0.19		$	(0.12	)	$	0.61
Diluted	$	0.05		$	0.19		$	(0.12	)	$	0.60
Weighted average shares outstanding:
Basic		10,915			10,842			10,899			10,824
Diluted		10,923			10,911			10,900			10,899

Dividends per common share	$	–		$	0.04		$	0.04		$	0.12

See accompanying notes to condensed consolidated financial statements

METROCORP BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2009			2008			2009			2008

Net income	$	1,138		$	2,076		$	256		$	6,579

Other comprehensive (loss) income, net of taxes:

Change in accumulated loss on effective cash flow hedging derivatives		(168	)		–			(168	)		–

Unrealized loss on investment securities, net:
Securities with OTTI charges during the period		(507	)		(119	)		(1,262	)		(1,659	)
Less: OTTI charges recognized in net income		(217	)		(119	)		(408	)		(1,659	)
Net unrealized losses on investment securities with OTTI		(290	)		–			(854	)		–

Unrealized holding (loss) gain arising during the period		1,016			(520	)		1,893			(589	)
Less: reclassification adjustment for (loss) gain included in net income		214			(36	)		220			58
Net unrealized gains (losses) on investment securities		802			(484	)		1,673			(531	)
Other comprehensive income (loss)		344			(484	)		651			(531	)
Total comprehensive income loss	$	1,482		$	1,592		$	907		$	5,932

See accompanying notes to condensed consolidated financial statements

METROCORP BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Nine Months Ended September 30, 2009

(In thousands)

(Unaudited)

	Preferred Stock				Common Stock					Additional						Accumulated other			Treasury
	Shares		Amount		Shares			Amount		paid-in capital			Retained earnings			comprehensive income (loss)			stock, at cost			Total
Balance at December 31, 2008		–	$	–		10,885		$	10,995	$	28,222		$	82,311		$	(910	)	$	(1,459	)	$	119,159
Issuance of preferred stock and warrant, at fair value		45		44,289		–			–		711			–			–			–			45,000
Re-issuance of treasury stock		–		–		42			–		(373	)		–			–			542			169
Stock-based compensation expense recognized in earnings		–		–		–			–		277			–			–			–			277
Net income		–		–		–			–		–			256			–			–			256
Amortization of preferred stock discount		–		107		–			–		–			(107	)		–			–			–
Forfeiture of restricted shares		–		–		(1	)		–		–			–			–			(3	)		(3	)
Other comprehensive income		–		–		–			–		–			–			651			–			651
Dividends – preferred stock		–		287		–			–		–			(1,594	)		–			–			(1,307	)
Dividends – common stock ($0.04 per share)		–		–		–			–		–			(435	)		–			–			(435	)
Balance at September 30, 2009		45	$	44,683		10,926		$	10,995	$	28,837		$	80,431		$	(259	)	$	(920	)	$	163,767

See accompanying notes to condensed consolidated financial statements

METROCORP BANCSHARES, INC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	For the Nine Months Ended
	September 30,
	2009			2008

Cash flows from operating activities:
Net income	$	256		$	6,579
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,455			1,605
Provision for loan losses		12,710			4,803
Impairment on securities		637			1,659
Gain on securities transactions, net		(344	)		(91	)
Loss (gain) on sale of foreclosed assets		1,029			(447	)
(Gain) loss on sale of premises and equipment		(20	)		10
Gain on sale of loans, net		–			288
Amortization of premiums and discounts on securities, net		(8	)		2
Amortization of deferred loan fees and discounts		(1,563	)		(1,785	)
Amortization of core deposit intangibles		133			188
Stock-based compensation		277			820
Changes in:
Accrued interest receivable		994			738
Other assets		(3,813	)		(2,319	)
Accrued interest payable		(207	)		(372	)
Other liabilities		1,408			387
Net cash provided by operating activities		12,944			12,065

Cash flows from investing activities:
Purchases of securities available-for-sale		(46,171	)		(48,858	)
Purchases of securities held-to-maturity		(4,044	)		–
Purchases of other investments		(19,207	)		–
Proceeds from sales of securities available-for-sale		31,848			4,849
Proceeds from maturities, calls, and principal paydowns of securities available-for-sale		23,077			50,908
Proceeds from sales and maturities of other investments		27,215			–
Net change in loans		(2,982	)		(143,759	)
Proceeds from sale of foreclosed assets		8,497			1,921
Proceeds from sale of premises and equipment		22			8
Purchases of premises and equipment		(324	)		(669	)
Net cash provided by (used in) investing activities		17,931			(135,600	)

Cash flows from financing activities:
Net change in:
Deposits		122,673			74,195
Other borrowings		(113,928	)		54,391
Proceeds from issuance of preferred stock with common stock warrant		45,000			228
Re-issuance of treasury stock		169			404
Cash dividends paid on preferred stock		(1,307	)		–
Cash dividends paid on common stock		(869	)		(1,298	)
Net cash provided by financing activities		51,738			127,920

Net increase in cash and cash equivalents		82,613			4,385
Cash and cash equivalents at beginning of period		38,101			46,270
Cash and cash equivalents at end of period	$	120,714		$	50,655

See accompanying notes to condensed consolidated financial statements

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 guidance, 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 September 30, 2009, results of operations for the three and nine months ended September 30, 2009 and 2008, and cash flows for the nine months ended September 30, 2009 and 2008. Interim period results are not necessarily indicative of results for a full-year period. The Company has evaluated subsequent events for potential recognition and/or disclosure through November 6, 2009, which is the date the financial statements included in this Quarterly Report on Form 10-Q were issued.

The year-end condensed 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, 2008.

2.	SECURITIES

In April 2009, the Financial Accounting Standards Board (“FASB”) issued a change in accounting guidance involving the recognition and presentation of other-than-temporary impairments. The Company adopted this guidance on April 1, 2009. Under the new guidance Accounting Standards Codification (“ASC”) Topic 320-10, when an other-than-temporary-impairment (“OTTI”) of a debt security has occurred, the amount of the OTTI recognized in earnings depends on whether the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis. If the debt security meets either of these two criteria, the OTTI recognized in earnings is equal to the entire difference between the security’s amortized cost basis and its fair value at the impairment measurement date. For OTTIs of debt securities that do not meet these two criteria, the net amount recognized in earnings is equal to the difference between the amortized cost of the debt security and its net present value calculated. Any difference between the fair value and the net present value of the debt security at the impairment measurement date is recorded in other comprehensive income (loss) (“OCI”). Unrealized gains or losses on securities for which an OTTI has been recognized in earnings is tracked as a separate component of accumulated other comprehensive income (loss) (“AOCI”). Prior to the adoption of the new guidance, an OTTI recognized in earnings for debt securities was equal to the total difference between amortized cost and fair value at the time of impairment.

For debt securities, the split between the amount of an OTTI recognized in other comprehensive income and the net amount recognized in earnings is driven principally by assumptions regarding the amount and timing of projected cash flows. For mortgage-backed and asset-backed securities, cash flow estimates are determined based on prepayment assumptions, default rates and loss severity rates derived from widely accepted third-party data sources. The Company has developed these estimates using information based on historical experience as well as using market observable data, such as industry analyst reports and forecasts, sector credit ratings and other data relevant to the collectability of a security.

The new cost basis of an impaired security is not adjusted for subsequent increases in estimated fair value. In periods subsequent to the recognition of an OTTI, the impaired security is accounted for as if it had been purchased on the measurement date of the impairment. For debt securities, the discount (or reduced premium) based on the new cost basis may be accreted into net investment income in future periods based on prospective changes in cash flow estimates, to reflect adjustments to the effective yield.

For equity securities, the Company evaluates whether unrealized losses on securities represent impairment that is other than temporary. If such impairment is identified, the carrying amount of the security is reduced with a charge to earnings. In making this evaluation, management first considers the reasons for the indicated impairment. These could include changes in market rates relative to those available when the security was acquired, changes in market expectations about the timing of cash flows from securities that can be prepaid, and changes in the market’s perception of the issuer’s financial health and the security’s credit quality. The Company then considers the likelihood of a recovery in fair value sufficient to eliminate the indicated impairment and the length of time over which an anticipated recovery would occur. Finally, the Company determines its ability to hold the impaired security until an anticipated recovery, in which case the impairment would be considered temporary.

Prior to the adoption of the new guidance, the Company recorded an OTTI charge of $225,000 for mortgage-backed securities and $15,000 for asset-backed securities for the three months ended March 31, 2009. The adoption of the new guidance had no effect on previously recognized OTTI as of March 31, 2009.

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

	As of September 30, 2009
	Amortized		Unrealized								Fair
	Cost		Gains		Losses			OTTI			Value
Securities available-for-sale
Debt Securities
U.S. Treasury and other U.S. government corporations and agencies	$	23,060	$	123	$	(1	)	$ ─			$	23,182
Obligations of state and political subdivisions		5,224		136		(6	)	─				5,354
Mortgage-backed securities and collateralized mortgage obligations
Government issued or guaranteed		51,337		1,081		(16	)	─				52,402
Privately issued residential		4,309	─			(314	)		(1,057	)		2,938
Asset backed securities		481	─		─				(277	)		204
Equity Securities
Investment in CRA funds		5,956		189	─			─				6,145
Total available-for-sale securities	$	90,367	$	1,529	$	(337	)	$	(1,334	)	$	90,225

Securities held-to-maturity
Obligations of state and political subdivisions	$	4,044	$	379	$ ─			$ ─			$	4,423
Total held-to-maturity securities	$	4,044	$	379	$ ─			$ ─			$	4,423

Other investments
Investment in CDARS	$	18,020	$ ─		$ ─			$ ─			$	18,020
FHLB/Federal Reserve Bank stock		6,248	─		─			─				6,248
Investment in subsidiary trust		1,083	─		─			─				1,083
Total other investments	$	25,351	$ ─		$ ─			$ ─			$	25,351

	As of December 31, 2008
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities available-for-sale
Debt Securities
U.S. Treasury and other U.S. government corporations and agencies	$	14,908	$	179	$ ─			$	15,087
Obligations of state and political subdivisions		3,853		24	─				3,877
Mortgage-backed securities and collateralized mortgage obligations
Government issued or guaranteed		72,787		555		(956	)		72,386
Privately issued residential		5,639		19		(1,299	)		4,359
Asset backed securities		550	─		─				550
Equity Securities
Investment in CRA funds		5,809		36	─				5,845
Total available-for-sale securities	$	103,546	$	813	$	(2,255	)	$	102,104

Securities held-to-maturity
Obligations of state and political subdivisions	$ ─		$ ─		$ ─			$ ─
Total held-to-maturity securities	$ ─		$ ─		$ ─			$ ─

Other investments
Investment in CDARS	$	20,240	$ ─		$ ─			$	20,240
FHLB/Federal Reserve Bank stock		7,897	─		─				7,897
Investment in subsidiary trust		1,083	─		─				1,083
Total other investments	$	29,220	$ ─		$ ─			$	29,220

The Company’s available-for-sale and held-to-maturity securities with unrealized losses are reviewed quarterly to identify OTTIs in value. In evaluating whether a decline in value is other-than-temporary, the Company considers several factors including, but not limited to the following: (1) the extent and the duration of the decline; (2) the reasons for the decline in value (credit event, and interest-rate related including general credit spread widening); (3) the financial condition of and near-term prospects of the issuer, and (4) the Company’s intent not to sell and that it is not more likely than not that the Company would be required to sell the security before the anticipated recovery of its amortized cost basis. With regard to available-for-sale equity securities, the Company also considers the ability and intent to hold the investment for a period of time to allow for a recovery of value. When it is determined that a decline in value of an equity security is other-than-temporary, the carrying value of the equity security is reduced to its fair value, with a corresponding charge to earnings.

The following table displays the gross unrealized losses and fair value of securities available-for-sale and held-to-maturity as of September 30, 2009 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
	(In thousands)
Securities available-for-sale
Debt securities
U.S. Treasury and other U.S. government corporations and agencies	$	4,949	$	(1	)	$ ─		$ ─			$	4,949	$	(1	)
Obligations of state and political subdivisions		862		(6	)	─		─				862		(6	)
Mortgage-backed securities and collateralized mortgage obligations
Government issued or guaranteed		1,174		(6	)		1,382		(10	)		2,556		(16	)
Privately issued residential		610		(307	)		2,312		(1,064	)		2,922		(1,371	)
Asset backed securities		204		(277	)	─		─				204		(277	)
Total available-for-sale securities	$	7,799	$	(597	)	$	3,694	$	(1,074	)	$	11,493	$	(1,671	)

Securities held-to-maturity
Debt securities
Obligations of state and political subdivisions	$ ─		$ ─			$ ─		$ ─			$ ─		$ ─
Total held-to-maturity securities	$ ─		$ ─			$ ─		$ ─			$ ─		$ ─

Other-Than-Temporary Impairments (OTTI)

During the nine months ended September 30, 2009, OTTI charges of $2.0 million were recorded. The credit-related portion of these impairments was $637,000, which was included in noninterest expense. The $1.3 million noncredit portion of these impairments was included in accumulated other comprehensive loss for the nine months ended September 30, 2009.

For the nine months ended September 30, 2009, credit-related losses of $603,000 and $34,000 on 34 non-agency residential mortgage-backed securities and four asset-backed securities, respectively, were recognized. The noncredit portion of these impairments of $1.1 million on non-agency residential mortgage-backed securities and $277,000 on asset-backed securities was included in accumulated other comprehensive loss for the nine months ended September 30, 2009. To measure credit losses, external credit ratings and other relevant collateral details and performance statistics on a security-by-security basis were considered. Securities exhibiting significant deterioration are subjected to further analysis. Assumptions were developed for prepayment speed, default rate, and loss severity for each security using third party sources and based on the collateral history. The resulting projections of future cash flows of the underlying collateral were then discounted by the underlying yield before any write-downs were considered to determine the net present value of the cash flows (“NPV”). The difference between the cost basis and the NPV was taken as a credit loss in the current period to the extent that these losses have not been previously recognized. The difference between the NPV and the quoted market price is considered a noncredit related loss and was included in other comprehensive loss.

The following table represents the impairment activity related to debt securities.

	Three months ended September 30, 2009
	Impairment related to credit losses			Impairment related to other factors			Total impairment
	(In thousands)
Beginning balance, July 1, 2009	$	720		$	881		$	1,601
Addition of OTTI that was not previously recognized		226			529			755
Additions to OTTI that was previously recognized when there is no intent to sell and no requirement to sell before recovery of amortized cost basis		16			32			48
Transfers from AOCI to OTTI related to credit losses		108			(108	)	─
Reclassifications from OTTI to realized losses		(12	)	─				(12	)
Ending balance, September 30, 2009	$	1,058		$	1,334		$	2,392

	Nine months ended September 30, 2009
	Impairment related to credit losses			Impairment related to other factors			Total impairment
	(Dollars in thousands)
Beginning balance, January 1, 2009	$	421		$ ─			$	421
Addition of OTTI that was not previously recognized		487			1,442			1,929
Additions to OTTI that was previously recognized when there is no intent to sell and no requirement to sell before recovery of amortized cost basis		54		─				54
Transfers from AOCI to OTTI related to credit losses		108			(108	)	─
Reclassifications from OTTI to realized losses		(12	)	─				(12	)
Ending balance, September 30, 2009	$	1,058		$	1,334		$	2,392

The following sets forth information concerning sales (excluding calls and maturities) of available-for-sale securities (in thousands). There were no sales of held-to-maturity securities.

	Nine Months Ended September 30,
	2009		2008
Amortized cost	$	31,512	$	4,319
Proceeds		31,848		4,196
Gross realized gains		337		123
Gross realized losses		—		—

At September 30, 2009, future contractual maturities of debt securities were as follows (in thousands):

	Securities				Securities
	Available-for-sale				Held-to-maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Within one year	$	10,185	$	10,198	$	—	$	—
Within two to five years		230		232		—		—
Within six to ten years		2,646		2,697		—		—
After ten years		15,704		15,613		4,044		4,423
Mortgage-backed securities and collateralized mortgage obligations		55,647		55,340		—		—
Total debt securities	$	84,412	$	84,080	$	4,044	$	4,423

The Company holds mortgage-backed securities which may mature at an earlier date than the contractual maturity due to prepayments. The Company also holds certain securities which may be called by the issuer at an earlier date than the contractual maturity date.

3.	ALLOWANCE FOR LOAN AND CREDIT LOSSES

Changes in the allowance for loan and credit losses are as follows:

	As of and for the Three Months						As of and for the Nine Months
	Ended September 30,						Ended September 30,
	2009			2008			2009			2008
	(In thousands)

Allowance for loan losses at beginning of period	$	24,266		$	15,520		$	24,235		$	13,125
Provision for loan losses		3,596			1,754			12,710			4,803
Charge-offs		(2,421	)		(1,692	)		(12,009	)		(2,451	)
Recoveries		162			141			667			246
Allowance for loan losses at end of period		25,603			15,723			25,603			15,723

Reserve for unfunded lending commitments at beginning of period		1,478			917			1,092			816
Provision for unfunded lending commitments		(290	)		(179	)		96			(78	)
Reserve for unfunded lending commitments at end of period		1,188			738			1,188			738

Allowance for credit losses	$	26,791		$	16,461		$	26,791		$	16,461

GOODWILL

Goodwill is recorded on the acquisition date of each entity, and evaluated annually for possible impairment. Goodwill is required to be tested for impairment on an annual basis or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company’s only reporting unit with assigned goodwill is Metro United.

The Company completed its 2009 impairment testing based on information that was as of August 31, 2009. The review utilized guideline company and guideline transaction information where available, discounted cash flow analysis, and quoted stock prices for the Company and guideline banks to estimate the fair value of Metro United. The estimated fair value of Metro United as of August 31, 2009 exceeded its respective carrying value; therefore, the Company determined there was no impairment of goodwill as of that date.

The Company utilized a discounted cash flow analysis to determine the fair value of Metro United. Multi-year financial forecasts were developed by projecting net income for the next five years and discounting the average terminal values based on the transaction multiples such as price-to-book, price-to-tangible book, and price-to-deposits in a normalized market. For the test as of August 31, 2009, the Company used an average growth rate of 6% for the five-year period and discounted Metro United’s terminal value using a 10% rate of return. The Company also performed a sensitivity analysis utilizing additional discount rates ranging from 8% to 15%. In the sensitivity analysis, an 8% discount rate indicated a fair value that was $20.3 million greater than carrying value, a 13.8% discount rate indicated that the fair value and carrying value were approximately equal, and a 15% discount rate indicated a fair value that was $3.3 million less than carrying value. The Company also considered the fair value of Metro United in relationship to the Company's stock price and performed a reconciliation to market price. This reconciliation was performed by first using the Company's market price on a minority basis with an estimated control premium of 30%. The Company then allocated the total fair value to both of its reporting units, MetroBank and Metro United. The derived fair value of Metro United was then compared to the carrying value of its equity. As the carrying value of its equity exceeded the fair value, an additional goodwill impairment evaluation was performed which involved calculating the implied fair value of Metro United’s goodwill.

The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. The fair value of Metro United’s assets and liabilities, including unrecognized intangible assets, is individually evaluated. The excess of the fair value of Metro United over the fair value of its net assets is the implied fair value of goodwill. The Company estimated the fair value of Metro United’s assets and liabilities, including previously unrecognized intangible assets, through a variety of valuation techniques that incorporated interest rates, credit or nonperformance risk, as well as market risk adjustments that are indicative of the current economic environment. The estimated values are based on an exit price and reflect management’s expectations regarding how a market participant would value the assets and liabilities. This evaluation and resulting conclusion were significantly affected by the estimated fair value of the loans of Metro United that were evaluated, particularly the market risk adjustment that is a consequence of the current distressed market conditions. Based on this analysis, the Company determined that the implied fair value of the goodwill for Metro United was in excess of the carrying value of the goodwill; therefore, no goodwill impairment was recorded as of the annual test date. However, it is possible that future changes in the fair value of Metro United’s net assets could result in future goodwill impairment. For example, to the extent that market liquidity returns and the fair value of the individual assets of Metro United increases at a faster rate than the fair value of Metro United as a whole, that may cause the implied goodwill to be lower than the carrying value of goodwill, resulting in goodwill impairment. Ultimately, future potential changes in valuation assumptions may impact the estimated fair value of Metro United and cause its fair value to be below its carrying value, therefore resulting in an impairment of the goodwill.

Subsequent to the August 31, 2009 annual test date, the Company’s common stock continued to trade below its book value. The Company performed an analysis that considered the Company’s common stock price, loan values of Metro United, and other factors and determined that as of September 30, 2009, goodwill was not impaired. As of September 30, 2009, the loan fair value of Metro United approximated the fair value at the annual test date.

5.	SHAREHOLDERS’ EQUITY

In connection with the Company's participation in the Capital Purchase Program (“CPP”), on January 16, 2009, the Company issued and sold to the U.S. Treasury (i) 45,000 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $1.00 per share, with a liquidation value of $1,000 per share (the “Series A Preferred Stock”), and (ii) a warrant (“Warrant”) to purchase 771,429 shares of the Company's common stock, at an exercise price of $8.75 per share, subject to certain anti-dilution and other adjustments, for an aggregate purchase price of $45.0 million in cash. Approximately $44.3 million was allocated to the initial carrying value of the preferred stock and $711,000 to the warrant based on their relative estimated fair values on the issue date. The fair value of the warrant was determined using a valuation model which incorporates assumptions including the Company’s common stock price, dividend yield, stock price volatility and the risk-free interest rate. The fair value of the preferred stock was determined based on assumptions regarding the discount rate for the Company which was estimated to be approximately 8% at the date of issuance. The difference between the initial carrying value of the preferred stock and the $45 million full redemption value will be accreted over five years using a straight-line method over the expected life of the preferred stock. The total capital raised through this issue qualifies as Tier 1 regulatory capital and can be used in calculating all regulatory capital ratios.

The Series A Preferred Stock pays cumulative dividends at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year. Pursuant to Section 111 of the Emergency Economic Stabilization Act of 2008, as amended, the Company may, at its option, subject to the necessary bank regulatory approval, redeem the Series A Preferred Stock at par value plus accrued and unpaid dividends.

The Company may not declare or pay dividends on its common stock or, with certain exceptions, repurchase common stock without first having paid all accrued cumulative preferred dividends that are due. For three years from the issue date, the Company also may not increase its common stock dividend rate above a quarterly rate of $0.04 per share or repurchase its common shares without Treasury’s consent, unless Treasury has transferred all the preferred shares to third parties or the preferred stock has been redeemed. In April 2009, the Company suspended regular cash dividends on its common stock for an indefinite period of time.

6.	EARNINGS PER COMMON SHARE

Basic earnings per common share (“EPS”) is computed by dividing net income (after deducting dividends on preferred stock) 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, restricted common shares and warrants can be dilutive common shares and are therefore considered in the earnings per share calculation, if dilutive. Stock options, restricted common shares and warrants that are antidilutive are excluded from earnings per share calculation. Stock options, restricted common shares and warrants are antidilutive when the exercise price is higher than the current market price of the Company’s common stock. For the three months ended September 30, 2009 and 2008, antidilutive stock options were 1,812,996 and 312,706, respectively. For the nine months ended September 30, 2009 and 2008, there were 1,814,983 and 275,968 antidilutive stock options, 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 Nine Months
	Ended September 30,				Ended September 30,
	2009		2008		2009			2008
	(In thousands, except per share amounts)

Net income (loss) available to common shareholders	$	575	$	2,076	$	(1,338	)	$	6,579

Weighted average common shares in basic EPS		10,915		10,842		10,899			10,824
Effect of dilutive securities		8		69		1			75
Weighted average common and potentially dilutive common shares used in diluted EPS		10,923		10,911		10,900			10,899

Earnings per common share:
Basic	$	0.05	$	0.19	$	(0.12	)	$	0.61
Diluted	$	0.05	$	0.19	$	(0.12	)	$	0.60

7.	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 consultation with its legal counsel, such litigation is not expected to have a material adverse effect on the Company’s consolidated financial position, result of operations or cash flows.

8.	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 they do for on-balance sheet instruments. Off-balance sheet financial instruments include commitments to extend credit and guarantees under standby and other letters of credit.

The contractual amount of the Company’s financial instruments with off-balance sheet risk at September 30, 2009 and December 31, 2008 is presented below:

	As of September 30, 2009		As of December 31, 2008
	(In thousands)
Unfunded loan commitments including unfunded lines of credit	$	140,368	$	247,731
Standby letters of credit		10,985		9,981
Commercial letters of credit		12,296		12,244
Operating leases		6,771		8,065
Total financial instruments with off-balance sheet risk	$	170,420	$	278,021

9.	DERIVATIVE FINANCIAL INSTRUMENTS

The fair value of derivative positions outstanding is included in other liabilities in the accompanying condensed consolidated balance sheets and in the net change in this financial statement line item in the accompanying condensed consolidated statements of cash flows.

Interest Rate Derivatives. During the third quarter of 2009, the Company entered into a forward-starting interest rate swap contract on its junior subordinated debentures with a notional amount of $17.5 million. The interest rate swap contract was designated as a hedging instrument in a cash flow hedge with the objective of protecting the quarterly interest payments on a portion of the Company’s $36.1 million of junior subordinated debentures issued to the Company’s unconsolidated subsidiary trust MCBI Statutory Trust I throughout the five-year period beginning in December 2010 and ending in December 2015 from the risk of variability of those payments resulting from changes in the three-month LIBOR interest rate. Under the swap contract, beginning December 2010, the Company will pay a fixed interest rate of 5.38% and receive a variable interest rate of three-month LIBOR plus a margin of 1.55% on a total notional amount of $17.5 million, with quarterly settlements beginning March 2011.

The notional amount and estimated fair value of the interest rate derivative contract outstanding at September 30, 2009 was $17.5 million and ($168,000), respectively. There were no interest rate derivative contracts outstanding at December 31, 2008. The Company obtains dealer quotations to value its interest rate derivative contract designated as hedges of cash flows.

The Company applies hedge accounting to interest rate derivatives. To qualify for hedge accounting, a derivative must be highly effective at reducing the risk associated with the exposure being hedged. In addition, for a derivative to be designated as a hedge, the risk management objective and strategy must be documented. Hedge documentation must identify the derivative hedging instrument, the asset or liability and type of risk to be hedged, and how the effectiveness of the derivative will be assessed prospectively and retrospectively. To assess effectiveness, the Company compares the dollar-value of the change in the fair value of the derivative to the change in the fair value or cash flows of the hedged item. The extent to which a derivative has been, and is expected to continue to be, effective at offsetting changes in the fair value or cash flows of the hedged item must be assessed and documented at least quarterly. Any hedge ineffectiveness (i.e., the amount by which the gain or loss on the designated derivative instrument does not exactly offset the gain or loss on the hedged item attributable to the hedged risk) must be reported in current-period earnings. If it is determined that a derivative is not highly effective at hedging the designated exposure, hedge accounting is discontinued.

Gains, Losses and Derivative Cash Flows. For cash flow hedges, the effective portion of the gain or loss due to changes in the fair value of the derivative hedging instrument is included in other comprehensive income, while the ineffective portion (indicated by the excess of the cumulative change in the fair value of the derivative over that which is necessary to offset the cumulative change in expected future cash flows on the hedge transaction) is included in other non-interest income or other non-interest expense. Net cash flows from the interest rate swap on junior subordinated debentures designated as a hedging instrument in an effective hedge of cash flows are included in interest expense on junior subordinated debentures.

Amounts included in the condensed consolidated statements of income and in other comprehensive income for the period related to interest rate derivatives designated as hedges of cash flows were as follows:

	Gains/(losses) recorded in income and other comprehensive income (loss) (in thousands)
Three months ended September 30, 2009	Derivatives – effective portion reclassified from AOCI into income		Hedge ineffectiveness recorded directly in income		Total income statement impact		Derivatives – effective portion recorded in OCI			Total change in OCI for period
Contract type
Interest rate	$	—	$	—	$	—	$	(168	)	$	(168	)

	Gains/(losses) recorded in income and other comprehensive income (loss) (in thousands)
Nine months ended September 30, 2009	Derivatives – effective portion reclassified from AOCI into income		Hedge ineffectiveness recorded directly in income		Total income statement impact		Derivatives – effective portion recorded in OCI			Total change in OCI for period
Contract type
Interest rate	$	—	$	—	$	—	$	(168	)	$	(168	)

Counterparty Credit Risk. Derivative contracts involve the risk of dealing with institutional derivative counterparties and their ability to meet contractual terms. Derivative contracts are executed with a Credit Support Annex, or CSA, which is a bilateral ratings-sensitive agreement that requires collateral postings at established credit threshold levels. These agreements protect the interests of the Company and its counterparties, should either party suffer a credit rating deterioration. Institutional counterparties must have an investment grade credit rating. The Company’s credit exposure on interest rate swaps is limited to the net favorable value and interest payments of all swaps by each counterparty. Credit exposure may be reduced by the amount of collateral pledged by the counterparty. There are no credit-risk-related contingent features associated with any of the Company’s derivative contracts. The Company had no credit exposure relating to the interest rate swap at September 30, 2009. The amount of cash collateral posted by the Company related to derivative contracts totaled $875,000 at September 30, 2009.

10.	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 nine months ended September 30, 2009 and 2008:

	For the three months ended September 30, 2009									For the three months ended September 30, 2008
	MetroBank		Metro United		Other			Consolidated Company		MetroBank		Metro United		Other			Consolidated Company
	(In thousands)
Total interest income	$	16,135	$	5,671	$	16		$	21,822	$	17,564	$	6,314	$	16		$	23,894
Total interest expense		4,770		1,917		520			7,207		6,656		2,848		570			10,074
Net interest income		11,365		3,754		(504	)		14,615		10,908		3,466		(554	)		13,820
Provision for loan losses		2,611		985	─				3,596		1,474		280	─				1,754
Net interest income after provision for loan losses		8,754		2,769		(504	)		11,019		9,434		3,186		(554	)		12,066
Noninterest income		2,528		107		(332	)		2,303		2,178		117		(263	)		2,032
Noninterest expenses		9,018		2,604		2			11,624		8,025		2,526		166			10,717
Income (loss) before income tax provision		2,264		272		(838	)		1,698		3,587		777		(983	)		3,381
Provision (benefit) for income taxes		769		46		(255	)		560		1,126		331		(152	)		1,305
Net income (loss)	$	1,495	$	226	$	(583	)	$	1,138	$	2,461	$	446	$	(831	)	$	2,076

	For the nine months ended September 30, 2009											For the nine months ended September 30, 2008
	MetroBank		Metro United			Other			Consolidated Company			MetroBank		Metro United		Other			Consolidated Company
	(In thousands)
Total interest income	$	48,757	$	16,781		$	47		$	65,585		$	54,307	$	19,208	$	49		$	73,564
Total interest expense		16,345		6,593			1,570			24,508			20,541		9,127		1 612			31,280
Net interest income		32,412		10,188			(1,523	)		41,077			33,766		10,081		(1,563	)		42,284
Provision for loan losses		9,138		3,572		─				12,710			3,078		1,725	─				4,803
Net interest income after provision for loan losses		23,274		6,616			(1,523	)		28,367			30,688		8,356		(1,563	)		37,481
Noninterest income		6,877		315			(1,021	)		6,171			7,106		372		(939	)		6,539
Noninterest expenses		26,402		7,851			75			34,328			25,094		7,683		701			33,478
Income before income tax provision		3,749		(920	)		(2,619	)		210			12,700		1,045		(3,203	)		10,542
Provision (benefit) for income taxes		1,137		(412	)		(771	)		(46	)		4,295		469		(801	)		3,963
Net income (loss)	$	2,612	$	(508	)	$	(1,848	)	$	256		$	8,405	$	576	$	(2,402	)	$	6,579

	As of September 30, 2009									As of September 30, 2008
	MetroBank		Metro United		Other			Consolidated Company		MetroBank		Metro United		Other			Consolidated Company
	(In thousands)
Net loans	$	929,885	$	356,050	$	-		$	1,285,935	$	964,950	$	360,974	$	-		$	1,325,924
Total assets		1,177,347		455,713		(3,328	)		1,629,732		1,173,748		422,220		(1,479	)		1,594,489
Deposits		1,011,435		387,720		(7,329	)		1,391,826		962,760		306,604		(4,126	)		1,265,238

11.	FAIR VALUE

FASB accounting guidance relating to fair value measurements 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. FASB accounting guidance 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. FASB accounting guidance relating to fair value measurements were updated to apply to non-financial assets and non-financial liabilities and were adopted January 1, 2009. In addition, further updates affirm that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction, and clarify and include additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. This update was adopted April 1, 2009.

FASB accounting guidance 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.

Financial assets measured at fair value on a recurring basis are as follows:

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 data that may include proprietary 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. Market values provided by the pricing service are compared to prices from other sources for reasonableness. The Company has not adjusted the values from the pricing service. See Note 2 Securities for additional discussion on valuation of securities.

Interest Rate Derivatives. The Company’s derivative position is classified within Level 2 in the fair value hierarchy and is valued using models generally accepted in the financial services industry that use actively quoted or observable market input values from external market data providers and/or non-binding broker-dealer quotations. The fair value of the derivative is determined using discounted cash flow models. These models’ key assumptions include the contractual terms of the respective contract, along with significant observable inputs, including interest rates, yield curves, non-performance risk and volatility. Derivative contracts are executed with a Credit Support Annex, which is a bilateral ratings-sensitive agreement that requires collateral postings at established credit threshold levels. These agreements protect the interests of the Company and its counterparties, should either party suffer a credit rating deterioration.

The following table presents the financial instruments carried at fair value on a recurring basis by caption on the consolidated balance sheets and by valuation hierarchy (as described above) at September 30, 2009 and December 31, 2008:

	Fair Value Measurements, 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
Securities available-for-sale at September 30, 2009
U.S. Treasury and other U.S. government corporations and agencies	$	–	$	23,182		$	–	$	23,182
Obligations of state and political subdivisions		–		5,354			–		5,354
Mortgage-backed securities and collateralized mortgage obligations							–
Government issued or guaranteed		–		52,402			–		52,402
Privately issued residential		–		2,938			–		2,938
Asset backed securities		–		204			–		204
Investment in CRA funds		6,145		–			–		6,145
Total available-for-sale securities	$	6,145	$	84,080		$	–	$	90,225

Derivative liabilities at September 30, 2009	$	–	$	(168	)	$	–	$	(168	)

Securities available-for-sale at December 31, 2008
U.S. Treasury and other U.S. government corporations and agencies	$	–	$	15,087		$	–	$	15,087
Obligations of state and political subdivisions		–		3,877			–		3,877
Mortgage-backed securities and collateralized mortgage obligations							–
Government issued or guaranteed		–		72,386			–		72,386
Privately issued residential		–		4,359			–		4,359
Asset backed securities		–		550			–		550
Investment in CRA funds		5,845		–			–		5,845
Total available-for-sale securities	$	5,845	$	96,259		$	–	$	102,104

Derivative liabilities at December 31, 2008	$	–	$	–		$	–	$	–

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 include the following:

Goodwill. Goodwill is measured at fair value on a non-recurring basis using Level 3 inputs. In the first step of a goodwill impairment test, the Company primarily uses a review of the valuation of recent guideline bank acquisitions, if available, as well as discounted cash flow analysis. If the second step of a goodwill impairment test is required, the implied fair value of goodwill is determined in the same manner as goodwill is recognized in a business combination. See Note 4 Goodwill for additional information.

Impaired Loans. Certain impaired loans with a valuation reserve are measured for impairment using the practical expedient, whereby fair value of the loan is based on the fair value of the loan’s collateral, provided the loan is collateral dependent. The fair value measurements of loan collateral can include real estate appraisals, comparable real estate sales information, cash flow projections, realization estimates, etc., all of which can include observable and unobservable inputs. As a result, the categorization of impaired loans can be either Level 2 or Level 3 of the fair value hierarchy, depending on the nature of the inputs used for measuring the related collateral’s fair value. As of September 30, 2009, certain impaired loans were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for loan losses based upon the fair value of the underlying collateral. Impaired loans with a carrying value of $14.3 million were reduced by specific valuation allowance allocations of $1.7 million to a fair value of $12.6 million based on collateral valuations utilizing Level 2 valuation inputs. Impaired loans with a carrying value of $292,000 were reduced by specific valuation allowance allocations of $60,000 to a fair value of $232,000 based on collateral valuations utilizing Level 3 valuation inputs.

On April 1, 2009, the Company adopted updates to FASB accounting guidance to require an entity to provide disclosures about fair value of financial instruments in interim financial information and to require those disclosures in summarized financial information at interim reporting periods.

Fair Value of Financial Instruments

The following table summarizes the carrying value and estimated fair values of financial instruments as of September 30, 2009 and December 31, 2008:

	As of September 30, 2009				As of December 31, 2008
	Carrying or Contract Amount		Estimated Fair Value		Carrying or Contract Amount		Estimated Fair Value
(In thousands)
Financial Assets
Cash and cash equivalents	$	120,714	$	120,714	$	38,101	$	38,101
Investment securities available-for-sale		90,225		90,225		102,104		102,104
Investment securities held-to-maturity		4,044		4,423		—		—
Other investments		25,351		25,351		29,220		29,220
Loans held-for-investment, net		1,285,935		1,188,587		1,321,813		1,194,550
Cash value of bank owned life insurance		28,160		28,160		27,090		27,090
Accrued interest receivable		4,952		4,952		5,946		5,946

Financial Liabilities
Deposits
Transaction accounts		699,853		699,853		597,877		597,876
Time deposits		691,973		694,532		671,276		677,416
Total deposits		1,391,826		1,394,385		1,269,153		1,275,292
Other borrowings		25,118		25,347		139,046		138,992
Junior subordinated debentures		36,083		38,264		36,083		38,623
Interest rate derivative		168		168		—		—
Accrued interest payable		1,072		1,072		1,279		1,279

Off-balance sheet financial instruments
Unfunded loan commitments, including unfunded lines of credit		140,368		—		247,731		—
Standby letters of credit		10,985		—		9,981		—
Commercial letters of credit		12,296		—		12,244		—

The following methodologies and assumptions were used to estimate the fair value of the Company’s financial instruments as disclosed in the table:

Assets for Which Fair Value Approximates Carrying Value. The fair values of certain financial assets and liabilities carried at cost, including cash and due from banks, deposits with banks, federal funds sold, cash value of bank owned life insurance, due from customers on acceptances and accrued interest receivable, are considered to approximate their respective carrying values due to their short-term nature and/or negligible credit losses.

Investment Securities. Fair values are based primarily upon quoted market prices obtained from an independent pricing service.

Loans. The fair value of loans originated by the Banks is estimated by discounting the expected future cash flows using the current interest rates at which similar loans with similar terms would be made. The presence of floors on a large portion of the variable rate loans has supported the yields above current market levels and is the key factor causing the fair value of the variable rate loans with floors to exceed the book value. The fair value of the remainder of the variable rate loans approximates the carrying value while fixed rate loans are generally above the carrying values. Using these results, valuation adjustments are made for specific credit risks as well as general portfolio credit and market risks to arrive at the fair value.

Liabilities for Which Fair Value Approximates Carrying Value. The estimated fair value for transactional deposit liabilities with no stated maturity (i.e., demand, savings, and money market deposits) approximates the carrying value. The estimated fair value of deposits does not take into account the value of the Company’s long-term relationships with depositors, commonly known as core deposit intangibles, which are separate intangible assets, and not considered financial instruments. Nonetheless, the company would likely realize a core deposit premium if its deposit portfolio were sold in the principal market for such deposits.

The fair value of acceptances outstanding, accounts payable and accrued liabilities are considered to approximate their respective carrying values due to their short-term nature.

Time Deposits. Fair values for fixed-rate time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregated expected monthly maturities on time deposits.

Other Borrowings. The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other borrowings maturing within fourteen days approximate their fair values. Fair values of other borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Junior Subordinated Debentures. The fair value of the junior subordinated debentures was estimated by discounting the cash flows through maturity based on the prevailing market rate.

Interest Rate Derivatives. The fair value was estimated using discounted cash flow models that use actively quoted or observable market input values from external market data providers and/or non-binding broker-dealer quotations.

Commitments to Extend Credit and Letters of Credit. The fair value of such instruments is estimated using fees currently charged for similar arrangements in the market. The estimated fair values of these instruments are not material as of the reporting dates.

12.	NEW AUTHORITATIVE ACCOUNTING GUIDANCE

Accounting Standards Codification

The FASB Accounting Standards Codification (“ASC”) became effective on July 1, 2009. At that date, the ASC became FASB’s officially recognized source of authoritative U.S. generally accepted accounting principles (GAAP) applicable to all public and non-public non-governmental entities, superseding existing FASB, American Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force (“EITF”) and related literature. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to the ASC affects the way companies refer to U.S. GAAP in financial statements and accounting policies. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.

FASB ASC Topic 855 “Subsequent Events.” ASC 855-10 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. AS 855-10 defines (i) the period after the balance sheet date during which a reporting entity’s management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and (iii) the disclosures an entity should make about events or transactions that occurred after the balance sheet date. AS 855-10 became effective for the Company’s financial statements for periods ending after June 15, 2009. The new interim disclosures required by AS 855-10 are included in the Company’s interim financial statements beginning June 30, 2009.

The FASB issued Statement No. 166, “Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140.” Statement No. 166 amends Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. Statement No. 166 eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. Statement No. 166 also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. Statement No. 166 is effective for the Company beginning January 1, 2010, and adoption is not expected to have a material impact on the financial condition, results of operations, or cash flows of the Company.

The FASB issued Statement No. 167, “Amendments to FASB Interpretation No. 46(R).” Statement No. 167 amends FIN 46 (Revised December 2003), “Consolidation of Variable Interest Entities,” to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. Statement No. 167 requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. Statement No. 167 is effective for the Company beginning January 1, 2010. The Company is in the process of determining the impact of Statement No. 167 on the financial condition, results of operations, and cash flows of the Company.

New authoritative accounting guidance under ASC Topic 810 amends prior guidance to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The new authoritative accounting guidance requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. The new authoritative accounting guidance under ASC Topic 810 will be effective January 1, 2010. The Company is in the process of determining the impact of this new guidance on the financial condition, results of operations, and cash flows of the Company.

FASB ASC Topic 815, “Derivatives and Hedging.” New authoritative accounting guidance under ASC Topic 815, “Derivatives and Hedging,” amends prior guidance to amend and expand the disclosure requirements for derivatives and hedging activities 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 ASC Topic 815, 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, the new authoritative accounting guidance 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. The new authoritative accounting guidance under ASC Topic 815 became effective for the Company on January 1, 2009 and the required disclosures are reported in Note 9 - Derivative Financial Instruments.

FASB ASC Topic 820, “Fair Value Measurements and Disclosures.” New authoritative accounting guidance under ASC Topic 820 relates to determining fair value of assets or liabilities affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction, and clarifies and includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. The new authoritative guidance requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence, and also expanded certain disclosure requirements. The new guidance under ASC Topic 820 became effective for interim and annual periods ending after June 15, 2009 and did not have a significant impact on the Company’s financial statements.

Further new authoritative accounting guidance (Accounting Standards Update No. 2009-5) which will amend ASC Topic 820 provides guidance for measuring the fair value of a liability in circumstances in which a quoted price in an active market for the identical liability is not available. In such instances, a reporting entity is required to measure fair value utilizing a valuation technique that uses (i) the quoted price of the identical liability when traded as an asset, (ii) quoted prices for similar liabilities or similar liabilities when traded as assets, or (iii) another valuation technique that is consistent with the existing principles of ASC Topic 820, such as an income approach or market approach. The new authoritative accounting guidance also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The forgoing new authoritative accounting guidance under ASC Topic 820 will be effective for the Company’s financial statements beginning October 1, 2009 and adoption is not expected to have a material impact on the financial condition, results of operations, or cash flows of the Company.

FASB ASC Topic 320 “Investments - Debt and Equity Securities.” ASC Topic 320-10 relates to recognition and presentation of other-than-temporary impairments (i) changes existing guidance for determining whether an impairment is other than temporary to debt securities and (ii) replaces the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. Under ASC Topic 320-10, declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. ASC Topic 320-10 was effective for interim and annual periods ending after June 15, 2009. The adoption of ASC Topic 320-10 was applied and considered during management’s other-than-temporary impairments analysis and conclusion. See Note 2, “Securities” to the Condensed Consolidated Financial Statements for disclosures required by this new guidance.

FASB ASC Topics 820, and 825 “Financial Instruments.” ASC Topic 820-10 relates to interim disclosures about fair value of financial instruments amends prior accounting standards relating to fair value to require an entity to provide disclosures about fair value of financial instruments in interim financial information and amends ASC Topic 270-10 to require those disclosures in summarized financial information at interim reporting periods. Under ASC Topic 820-10, a publicly traded company shall include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. In addition, entities must disclose, in the body or in the accompanying notes of its summarized financial information for interim reporting periods and in its financial statements for annual reporting periods, the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position, as required by ASC Topic 825-10, and ASC Topic 820-10. The new interim disclosures required by ASC Topic 820-10 became effective for interim and annual periods ending after June 15, 2009 and are included in the Company’s interim financial statements as of and for the nine months ended September 30, 2009.

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 the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations resulting in, among other things, a deterioration in credit quality or a reduced demand for credit, including the resultant effect on the Company's loan portfolio and allowance for loan losses;

•

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 concentration of the Company’s loan portfolio in loans collateralized by real estate;

•

the Company’s ability to raise additional capital;

•

the effect of compliance, or failure to comply within stated deadlines, of the provisions of the formal agreement with the Office of the Comptroller of the Currency;

•

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;

•

the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on the results of operations;

•

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 the Company’s capital levels and regulatory capital ratios;

•

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

•

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

•

government intervention in the U.S. financial system; 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.

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 $1.1 million for the three months ended September 30, 2009, a decrease of $938,000 compared with the same quarter in 2008. The Company’s diluted earnings per common share for the three months ended September 30, 2009 was $0.05, a decrease of $0.14 per diluted common share compared with diluted earnings per common share of $0.19 for the same quarter in 2008. Diluted earnings per share 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. Preferred stock dividends were $563,000 or $0.05 per diluted share for the three months ended September 30, 2009. There were no preferred stock dividends for the three months ending September 30, 2008. The Company recorded net income of $256,000 for the nine months ended September 30, 2009, a decrease of $6.3 million compared with the same period in 2008. The Company’s diluted loss per common share for the nine months ended September 30, 2009 was $0.12, a decrease of $0.72 per diluted share compared with diluted earnings per common share of $0.60 for the same period in 2008. Preferred stock dividends were $1.6 million or $0.15 per diluted share for the nine months ended September 30, 2009. There were no preferred stock dividends for the nine months ended September 30, 2008. Details of the changes in the various components of net income are further discussed below.

Total assets were $1.63 billion at September 30, 2009, an increase of $49.5 million or 3.1% from $1.58 billion at December 31, 2008. Available-for-sale investment securities at September 30, 2009 were $90.2 million, a decrease of $11.9 million or 11.6% from $102.1 million at December 31, 2008. Net loans at September 30, 2009 were $1.29 billion, a decrease of $35.9 million or 2.7% from $1.32 billion at December 31, 2008. Total deposits at September 30, 2009 were $1.39 billion, an increase of $122.7 million or 9.7% from $1.27 billion at December 31, 2008. Other borrowings at September 30, 2009 were $25.1 million, a decrease of $113.9 million or 81.9% from $139.0 million at December 31, 2008. The Company’s return on average assets (“ROAA”) for the three months ended September 30, 2009 and 2008 was 0.28% and 0.52%, respectively. The Company’s return on average equity (“ROAE”) for the three months ended September 30, 2009 and 2008 was 2.74% and 6.67%, respectively. The Company’s ROAA for the nine months ended September 30, 2009 and 2008 was 0.02% and 0.57%, respectively. The Company’s ROAE for the nine months ended September 30, 2009 and 2008 was 0.21% and 7.21%, respectively. Shareholders’ equity at September 30, 2009 was $163.8 million compared to $119.2 million at December 31, 2008, an increase of $44.6 million or 37.4%. Details of the changes in the various balance sheet items are further discussed below.

Results of Operations

Net Interest Income and Net Interest Margin. For the three months ended September 30, 2009, net interest income, before the provision for loan losses, was $14.6 million, an increase of $795,000 or 5.8% compared with $13.8 million for the same period in 2008, primarily due to lower deposit cost. Average interest-earning assets for the three months ended September 30, 2009 were $1.50 billion, an increase of $14.4 million or 1.0% compared with $1.49 billion for the same period in 2008, primarily due to growth in federal funds sold and other short-term investments partially offset by a decline in loans and other investments. The weighted average yield on interest-earning assets for the third quarter of 2009 was 5.77%, a decrease of 62 basis points compared with 6.39% for the same quarter in 2008. Average interest-bearing liabilities for the three months ended September 30, 2009 were $1.22 billion, a decrease of $3.8 million or 0.3% compared with $1.22 billion for the same period in 2008, primarily due to a decrease in other borrowings partially offset by an increase in money market accounts and time deposits. The weighted average interest rate paid on interest-bearing liabilities for the third quarter 2009 was 2.35%, a decrease of 93 basis points compared with 3.28% for the same quarter in 2008. Interest rate cuts by the Federal Reserve, which caused the prime rate to decrease from 5% to 3.25% during the last 12 months, resulted in a decrease in yields and costs for the three months ended September 30, 2009, compared with the same period in 2008.

For the nine months ended September 30, 2009, net interest income, before the provision for loan losses, was $41.1 million, a decrease of $1.2 million or 2.9% compared with $42.3 million for the same period in 2008, primarily due to lower loan yields as a result of interest rate cuts and an increase in nonperforming assets. Average interest-earning assets for the nine months ended September 30, 2009 were $1.51 billion, an increase of $75.0 million or 5.2% compared with $1.44 billion for the same period in 2008, primarily due to growth in loans and federal funds sold and other short-term investments. The weighted average yield on interest-earning assets for the nine months ended September 30, 2009 was 5.79%, down 104 basis points compared with 6.83% for the same period in 2008. Average interest-bearing liabilities for the nine months ended September 30, 2009 were $1.23 billion, an increase of $47.4 million or 4.0% compared with $1.18 billion for the same period in 2008, primarily due to an increase in money market accounts and time deposits, partially offset by a decrease in other borrowings. The weighted average rate paid on interest-bearing liabilities for the nine months ended September 30, 2009 was 2.67%, down 87 basis points compared with 3.54% for the same period in 2008.

The net interest margin for the three months ended September 30, 2009 was 3.86%, an increase of 16 basis points compared with 3.70% for the same period in 2008. The increase was primarily the result of a decline in the cost of earning assets of 78 basis points partially offset by a decrease in the yield on earning assets of 62 basis points,. The net interest margin for the nine months ended September 30, 2009 was 3.63%, down 29 basis points compared with 3.92% for the same period in 2008. For the nine months ended September 30, 2009, the yield on average earning assets decreased 104 basis points, which was partially offset by a 75 basis point decrease in the cost of average earning assets. The decrease in yield on earning assets and the cost of earning assets for the three and nine months ended September 30, 2009 was due primarily to interest rate cuts and an increase in nonperforming assets.

Total Interest Income. Total interest income for the three months ended September 30, 2009 was $21.8 million, a decrease of approximately $2.1 million or 8.7% compared with $23.9 million for the same period in 2008. Total interest income for the nine months ended September 30, 2009 was $65.6 million, a decrease of $8.0 million or 10.8% compared with $73.6 million for the same period in 2008. The decrease for the three and nine months ended September 30, 2009 was primarily due to lower loan yields and an increase in nonperforming assets.

Interest Income from Loans. Interest income from loans for the three months ended September 30, 2009 was $20.7 million, a decrease of $1.6 million or 7.4% compared with $22.3 million for the same quarter in 2008. Average total loans for the three months ended September 30, 2009 were $1.32 billion compared to $1.33 billion for the same period in 2008, a decrease of $4.7 million or 0.4%. For the third quarter of 2009, the average yield on loans was 6.20%, a decrease of 49 basis points compared to 6.69% for the same quarter in 2008. Interest income from loans for the nine months ended September 30, 2009 was $61.8 million, a decrease of $6.9 million or 10.1% compared with $68.7 million for the same period in 2008. The decrease for the three and nine months ended September 30, 2009 was the result of lower loan yields and an increase in nonperforming assets. Average total loans for the nine months ended September 30, 2009 were $1.33 billion, an increase of $49.5 million or 3.9% compared with average total loans for the same period in 2008 of $1.28 billion. For the nine months ended September 30, 2009, the yield on average total loans was 6.22%, down 96 basis points compared with 7.18% for the same period in 2008.

Approximately $889.7 million or 67.7% of the total loan portfolio are variable rate loans that periodically reprice and are sensitive to changes in market interest rates. 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 September 30, 2009, the average yield on total loans was approximately 295 basis points above the prime rate primarily because of interest rate floors. At September 30, 2009, approximately $736.9 million in loans or 56.1% of the total loan portfolio were variable rate loans with interest rate floors that carried a weighted average interest rate of 6.34%. At September 30, 2008, variable rate loans with interest rate floors carried a weighted average interest rate of 6.76% and comprised 50.9% 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 September 30, 2009 was $1.2 million, a decrease of $431,000 or 27.0% compared to $1.6 million for the same period in 2008. The decrease in interest income from investments for the three months ended September 30, 2009 was primarily the result of declining interest rates. Average total investments for the three months ended September 30, 2009 were $180.3 million compared to average total investments for the same period in 2008 of $161.1 million, an increase of $19.2 million or 11.9%. For the third quarter 2009, the average yield on total investments was 2.57% compared to 3.95% for the same quarter in 2008, a decrease of 138 basis points. Interest income from investments for the nine months ended September 30, 2009 was $3.8 million, down $1.0 million or 21.8% compared with $4.8 million for the same period in 2008. The decrease in interest income from investments for the nine months ended September 30, 2009 was primarily the result of declining interest rates, and the effect of a decline in taxable securities due to paydowns, sales, calls and maturities of securities. Average total investments for the nine months ended September 30, 2009 were $187.1 million compared with average total investments for the same quarter in 2008 of $161.6 million, an increase of $25.5 million or 15.8%. The increase in average total investments for the three and nine months ended September 30, 2009 was primarily the result of an increase in Federal funds sold. For the nine months ended September 30, 2009, the average yield on investments was 2.71% compared with 4.01% for the same quarter in 2008, a decrease of 130 basis points.

Total Interest Expense. Total interest expense for the three months ended September 30, 2009 was $7.2 million, a decrease of $2.9 million or 28.5% compared to $10.1 million for the same period in 2008. Total interest expense for the nine months ended September 30, 2009 was $24.5 million, down $6.8 million or 21.6% compared with $31.3 million for the same period in 2008. Interest expense decreased for both the three and nine months ended September 30, 2009 primarily due to lower cost of funds and the effects of a decrease in other borrowings that was partially offset by an increase in interest-bearing deposits.

Interest Expense on Deposits. Interest expense on interest-bearing deposits for the three months ended September 30, 2009 was $6.4 million, a decrease of $2.2 million or 24.9% compared to $8.6 million for the same period in 2008. Average interest-bearing deposits for the three months ended September 30, 2009 were $1.15 billion compared to average interest-bearing deposits for the same period in 2008 of $1.03 billion, an increase of $122.1 million or 11.8%. The average interest rate paid on interest-bearing deposits for the third quarter of 2009 was 2.22% compared to 3.31% for the same quarter in 2008, a decrease of 109 basis points. The decline in interest expense and the average interest rate paid on interest-bearing deposits was primarily due to declining interest rates in the deposit market.

Interest expense on interest-bearing deposits for the nine months ended September 30, 2009 was $22.2 million, down $4.8 million or 17.8% compared with $27.0 million for the same period in 2008. Average interest-bearing deposits for the nine months ended September 30, 2009 were $1.15 billion compared with average interest-bearing deposits for the same period in 2008 of $1.00 billion, an increase of $146.8 million or 14.6%. The average interest rate incurred on interest-bearing deposits for the nine months ended September 30, 2009 was 2.58% compared with 3.59% for the same period in 2008, a decrease of 101 basis points. The decline in interest expense and the average interest rate paid on interest-bearing deposits was primarily due to declining interest rates in the deposit market.

Interest Expense on Junior Subordinated Debentures. Interest expense on junior subordinated debentures for the three months ended September 30, 2009 and 2008 was $519,000. Interest expense on junior subordinated debentures for the nine months ended September 30, 2009 and 2008 was $1.6 million. Average junior subordinated debentures for the three and nine months ended September 30, 2009 and 2008 were $36.1 million. The average interest rate incurred on junior subordinated debentures for the three and nine months ended September 30, 2009 and 2008 was 5.76%. The junior subordinated debentures accrue interest at a fixed rate of 5.76% 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%. Related to these debentures, the Company entered into a forward-starting interest rate swap contract. Under the swap, beginning December 15, 2010, the Company will pay a fixed interest rate of 5.38% and receive a variable interest rate of three-month LIBOR plus a margin of 1.55% on a total notional amount of $17.5 million, with quarterly settlements beginning March 2011. See Note 9, “Derivative Financial Instruments,” to the Condensed Consolidated Financial Statements for additional information related to this interest rate swap.

Interest Expense on Other Borrowings. Interest expense on other borrowings for the three months ended September 30, 2009 was $240,000, a decrease of $734,000 compared to $974,000 for the same period in 2008. Interest expense on other borrowed funds for the nine months ended September 30, 2009 was $768,000, down $2.0 million compared with $2.7 million for the same period in 2008. Average borrowed funds, consisting primarily of security repurchase agreements and borrowings from the Federal Home Loan Bank (“FHLB”), for the three months ended September 30, 2009 was $28.8 million a decrease of $125.9 million compared to $154.7 million for the same period in 2008. Other borrowings decreased primarily due to liquidity provided by deposit growth and funds received from participation in the Capital Purchase Program (“CPP”). The average interest rate paid on borrowed funds for the third quarter of 2009 was 3.31% compared to 2.50% for the same quarter in 2008. The average interest rate increased as lower cost short-term FHLB borrowings were repaid and higher cost long-term borrowings remained outstanding. Average borrowed funds for the nine months ended September 30, 2009 was $40.2 million, a decrease of $99.3 million compared to $139.5 million for the same period in 2008. Other borrowings decreased primarily due to liquidity provided by deposit growth and funds received from participation in the CPP. The average interest rate paid on borrowed funds for the nine months ended September 30, 2009 was 2.55% compared to 2.63% for the same period in 2008.

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

	For The Three Months Ended September 30,
	2009								2008
	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:
Loans	$	1,320,601		$	20,654		6.20	%	$	1,325,350		$	22,295		6.69	%
Taxable securities		110,336			965		3.47			108,075			1,207		4.44
Tax-exempt securities		6,787			85		4.97			3,852			47		4.85
Other investments (2)		19,873			89		1.78			25,813			235		3.62
Federal funds sold and other short-term investments		43,257			29		0.27			23,400			110		1.87
Total interest-earning assets		1,500,854			21,822		5.77			1,486,490			23,894		6.39
Allowance for loan losses		(24,918	)							(16,083	)
Total interest-earning assets, net of allowance for loan losses		1,475,936								1,470,407
Noninterest-earning assets		130,296								107,457
Total assets	$	1,606,232							$	1,577,864

Liabilities and shareholders' equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	54,727		$	69		0.50	%	$	59,209			114		0.77	%
Savings and money market accounts		418,335			1,692		1.60			319,953			2,227		2.77
Time deposits		680,621			4,687		2.73			652,404			6,240		3.81
Junior subordinated debentures		36,083			519		5.76			36,083			519		5.76
Other borrowings		28,808			240		3.31			154,689			974		2.50
Total interest-bearing liabilities		1,218,574			7,207		2.35			1,222,338			10,074		3.28
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		210,040								213,735
Other liabilities		13,104								18,032
Total liabilities		1,441,718								1,454,105
Shareholders' equity		164,514								123,759
Total liabilities and shareholders' equity	$	1,606,232							$	1,577,864

Net interest income				$	14,615							$	13,820
Net interest spread							3.42	%							3.11	%
Net interest margin							3.86	%							3.70	%

___________________________________________

(1)	Annualized.

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

	For The Nine Months Ended September 30,
	2009								2008
	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:
Loans	$	1,327,198		$	61,791		6.22	%	$	1,277,701		$	68,715		7.18	%
Taxable securities		103,808			3,048		3.93			118,684			3,855		4.34
Tax-exempt securities		5,669			210		4.95			4,993			184		4.92
Other investments (2)		20,968			386		2.46			14,102			417		3.95
Federal funds sold and other short-term investments		56,669			150		0.35			23,859			393		2.20
Total interest-earning assets		1,514,312			65,585		5.79			1,439,339			73,564		6.83
Allowance for loan losses		(24,525	)							(15,031	)
Total interest-earning assets, net of allowance for loan losses		1,489,787								1,424,308
Noninterest-earning assets		123,359								108,479
Total assets	$	1,613,146							$	1,532,787

Liabilities and shareholders' equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	54,776		$	209		0.51	%	$	59,033			371		0.84	%
Savings and money market accounts		400,240			5,981		2.00			291,354			5,937		2.72
Time deposits		696,643			15,991		3.07			654,496			20,671		4.22
Junior subordinated debentures		36,083			1,559		5.76			36,083			1,559		5.76
Other borrowings		40,196			768		2.55			139,530			2,742		2.63
Total interest-bearing liabilities		1,227,938			24,508		2.67			1,180,496			31,280		3.54
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		208,595								210,966
Other liabilities		14,245								19,442
Total liabilities		1,450,778								1,410,904
Shareholders' equity		162,368								121,883
Total liabilities and shareholders' equity	$	1,613,146							$	1,532,787

Net interest income				$	41,077							$	42,284
Net interest spread							3.12	%							3.29	%
Net interest margin							3.63	%							3.92	%

___________________________________________

(1)	Annualized.

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

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 nine months ended September 30, 2009 compared with the three and nine months ended September 30, 2008. For purposes of this table, changes attributable to both rate and volume have been allocated to each accordingly.

	Three Months Ended September 30,									Nine Months Ended September 30,
	2009 vs 2008									2009 vs 2008
	Increase (Decrease)									Increase (Decrease)
	Due to									Due to
	Volume			Rate			Total			Volume			Rate			Total
	(In thousands)

Interest-earning assets:
Loans	$	(19	)	$	(1,622	)	$	(1,641	)	$	2,596		$	(9,520	)	$	(6,924	)
Taxable securities		29			(271	)		(242	)		(486	)		(321	)		(807	)
Tax-exempt securities		36			2			38			25			1			26
Other investments		(54	)		(92	)		(146	)		202			(233	)		(31	)
Federal funds sold and other short-term investments		94			(175	)		(81	)		540			(783	)		(243	)
Total increase (decrease) in interest income		86			(2,158	)		(2,072	)		2,877			(10,856	)		(7,979	)

Interest-bearing liabilities:
Interest-bearing demand deposits		(8	)		(37	)		(45	)		(27	)		(135	)		(162	)
Savings and money market accounts		693			(1,228	)		(535	)		2,211			(2,167	)		44
Time deposits		288			(1,841	)		(1,553	)		1,311			(5,991	)		(4,680	)
Junior subordinated debentures		-			-			-			-			-			-
Other borrowings		(792	)		58			(734	)		(1,953	)		(21	)		(1,974	)
Total increase (decrease) in interest expense		181			(3,048	)		(2,867	)		1,542			(8,314	)		(6,772	)

Increase (decrease) in net interest income	$	(95	)	$	890		$	795		$	1,335		$	(2,542	)	$	(1,207	)

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 September 30, 2009 was $3.6 million, an increase of $1.8 million, compared to $1.8 million for the same period in 2008. The provision for loan losses for the nine months ended September 30, 2009 was $12.7 million, an increase of $7.9 million, compared with $4.8 million for the same period in 2008. The increase for the three and nine months ended September 30, 2009 was primarily due to an increase in net charge-offs and nonperforming assets since September 30, 2008. The allowance for loan losses as a percent of total loans was 1.95% at September 30, 2009 and 1.80% at December 31, 2008, and increased compared with 1.17% at September 30, 2008.

Noninterest Income. Noninterest income for the three months ended September 30, 2009 was $2.3 million, an increase of $271,000 or 13.3% compared with the same period in 2008. The increase for the three months ended September 30, 2009 was primarily the result of gains on the sale of securities partially offset by a decrease in service fees. Noninterest income for the nine months ended September 30, 2009 was $6.2 million, down $368,000 or 5.6% compared with the same period in 2008. The decrease for the nine months ended September 30, 2009 was primarily due to a decline in service fees and a decline in gains on sale of loans, partially offset by increases in gain on securities transactions, rental income received on other real estate property and in the cash value of bank owned life insurance.

Noninterest Expense. Noninterest expense for the three months ended September 30, 2009 was $11.6 million, an increase of $907,000 or 8.5% compared with the same period in 2008. The increase was the result of higher expenses related to foreclosed assets and higher FDIC assessments, partially offset by decreases in salaries and employee benefit expenses (further described below). Noninterest expense for the nine months ended September 30, 2009 was $34.3 million, an increase of $850,000 or 2.5% compared with the same period in 2008. For the nine months ended September 30, 2009, the increase was the result of higher expenses related to foreclosed assets and higher FDIC assessments, partially offset by decreases in salaries, employee benefit expenses and other-than-temporary impairment (“OTTI”) charges.

Salaries and employee benefits expense for the three months ended September 30, 2009 was $4.9 million, a decrease of $1.3 million or 22.0% compared with $6.2 million for the same period in 2008. Salaries and employee benefits expense for the nine months ended September 30, 2009 was $15.5 million, a decrease of $3.2 million or 16.9% compared with $18.7 million for the same period in 2008. Salaries and employee benefits expense for the three and nine months ended September 30, 2009 declined primarily due to streamlined operations and decreases in amount of bonus accrual, stock-based compensation expense and employee health care benefit expenses. The number of full-time equivalent employees at September 30, 2009 was 295, a decrease of 10.9% compared with 331 at September 30, 2008.

For the three months ended September 30, 2009, a $338,000 OTTI write down of investment securities was charged against earnings (and an additional noncredit-related OTTI of $453,000 pre-tax was recognized through equity). For the nine months ended September 30, 2009, a $637,000 OTTI write down of investment securities was charged against earnings (and an additional noncredit-related OTTI of $1.3 million pre-tax was recognized through equity).

The FDIC assessment was $1.0 million and $2.7 million for the three and nine months ended September 30, 2009, an increase of $835,000 and $2.3 million, respectively, compared with the same periods in 2008, primarily due to the higher assessment rate effective in 2009 and the one-time emergency special FDIC assessment of 5 basis points that was assessed during the second quarter of 2009. In addition, the FDIC assessment was higher because of utilization of remaining available credits during the first quarter of 2008, and the participation in the FDIC’s Temporary Liquidity Guarantee Program. The FDIC has adopted a proposed rule to require depository institutions to pre-pay, on December 30, 2009, estimated quarterly risk-based assessments for the fourth quarter of 2009 and all of 2010, 2011 and 2012. Comments to the proposed rule are due to the FDIC by October 28, 2009 and a final rule will be adopted after that date.

Other noninterest expense for the three months ended September 30, 2009 was $2.1 million, an increase of $102,000 compared with the same quarter in 2008, primarily due to an increase in legal fees. Other noninterest expense for the nine months ended September 30, 2009 was $6.7 million, a decrease of $233,000 compared with the same period in 2008. The decline for nine months ended September 30, 2009 was due to cost control efforts which resulted in cost reductions across the organization.

The Company’s efficiency ratio is calculated by dividing total noninterest expense, excluding loan loss provisions and impairment on securities, by net interest income plus noninterest income. The efficiency ratio for the three months ended September 30, 2009 was 66.71%, a decrease from 66.86% for the same quarter in 2008, and was primarily the result of increased net interest income. The Company’s efficiency ratio for the nine months ended September 30, 2009 was 71.31%, compared with 65.17% for the same period in 2008.

Income Taxes. Income tax expense for the three months ended September 30, 2009 was $560,000, compared with $1.3 million for the same period in 2008. The Company’s effective tax rate was 33.0% and 38.6% for the three months ended September 30, 2009 and 2008, respectively. Income tax benefit for the nine months ended September 30, 2009 was $46,000, compared with income tax expense of $4.0 million for the same period in 2008. The Company’s effective tax rate was 21.9% and 37.6% for the nine months ended September 30, 2009 and 2008, respectively. The decrease in the effective tax rate for the three and nine months ended September 30, 2009 was due primarily to the change in the relationship of taxable income to tax exempt income, non-deductible expenses and certain state income taxes based principally on gross receipts rather than net income.

Financial Condition

Loan Portfolio. Total loans at September 30, 2009 were $1.31 billion, a decrease of $34.5 million or 2.6% compared with $1.35 billion at December 31, 2008. Compared to December 31, 2008, commercial and industrial loans, real estate construction loans and consumer loans decreased $55.6 million, $16.6 million and $770,000, respectively, while real estate mortgage loans increased $37.8 million during the nine months ended September 30, 2009. At September 30, 2009 and December 31, 2008, the ratio of total loans to total deposits was 94.23%, and 106.06%, respectively. Total loans represented 80.5% and 85.2% of total assets at September 30, 2009 and December 31, 2008, respectively.

The following table summarizes the loan portfolio by type of loan at the dates indicated:

	As of September 30, 2009						As of December 31, 2008
	Amount			Percent			Amount			Percent
	(Dollars in thousands)

Commercial and industrial	$	411,996			31.35	%	$	467,546			34.65	%
Real estate mortgage
Residential		34,381			2.62			12,399			0.92
Commercial		735,900			56.00			720,052			53.37
		770,281			58.62			732,451			54.29
Real estate construction
Residential		39,162			2.98			43,242			3.20
Commercial		88,627			6.74			101,125			7.50
		127,789			9.72			144,367			10.70
Consumer and other		4,094			0.31			4,864			0.36
Gross loans		1,314,160			100.00	%		1,349,228			100.00	%
Unearned discounts, interest and deferred fees		(2,622	)					(3,180	)
Total loans		1,311,538						1,346,048
Allowance for loan losses		(25,603	)					(24,235	)
Loans, net	$	1,285,935					$	1,321,813

Nonperforming Assets. Total nonperforming assets increased $11.2 million to $68.8 million at September 30, 2009 from $57.6 million at December 31, 2008. At September 30, 2009, total nonperforming assets consisted of $39.8 million in nonaccrual loans, $6.0 million of troubled debt restructurings and $23.0 million in other real estate (“ORE”).

The following table summarizes nonaccrual loans by type of loan at the dates indicated:

	As of September 30, 2009		As of December 31, 2008
	(In thousands)
Commercial and industrial loans	$	2,271	$	7,742
Commercial real estate mortgage		12,018		11,287
Residential real estate mortgage		296		—
Commercial real estate construction		—		12,105
Residential real estate construction		11,167		7,069
Commercial land		9,594		6,108
Residential land		4,223		3,897
Other		266		31
Total nonaccrual loans(1)	$	39,835	$	48,239

___________________________________________

(1) 69.4% of nonaccrual loans are from Texas and 30.6% are from California at September 30, 2009; 80.8% of nonaccrual loans are from Texas and 19.2% are from California at December 31, 2008.

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

	As of			As of
	September 30, 2009			December 31, 2008
	(Dollars in thousands)
Nonaccrual loans	$	39,835		$	48,239
Accruing loans 90 days or more past due		—			103
Troubled debt restructurings		5,962			4,474
Other real estate (“ORE”)		23,012			4,825
Total nonperforming assets		68,809			57,641
Nonperforming loans guaranteed by the SBA, Ex-Im Bank and OCCGF		(2,803	)		(1,843	)
Total net nonperforming assets	$	66,006		$	55,798

Total nonperforming assets to total assets		4.22	%		3.65	%
Total nonperforming assets to total loans and ORE		5.16	%		4.27	%
Net nonperforming assets to total assets (1)		4.05	%		3.53	%
Net nonperforming assets to total loans and ORE (1)		4.95	%		4.13	%

___________________________________________

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

Nonaccrual loans decreased by $8.4 million to $39.8 million compared with $48.2 million at December 31, 2008, mainly as a result of loans transferred to ORE and from loan charge-offs. ORE increased by approximately $18.2 million compared with December 31, 2008, to $23.0 million at September 30, 2009. ORE decreased by approximately $637,000 when compared with June 30, 2009, primarily due to $1.4 million of ORE sales and write-downs on properties in Texas, partially offset by $1.1 million of new foreclosed properties in Texas.

Net nonperforming assets at September 30, 2009 were $66.0 million compared to $55.8 million at December 31, 2008, an increase of $10.2 million or 18.3%. The ratios for net nonperforming assets to total loans and ORE at September 30, 2009 and December 31, 2008 were 4.95% and 4.13%, respectively. The ratios for net nonperforming assets to total assets were 4.05% and 3.53% 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 totaled $2.8 million at September 30, 2009 compared to $1.8 million at December 31, 2008.

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 at its option may repurchase any loan that may become classified as nonperforming. Any repurchased loans may increase the Company’s nonperforming loans until the time at which the 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 is a summary of loans considered to be impaired as of the dates indicated:

	As of September 30, 2009		As of December 31, 2008
	(In thousands)
Impaired loans with no allocated allowance	$	31,210	$	35,640
Impaired loans with an allocated allowance		14,587		17,073
Total recorded investment in impaired loans	$	45,797	$	52,713

Valuation allowance related to impaired loans	$	1,722	$	3,280

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 average recorded investment in impaired loans during the nine months ended September 30, 2009 and the year ended December 31, 2008 was $45.5 million and $17.5 million, respectively. Interest income on impaired loans recognized for cash payments received during the three and nine months ended September 30, 2009 and 2008 was immaterial.

Allowance for Loan Losses and Reserve for Unfunded Lending Commitments. At September 30, 2009 and 2008, the allowance for loan losses was $25.6 million and $15.7 million, respectively, or 1.95% and 1.17% of total loans, respectively. At December 31, 2008, the allowance for loan losses was $24.2 million, or 1.80% of total loans. Net charge-offs for the three months ended September 30, 2009 and 2008 were $2.3 million and $1.6 million, respectively. The third quarter 2009 charge-offs consisted of $1.6 million in loans from Texas and $794,000 in loans from California, partially offset by recoveries of $161,000 from both banks. Net charge-offs for the nine months ended September 30, 2009 were $11.3 million compared with $2.2 million for the same period in 2008. The net charge-offs for the nine months ended September 30, 2009 consisted of $8.7 million in loans from Texas and $2.6 million in loans from California.

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, (2) one or more components of collective loan impairment, (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.

In addition to the analysis described above, due to continued distressed economic conditions in the Texas and California real estate markets, the Company incorporated additional qualitative factor adjustments and increased its estimation of the allowance for loan losses. Such factors include, for each of the Company’s market areas, general economic indicators such as the unemployment rate and leading economic indexes of local regions, real estate concentrations and vacancies, collateral types, rental rates, absorption rates, delinquencies and current year loss trends.

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

	As of and for the Three Months Ended September 30,
	2009			2008
	(Dollars in thousands)
Average total loans outstanding for the period	$	1,320,601		$	1,325,350
Total loans outstanding at end of period	$	1,311,538		$	1,341,647

Allowance for loan losses at beginning of period	$	24,266		$	15,520
Provision for loan losses		3,596			1,754
Charge-offs:
Commercial and industrial		(657	)		(1,224	)
Real estate mortgage		(1,408	)		(415	)
Real estate construction		(335	)		(26	)
Consumer and other		(21	)		(27	)
Total charge-offs		(2,421	)		(1,692	)

Recoveries:
Commercial and industrial		159			137
Real estate mortgage		2			–
Real estate construction		–			–
Consumer and other		1			4
Total recoveries		162			141
Net (charge-offs) recoveries		(2,259	)		(1,551	)
Allowance for loan losses at end of period		25,603			15,723

Reserve for unfunded lending commitments at beginning of period		1,478			917
Provision for unfunded lending commitments		(290	)		(179	)
Reserve for unfunded lending commitments at end of period		1,188			738

Allowance for credit losses at end of period	$	26,791		$	16,461

Ratio of net (charge-offs) recoveries to end of period total loans		(0.17	) %		(0.12	) %

	As of and for the Nine Months Ended September 30,
	2009			2008
	(Dollars in thousands)
Average total loans outstanding for the period	$	1,327,198		$	1,277,701
Total loans outstanding at end of period	$	1,311,538		$	1,341,647

Allowance for loan losses at beginning of period	$	24,235		$	13,125
Provision for loan losses		12,710			4,803
Charge-offs:
Commercial and industrial		(8,879	)		(1,641	)
Real estate mortgage		(2,016	)		(505	)
Real estate construction		(1,021	)		(236	)
Consumer and other		(93	)		(69	)
Total charge-offs		(12,009	)		(2,451	)

Recoveries:
Commercial and industrial		573			238
Real estate mortgage		3			–
Real estate construction		88			–
Consumer and other		3			8
Total recoveries		667			246
Net (charge-offs) recoveries		(11,342	)		(2,205	)
Allowance for loan losses at end of period		25,603			15,723

Reserve for unfunded lending commitments at beginning of period		1,092			816
Provision for unfunded lending commitments		96			(78	)
Reserve for unfunded lending commitments at end of period		1,188			738

Allowance for credit losses at end of period	$	26,791		$	16,461

Ratio of allowance for loan losses to end of period total loans		1.95	%		1.17	%
Ratio of net (charge-offs) recoveries to end of period total loans		(0.86	) %		(0.16	) %
Ratio of allowance for loan losses to end of period total nonperforming loans (1)		55.91	%		61.98	%
Ratio of allowance for loan losses to end of period net nonperforming loans (2)		59.55	%		66.34	%

___________________________________________

(1)	Total nonperforming loans are nonaccrual loans, loans 90 days or more past due and troubled debt restructurings.

(2)	Net nonperforming loans are comprised of nonaccrual loans, loans 90 days or more past due and troubled debt restructurings, net of the loan portions guaranteed by the SBA, Ex-Im Bank and OCCGF.

Securities. At September 30, 2009, the available-for-sale securities portfolio was $90.2 million, a decrease of $11.9 million or 11.6% compared with $102.1 million at December 31, 2008. The decrease was primarily due to principal payments on and sales of mortgage-backed securities and collateralized mortgage obligations, and maturities and calls of U.S. government agency and municipal obligations. At September 30, 2009, the held-to-maturity portfolio was $4.0 million. There were no held-to-maturity securities at December 31, 2008. The securities portfolio is primarily comprised of mortgage-backed securities, collateralized mortgage obligations, obligations of U.S. Treasury and other U.S. government corporations and agencies and municipal securities. The securities portfolio has been funded primarily by the liquidity created from deposit growth and loan repayments in excess of loan funding requirements. Other investments, which include CDARS One-Way Sell investments (“CDARS”), Federal Reserve Bank (“FRB”) and FHLB stock, and the investment in subsidiary trust, were $25.4 million at September 30, 2009, a decrease of $3.8 million or 13.2% compared with $29.2 million at December 31, 2008. The decrease is primarily the result of maturities of CDARS, and FHLB’s repurchase of FHLB stock.

Deposits. At September 30, 2009, total deposits were $1.39 billion, up $122.7 million or 9.7% compared with $1.27 billion at December 31, 2008, primarily due to growth in money market accounts from a deposit campaign which ended in the second quarter of 2009. The Company’s ratio of noninterest-bearing demand deposits to total deposits at September 30, 2009 and December 31, 2008 was 15.2% and 16.1%, respectively. Interest-bearing deposits at September 30, 2009 were $1.18 billion, an increase of $115.6 million or 10.9% compared with $1.07 billion at December 31, 2008.

Junior Subordinated Debentures. Junior subordinated debentures at September 30, 2009 and December 31, 2008 were $36.1 million. 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 debentures issued to the Company’s unconsolidated subsidiary trust MCBI Statutory Trust I, were used to fund the Company’s acquisition of Metro United. Related to these debentures, the Company entered into a forward-starting interest rate swap contract. Under the swap, beginning December 2010, the Company will pay a fixed interest rate of 5.38% and receive a variable interest rate of three-month LIBOR plus a margin of 1.55% on a total notional amount of $17.5 million, with quarterly settlements beginning March 2011. See Note 9, “Derivative Financial Instruments,” to the Condensed Consolidated Financial Statements for additional information related to this interest rate swap.

Other Borrowings. Other borrowings at September 30, 2009 were $25.1 million, a decrease of $113.9 million or 81.9% compared to other borrowings of $139.0 million at December 31, 2008. Other borrowings decreased primarily due to liquidity provided by deposit growth and funds from the CPP. Other borrowings at September 30, 2009 primarily include $25.0 million in security repurchase agreements. The security repurchase agreements bear an average rate of 3.71% 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. In the third quarter of 2009, all FHLB borrowings were repaid, and in January 2009, the $4.0 million subordinated debentures, including accrued interest were repaid.

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

	As of and for the Nine Months Ended September 30, 2009			As of and for the Year Ended December 31, 2008
	(Dollars in thousands)
Federal Funds Purchased:
at end of period	$	–		$	–
average during the period		30			84
maximum month-end balance during the period		–			4,500

FHLB Notes and Advances:
at end of period	$	–		$	109,000
average during the period		14,262			112,118
maximum month-end balance during the period		55,000			133,000
Interest rate at end of period		N/A			0.48	%
Interest rate during the period		0.5	%		2.21

Security Repurchase Agreements:
at end of period	$	25,000		$	25,000
average during the period		25,000			25,000
maximum month-end balance during the period		25,000			25,000
Interest rate at end of period		3.71	%		3.71	%
Interest rate during the period		3.71			2.91

Subordinated debentures:
at end of period	$	–		$	4,000
average during the period		205			2,060
maximum month-end balance during the period		–			4,000
Interest rate at end of period		N/A			6.5	%
Interest rate during the period		7.17	%		5.05

Federal Reserve TT&L:
at end of period	$	118		$	1,046
average during the period		699			731
maximum month-end balance during the period		1,020			1,283

Liquidity. The Company’s loan to deposit ratio at September 30, 2009 and 2008 was 94.23% and 106.04%, respectively. As of September 30, 2009, the Company had commitments to fund loans in the amount of $140.4 million. At this same date, the Company had stand-by letters of credit of $12.3 million. Available sources to fund these commitments and other cash demands of the Company come from cash and cash equivalents, sales and maturities of securities available for sale, loan and investment repayments, deposit inflows, and lines of credit from the FHLBs of Dallas and San Francisco, other correspondent banks as well as the FRB discount window. With its current level of collateral, the Company has the ability to borrow an additional $357.5 million from the FHLBs, $27.2 million from the FRB discount window and $10.0 million from other correspondent banks.

Capital Resources. Shareholders’ equity at September 30, 2009 was $163.8 million compared to $119.2 million at December 31, 2008, an increase of $44.6 million. The increase was primarily the result of the $45.0 million preferred stock issuance in January 2009, partially offset by the payment of preferred stock and common stock dividends. In April 2009, the Company suspended regular cash dividends on its common stock for an indefinite period of time.

The following table provides a comparison of the Company’s and each of the Banks’ leverage and risk-weighted capital ratios as of September 30, 2009 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 September 30, 2009
The Company
Leverage ratio		4.00	%(1)		N/A	%		11.15	%
Tier 1 risk-based capital ratio		4.00			N/A			12.50
Risk-based capital ratio		8.00			N/A			13.77
MetroBank
Leverage ratio		4.00	%(2)		5.00	%		10.96	%
Tier 1 risk-based capital ratio		4.00			6.00			12.49
Risk-based capital ratio		8.00			10.00			13.75
Metro United
Leverage ratio		4.00	%(3)		5.00	%		10.89	%
Tier 1 risk-based capital ratio		4.00			6.00			11.77
Risk-based capital ratio		8.00			10.00			13.02

___________________________________________

(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.

Allowance for loan losses. 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. 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”.

Goodwill. The Company believes goodwill is a critical accounting estimate that requires significant judgment and estimates to be used in the preparation of its consolidated financial statements. The Company reviews goodwill for impairment on an annual basis, or more often, if events or circumstances indicate that it is more likely than not that the fair value of Metro United, the Company's only reporting unit with assigned goodwill, is below the carrying value of its equity. The Company's annual evaluation is performed as of August 31 of each year.

Annual Evaluation

In determining the fair value of Metro United, the Company primarily uses a review of the valuation of recent guideline bank acquisitions as well as discounted cash flow analysis. The guideline bank transactions were selected from a similar geographic footprint as Metro United or having a similar market focus, based on publicly available information. Valuation multiples such as price-to-book, price-to-tangible book, price-to-deposits, and price-to-earnings from the guideline transactions are compared with Metro United’s operating results to derive its implied goodwill as of the valuation date. The Company also uses the discounted cash flow method to estimate the value of Metro United. The discounted cash flow method estimates the value of interest rate sensitive instruments by discounting the expected future cash flows using the current interest rates at which similar instruments with similar terms would be made. In addition, as a third method of determining fair value, quoted stock prices as of the valuation date for the Company and its peer guideline banks were used as a current comparative proxy. The values separately derived from each valuation technique (i.e., guideline transactions, discounted cash flows, and quoted market prices) are evaluated to assess whether goodwill was impaired. The results of these valuation techniques are equally weighted to derive the fair value of goodwill.

The Company also considered the fair value of Metro United in relationship to the Company’s stock price and performed a reconciliation to market price. This reconciliation was performed by first using the Company’s market price on a minority basis with an estimated control premium of 30%. The Company then allocated the total fair value to both of its segments, Metro Bank and Metro United. The allocation was based upon an average of the following internal ratios:

•

Metro United’s assets as a percentage of total assets

•

Metro United’s loans as a percentage of total loans

•

Metro United’s deposits as a percentage of total deposits

•

Metro United’s stockholder's equity as a percentage of total stockholders' equity

The derived fair value of Metro United was then compared to the carrying value of its equity. As the carrying value of its equity exceeded the fair value, an additional goodwill impairment evaluation was performed which involves calculating the implied fair value of the Metro United’s goodwill.

The implied fair value of goodwill is determined in the same manner as goodwill is recognized in a business combination. The fair value of goodwill is determined by applying a weight of 50% to the implied fair value of Metro United and the remaining 50% is equally distributed among the valuation techniques mention above. The fair value of Metro United’s assets and liabilities, including previously unrecognized intangible assets, is individually determined. Significant judgment and estimates are involved in estimating the fair value of the assets and liabilities of Metro United. The value of the implied goodwill is highly sensitive to the estimated fair value of Metro United’s net assets. The excess fair value of Metro United over the fair value of its net assets is the implied goodwill. The fair value of Metro United’s net assets is estimated using recent data observed in the market, including similar assets and liabilities.

Observable market information is utilized to the extent available and relevant. The estimated fair values reflect management’s assumptions regarding how a market participant would value the net assets and includes appropriate credit, liquidity, and market risk adjustments that are indicative of the current environment. The estimated liquidity and market risk adjustments on certain loan categories ranged from 20% to 50% due to the distressed nature of the market in California. The size of the implied goodwill was significantly affected by the estimated fair value of the loans pertaining to Metro United. The significant market risk adjustment that is a consequence of the current distressed market conditions was a significant contributor to the valuation discounts associated with these loans.

If the implied fair value of the goodwill for Metro United exceeds its carrying value of the goodwill, no goodwill impairment is recorded. Changes in the estimated fair value of the individual assets and liabilities may result in a different amount of implied goodwill, and ultimately the amount of goodwill impairment, if any. Sensitivity analysis is performed to assess the potential ranges of implied goodwill.

Based on the fair value of Metro United’s assets and liabilities at August 31, 2009, the implied fair value of goodwill exceeded its carrying value. However, it is possible that future changes in the fair value of Metro United’s net assets could result in future goodwill impairment. For example, to the extent that market liquidity returns and the fair value of the individual assets of Metro United increases at a faster rate than the fair value of Metro United as a whole, that may cause the implied goodwill to be lower than the carrying value of goodwill, resulting in goodwill impairment. Ultimately, future potential changes in valuation assumptions may impact the estimated fair value of Metro United and cause its fair value to be below its carrying value, therefore resulting in an impairment of the goodwill.

Subsequent to the annual test date on August 31, 2009, the Company’s stock continued to trade below book value. The Company performed an analysis that considered the Company’s stock price, loan values of Metro United, and other factors and determined that as of September 30, 2009, goodwill was not impaired. The loan fair value of Metro United remained at the same level as the annual test date.

Impairment of investment securities. Investments classified as available-for-sale are carried at fair value and the impact of changes in fair value are recorded on the consolidated balance sheet as an unrealized gain or loss in accumulated other comprehensive income (loss), a separate component of shareholders’ equity. Securities classified as available-for-sale or held-to-maturity are subject to review to identify when a decline in value is other-than-temporary. Factors considered in determining whether a decline in value is other-than-temporary include: the extent and the duration of the decline; the reasons for the decline in value (credit event, and interest-rate related including general credit spread widening); the financial condition of and near-term prospects of the issuer, and the Company’s intent not to sell and that it is not more likely than not that the Company would be required to sell the security before the anticipated recovery of its amortized cost basis. When it is determined that a decline in value is other-than-temporary, the carrying value of the security is reduced to its estimated fair value, with a corresponding charge to earnings.

For debt securities, determining credit-related impairment is driven principally by assumptions regarding the amount and timing of projected cash flows. For mortgage-backed and asset-backed securities, cash flow estimates are determined based on prepayment assumptions, default rates and loss severity rates derived from widely accepted third-party data sources. The Company has developed these estimates using information based on historical experience as well as using market observable data, such as industry analyst reports and forecasts, sector credit ratings and other data relevant to the collectability of a security. See Note 2 Securities for additional discussion on other-than-temporary impairment.

Stock-based compensation. 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 FASB accounting guidance. 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 in the 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.

Fair Value. The Company believes that the determination of fair value is a critical accounting estimate that requires significant judgment 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. 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. 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. The Company adopted ASC guidance which applies fair value disclosure for non-financial assets and non-financial liabilities on January 1, 2009.

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 ASC Topic 820-10 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 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. The use of significant, unobservable inputs would be described in Note 11, “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.

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, 2008. See Form 10-K, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Interest Rate Sensitivity and Liquidity.”

Item 4.

Controls and Procedures.

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

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings.

Item 1A.

Risk Factors.

There have been no material changes in the Company’s risk factors previously described under “Part I, Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 and under “Part II, Item 1A. Risk Factors” in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

None

Item 3.

Defaults Upon Senior Securities.

Not applicable

Item 4.

Submission of Matters to a Vote of Security Holders.

None

Item 5.

Other Information.

Not applicable

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 of the Company (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		Statement of Designations establishing the terms of the Series A Preferred Stock of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on January 21, 2009).

3.4		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).

4.1		Specimen form of certificate evidencing the Common Stock (incorporated herein by reference to Exhibit 4 to the Registration Statement).

4.2		Warrant, dated January 16, 2009, to purchase 771,429 shares of the Company's Common Stock (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on January 21, 2009).

4.3		Form of Certificate for the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $1.00 per share (incorporated herein by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed on January 21, 2009).

11		Computation of Earnings Per Common Share, included as Note (6) 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.

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: November 6, 2009		George M. Lee Executive Vice Chairman, President and
		Chief Executive Officer (principal executive officer)


Date: November 6, 2009	By:	/s/ David C. Choi
		David C. Choi
		Chief Financial Officer (principal financial officer/ principal accounting officer)

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 of the Company (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		Statement of Designations establishing the terms of the Series A Preferred Stock of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on January 21, 2009).

3.4		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).

4.1		Specimen form of certificate evidencing the Common Stock (incorporated herein by reference to Exhibit 4 to the Registration Statement).

4.2		Warrant, dated January 16, 2009, to purchase 771,429 shares of the Company's Common Stock (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on January 21, 2009).

4.3		Form of Certificate for the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $1.00 per share (incorporated herein by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed on January 21, 2009).

11		Computation of Earnings Per Common Share, included as Note (6) 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.

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. sophomore Avg

MetroCorp Bancshares Inactive 10-Q2009 Q3 Quarterly report

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