MetroCorp Bancshares 10Q 2011 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

	þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011

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

Commission file number: 000-25141

________________

MetroCorp Bancshares, Inc.

(Exact name of registrant as specified in its charter)

Texas

(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 R No £

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

Large Accelerated Filer £	Accelerated Filer £

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

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 4, 2011, the number of outstanding shares of Common Stock was 13,340,815.

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,
	2011			2010
ASSETS
Cash and due from banks	$	20,300		$	21,406
Federal funds sold and other short-term investments		177,248			130,319
Total cash and cash equivalents		197,548			151,725
Securities available-for-sale, at fair value		99,227			134,369
Securities available-for-sale pledged with creditors’ right to repledge, at fair value		50,416			41,337
Total securities available-for-sale		149,643			175,706
Securities held-to-maturity (fair value $4,504 and $4,167 at September 30, 2011 and December 31, 2010, respectively)		4,045			4,045
Other investments		6,594			6,925
Loans, net of allowance for loan losses of $29,969 and $33,757 at September 30, 2011 and December 31, 2010, respectively		1,029,196			1,110,553
Accrued interest receivable		3,906			4,682
Premises and equipment, net		5,076			5,377
Goodwill		17,327			17,327
Deferred tax asset, net		15,485			17,781
Customers' liability on acceptances		5,613			4,708
Foreclosed assets, net		23,844			19,956
Cash value of bank owned life insurance		31,070			29,988
Prepaid FDIC assessment		5,699			7,610
Other assets		2,734			2,202
Total assets	$	1,497,780		$	1,558,585

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing	$	251,360		$	223,105
Interest-bearing		990,132			1,071,079
Total deposits		1,241,492			1,294,184
Junior subordinated debentures		36,083			36,083
Other borrowings		36,416			56,804
Accrued interest payable		296			447
Acceptances outstanding		5,613			4,708
Other liabilities		12,158			7,592
Total liabilities		1,332,058			1,399,818
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, 2011 and December 31, 2010		44,966			45,427
Common stock, $1.00 par value, 50,000,000 shares authorized; 13,331,815 and 13,230,315 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively		13,332			13,230
Additional paid-in-capital		33,753			33,178
Retained earnings		74,115			69,168
Accumulated other comprehensive loss		(444	)		(2,236	)
Total shareholders' equity		165,722			158,767
Total liabilities and shareholders' equity	$	1,497,780		$	1,558,585

See accompanying notes to condensed consolidated financial statements

METROCORP BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2011			2010			2011			2010
Interest income:
Loans	$	15,364		$	17,960		$	46,696		$	55,717
Securities:
Taxable		1,025			977			3,413			2,590
Tax-exempt		99			117			296			356
Other investments		41			57			125			207
Federal funds sold and other short-term investments		239			108			426			266
Total interest income		16,768			19,219			50,956			59,136

Interest expense:
Time deposits		1,857			2,863			6,057			9,410
Demand and savings deposits		800			1,301			2,647			4,397
Junior subordinated debentures		327			519			976			1,559
Subordinated debentures and other borrowings		259			287			803			798
Total interest expense		3,243			4,970			10,483			16,164

Net interest income		13,525			14,249			40,473			42,972
Provision for loan losses		875			4,700			2,450			15,028
Net interest income after provision for loan losses		12,650			9,549			38,023			27,944

Noninterest income:
Service fees		1,124			1,222			3,214			3,384
Loan-related fees		89			91			268			305
Letters of credit commissions and fees		143			185			492			570
Gain on securities, net		203			31			129			76
Total other-than-temporary impairments (“OTTI”) on securities		(32	)		(212	)		(215	)		(495	)
Less: Noncredit portion of “OTTI”		(2	)		(48	)		(20	)		(135	)
Net impairments on securities		(30	)		(164	)		(195	)		(360	)
Other noninterest income		287			396			1,138			1,173
Total noninterest income		1,816			1,761			5,046			5,148

Noninterest expenses:
Salaries and employee benefits		5,214			5,073			15,702			15,430
Occupancy and equipment		1,896			1,882			5,545			5,780
Foreclosed assets, net		1,222			1,088			2,741			5,367
FDIC assessment		632			881			2,016			2,471
Goodwill impairment		—			—			—			2,000
Other noninterest expense		2,471			1,935			7,217			6,024
Total noninterest expenses		11,435			10,859			33,221			37,072

Income (loss) before provision for income taxes		3,031			451			9,848			(3,980	)
Provision (benefit) for income taxes		762			(186	)		3,090			(1,323	)
Net income (loss)	$	2,269		$	637		$	6,758		$	(2,657	)

Dividends and discount – preferred stock		(601	)		(605	)		(1,811	)		(1,805	)
Net income (loss) available to common shareholders	$	1,668		$	32		$	4,947		$	(4,462	)

Earnings (loss) per common share:
Basic	$	0.13		$	0.00		$	0.38		$	(0.38	)
Diluted	$	0.13		$	0.00		$	0.37		$	(0.38	)
Weighted average shares outstanding:
Basic		13,145			12,329			13,141			11,712
Diluted		13,234			12,345			13,216			11,712

Dividends per common share	$	–		$	–		$	–		$	–

See accompanying notes to condensed consolidated financial statements

METROCORP BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2011			2010			2011			2010

Net income (loss)	$	2,269		$	637		$	6,758		$	(2,657	)

Other comprehensive income (loss), net of taxes:

Change in accumulated loss on effective cash flow hedging derivatives		(297	)		(390	)		(389	)		(1,191	)

Unrealized loss on investment securities, net:
Securities with OTTI charges during the period		(21	)		(135	)		(138	)		(316	)
Less: OTTI charges recognized in net income		(20	)		(105	)		(125	)		(231	)
Net unrealized losses on investment securities with OTTI		(1	)		(30	)		(13	)		(85	)

Unrealized holding gain arising during the period		1,155			474			2,277			2,396
Less: reclassification adjustment for gain included in net income		130			20			83			49
Net unrealized gains on investment securities		1,025			454			2,194			2,347
Other comprehensive income		727			34			1,792			1,071
Total comprehensive income (loss)	$	2,996		$	671		$	8,550		$	(1,586	)

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, 2011

(In thousands)

(Unaudited)

	Preferred Stock				Common Stock				Additional paid-in		Retained			Accumulated other compre- hensive income
	Shares		Amount		Shares		Amount		capital		earnings			(loss)			Total
Balance at December 31, 2010		45	$	45,427		13,230	$	13,230	$	33,178	$	69,168		$	(2,236	)	$	158,767
Issuance of common stock		–		–		102		102		507		–			–			609
Stock-based compensation expense related to stock options recognized in earnings		–		–		–		–		68		–			–			68
Net income		–		–		–		–		–		6,758			–			6,758
Amortization of preferred stock discount		–		107		–		–		–		(107	)		–			–
Other comprehensive income		–		–		–		–		–		–			1,792			1,792
Dividends – preferred stock		–		(568)		–		–		–		(1,704	)		–			(2,272	)
Balance at September 30, 2011		45	$	44,966		13,332	$	13,332	$	33,753	$	74,115		$	(444	)	$	165,722

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,
	2011			2010
Cash flows from operating activities:
Net income (loss)	$	6,758		$	(2,657	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		1,070			1,224
Provision for loan losses		2,450			15,028
Impairment on securities		195			360
Goodwill impairment		—			2,000
Gain on securities transactions, net		(129	)		(76	)
Loss on writedown and sale of foreclosed assets		1,313			2,916
(Gain) loss on sale of premises and equipment		11			(7	)
Amortization of premiums and discounts on securities, net		116			19
Amortization of deferred loan fees and discounts		(881	)		(992	)
Amortization of core deposit intangibles		65			95
Stock-based compensation		68			(20	)
Changes in:
Accrued interest receivable		776			307
Other assets		1,911			(1,186	)
Accrued interest payable		(151	)		(70	)
Other liabilities		4,177			1,346
Net cash provided by operating activities		17,749			18,287

Cash flows from investing activities:
Purchases of securities available-for-sale		(91,002	)		(123,000	)
Purchases of other investments		(2	)		(50	)
Proceeds from sales of securities available-for-sale		7,927			20,076
Proceeds from maturities, calls, and principal paydowns of securities available-for-sale		112,363			14,590
Proceeds from sales and maturities of other investments		333			48,135
Net change in loans		60,127			77,296
Proceeds from sale of foreclosed assets		14,460			17,573
Proceeds from sale of premises and equipment		—			9
Purchases of premises and equipment		(780	)		(847	)
Net cash provided by investing activities		103,426			53,782

Cash flows from financing activities:
Net change in:
Deposits		(52,692	)		(64,198	)
Other borrowings		(20,388	)		30,692
Proceeds from issuance of common stock		—			6,899
Cash dividends paid on preferred stock		(2,272	)		(1,132	)
Net cash used in financing activities		(75,352	)		(27,739	)

Net increase in cash and cash equivalents		45,823			44,330
Cash and cash equivalents at beginning of period		151,725			108,093
Cash and cash equivalents at end of period	$	197,548		$	152,423

Supplemental information:
Interest paid	$	10,633		$	16,235
Income taxes paid		1,022			3,025
Noncash investing and financing activities:
Issuance of common stock pursuant to incentive plan		609			349
Foreclosed assets acquired		19,661			14,339
Loans originated to finance foreclosed assets		3,305			3,505

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.

A legal entity is referred to as a Variable Interest Entity (“VIE”) if any of the following conditions exist: (1) the total equity at risk is insufficient to permit the legal entity to finance its activities without additional subordinated financial support from other parties, or (2) the entity has equity investors that cannot make significant decisions about the entity’s operations or that do not absorb their proportionate share of the expected losses or receive the expected returns of the entity. In addition, as specified in VIE accounting guidance, a VIE must be consolidated by the Company if it is deemed to be the primary beneficiary of the VIE. The primary beneficiary is the party that has both (1) the power to direct the activities of an entity that most significantly impact the VIE’s economic performance, and (2) through its interests in the VIE, the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. All facts and circumstances are taken into consideration when determining whether the Company has variable interest that would deem it the primary beneficiary and, therefore, require consolidation of the related VIE or otherwise rise to the level where disclosure would provide useful information to the users of the Company’s financial statements. In the case of the Company’s sole VIE, MCBI Statutory Trust I, it is qualitatively clear based on the extent of the Company’s involvement that the Company is not the primary beneficiary of the VIE. 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 U.S. generally accepted accounting principles 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, 2011, results of operations for the three and nine months ended September 30, 2011 and 2010, and cash flows for the nine months ended September 30, 2011 and 2010. Interim period results are not necessarily indicative of results for a full year period. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. generally accepted accounting principles.

These unaudited condensed consolidated 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, 2010.

2.	SECURITIES

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

	As of September 30, 2011
	Amortized		Unrealized								Fair
	Cost		Gains		Losses				OTTI		Value
Securities available-for-sale	(In thousands)
Debt Securities
U.S. Treasury and other U.S. government corporations and agencies	$	72,647	$	182	$	(116	)	$	─		$	72,713
Obligations of state and political subdivisions		3,850		212		─			─			4,062
Mortgage-backed securities and collateralized mortgage obligations
Government issued or guaranteed		57,048		1,246		─			─			58,294
Privately issued residential		943		265		(32	)		(438	)		738
Asset backed securities		241		54		─			(185	)		110
Equity Securities
Investment in CRA funds		13,517		209		─			─			13,726
Total available-for-sale securities	$	148,246	$	2,168	$	(148	)	$	(623	)	$	149,643

Securities held-to-maturity
Obligations of state and political subdivisions	$	4,045	$	459	$	─		$	─		$	4,504
Total held-to-maturity securities	$	4,045	$	459	$	─		$	─		$	4,504

Other investments
FHLB/Federal Reserve Bank stock (1)	$	5,511	$	─	$	─		$	─		$	5,511
Investment in subsidiary trust (1)		1,083		─		─			─			1,083
Total other investments	$	6,594	$	─	$	─		$	─		$	6,594

	As of December 31, 2010
	Amortized			Unrealized							Fair
	Cost		Gains		Losses			OTTI			Value
	(In thousands)
Securities available-for-sale
Debt Securities
U.S. Treasury and other U.S. government corporations and agencies	$	112,959	$	196	$	(1,554	)	$	─		$	111,601
Obligations of state and political subdivisions		4,356		57		(42	)		─			4,371
Mortgage-backed securities and collateralized mortgage obligations
Government issued or guaranteed		45,285		476		(377	)		─			45,384
Privately issued residential		1,564		289		(65	)		(558	)		1,230
Asset backed securities		342		67		─			(231	)		178
Equity Securities
Investment in CRA funds		13,210		─		(268	)					12,942
Total available-for-sale securities	$	177,716	$	1,085	$	(2,306	)	$	(789	)	$	175,706

Securities held-to-maturity
Obligations of state and political subdivisions	$	4,045	$	122	$	─		$	─		$	4,167
Total held-to-maturity securities	$	4,045	$	122	$	─		$	─		$	4,167

Other investments
FHLB/Federal Reserve Bank stock (1)	$	5,842	$	─	$	─		$	─		$	5,842
Investment in subsidiary trust (1)		1,083		─		─			─			1,083
Total other investments	$	6,925	$	─	$	─		$	─		$	6,925

____________

(1) Represents securities with restrictions and limited marketability and are carried at cost.

The following table displays the gross unrealized losses and fair value of securities available-for-sale as of September 30, 2011 for which other-than-temporary impairments (“OTTI”) have not been recognized, that were in a continuous unrealized loss position for the periods indicated. There were no securities held-to-maturity in a continuous unrealized loss position as of September 30, 2011 or December 31, 2010.

	September 30, 2011
	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	$	34,834	$	(116	)	$	-	$	-		$	34,834	$	(116	)
Mortgage-backed securities and collateralized mortgage obligations
Government issued or guaranteed		10		-			17		-			27		-
Privately issued residential		-		-			191		(32	)		191		(32	)

Total available-for-sale securities	$	34,844	$	(116	)	$	208	$	(32	)	$	35,052	$	(148	)

	December 31, 2010
	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	$	77,784	$	(1,554	)	$	-	$	-		$	77,784	$	(1,554	)
Obligations of state and political subdivisions		2,220		(42	)		-		-			2,220		(42	)
Mortgage-backed securities and collateralized mortgage obligations
Government issued or guaranteed		22,674		(377	)		-		-			22,674		(377	)
Privately issued residential	-		-				398		(65	)		398		(65	)

Equity Securities
Investment in CRA funds		12,942		(268	)		-		-			12,942		(268	)
Total available-for-sale securities	$	115,620	$	(2,241	)	$	398	$	(65	)	$	116,018	$	(2,306	)

As of September 30, 2011, management does not have the intent to sell any of the securities classified as available-for-sale in the table above and believes it is not more likely than not that the Company will have to sell any such securities before a recovery of the cost. The unrealized losses are largely due to price declines in U.S. government corporations and agencies securities related to overall market volatility. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such securities decline. Management does not believe that any of the unrealized losses above are due to credit quality. Accordingly, management believes the $148,000 of gross unrealized losses is temporary and the remaining $623,000 of OTTI represents an unrealized loss which has been recognized in other comprehensive loss.

Other-Than-Temporary Impairments (OTTI)

The following table presents a rollforward for the three and nine months ended September 30, 2011, of the credit losses component of OTTI losses that have been recognized in income related to debt securities that the Company does not intend to sell.

	Impairment related to credit losses
	Three months ended September 30, 2011			Nine months ended September 30, 2011
	(In thousands)
Credit losses at beginning of period	$	1,564		$	1,600
Additions to OTTI that were not previously recognized		4			4
Additions to OTTI that were previously recognized when there is no intent to sell and no requirement to sell before recovery of amortized cost basis		7			25
Transfers from accumulated other comprehensive income to OTTI related to credit losses		19			166
Reclassifications from OTTI to realized losses on sales of securities		(11	)		(212	)
Credit losses at end of period	$	1,583		$	1,583

For the nine months ended September 30, 2011, credit losses of $155,000 on 12 non-agency residential mortgage-backed securities and $40,000 on two asset-backed securities were recognized. 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.

Other Securities Information

The following sets forth information concerning sales (excluding calls and maturities) of available-for-sale securities for the nine months ended September 30, 2011 and 2010 (in thousands). There were no sales or transfers of held-to-maturity securities in either period.

	Nine Months Ended September 30,
	2011			2010
Amortized cost	$	7,973		$	20,092
Proceeds		7,927			20,076
Gross realized gains		94			216
Gross realized losses		(140	)		(232	)

The Company holds mortgage-backed securities and collateralized mortgage obligations 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.

At September 30, 2011, 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	$	—	$	—	$	—	$	—
Within two to five years		22,765		22,764		—		—
Within six to ten years		50,974		51,108		—		—
After ten years		2,999		3,013		4,045		4,504
Mortgage-backed securities and collateralized mortgage obligations		57,991		59,032		—		—
Total debt securities	$	134,729	$	135,917	$	4,045	$	4,504

LOANS

The loan portfolio is classified by major type as follows:

	As of September 30, 2011						As of December 31, 2010
	Amount			Percent			Amount			Percent
	(Dollars in thousands)

Commercial and industrial	$	345,968			32.60	%	$	349,891			30.52	%
Real estate mortgage
Residential		39,862			3.76			38,667			3.37
Commercial		664,660			62.63			718,795			62.69
		704,522			66.39			757,462			66.06
Real estate construction
Residential		6,905			0.65			10,983			0.96
Commercial		-			0.00			24,291			2.12
		6,905			0.65			35,274			3.08
Consumer and other		3,860			0.36			3,928			0.34
Gross loans		1,061,255			100.00	%		1,146,555			100.00	%
Unearned discounts, interest and deferred fees		(2,090	)					(2,245	)
Total loans		1,059,165						1,144,310
Allowance for loan losses		(29,969	)					(33,757	)
Loans, net	$	1,029,196					$	1,110,553

The recorded investment in loans is the face amount increased or decreased by applicable accrued interest and unamortized premium, discount, or finance charges, and may also reflect previous direct write-downs of loans.

The recorded investment in loans at the dates indicated is determined as follows (in thousands):

September 30, 2011	Gross Loan Balance		Deferred Loan Fees			Accrued Interest Receivable		Recorded Investment in Loans

Commercial and industrial	$	345,968	$	(751	)	$	1,037	$	346,254
Real estate-mortgage		704,522		(1,095	)		2,330		705,757
Real estate-construction		6,905		(1	)		21		6,925
Consumer and other		3,860		(243	)		12		3,629

Total	$	1,061,255	$	(2,090	)	$	3,400	$	1,062,565

December 31, 2010	Gross Loan Balance		Deferred Loan Fees			Accrued Interest Receivable		Recorded Investment in Loans

Commercial and industrial	$	349,891	$	(932	)	$	1,116	$	350,075
Real estate-mortgage		757,462		(1,091	)		2,653		759,024
Real estate-construction		35,274		(21	)		94		35,347
Consumer and other		3,928		(201	)		8		3,735

Total	$	1,146,555	$	(2,245	)	$	3,871	$	1,148,181

Loan Origination/Risk Management

The Company selectively extends credit for the purpose of establishing long-term relationships with its customers. The Company mitigates the risks inherent in lending by focusing on businesses and individuals with demonstrated payment history, historically favorable profitability trends and stable cash flows. In addition to these primary sources of repayment, the Company looks to tangible collateral and personal guarantees as secondary sources of repayment. Lending officers are provided with detailed underwriting policies covering all lending activities in which the Company is engaged and that require all lenders to obtain appropriate approvals for the extension of credit. The Company also maintains documentation requirements and extensive credit quality assurance practices in order to identify credit portfolio weaknesses as early as possible so any exposures that are discovered may be reduced.

The Company has certain lending procedures in place that are designed to maximize loan income within an acceptable level of risk. These procedures include the approval of lending policies and underwriting guidelines by the Board of Directors of each bank, and separate policy, administrative and approval oversight by the Directors’ Loan Committee of MetroBank, and by the Directors’ Credit Committee of Metro United. Additionally, MetroBank’s loan portfolio is reviewed by its internal loan review department, and Metro United's loan portfolio is reviewed by an external third-party company. These procedures also serve to identify changes in asset quality in a timely manner and to ensure proper recording and reporting of nonperforming assets.

Inherent in all lending is the risk of nonpayment. The types of collateral required, the terms of the loans and the underwriting practices discussed under each loan category below are all designed to minimize the risk of nonpayment. In addition, as further risk protection, the Banks rarely make loans at their respective legal lending limits. MetroBank generally does not make loans larger than $12 million to one borrower and Metro United generally does not make loans larger than $6 million to one borrower. Loans greater than the Banks’ lending limits are subject to participation with other financial institutions, including with each other. Loans originated by MetroBank are approved by the Chief Credit Officer, Chief Lending Officer, Senior Credit Officer, MetroBank’s Loan Committee, or the Director’s Credit Committee based on the size of the loan relationship and its risk rating. Loans originated by Metro United are approved by the Director’s Credit Committee except for certain consumer loans. Control systems and procedures are in place to ensure all loans are approved in accordance with credit policies. The Company also uses interest rate floors on a majority of its variable rate loans to control interest rate risk within the commercial and real estate loan portfolios.

Commercial and Industrial Loans. Generally, the Company’s commercial loans are underwritten on the basis of the borrower’s ability to service such debt as reflected by cash flow projections. Commercial loans are generally collateralized by business assets, which may include real estate, accounts receivable and inventory, certificates of deposit, securities, guarantees or other collateral. The Company also generally obtains personal guarantees from the principals of the business. Working capital loans are primarily collateralized by short-term assets, whereas term loans are primarily collateralized by long-term assets. As a result, commercial loans involve additional complexities, variables and risks and require more thorough underwriting and servicing than other types of loans. Indigenous to individuals in the Asian business community is the desire to own the building and land which house their businesses. Accordingly, while a loan may be principally driven and classified by the type of business operated, real estate is frequently the primary source of collateral.

Real Estate Mortgage - Commercial and Residential Mortgage Loans. The Company makes commercial mortgage loans to finance the purchase of real property, which generally consists of developed real estate. The Company’s commercial mortgage loans are collateralized by first liens on real estate. For MetroBank, these loans typically have variable rates and amortize over a 15 to 20 year period, with balloon payments due at the end of five to seven years. For Metro United, these loans have both variable and fixed rates and amortize over a 25 to 30 year period, with balloon payments due at the end of five to ten years. Payments on loans collateralized by such properties are dependent on the successful operation or management of the properties. Accordingly, repayment of these loans may be subject to adverse conditions in the real estate market or the economy to a greater extent than other types of loans. In underwriting commercial mortgage loans, consideration is given to the property’s historical cash flow, current and projected occupancy, location and physical condition. The underwriting analysis also includes credit checks, appraisals, environmental impact reports and a review of the financial condition of the borrower. The Company also originates two to seven year balloon residential mortgage loans with a 15 to 30 year amortization primarily collateralized by owner occupied residential properties, which are retained in the Company’s residential mortgage portfolio.

Real Estate Construction Loans. The Company makes loans to finance the construction of residential and non-residential properties. The majority of the Company’s residential construction loans in Texas are for single-family dwellings that are pre-sold or are under earnest money contracts. The Company also originates loans to finance the construction of commercial properties such as multi-family, office, industrial, warehouse and retail centers. Construction loans involve additional risks attributable to the fact that loan funds are advanced upon the security of a project under construction, and the project is of uncertain value prior to its completion. Because of uncertainties inherent in estimating construction costs, the market value of the completed project and the effects of governmental regulation on real property, it can be difficult to accurately evaluate the total funds required to complete a project and the related loan to value ratio. As a result of these uncertainties, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. If the Company is forced to foreclose on a project prior to completion, there is no assurance that the Company will be able to recover the entire unpaid portion of the loan. In addition, the Company may be required to fund additional amounts to complete a project and may have to hold the property for an indeterminable period of time. While the Company has underwriting procedures designed to identify what it believes to be acceptable levels of risks in construction lending, no assurance can be given that these procedures will prevent losses from the risks described above.

Consumer Loans. The Company, through its subsidiary Metro United, offers a wide variety of loan products to retail customers through its branch network. Loans to retail customers include automobile loans, lines of credit and other personal loans. The terms of these loans typically range from 12 to 60 months depending on the nature of the collateral and the size of the loan.

Loan review process. In addition to MetroBank’s loan portfolio review by its internal loan review department and Metro United's loan portfolio review by an external third-party company, other ongoing reviews are performed by loan officers and involves the grading of each loan by its respective loan officer. Depending on the grade, a loan will be aggregated with other loans of similar grade and a loss factor is applied to the total loans in each group to establish the required level of allowance for loan losses. For both Banks, grades of 1-10 are applied to each loan, with loans graded 7-10 requiring the most allowance for loan losses. Factors utilized in the grading process include but are not limited to historical performance, payment status, collateral value, and financial strength of the borrower. Oversight of the loan review process of both Banks is the responsibility of the Audit Committee. Differences of opinion are resolved among the loan officer, compliance officer, and the Chief Credit Officer. See “Allowance for Loan Losses and Reserve for Unfunded Lending Commitments” below for additional discussion on loan grades.

MetroBank’s and Metro United’s credit department reports credit risk grade changes on a weekly basis to its management and on a monthly basis to its Board of Directors. MetroBank performs monthly concentration analyses and Metro United performs quarterly concentration analyses based on industries, collateral types and business lines. Findings are reported to the Director’s Loan Committee of MetroBank and the Directors’ Credit Committee of Metro United. Loan concentration reports based on type are prepared, monitored and reviewed quarterly and presented to the Directors’ Loan Committee for MetroBank, the Directors’ Credit Committee for Metro United and the Board of Directors of each respective bank.

In addition, the Company reviews the real estate values, and when necessary, orders new appraisals from independent third parties on loans collateralized by real estate when loans are renewed, prior to foreclosure and at other times as necessary, particularly in problem loan situations. In instances where updated appraisals reflect reduced collateral values, an evaluation of the borrower’s overall financial condition is made to determine the need, if any, for possible charge-offs or appropriate additions to the allowance for loan losses. The Company records other real estate at fair value at the time of acquisition less estimated costs to sell.

The following table presents the recorded investment in loans by credit risk profile, and which were updated as of the date indicated (in thousands):

As of September 30, 2011	Commercial and industrial		Real estate- mortgage		Real estate - construction		Consumer and other		Total

Grade:
1-6 - “Pass”	$	305,754	$	565,079	$	2,649	$	3,629	$	877,111
7 - “Special Mention”/ “Watch”		10,978		31,988		-		-		42,966
8 - “Substandard”		29,522		108,465		4,276		-		142,263
9 -“Doubtful"		-		225		-		-		225

Total	$	346,254	$	705,757	$	6,925	$	3,629	$	1,062,565

As of December 31, 2010	Commercial and industrial		Real estate mortgage		Real estate - construction		Consumer and other		Total

Grade:
1-6 - “Pass”	$	301,919	$	563,003	$	12,831	$	3,732	$	881,485
7 - “Special Mention”/ “Watch”		8,063		45,776		3,536		-		57,375
8 - “Substandard”		40,093		149,988		18,980		3		209,064
9 -“Doubtful"		-		257		-		-		257

Total	$	350,075	$	759,024	$	35,347	$	3,735	$	1,148,181

There can be no assurance, however, that the Company’s loan portfolio will not become subject to increasing pressures from deteriorating borrowers’ financial condition due to general economic and other factors. While future deterioration in the loan portfolio is possible, management is continuing its risk assessment and resolution program. In addition, management is focusing its attention on minimizing the Company’s credit risk through diversification.

Nonperforming Assets

The Company generally places a loan on nonaccrual status and ceases accruing interest when, in the opinion of management, full payment of loan principal or interest is in doubt. All loans past due 90 days are placed on nonaccrual status unless the loan is both well collateralized and in the process of collection. Cash payments received while a loan is classified as nonaccrual are recorded as a reduction of principal as long as significant doubt exists as to collection of the principal. Loans are restored to accrual status only when interest and principal payments are brought current and, in management’s judgment, future payments are reasonably assured. In addition to nonaccrual loans, the Company evaluates on an ongoing basis other loans which are potential problem loans as to risk exposure in determining the adequacy of the allowance for loan losses.

A loan is considered impaired based on current information and events if it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual basis for other loans. The measurement of impaired loans is based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the loan’s observable market price or based on the fair value of the collateral if the loan is collateral-dependent.

The Company requires that nonperforming assets be monitored by the special assets department or senior lenders for MetroBank, and the special asset team consisting of internal credit personnel with the assistance of third party consultants and attorneys for Metro United. All nonperforming assets are actively managed pursuant to the Company’s loan policy. Senior management is apprised on a weekly basis of the workout endeavors and provides assistance as necessary to determine the best strategy for problem loan resolution and maximizing repayment on nonperforming assets.

In addition to the Banks’ loan review process described in the preceding paragraphs, the Office of the Comptroller of the Currency (“OCC”) periodically examines and evaluates MetroBank, while the Federal Deposit Insurance Corporation (“FDIC”) and California Department of Financial Institutions (“CDFI”) periodically examine and evaluate Metro United. Based upon such examinations, the regulators may revalue the assets of the institution and require that it charge-off certain assets, establish specific reserves to compensate for the difference between the regulators-determined value and the book value of such assets or take other regulatory action designed to lessen the risk in the asset portfolio.

The following table provides an analysis of the age of the recorded investment in loans by portfolio segment as of the date indicated (in thousands):

As of September 30, 2011	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Recorded Investment in Loans		Recorded Investment 90 Days and Accruing

Commercial and industrial	$	1,442	$	4,563	$	12,254	$	18,259	$	327,995	$	346,254	$	-
Real estate mortgage:
Residential		106		-		261		367		39,590		39,957		-
Commercial		14,047		2,387		19,742		36,176		629,624		665,800		29
Real estate construction:
Residential		-		-		-		-		6,925		6,925		-
Commercial		-		-		-		-		-		-		-
Consumer and other		7		-		6		13		3,616		3,629		-

Total	$	15,602	$	6,950	$	32,263	$	54,815	$	1,007,750	$	1,062,565	$	29

The following table presents the recorded investment in nonaccrual loans, including nonaccruing troubled debt restructurings, by portfolio segment at the dates indicated (in thousands):

Recorded investment in nonaccrual loans	September 30, 2011		December 31, 2010
Commercial and industrial	$	13,520	$	16,614
Real estate mortgage:
Residential		261		286
Commercial		34,488		48,592
Real estate construction:
Residential		—		196
Commercial		—		5,193
Consumer and other		1		3

Total	$	48,270	$	70,884

Information on impaired loans, which includes nonaccrual loans and troubled debt restructurings, and the related specific allowance for loan losses on such loans as of September 30, 2011 and December 31, 2010, is presented below (in thousands):

As of September 30, 2011	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment

Impaired loans with no allowance
Commercial and industrial	$	7,632	$	7,636	$	—	$	12,537
Real estate mortgage:
Residential		261		261		—		272
Commercial		18,512		18,526		—		31,062
Real estate construction:
Residential		—		—		—		49
Commercial		—		—		—		1,301

Impaired loans with an allowance
Commercial and industrial	$	5,888	$	5,894	$	275	$	3,194
Real estate mortgage:
Residential		—		—		—		—
Commercial		15,976		16,007		749		7,676

Total:
Commercial and industrial	$	13,520	$	13,530	$	275	$	15,731
Real estate mortgage		34,749		34,794		749		39,010
Real estate construction		—		—		—		1,350

As of December 31, 2010	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment

Impaired loans with no allowance
Commercial and industrial	$	17,940	$	18,004	$	—	$	14,385
Real estate mortgage:
Residential		286		286		—		265
Commercial		41,012		41,093		—		31,663
Real estate construction:
Residential		197		197		—		2,279
Commercial		5,205		5,213		—		6,330

Impaired loans with an allowance
Commercial and industrial	$	98	$	98	$	57	$	1,037
Real estate mortgage:
Residential		—		—		—		—
Commercial		7,581		7,606		483		13,713
Real estate construction:
Residential		—		—		—		238
Commercial		—		—		—		828

Total:
Commercial and industrial	$	18,038	$	18,102	$	57	$	15,422
Real estate mortgage		48,879		48,985		483		45,641
Real estate construction		5,402		5,410		—		9,675

For the nine months ended September 30, 2011 and 2010, interest income of $118,000 and $84,000 was recognized on impaired loans, which consisted of nonaccrual loans that were paid in full and accruing TDRs.

Troubled Debt Restructurings

Loans are classified as a troubled debt restructuring in cases where a borrower is experiencing financial difficulty and the Banks make concessionary modifications to contractual terms. Restructured loans typically involve a modification of terms such as a reduction of the stated interest rate and/or an extension of the maturity date(s). Generally, a nonaccrual loan that is restructured remains on nonaccrual for a minimum period of six months to demonstrate that the borrower can meet the restructured terms. Once performance has been demonstrated the loan may be returned to performing status after the calendar year end. Effective July 1, 2011, the Company adopted the provisions of Accounting Standards Update (“ASU”) No. 2011-02, “Receivables (Topic 310) – A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” As such, the Company reassessed all loan modification occurring since January 1, 2011 for identification as a troubled debt restructuring.

The following table presents the recorded investment in troubled debt restructurings that occurred for the three and nine months ending September 30, 2011 (in thousands):

	Three months ended, September 30, 2011						Nine months ended, September 30, 2011
Troubled Debt Restructurings	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Real estate mortgage:
Commercial		-		-		-		1	$	7,715	$	7,578

As of September 30, 2011, there have been no defaults on any loans that were modified as troubled debt restructurings during the preceding twelve months. The loan identified as troubled debt restructuring by the Company was previously on nonaccrual status and reported as an impaired loan prior to restructuring. The modification primarily related to an interest rate reduction and a period of interest-only payments. The loan restructured during the nine months ended September 30, 2011 is on nonaccrual status as of September 30, 2011. Because the loan was classified and on nonaccrual status both before and after restructuring, the modification did not impact the Company’s determination of the allowance for loan losses. As of September 30, 2011, commitments to lend additional funds on loans that were modified as troubled debt restructurings were insignificant.

Allowance for Loan Losses and Reserve for Unfunded Lending Commitments

The allowance for loan losses provides for the risk of losses inherent in the lending process and the Company allocates the allowance for loan losses according to management’s assessments of risk inherent in the portfolio. The allowance for loan losses is increased by provisions charged against current earnings and is reduced by net charge-offs. Loans are charged off when they are deemed 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 formula-based general reserve based on historical average losses by loan grade and grade migration, (2) specific reserves on larger impaired individual credits that are based on the difference between the current loan balance and the loan’s collateral value, observable market price, or discounted present value, (3) a qualitative component that reflects current market conditions and other factors precedent to losses different from historical averages, and (4) a reserve for unfunded lending commitments.

In setting the qualitative reserve portion of the allowance for loan losses, the factors the Company may consider include, but are not limited to, concentrations of credit, common characteristics 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, changes in value of the collateral securing loans, results of portfolio stress tests, and changes in lending processes, procedures and personnel. After the aforementioned assessment of the loan portfolio, the general economic environment and other relevant factors, management determines the appropriate allowance for loan loss level and makes the provision necessary to achieve that level. This methodology is consistently followed so that the level of the allowance for loan losses is reevaluated on an ongoing basis in response to changes in circumstances, economic conditions or other factors.

The Company follows a loan review program to evaluate the credit risk in the loan portfolio as discussed under “Nonperforming Assets” above. Through the loan review process, the Company maintains an internally classified loan list which, along with the delinquency list of loans, helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. Loans classified as “substandard” are risk-rated as grade 8, and have well-defined weaknesses such as a highly-leveraged position, unfavorable financial ratios, uncertain repayment sources or poor financial condition, which may jeopardize recoverability of the debt. Loans classified as “doubtful” are risk-rated as grade 9, and have characteristics similar to substandard loans but with an increased risk that a loss may occur, or at least a portion of the loan may require a charge-off if liquidated at present. Although loans classified as substandard do not duplicate loans classified as doubtful, both substandard and doubtful loans include some loans that are delinquent at least 30 days or on nonaccrual status. Loans classified as “loss” are risk-rated as grade 10 and are charged off.

In addition to the internally classified loan list and delinquency list of loans, the Company maintains a separate “watch list” for loans risk-rated as grade 7, which further aids the Company in monitoring loan portfolios. Watch list loans show potential weaknesses where the present status portrays one or more deficiencies that require attention in the short-term or where pertinent ratios of the loan account have weakened to a point where more frequent monitoring is warranted. These loans do not have all of the characteristics of a classified loan (substandard or doubtful) but do show weakened elements compared with those of a satisfactory credit. The Company reviews these loans to assist in assessing the adequacy of the allowance for loan losses.

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 described above. Management of both banks review and approve their respective allowance for loan losses and the reserve for unfunded lending commitments monthly and perform a comprehensive analysis quarterly, which is also presented to each bank’s Board of Directors for approval. The allowance for credit losses is also subject to federal and California State banking regulations. The Banks’ primary regulators conduct periodic examinations of the allowance for credit losses and make assessments regarding its adequacy and the methodology used in its determination.

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 above.

The following table presents the allowance for loan losses and recorded investment in loans by portfolio segment as of the date indicated (in thousands):

As of and for the three months ended September 30, 2011	Commercial and industrial			Real estate- mortgage			Real estate - construction			Consumer and other			Unallocated		Total


Allowance for loan losses at beginning of period	$	7,136		$	20,590		$	490		$	152		$	2,025	$	30,393
Provision for loan losses		527			74			(2	)		12			264		875
Charge-offs		(597	)		(1,350	)		—			(18	)		—		(1,965	)
Recoveries		260			396			5			5			—		666

Allowance for loan losses at end of period	$	7,325		$	19,710		$	493		$	151		$	2,289	$	29,969

Ending allowance for loan losses balance for loans individually evaluated for impairment	$	275		$	749		$	—		$	—				$	1,024

Ending allowance for loan losses balance for loans collectively evaluated for impairment	$	7,051		$	18,961		$	493		$	151				$	26,656


Loans:
Recorded investment in loans	$	346,254		$	705,757		$	6,925		$	3,629				$	1,062,565

Recorded investment in loans individually evaluated for impairment	$	13,520		$	34,749		$	—		$	1				$	48,270

Recorded investment in loans collectively evaluated for impairment	$	332,734		$	671,008		$	6,925		$	3,628				$	1,014,295

As of and for the nine months ended September 30, 2011	Commercial and industrial			Real estate- mortgage			Real estate - construction			Consumer and other			Unallocated		Total

Allowance for loan losses at beginning of period	$	8,187		$	22,016		$	1,993		$	194		$	1,367	$	33,757
Provision for loan losses		1,865			1,907			(2,222	)		(22	)		922		2,450
Charge-offs		(3,222	)		(4,673	)		—			(49	)		—		(7,944	)
Recoveries		496			460			722			28			—		1,706

Allowance for loan losses at end of period	$	7,326		$	19,710		$	493		$	151		$	2,289	$	29,969

Ending allowance for loan losses balance for loans individually evaluated for impairment	$	275		$	749		$	—		$	—				$	1,024

Ending allowance for loan losses balance for loans collectively evaluated for impairment	$	7,051		$	18,961		$	493		$	151				$	26,656


Loans:
Recorded investment in loans	$	346,254		$	705,757		$	6,925		$	3,629				$	1,062,565

Recorded investment in loans individually evaluated for impairment	$	13,520		$	34,749		$	—		$	1				$	48,270

Recorded investment in loans collectively evaluated for impairment	$	332,734		$	671,008		$	6,925		$	3,628				$	1,014,295

Changes in the allowance for loan losses and unfunded lending commitments as of and for the three and nine months ended September 30, 2010 are as follows:

	As of and for the three months ended September 30, 2010			As of and for the nine months ended September 30, 2010
	(Dollars in thousands)

Allowance for loan losses at beginning of period	$	36,004		$	29,403
Provision for loan losses		4,700			15,028
Charge-offs		(6,115	)		(10,400	)
Recoveries		55			613
Allowance for loan losses at end of period		34,644			34,644

Reserve for unfunded lending commitments at beginning of period		822			1,043
Provision for unfunded lending commitments		(110	)		(331	)
Reserve for unfunded lending commitments at end of period		712			712

Allowance for credit losses	$	35,356		$	35,356

GOODWILL

As of September 30, 2011 and December 31, 2010, gross goodwill, accumulated impairment losses, and net goodwill were $21.8 million, $4.5 million, and $17.3 million, respectively. As of January 1, 2010, gross goodwill, accumulated impairment losses, and net goodwill were $21.8 million, $2.5 million, and $19.3 million, respectively. Impairment losses for the year ending December 31, 2010 were $2.0 million. There were no impairment losses for the nine months ending September 30, 2011.

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.

Annual Evaluation

The Company completed its 2011 annual impairment test based on information as of August 31, 2011. 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.

Due to the staleness of the bank transaction multiples and fluctuations in market capitalization of peer banks used in the market methods, management puts more weight on the income approach for the step-one evaluation. The Company also performed a reconciliation of the estimated fair value to the stock price of the Company which 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.

Under the discounted cash flow method, the Company used an average growth rate of 6.5% on assets 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%. An 8% discount rate indicated a fair value that was $9.8 million greater than carrying value, an 11% discount rate indicated that fair value and carrying value were approximately equal, and a 15% discount rate indicated a fair value that was $9.8 million less than the carrying value.

The derived fair value of Metro United was compared with the carrying value of its equity. The fair value at the evaluation date exceeded the carrying value, therefore the Company determined there was no impairment of goodwill as of that date.

Goodwill impairment, if any, is a noncash adjustment to the Company’s financial statements. As goodwill and other intangible assets are not included in the calculation of regulatory capital, the Company’s well capitalized regulatory ratios are not affected. Subsequent reversal of goodwill impairment is prohibited.

5.	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, 2011 and 2010, there were 1,231,972 and 1,700,989 antidilutive stock options, respectively. For the nine months ended September 30, 2011 and 2010, there were 1,233,180 and 1,790,307 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,
	2011		2010		2011		2010
	(In thousands, except per share amounts)

Net income (loss) available to common shareholders	$	1,668	$	32	$	4,947	$	(4,462	)

Weighted average common shares in basic EPS		13,145		12,329		13,141		11,712
Effect of dilutive securities		89		16		75		—
Weighted average common and potentially dilutive common shares used in diluted EPS		13,234		12,345		13,216		11,712

Earnings (loss) per common share:
Basic	$	0.13	$	0.00	$	0.38	$	(0.38	)
Diluted	$	0.13	$	0.00	$	0.37	$	(0.38	)

6.	COMMITMENTS AND CONTINGENCIES

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 as of September 30, 2011 and December 31, 2010 is presented below:

	As of September 30, 2011		As of December 31, 2010
	(Dollars in thousands)
Unfunded loan commitments including unfunded lines of credit	$	74,700	$	63,967
Standby letters of credit		15,248		5,137
Commercial letters of credit		6,027		5,019
Operating leases		7,526		8,698
Total financial instruments with off-balance sheet risk	$	103,501	$	82,821

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

7.	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 is 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.

The Company’s Board of Directors elected to suspend its common stock dividend indefinitely in April 2009 and to defer the dividend on the Series A Preferred Stock for the second quarter of 2010. The Board of Directors of the Company later elected to resume payment of dividends on the Series A Preferred Stock, and in the third quarter of 2011 paid the dividend that was deferred from the second quarter of 2010. The payment of future dividends paid by the Company will be made at the discretion of the Company's Board of Directors and will be subject to any regulatory restrictions imposed by the Federal Reserve Board. Additionally, future determination of dividends will depend on a number of factors, including but not limited to current and prospective earnings, capital requirements, financial condition, and other factors that the Board of Directors may deem relevant to the Company and its subsidiary banks.

The Company paid no common dividends for the nine months ended September 30, 2011 and 2010. Preferred dividends paid for the nine months ended September 30, 2011 and 2010 were $2.3 million and $1.1 million, respectively.

8.	REGULATORY MATTERS

The Banks are subject to regulations and, among others things, may be limited in their ability to pay dividends or otherwise transfer funds to the holding company. Under applicable restrictions as of September 30, 2011, no dividends could be paid by the Company, or by MetroBank and Metro United to the Company without regulatory approval. In addition, dividends paid by the Banks to the holding company would be prohibited if the effect thereof would cause the Banks’ capital to be reduced below applicable minimum capital requirements.

On August 10, 2009, MetroBank entered into a written agreement (the “Agreement”) with the OCC. The Agreement is based on the findings of the OCC during the annual on-site examination of MetroBank performed in the first quarter of 2009 and is primarily focused on matters related to MetroBank’s asset quality. Pursuant to the Agreement, the Board of Directors of MetroBank has appointed a compliance committee to monitor and coordinate MetroBank’s performance under the Agreement. The Agreement provides for, among other things, the development and implementation of written programs to reduce MetroBank’s credit risks, monitor and reduce the level of criticized assets and manage commercial real estate loan concentrations in light of current adverse commercial real estate market conditions generally and in its market areas. During and since the completion of the examination, management of MetroBank has proactively made adjustments to policies and procedures in an effort to alleviate the effects of the credit challenge caused by the economic deterioration and market conditions generally and in its market areas.

On July 22, 2010, Metro United entered into a Stipulation to the Issuance of a Consent Order ("Stipulation") with the FDIC and the CDFI. Pursuant to the Stipulation, Metro United has consented to the issuance of a Consent Order ("Order") by the FDIC and CDFI, also effective as of July 22, 2010. The Order is based on the findings during the annual on-site examination of Metro United performed in the first quarter of 2010 utilizing financial information as of December 31, 2009. The Order represents the agreements between Metro United, the FDIC and the CDFI as to areas of Metro United's operations that warrant improvement and requires the submission of plans for making those improvements. The Order imposes no fines or penalties on Metro United.

Under the terms of the Order, Metro United cannot declare or pay cash dividends and shall not establish any new branches or other offices without the prior written consent of certain officials of the FDIC and the CDFI. In addition, pursuant to the Order, Metro United developed and submitted a written capital plan to achieve and maintain ratios of Tier 1 capital to average total assets (leverage) of at least 9% and total capital to total risk-weighted assets of at least 13% by December 31, 2010. As of December 31, 2010, Metro United's Tier 1 leverage ratio was 9.84% and its total risk-based capital ratio was 14.28%. As of September 30, 2011, Metro United's Tier 1 leverage ratio was 11.75% and its total risk-based capital ratio was 16.15%. The Order requires certain corrective steps, imposes limits on activities (such as payment of dividends), prescribes regulatory parameters (such as asset management) and requires the adoption of new or revised policies, procedures and controls on Metro United's operations. In many cases, Metro United must adopt or revise the policies and submit them to the FDIC and CDFI for approval within the time frames prescribed.

Although Metro United meets the capital levels deemed to be “well-capitalized”, due to the capital requirement within the Order, it cannot be considered better than "adequately capitalized" for capital adequacy purposes, even if it exceeds the levels of capital set forth in the Order. As an adequately capitalized institution, Metro United may not pay interest rates on deposits that are more than 75 basis points above the rate of the applicable market of Metro United as determined by the FDIC. Additionally, neither MetroBank nor Metro United may accept, renew or roll over brokered deposits without prior approval of the OCC or the FDIC and CDFI, respectively.

Management and the Boards of Directors of the Company, MetroBank and Metro United have taken steps to address the findings of the respective exams and are working with the OCC to comply with the requirements of the Agreement and the FDIC and CDFI to comply with the requirements of the Order. Failure by MetroBank and Metro United to meet the requirements and conditions imposed by the Agreement and Order, respectively, could result in more severe regulatory enforcement actions such as capital directives to raise additional capital, civil money penalties, cease and desist or removal orders, injunctions, and public disclosure of such actions against MetroBank and Metro United. Any such failure and resulting regulatory action could have a material adverse effect on the financial condition and results of operations of the Company, MetroBank and Metro United.

The Company and the Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. The regulations require the Company to meet specific capital adequacy guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Banks’ capital classification is also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Banks to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of September 30, 2011, that the Company and the Banks met all capital adequacy requirements to which they were subject.

As of September 30, 2011, the most recent notifications from the OCC with respect to MetroBank categorized MetroBank as “well capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events since the notifications that management believes have changed MetroBank’s level of capital adequacy.

Although regulatory standards require the ratios stated below, as a result of the Order, Metro United is required to maintain a leverage ratio at least 9.0% and a total risk-based capital ratio of at least 13.0%. Due to the capital requirement within Metro United's Order, Metro United cannot be considered to be any better than "adequately capitalized" for capital adequacy purposes even if it exceeds the capital levels set forth in the Order.

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, 2011 to the minimum and well-capitalized regulatory standards:

	Actual					Minimum Required For Capital Adequacy Purposes					To be Categorized as Well Capitalized under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of September 30, 2011
Total risk-based capital ratio
MetroCorp Bancshares, Inc.	$	192,890		16.93	%	$	91,151		8.00	%	$	N/A		N/A	%
MetroBank, N.A.		137,797		16.33			67,489		8.00			84,361		10.00
Metro United Bank		47,641		16.15			23,603		8.00			29,504		10.00
Tier 1 risk-based capital ratio
MetroCorp Bancshares, Inc.		178,345		15.65			45,576		4.00			N/A		N/A
MetroBank, N.A.		126,992		15.05			33,745		4.00			50,617		6.00
Metro United Bank		43,910		14.88			11,802		4.00			17,703		6.00
Leverage ratio
MetroCorp Bancshares, Inc.		178,345		12.03			59,301		4.00			N/A		N/A
MetroBank, N.A.		126,992		11.42			44,464		4.00			55,580		5.00
Metro United Bank		43,910		11.75			14,954		4.00			18,693		5.00
As of December 31, 2010
Total risk-based capital ratio
MetroCorp Bancshares, Inc.	$	184,573		15.13	%	$	97,599		8.00	%	$	N/A		N/A	%
MetroBank, N.A.		133,737		14.92			71,727		8.00			89,658		10.00
Metro United Bank		46,141		14.28			25,840		8.00			32,300		10.00
Tier 1 risk-based capital ratio
MetroCorp Bancshares, Inc.		169,087		13.86			48,799		4.00			N/A		N/A
MetroBank, N.A.		122,366		13.65			35,863		4.00			53,795		6.00
Metro United Bank		42,031		13.01			12,920		4.00			19,380		6.00
Leverage ratio
MetroCorp Bancshares, Inc.		169,087		10.75			62,893		4.00			N/A		N/A
MetroBank, N.A.		122,366		10.64			46,003		4.00			57,503		5.00
Metro United Bank		42,031		9.84			17,089		4.00			21,361		5.00

9.	ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The balance of and changes in each component of accumulated other comprehensive income (loss) as of and for the nine months ended September 30, 2011 are as follows (net of taxes):

	Gains (Losses) on Effective Cash Hedging Derivatives			Net Unrealized Losses on Investments with OTTI			Net Unrealized Investment Gains (Losses)			Total Accumulated Other Comprehensive Income (Loss)
Balance December 31, 2010	$	(949	)	$	(977	)	$	(310	)	$	(2,236	)
Current period change		(389	)		(13	)		2,194			1,792

Balance September 30, 2011	$	(1,338	)	$	(990	)	$	1,884		$	(444	)

10.	DERIVATIVE FINANCIAL INSTRUMENTS

The fair value of derivative financial instruments outstanding is included in other assets and other liabilities in the accompanying consolidated balance sheets and in the net change in each of these financial statement line items in the accompanying consolidated statements of cash flows.

Interest Rate Derivatives. The Company uses derivatives (interest rate swaps and caps) to mitigate exposure to interest rate risk and the objectives of such are described below.

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 which began in March 2011.

The Company applies hedge accounting to the interest rate swap above. 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.

At the end of the second quarter of 2011, the Company entered into an interest rate cap with a notional amount of $15.0 million with the objective of mitigating the effect of potential future interest rate increases. The interest rate cap contract is not designated nor accounted for as a hedging instrument. The interest rate cap contract was effective July 1, 2011 for a five-year term. Under the interest rate cap contract, beginning October 3, 2011 and ending July 1, 2016, the Company will receive quarterly settlements for the difference between the three-month LIBOR interest rate and the cap rate of 2.0%, if the three-month LIBOR interest rate exceeds the cap rate on the settlement date.

The Company obtains dealer quotations to value its interest rate derivative contract designated as a hedge of cash flows and its non-hedging interest rate derivative. The notional amounts and estimated fair values of interest rate derivative contracts outstanding at September 30, 2011 and December 31, 2010 are presented in the following table (in thousands).

	September 30, 2011					December 31, 2010
	Notional Amount		Estimated Fair Value			Notional Amount		Estimated Fair Value
Interest rate derivative contract designated as a hedge of cash flows	$	17,500	$	(2,091	)	$	17,500	$	(1,483	)

Interest rate derivative contract not designated as a hedge of cash flows	$	15,000	$	247		$	—	$	—

Gains, Losses and Derivative Cash Flows. For designated 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 in the Condensed Consolidated Statement of 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 in the Condensed Consolidated Statement of Operations. 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 in the Condensed Consolidated Statement of Operations.

For interest rate derivatives not designated as a hedging instrument, gains or losses due to changes in fair value are included in other non-interest income in the Condensed Consolidated Statement of Operations.

Amounts included in the Condensed Consolidated Statements of Operations and in the Condensed Consolidated Statement of Comprehensive Income for the period related to the interest rate derivative designated as a hedge of cash flows were as follows. There were no interest rate derivatives designated as hedges of fair value at September 30, 2011.

	Gains/(losses) recorded in income and other comprehensive income (loss) (in thousands)
Three months ended September 30, 2011	Derivative effective portion reclassified from AOCI into income		Hedge ineffectiveness recorded directly in income		Total income statement impact		Derivative effective portion recorded in OCI			Total change in OCI for period
Interest rate derivative designated as a hedge of cash flows:
Interest rate swap	$	—	$	—	$	—	$	(464	)	$	(464	)

Three months ended September 30, 2010
Interest rate derivative designated as a hedge of cash flows:
Interest rate swap	$	—	$	—	$	—	$	(609	)	$	(609	)

	Gains/(losses) recorded in income and other comprehensive income (loss) (in thousands)
Nine months ended September 30, 2011	Derivative effective portion reclassified from AOCI into income		Hedge ineffectiveness recorded directly in income		Total income statement impact		Derivative effective portion recorded in OCI			Total change in OCI for period
Interest rate derivative designated as a hedge of cash flows:
Interest rate swap	$	—	$	—	$	—	$	(608	)	$	(608	)

Nine months ended September 30, 2010
Interest rate derivative designated as a hedge of cash flows:
Interest rate swap	$	—	$	—	$	—	$	(1,861	)	$	(1,861	)

Amounts included in the consolidated statements of operations for the period related to non-hedging interest rate derivatives were as follows (in thousands).

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Non-hedging interest rate derivative:
Other non-interest income	$	(348)	$	—	$	(337)	$	—

Counterparty Credit Risk. Derivative contracts involve the risk of dealing with institutional derivative counterparties and their ability to meet contractual terms. Derivative contracts are generally executed with a Credit Support Annex, (“CSA”), which is a bilateral ratings-sensitive agreement that requires collateral postings at established credit threshold levels. CSA 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. There was no CSA on the interest rate cap contract because the counterparty was the FHLB of Dallas, a government sponsored enterprise. 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. The Company’s credit exposure on the interest rate cap is the value of the expected interest payments that would be collected over the life of the cap contract. 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, 2011. The amount of cash collateral posted by the Company related to derivative contracts was $2.3 million and $2.1 million at September 30, 2011 and December 31, 2010, respectively.

11.	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, 2011 and 2010:

	For the three months ended September 30, 2011									For the three months ended September 30, 2010
	MetroBank		Metro United		Other			Consolidated Company		MetroBank			Metro United		Other			Consolidated Company
	(In thousands)
Total interest income	$	12,680	$	4,081	$	7		$	16,768	$	14,237		$	4,965	$	17		$	19,219
Total interest expense		2,147		757		339			3,243		3,446			992		532			4,970

Net interest income	$	10,533	$	3,324	$	(332	)	$	13,525		10,791			3,973		(515	)		14,249
Provision for loan losses		550		325		—			875		4,300			400		—			4,700

Net interest income after provision for loan losses		9,983		2,999		(332	)		12,650		6,491			3,573		(515	)		9,549
Noninterest income		2,092		55		(331	)		1,816		1,990			72		(301	)		1,761
Noninterest expenses		8,539		2,850		46			11,435		8,242			2,589		28			10,859

Income (loss) before income tax provision		3,536		204		(709	)		3,031		239			1,056		(844	)		451
Provision (benefit) for income taxes		915		83		(236	)		762		(109	)		320		(397	)		(186	)

Net income (loss)	$	2,621	$	121	$	(473	)	$	2,269	$	348		$	736	$	(447	)	$	637

	For the nine months ended September 30, 2011									For the nine months ended September 30, 2010
	MetroBank		Metro United		Other			Consolidated Company		MetroBank		Metro United			Other			Consolidated Company
	(In thousands)
Total interest income	$	38,370	$	12,567	$	19		$	50,956	$	43,353	$	15,734		$	49		$	59,136
Total interest expense		7,075		2,395		1,013			10,483		10,706		3,867			1,591			16,164

Net interest income	$	31,295	$	10,172	$	(994	)	$	40,473		32,647		11,867			(1,542	)		42,972
Provision for loan losses		2,050		400		—			2,450		10,300		4,728			—			15,028

Net interest income after provision for loan losses		29,245		9,772		(994	)		38,023		22,347		7,139			(1,542	)		27,944
Noninterest income		5,841		198		(993	)		5,046		5,827		254			(933	)		5,148
Noninterest expenses		25,037		8,095		89			33,221		26,387		10,592			93			37,072

Income before income tax provision		10,049		1,875		(2,076	)		9,848		1,787		(3,199	)		(2,568	)		(3,980	)
Provision (benefit) for income taxes		3,008		776		(694	)		3,090		205		(622	)		(906	)		(1,323	)

Net income (loss)	$	7,041	$	1,099	$	(1,382	)	$	6,758	$	1,582	$	(2,577	)	$	(1,662	)	$	(2,657	)

	As of September 30, 2011									As of September 30, 2010
	MetroBank		Metro United		Other			Consolidated Company		MetroBank		Metro United		Other			Consolidated Company
	(In thousands)
Net loans	$	737,313	$	291,883	$	—		$	1,029,196	$	817,697	$	321,226	$	─		$	1,138,923
Total assets		1,110,963		388,897		(2,080	)		1,497,780		1,162,650		410,251		(5,442	)		1,567,459
Deposits		939,206		315,577		(13,291	)		1,241,492		995,184		319,337		(14,552	)		1,299,969

12.	FAIR VALUE

Fair value is the exchange price that would be received to sell 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. Fair value is reported based on a hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are:

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 with prices from other sources for reasonableness. The Company has not adjusted the values from the pricing service.

Interest Rate Derivatives. The Company’s derivative positions are classified within Level 2 in the fair value hierarchy and are 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 derivatives are 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, with counterparties other than government sponsored enterprises, 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. Derivative contracts with a government sponsored enterprise as the counterparty are assumed to have low risk of credit rating deterioration for the counterparty.

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, 2011 and December 31, 2010:

	Fair Value Measurements, using
September 30, 2011	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Fair Value Measurements
	(In thousands)
Securities available-for-sale
U.S. Treasury and other U.S. government corporations and agencies	$	–	$	72,713		$	–	$	72,713
Obligations of state and political subdivisions		–		4,062			–		4,062
Mortgage-backed securities and collateralized mortgage obligations
Government issued or guaranteed		–		58,294			–		58,294
Privately issued residential		–		738			–		738
Asset backed securities		–		110			–		110
Investment in CRA funds		13,726		–			–		13,726
Total available-for-sale securities		13,726		135,917			–		149,643
Derivative assets
Interest rate cap		–		247			–		247
Total assets measured at fair value on a recurring basis	$	13,726	$	136,164		$	–	$	149,890

Derivative liabilities
Interest rate swap	$	–	$	(2,091	)	$	–	$	(2,091	)

December 31, 2010
Securities available-for-sale
U.S. Treasury and other U.S. government corporations and agencies	$	–	$	111,601		$	–	$	111,601
Obligations of state and political subdivisions		–		4,371			–		4,371
Mortgage-backed securities and collateralized mortgage obligations
Government issued or guaranteed		–		45,384			–		45,384
Privately issued residential		–		1,230			–		1,230
Asset backed securities		–		178			–		178
Investment in CRA funds		12,942		—			–		12,942
Total available-for-sale securities	$	12,942	$	162,764		$	–	$	175,706

Derivative liabilities
Interest rate swap	$	–	$	(1,483	)	$	–	$	(1,483	)

There were no transfers between Level 1 and Level 2 financial instruments carried at fair value on a recurring basis.

Certain non-financial assets measured at fair value on a recurring basis include reporting units measured at fair value in the first step of a goodwill impairment test. Certain non-financial assets measured at fair value on a non-recurring basis include non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible assets measured at fair value for impairment assessment, as well as foreclosed assets. 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).

Non-financial and 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.

Foreclosed Assets. Foreclosed assets are carried at fair value less costs to sell. The fair value measurements of foreclosed assets can include Level 2 measurement inputs such as real estate appraisals and comparable real estate sales information, in conjunction with Level 3 measurement inputs such as cash flow projections, qualitative adjustments, sales cost estimates, etc. As a result, the categorization of foreclosed assets is Level 3 of the fair value hierarchy. In connection with the measurement and initial recognition of certain foreclosed assets, the Company may recognize charge-offs through the allowance for loan losses.

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 collateral dependent 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.

The following presents assets carried at fair value on a nonrecurring basis by caption on the condensed consolidated balance sheets and by valuation hierarchy (as described above) as of September 30, 2011 and December 31, 2010 (in thousands):

	As of September 30, 2011						As of December 31, 2010
	Level 2			Level 3			Level 2			Level 3
Assets
Goodwill		$	-		$	17,327		$	-		$	17,327
Foreclosed assets			-			23,844			-			19,956
Impaired loans (1)			20,876			-			7,121			-

(1) Impaired loans represent collateral dependent impaired loans with a specific valuation reserve.

The following presents losses related to fair value adjustments that are included in the Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010 related to assets held at those dates (in thousands):

	Three months ended September 30,						Nine months ended September 30,
	2011			2010			2011			2010
Losses related to:
Goodwill		$	—		$	—		$	—		$	2,000
Foreclosed assets (1)			948			551			1,591			3,178
Impaired loans (2)			369			105			3,905			105

(1) Losses represent related losses on foreclosed properties that were written down subsequent to their initial classification as foreclosed properties.

(2) Losses on impaired loans represent charge-offs which were netted against the allowance for loan losses.

Fair Value of Financial Instruments

The following table summarizes the carrying value and estimated fair values of financial instruments as of September 30, 2011 and December 31, 2010:

	As of September 30, 2011				As of December 31, 2010
	Carrying or Contract Amount		Estimated Fair Value		Carrying or Contract Amount		Estimated Fair Value
	(In thousands)
Financial Assets
Cash and cash equivalents	$	197,548	$	197,548	$	151,725	$	151,725
Investment securities available-for-sale		149,643		149,643		175,706		175,706
Investment securities held-to-maturity		4,045		4,504		4,045		4,167
Other investments		6,594		6,594		6,925		6,925
Loans held-for-investment, net		1,029,196		941,575		1,110,553		990,818
Cash value of bank owned life insurance		31,070		31,070		29,988		29,988
Accrued interest receivable		3,906		3,906		4,682		4,682
Interest rate cap		247		247		—		—

Financial Liabilities
Deposits
Transaction accounts		726,198		726,198		707,000		707,000
Time deposits		515,294		512,727		587,184		586,342
Total deposits		1,241,492		1,238,925		1,294,184		1,293,342
Other borrowings		36,416		38,906		56,804		59,028
Junior subordinated debentures		36,083		36,083		36,083		36,083
Interest rate swap		2,091		2,091		1,483		1,483
Accrued interest payable		296		296		447		447

Off-balance sheet financial instruments
Unfunded loan commitments, including unfunded lines of credit		—		216		—		179
Standby letters of credit		—		103		—		13

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, certificates of deposit with banks denominated in a foreign currency, 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 (as opposed to the exit price concept of fair value). 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.

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.

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.

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.

13.	INCOME TAXES

Income tax expense for the three months ended September 30, 2011 was $762,000, compared with income tax benefit of $186,000 for the same period in 2010. The Company’s effective tax rate was 25.14% for the three months ended September 30, 2011 compared with 41.24% for the three months ended September 30, 2010. The decrease in the effective income tax rate in 2011 as compared with 2010 was primarily the result of the effect of state income taxes. The Texas tax is based on the Company’s gross margin with limited deductions. Because the Texas tax allows only limited deductions the tax may not correlate, from year to year, with pre-tax income. Additionally, during the third quarter of 2011, the Company realized a benefit on a refund of Texas margin taxes for a contested prior period. The California tax is based on the unitary income of the consolidated group which can vary disproportionately from pre-tax income depending on the apportionment of income among members of the unitary group. Income tax expense for the nine months ended September 30, 2011 was $3.1 million, compared with income tax benefit of $1.3 million for the same period in 2010. The Company’s effective tax rate was 31.38% for the nine months ended September 30, 2011 compared with 33.24% for the nine months ended September 30, 2010. The increase in the effective income tax rate in 2011 as compared with 2010 was primarily the result of non-deductible goodwill impairment and the effect of state income taxes.

As of September 30, 2011, the Company had approximately $15.5 million in net deferred tax assets. Deferred tax assets are subject to an evaluation of whether it is more likely than not that they will be realized. The Company has not provided a valuation allowance for the net deferred tax assets at September 30, 2011 and 2010 due primarily to its ability to offset reversals of net deductible temporary differences against income taxes paid in previous years and expected to be paid in future years. In making such judgments, significant weight is given to evidence that can be objectively verified. Because of historical losses that were recorded by the Company for the years ended December 31, 2009 and 2010, and if the Company is unable to generate sufficient taxable income in the future, then the Company may not be able to conclude it is more likely than not that the benefits of the deferred tax assets will be fully realized and may be required to recognize a valuation allowance and a corresponding income tax expense equal to the portion of the deferred tax asset that may not be realized.

As a result of the losses incurred in 2009 and 2010, the Company is in a three-year cumulative pretax loss position at September 30, 2011. A cumulative loss position is considered significant negative evidence in assessing the realizability of a deferred tax asset. The Company has concluded that there is sufficient positive evidence to overcome this negative evidence. The Company forecasts sufficient taxable income in the carryforward period, exclusive of tax planning strategies to fully realize its deferred tax asset. The Company has projected its pretax earnings based upon business that the Company intends to conduct going forward, which in the past has produced steady and strong earnings. During 2009 and 2010, earnings were negatively affected by the large increase in provisions for loan losses during the sharp economic downturn cycle. The Company reduced its cost structure, and taking this into account, the Company projects that it will generate sufficient pretax earnings within a five-year period.

The U.S. Federal and California State net operating loss carryforward period of 20 years provides enough time to utilize the deferred tax assets pertaining to the existing net operating loss carryforwards and any net operating losses that would be created by the reversal of the future net deductions which have not yet been taken on a tax return.

14.	NEW AUTHORITATIVE ACCOUNTING GUIDANCE

Accounting Standards Update (“ASU”) No. 2011-08, “Intangibles – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment” amends Topic 350 to allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessments, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The new authoritative accounting guidance under ASU 2011-08 will be effective for the Company on January 1, 2012 and is not expected to have an impact on the Company's financial condition, results of operations, or cash flows.

ASU No. 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income” amends Topic 220, "Comprehensive Income," to require that all nonowner changes in shareholders' equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, ASU 2011-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in shareholders' equity was eliminated. The new authoritative accounting guidance under ASU 2011-03 will be effective for the Company on January 1, 2012 and is not expected to have an impact on the Company's financial condition, results of operations, or cash flows.

ASU No. 2011-04, “Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” amends Topic 820, "Fair Value Measurements and Disclosures," to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures. The new authoritative accounting guidance under ASU 2011-03 will be effective for the Company on January 1, 2012 and is not expected to have an impact on the Company's financial condition, results of operations, or cash flows.

ASU No. 2011-03, “Transfers and Servicing (Topic 860) - Reconsideration of Effective Control for Repurchase Agreements.” ASU 2011-03 removes from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The new authoritative accounting guidance under ASU 2011-03 will be effective for the Company on January 1, 2012 and is not expected to have an impact on the Company's financial condition, results of operations, or cash flows.

ASU No. 2011-02, "A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (Topic 310)." ASU 2011-02 provides additional guidance for determining whether the creditor has granted a concession and whether the debtor is experiencing financial difficulty. The new authoritative accounting guidance under ASU 2011-02 will be effective for the Company on July 1, 2011 and will be applied retrospectively to restructurings occurring on or after January 1, 2011. At the same time the Company adopts ASU 2011-002, it will be required to disclose the activity-based information about troubled debt restructurings that was previously deferred by ASU 2011-01 “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20”. The new authoritative accounting guidance under ASU 2011-02 and ASU 2011-01 did not have an impact on the Company's financial condition, results of operations, or cash flows.

ASU No. 2010-29, "Business Combinations (Topic 805)—Disclosure of Supplementary Pro Forma Information for Business Combinations." ASU 2010-29 provides clarification regarding the acquisition date that should be used for reporting the pro forma financial information disclosures required by Topic 805 when comparative financial statements are presented. ASU 2010-29 also requires entities to provide a description of the nature and amount of material, nonrecurring pro forma adjustments that are directly attributable to the business combination. The new authoritative accounting guidance under ASU 2010-29 was effective for the Company prospectively for business combinations occurring after December 31, 2010.

ASU No. 2010-28, "Intangibles—Goodwill and Other (Topic 350)—When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts." ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist such as if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The new authoritative accounting guidance under ASU 2010-28 was effective for the Company on January 1, 2011 and did not have an impact on the Company's financial condition, results of operations, or cash flows.

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 MetroBank’s compliance, or failure to comply within stated deadlines, of the provisions of the formal agreement with the OCC;

•

the effect of Metro United's compliance, or failure to comply within stated deadlines, of the provisions of the consent order issued by the FDIC and CDFI;

•

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;

•

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

•

increases in the level of nonperforming assets;

•

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;

•

an inability to fully realize the Company’s net deferred tax asset;

•

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;

•

potential environmental risk and associated cost on the Company's foreclosed real estate assets;

•

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

•

increases in FDIC deposit insurance assessments;

•

government intervention in the U.S. financial system;

•

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

•

changes in statutes and government regulations or their interpretations applicable to bank holding companies and the Company’s 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 operations. This section should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and accompanying notes and other detailed information appearing elsewhere in this document.

Overview

The Company recorded net income of $2.3 million for the three months ended September 30, 2011, an increase of $1.6 million compared with the same quarter in 2010. The Company’s diluted earnings per common share for the three months ended September 30, 2011 was $0.13, an increase of $0.13 per diluted common share compared with $0.00 for the same quarter in 2010. Diluted earnings (loss) per common share is computed by dividing net income (after deducting dividends and accretion of discount on preferred stock) by the weighted-average number of common shares and potentially dilutive common shares outstanding during the period. Preferred stock dividends accrued and discount accreted were $601,000 or $0.05 per diluted share, and $605,000 or $0.05 per diluted share for the three months ended September 30, 2011 and 2010, respectively. The Company recorded net income of $6.8 million for the nine months ended September 30, 2011, an increase of $9.4 million compared with a net loss of $2.7 million for the same period in 2010. The Company’s diluted earnings per common share for the nine months ended September 30, 2011 was $0.37, an increase of $0.75 per diluted share compared with diluted loss per common share of ($0.38) for the same period in 2010. Preferred stock dividends accrued and discount accreted were $1.8 million or $0.14 per diluted share and $1.8 million or $0.15 per diluted share for the nine months ended September 30, 2011 and 2010, respectively. Details of the changes in the various components of net income are further discussed below.

Total assets were $1.50 billion at September 30, 2011, a decrease of $60.8 million or 3.9% from $1.56 billion at December 31, 2010. Available-for-sale investment securities at September 30, 2011 were $149.6 million, a decrease of $26.1 million or 14.8% from $175.7 million at December 31, 2010. Net loans at September 30, 2011 were $1.03 billion, a decrease of $81.4 million or 7.3% from $1.11 billion at December 31, 2010. Total deposits at September 30, 2011 were $1.24 billion, a decrease of $52.7 million or 4.1% from $1.29 billion at December 31, 2010. Other borrowings at September 30, 2011 were $36.4 million, a decrease of $20.4 million or 35.9% from $56.8 million at December 31, 2010. The Company’s return on average assets (“ROAA”) for the three months ended September 30, 2011 and 2010 was 0.60% and 0.16%, respectively. The Company’s return on average equity (“ROAE”) for the three months ended September 30, 2011 and 2010 was 5.44% and 1.60%, respectively. The Company’s ROAA for the nine months ended September 30, 2011 and 2010 was 0.60% and (0.22)%, respectively. The Company’s ROAE for the nine months ended September 30, 2011 and 2010 was 5.55% and (2.25)%, respectively. Shareholders’ equity at September 30, 2011 was $165.7 million compared with $158.8 million at December 31, 2010, an increase of $6.9 million or 4.4%. 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, 2011, net interest income, before the provision for loan losses, was $13.5 million, a decrease of $724,000 or 5.1% compared with $14.2 million for the same period in 2010, due primarily to a decline in average total loans and yields, partially offset by lower volume and cost of deposits. Average interest-earning assets for the three months ended September 30, 2011 were $1.40 billion, a decrease of $98.2 million or 6.5% compared with $1.50 billion for the same period in 2010, primarily due to lower loan volume, partially offset by growth in taxable securities and federal funds sold and interest-bearing deposits. The weighted average yield on interest-earning assets for the third quarter of 2011 was 4.74%, a decrease of 34 basis points compared with 5.08% for the same quarter in 2010. Average interest-bearing liabilities for the three months ended September 30, 2011 were $1.08 billion, a decrease of $144.7 million or 11.8% compared with $1.23 billion for the same period in 2010, primarily due to declines in time deposits, savings and money market accounts, and other borrowings. The weighted average interest rate paid on interest-bearing liabilities for the third quarter 2011 was 1.19%, a decrease of 42 basis points compared with 1.61% for the same quarter in 2010.

For the nine months ended September 30, 2011, net interest income, before the provision for loan losses, was $40.5 million, a decrease of $2.5 million or 5.8% compared with $43.0 million for the same period in 2010, primarily due to a decline in average total loans and yields, partially offset by lower volume and cost of deposits. Average interest-earning assets for the nine months ended September 30, 2011 were $1.42 billion, a decrease of $82.6 million or 5.5% compared with $1.50 billion for the same period in 2010, primarily due to lower loan volume, partially offset by growth in taxable securities and federal funds sold and interest-bearing deposits. The weighted average yield on interest-earning assets for the nine months ended September 30, 2011 was 4.80%, down 46 basis points compared with 5.26% for the same period in 2010. Average interest-bearing liabilities for the nine months ended September 30, 2011 were $1.11 billion, a decrease of $128.5 million or 10.4% compared with $1.24 billion for the same period in 2010, primarily due to a decline in time deposits and savings and money market accounts. The weighted average rate paid on interest-bearing liabilities for the nine months ended September 30, 2011 was 1.27%, down 48 basis points compared with 1.75% for the same period in 2010.

The net interest margin for the three months ended September 30, 2011 was 3.83%, an increase of six basis points compared with 3.77% for the same period in 2010. The yield on average earning assets decreased 34 basis points, and the cost of average earning assets decreased 40 basis points for the same periods. The net interest margin for the nine months ended September 30, 2011 was 3.81%, a decrease of one basis point compared with 3.82% for the same period in 2010. The yield on average earning assets decreased 46 basis points, and the cost of average earning assets decreased 45 basis points for the same periods. The decrease in yield and cost of earning assets for the three and nine months ended September 30, 2011 was due primarily to a decline in average total loans and yields, partially offset by lower volume and cost of deposits.

Total Interest Income. Total interest income for the three months ended September 30, 2011 was $16.8 million, a decrease of $2.4 million or 12.8% compared with $19.2 million for the same period in 2010. Total interest income for the nine months ended September 30, 2011 was $51.0 million, a decrease of $8.1 million or 13.8% compared with $59.1 million for the same period in 2010. The decrease for both periods was primarily due to lower loan volume and loan yield, partially offset by an increase in the volume of taxable securities and federal funds sold and other short-term investments.

Interest Income from Loans. Interest income from loans for the three months ended September 30, 2011 was $15.4 million, a decrease of $2.6 million or 14.5% compared with $18.0 million for the same quarter in 2010. Average total loans for the three months ended September 30, 2011 were $1.06 billion compared with $1.20 billion for the same period in 2010, a decrease of $140.7 million or 11.7%. For the third quarter of 2011, the average yield on loans was 5.74%, a decrease of 18 basis points compared with 5.92% for the same quarter in 2010. Interest income from loans for the nine months ended September 30, 2011 was $46.7 million, a decrease of $9.0 million or 16.2% compared with $55.7 million for the same period in 2010. The decrease for the three and nine months ended September 30, 2011 was the result of lower loan volume and yields. Average total loans for the nine months ended September 30, 2011 were $1.09 billion, a decrease of $152.0 million or 12.3% compared with average total loans for the same period in 2010 of $1.24 billion. For the nine months ended September 30, 2011, the yield on average total loans was 5.74%, a decrease of 27 basis points compared with 6.01% for the same period in 2010.

Approximately $817.4 million or 77.0% 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. For the nine months ended September 30, 2011, the average yield on total loans was approximately 249 basis points above the prime rate primarily because of interest rate floors. At September 30, 2011, approximately $635.0 million in loans or 59.8% of the total loan portfolio were variable rate loans with interest rate floors that carried a weighted average interest rate of 6.08%. At September 30, 2010, variable rate loans with interest rate floors comprised 55.7% of the total loan portfolio and carried a weighted average interest rate of 6.29%.

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, 2011 was $1.4 million, an increase of $145,000 or 11.5% compared with $1.3 million for the same period in 2010. Average total investments for the three months ended September 30, 2011 were $340.5 million compared with average total investments for the same period in 2010 of $298.0 million, an increase of $42.5 million or 14.3%. The increase in average total investments for both periods was primarily the result of an increase in taxable investment securities, and in federal funds sold and other short-term investments. For the third quarter 2011, the average yield on total investments was 1.64% compared with 1.68% for the same quarter in 2010, a decrease of four basis points primarily due to the addition of lower yielding securities.

Interest income from investments for the nine months ended September 30, 2011 was $4.3 million, an increase of $841,000 or 24.6% compared with $3.4 million for the same period in 2010, primarily due to an increase in taxable investment securities. Average total investments for the nine months ended September 30, 2011 were $332.8 million compared with average total investments for the same quarter in 2010 of $263.5 million, an increase of $69.3 million or 26.3%. The increase was primarily the result of an increase in taxable investment securities, and in federal funds sold and other short-term investments. For the nine months ended September 30, 2011, the average yield on investments was 1.71% compared with 1.73% for the same quarter in 2010, a decrease of two basis points.

Total Interest Expense. Total interest expense for the three months ended September 30, 2011 was $3.2 million, a decrease of $1.8 million or 34.7% compared with $5.0 million for the same period in 2010. Total interest expense for the nine months ended September 30, 2011 was $10.5 million, a decrease of $5.7 million or 35.1% compared with $16.2 million for the same period in 2010. Interest expense decreased for both the three and nine months ended September 30, 2011 primarily due to lower deposit volume and deposit cost and lower interest cost on the junior subordinated debentures.

Interest Expense on Deposits. Interest expense on interest-bearing deposits for the three months ended September 30, 2011 was $2.7 million, a decrease of $1.5 million or 36.2% compared with $4.2 million for the same period in 2010. Average interest-bearing deposits for the three months ended September 30, 2011 were $1.01 billion compared with $1.13 billion for the same period in 2010, a decrease of $124.3 million or 11.0%. The average interest rate paid on interest-bearing deposits for the third quarter of 2011 was 1.05% compared with 1.46% for the same quarter in 2010, a decrease of 41 basis points. The decline in interest expense and the average interest rate paid on interest-bearing deposits was primarily due to lower deposit volume and declining interest rates in the deposit market.

Interest expense on interest-bearing deposits for the nine months ended September 30, 2011 was $8.7 million, a decrease of $5.1 million or 37.0% compared with $13.8 million for the same period in 2010. Average interest-bearing deposits for the nine months ended September 30, 2011 were $1.03 billion compared with the same period in 2010 of $1.16 billion, a decrease of $129.7 million or 11.2%. The average interest rate incurred on interest-bearing deposits for the nine months ended September 30, 2011 was 1.13% compared with 1.60% for the same period in 2010, a decrease of 47 basis points. The decline in interest expense and the average interest rate paid on interest-bearing deposits was primarily due to lower deposit volume and 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, 2011 was $327,000, a decrease of $192,000 or 37.0% from $519,000 at September 30, 2010. Interest expense on junior subordinated debentures for the nine months ended September 30, 2011 was $976,000, a decrease of $583,000 or 37.4% from $1.6 million at September 30, 2010. The decline for both periods was due to the unhedged portion of the debt converting from fixed rate to variable rate. Average junior subordinated debentures for the three and nine months ended September 30, 2011 and 2010 were $36.1 million. The average interest rate incurred on junior subordinated debentures for the three months ended September 30, 2011 and 2010 was 3.55% and 5.76%, respectively. The average interest rate incurred on junior subordinated debentures for the nine months ended September 30, 2011 and 2010 was 3.57% and 5.76%, respectively.

Interest Expense on Other Borrowings. Interest expense on other borrowings for the three months ended September 30, 2011 was $259,000, a decrease of $28,000 compared with $287,000 for the same period in 2010. Interest expense on other borrowed funds for the nine months ended September 30, 2011 was $803,000, an increase of $5,000 compared with $798,000 for the same period in 2010. 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, 2011 were $36.4 million a decrease of $20.4 million compared with $56.8 million for the same period in 2010. Other borrowings decreased primarily due to partial repayment of FHLB San Francisco advances in the second quarter of 2011. The average interest rate paid on borrowed funds for the third quarter of 2011 was 2.82% compared with 2.00% for the same quarter in 2010. Average borrowed funds for the nine months ended September 30, 2011 were $45.0 million, an increase of $1.2 million compared with $43.8 million for the same period in 2010, primarily due to an increase in FHLB San Francisco borrowings. The average interest rate paid on borrowed funds for the nine months ended September 30, 2011 was 2.39% compared with 2.44% for the same period in 2010.

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,
	2011								2010
	Average Outstanding Balance			Interest Earned/ Paid		Average Yield/ Rate(1)			Average Outstanding Balance			Interest Earned/ Paid		Average Yield/ Rate(1)
	(Dollars in thousands)
Assets
Interest-earning assets:
Loans	$	1,062,275		$	15,364		5.74	%	$	1,203,013		$	17,960	5.92	%
Taxable securities		154,764			1,025		2.63			126,875			977	3.06
Tax-exempt securities		8,310			99		4.73			10,057			117	4.62
Other investments (2)		6,650			41		2.45			8,625			57	2.62
Federal funds sold and other short-term investments		170,823			239		0.56			152,402			108	0.28
Total interest-earning assets		1,402,822			16,768		4.74			1,500,972			19,219	5.08
Allowance for loan losses		(30,718	)							(37,568	)
Total interest-earning assets, net of allowance for loan losses		1,372,104								1,463,404
Noninterest-earning assets		132,789								140,480
Total assets	$	1,504,893							$	1,603,884

Liabilities and shareholders' equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	65,145		$	36		0.22	%	$	55,481		$	65	0.46	%
Savings and money market accounts		419,541			764		0.72			461,140			1,236	1.06
Time deposits		523,484			1,857		1.41			615,808			2,863	1.84
Junior subordinated debentures		36,083			327		3.55			36,083			519	5.76
Other borrowings		36,385			259		2.82			56,791			287	2.00
Total interest-bearing liabilities		1,080,638			3,243		1.19			1,225,303			4,970	1.61
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		241,394								202,780
Other liabilities		17,466								17,680
Total liabilities		1,339,498								1,445,763

Shareholders' equity		165,395								158,121
Total liabilities and shareholders' equity	$	1,504,893							$	1,603,884

Net interest income				$	13,525							$	14,249
Net interest spread							3.55	%						3.47	%
Net interest margin							3.83	%						3.77	%

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

	For The Nine Months Ended September 30,
	2011								2010
	Average Outstanding Balance			Interest Earned/ Paid		Average Yield/ Rate(1)			Average Outstanding Balance			Interest Earned/ Paid		Average Yield/ Rate(1)
	(Dollars in thousands)
Assets
Interest-earning assets:
Loans	$	1,086,860		$	46,696		5.74	%	$	1,238,835		$	55,717	6.01	%
Taxable securities		164,262			3,413		2.78			105,514			2,590	3.28
Tax-exempt securities		8,369			296		4.73			10,160			356	4.68
Other investments (2)		6,775			125		2.47			14,489			207	1.91
Federal funds sold and other short-term investments		153,431			426		0.37			133,312			266	0.27
Total interest-earning assets		1,419,697			50,956		4.80			1,502,310			59,136	5.26
Allowance for loan losses		(32,514	)							(34,766	)
Total interest-earning assets, net of allowance for loan losses		1,387,183								1,467,544
Noninterest-earning assets		130,714								143,530
Total assets	$	1,517,897							$	1,611,074

Liabilities and shareholders' equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	61,791		$	163		0.35	%	$	55,317		$	206	0.50	%
Savings and money market accounts		413,618			2,484		0.80			464,788			4,191	1.21
Time deposits		550,591			6,057		1.47			635,628			9,410	1.98
Junior subordinated debentures		36,083			976		3.57			36,083			1,559	5.76
Other borrowings		45,008			803		2.39			43,771			798	2.44
Total interest-bearing liabilities		1,107,091			10,483		1.27			1,235,587			16,164	1.75
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		231,937								201,916
Other liabilities		16,129								16,011
Total liabilities		1,355,157								1,453,514
Shareholders' equity		162,740								157,560
Total liabilities and shareholders' equity	$	1,517,897							$	1,611,074

Net interest income				$	40,473							$	42,972
Net interest spread							3.53	%						3.51	%
Net interest margin							3.81	%						3.82	%

(1)	Annualized.
(2)	Other investments include 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, 2011 compared with the three and nine months ended September 30, 2010. 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,
	2011 vs 2010									2011 vs 2010
	Increase (Decrease)									Increase (Decrease)
	Due to									Due to
	Volume			Rate			Total			Volume			Rate			Total
	(In thousands)

Interest-earning assets:
Loans	$	(2,101	)	$	(495	)	$	(2,596	)	$	(6,835	)	$	(2,186	)	$	(9,021	)
Taxable securities		215			(167	)		48			1,442			(619	)		823
Tax-exempt securities		(20	)		2			(18	)		(63	)		3			(60	)
Other investments		(13	)		(3	)		(16	)		(110	)		28			(82	)
Federal funds sold and other short-term investments		13			118			131			40			120			160
Total decrease in interest income		(1,906	)		(545	)		(2,451	)		(5,526	)		(2,654	)		(8,180	)

Interest-bearing liabilities:
Interest-bearing demand deposits		11			(40	)		(29	)		24			(67	)		(43	)
Savings and money market accounts		(111	)		(361	)		(472	)		(461	)		(1,246	)		(1,707	)
Time deposits		(429	)		(577	)		(1,006	)		(1,259	)		(2,094	)		(3,353	)
Junior subordinated debentures		-			(192	)		(192	)		-			(583	)		(583	)
Other borrowings		(103	)		75			(28	)		23			(18	)		5
Total decrease in interest expense		(632	)		(1,095	)		(1,727	)		(1,673	)		(4,008	)		(5,681	)

Increase (decrease) in net interest income	$	(1,274	)	$	550		$	(724	)	$	(3,853	)	$	1,354		$	(2,499	)

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, 2011 was $875,000, a decrease of $3.8 million compared with $4.7 million for the same period in 2010. The provision for loan losses for the nine months ended September 30, 2011 was $2.5 million, a decrease of $12.5 million compared with $15.0 million for the same period in 2010. The decrease for the three and nine months ended September 30, 2011 was primarily due to a decrease in nonperforming assets, as well as a reduction in total loans. The allowance for loan losses as a percent of total loans was 2.83% at September 30, 2011, 2.95% at December 31, 2010, and 2.95% at September 30, 2010.

Noninterest Income. Noninterest income for the three months ended September 30, 2011 and 2010 was $1.8 million. Noninterest income for the nine months ended September 30, 2011 was $5.0 million, a decrease of $102,000 or 2.0% compared with the same period in 2010. The decrease was primarily due to a decline in service fees, partially offset by a decline in securities impairment.

Noninterest Expense. Noninterest expense for the three months ended September 30, 2011 was $11.4 million, an increase of $576,000 or 5.3% compared with the same period in 2010. The increase was mainly the result of higher other noninterest expenses, foreclosed assets expense, and salaries and employee benefits, partially offset by a decrease in the FDIC assessment. Other noninterest expense increased primarily as a result of a higher provision for unfunded commitments, and increased legal fees and consulting fees.

Noninterest expense for the nine months ended September 30, 2011 was $33.2 million, a decrease of $3.9 million or 10.4% compared with the same period in 2010. The decrease was primarily the result of lower foreclosed assets expense, a $2.0 million goodwill impairment charge that was recorded in the first quarter of 2010 and lower FDIC assessment, partially offset by an increase in other noninterest expense. Other noninterest expense increased primarily as a result of a higher provision for unfunded commitments, and increased legal fees and consulting fees.

Salaries and employee benefits expense for the three months ended September 30, 2011 was $5.2 million, an increase of $141,000 or 2.8% compared with $5.1 million for the same period in 2010. The increase was primarily due to higher bonus accrual, partially offset by a decrease in employee healthcare expenses. Salaries and employee benefits expense for the nine months ended September 30, 2011 was $15.7 million, an increase of $272,000 or 1.8% compared with $15.4 million for the same period in 2010. The increase was primarily due to higher bonus accrual, partially offset by a decrease in stock-based compensation costs.

Foreclosed assets expense for the three months ended September 30, 2011 was $1.2 million, an increase of $134,000 or 12.3% compared with $1.1 million for the same period in 2010, primarily due to an increase in writedowns on foreclosed properties. Foreclosed assets expense for the nine months ended September 30, 2011 was $2.7 million, a decrease of $2.7 million or 48.9% compared with $5.4 million for the same period in 2010. The decrease was primarily the result of a reduction in writedowns on foreclosed properties and a decline in property taxes paid on foreclosed assets.

The FDIC assessment for the three months ended September 30, 2011 was $632,000, a decrease of $249,000 or 28.3% compared with $881,000 for the same period in 2010. The FDIC assessment for the nine months ended September 30, 2011 was $2.0 million, a decrease of $455,000 or 18.4% compared with $2.5 million for the same period in 2010. The decrease for both periods resulted from a reduction in the FDIC assessment rate.

Other noninterest expense for the three months ended September 30, 2011 was $2.5 million, an increase of $536,000 or 27.7% compared with the same quarter in 2010. Other noninterest expense for the nine months ended September 30, 2011 was $7.2 million, an increase of $1.2 million or 19.8% compared with the same period in 2010. The increase for both periods was primarily due to a higher provision for unfunded commitments, legal fees and consulting fees.

The Company’s efficiency ratio is calculated by dividing total noninterest expense, excluding loan loss provisions and goodwill impairment, by net interest income plus noninterest income, excluding impairment on securities. The efficiency ratio for the three months ended September 30, 2011 was 74.39%, an increase from 67.14% for the same quarter in 2010. The increase was primarily due to increases in the provision for unfunded commitments, legal fees, consulting fees and foreclosed assets expense. The Company’s efficiency ratio for the nine months ended September 30, 2011 was 72.67%, compared with 72.34% for the same period in 2010.

Income Taxes. Income tax expense for the three months ended September 30, 2011 was $762,000, compared with income tax benefit of $186,000 for the same period in 2010. The Company’s effective tax rate was 25.14% for the three months ended September 30, 2011 compared with 41.24% for the three months ended September 30, 2010. The decrease in the effective income tax rate in 2011 as compared with 2010 was primarily the result of the effect of state income taxes. The Texas tax is based on the Company’s gross margin with limited deductions. Because the Texas tax allows only limited deductions the tax may not correlate, from year to year, with pre-tax income. Additionally, during the third quarter of 2011, the Company realized a benefit on a refund of Texas margin taxes for a contested prior period. The California tax is based on the unitary income of the consolidated group which can vary disproportionately from pre-tax income depending on the apportionment of income among members of the unitary group. Income tax expense for the nine months ended September 30, 2011 was $3.1 million, compared with income tax benefit of $1.3 million for the same period in 2010. The Company’s effective tax rate was 31.38% for the nine months ended September 30, 2011 compared with 33.24% for the nine months ended September 30, 2010. The increase in the effective income tax rate in 2011 as compared with 2010 was primarily the result of non-deductible goodwill impairment and the effect of state income taxes.

Financial Condition

Loan Portfolio. Total loans at September 30, 2011 were $1.06 billion, a decrease of $85.1 million or 7.4% compared with $1.14 billion at December 31, 2010, primarily as a result of principal reductions in conjunction with decreased demand due to weakened economic conditions in the Company’s market areas. At September 30, 2011, commercial and industrial loans, real estate mortgage loans, and real estate construction loans decreased $3.9 million, $52.9 million, and $28.4 million, respectively, compared with their respective levels at December 31, 2010. At September 30, 2011 and December 31, 2010, the ratio of total loans to total deposits was 85.31%, and 88.42%, respectively. Total loans represented 70.72% and 73.42% of total assets at September 30, 2011 and December 31, 2010, respectively.

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

	As of September 30, 2011						As of December 31, 2010
	Amount			Percent			Amount			Percent
	(Dollars in thousands)

Commercial and industrial	$	345,968			32.60	%	$	349,891			30.52	%
Real estate mortgage
Residential		39,862			3.76			38,667			3.37
Commercial		664,660			62.63			718,795			62.69
		704,522			66.39			757,462			66.06
Real estate construction
Residential		6,905			0.65			10,983			0.96
Commercial		-			0.00			24,291			2.12
		6,905			0.65			35,274			3.08
Consumer and other		3,860			0.36			3,928			0.34
Gross loans		1,061,225			100.00	%		1,146,555			100.00	%
Unearned discounts, interest and deferred fees		(2,090	)					(2,245	)
Total loans		1,059,165						1,144,310
Allowance for loan losses		(29,969	)					(33,757	)
Loans, net	$	1,029,196					$	1,110,553

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 Small Business Administration (“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. There were no sales of SBA loans for the nine months ended September 30, 2011 or 2010.

Nonperforming Assets. At September 30, 2011, total nonperforming assets consisted of $29.7 million in nonaccrual loans, $28,000 of accruing loans 90 days or more past due, $18.7 million of nonaccruing troubled debt restructurings and $23.8 million in other real estate (“ORE”). Total nonperforming assets decreased $20.6 million to $72.2 million at September 30, 2011 from $92.8 million at December 31, 2010, which consisted of a reduction of $24.1 million in Texas, partially offset by a $3.5 million increase in California.

On a linked-quarter basis, total nonperforming assets decreased by $5.0 million, which consisted of a $3.8 million decrease in Texas and a $1.2 million decrease in California. The decrease in nonperforming assets in Texas consisted primarily of declines of $8.4 million in nonaccrual loans, and $2.5 million in nonaccruing troubled debt restructurings (“TDRs”), partially offset by an increase of $7.3 million in ORE. In Texas, nonaccrual loans decreased primarily due to $6.5 million in transfers to ORE, $3.5 million from the sale of a loan, $2.9 million in loan upgrades and payoffs and $1.0 million in chargeoffs, which were partially offset by the addition of $5.7 million in loans to nonaccrual status. Nonaccruing TDRs decreased primarily due to a $2.2 million transfer to ORE in Texas. The decrease in nonperforming assets in California primarily consisted of a decrease of $1.6 million in nonaccrual loans resulting from chargedowns and transfer of a loan relationship to ORE, partially offset by the resulting increase of $744,000 in ORE.

On a linked-quarter basis, ORE increased by approximately $8.0 million compared with June 30, 2011, which included increases of $7.3 million in Texas and $744,000 in California. The increase in Texas was primarily the result of $9.0 million in foreclosures of seven properties, partially offset by $886,000 in sales of three properties and $825,000 in writedowns on three properties. The $744,000 increase in California resulted from the addition of three properties from one loan relationship, partially offset by writedowns on two properties.

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

	As of			As of
	September 30, 2011			December 31, 2010
	(Dollars in thousands)
Nonaccrual loans (1)	$	29,664		$	50,985
Accruing loans 90 days or more past due (1)		28			334
Troubled debt restructurings – accruing (1)		-			1,314
Troubled debt restructurings – nonaccruing (1)		18,660			20,198
Other real estate (“ORE”)		23,844			19,956
Total nonperforming assets	$	72,196		$	92,787

Total nonperforming assets to total assets		4.82	%		5.95	%
Total nonperforming assets to total loans and ORE		6.67	%		7.97	%

(1) Represents the unpaid principal balance.

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

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

As of September 30, 2011	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment
	(Dollars in thousands)
Impaired loans with no allowance
Commercial and industrial	$	7,632	$	7,636	$	—	$	12,537
Real estate mortgage:
Residential		261		261		—		272
Commercial		18,512		18,526		—		31,062
Real estate construction:
Residential		—		—		—		49
Commercial		—		—		—		1,301

Impaired loans with an allowance
Commercial and industrial	$	5,888	$	5,894	$	275	$	3,194
Real estate mortgage:
Residential		—		—		—		—
Commercial		15,976		16,007		749		7,676
Real estate construction:
Residential		—		—		—		—
Commercial		—		—		—		—

Total:
Commercial and industrial	$	13,520	$	13,530	$	275	$	15,731
Real estate mortgage		34,749		34,794		749		39,010
Real estate construction		—		—		—		1,350

As of December 31, 2010	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment
	(Dollars in thousands)
Impaired loans with no allowance
Commercial and industrial	$	17,940	$	18,004	$	—	$	14,385
Real estate mortgage:
Residential		286		286		—		265
Commercial		41,012		41,093		—		31,663
Real estate construction:
Residential		197		197		—		2,279
Commercial		5,205		5,213		—		6,330

Impaired loans with an allowance
Commercial and industrial		98		98		57		1,037
Real estate mortgage:
Residential		—		—		—		—
Commercial		7,581		7,606		483		13,713
Real estate construction:
Residential		—		—		—		238
Commercial		—		—		—		828

Total:
Commercial and industrial	$	18,038	$	18,102	$	57	$	15,422
Real estate mortgage		48,879		48,985		483		45,641
Real estate construction		5,402		5,410		—		9,675

Allowance for Loan Losses and Reserve for Unfunded Lending Commitments. At September 30, 2011 and 2010, the allowance for loan losses was $30.0 million and $34.6 million, respectively, or 2.83% and 2.95% of total loans, respectively. At December 31, 2010, the allowance for loan losses was $33.8 million, or 2.95% of total loans. Net charge-offs for the three months ended September 30, 2011 were $1.3 million or (0.12)% of total loans compared with net charge-offs of $6.1 million or (0.52)% of total loans for the three months ended September 30, 2010. The net charge-offs primarily consisted of $411,000 in loans from Texas and $889,000 in loans from California. Net charge-offs for the nine months ended September 30, 2011 were $6.2 million or (0.59)% of total loans compared with net charge-offs of $9.8 million or (0.83)% of total loans for the nine months ended September 30, 2010.

The allowance for loan losses provides for the risk of losses inherent in the lending process and the Company allocates the allowance for loan losses according to management’s assessments of risk inherent in the loan portfolio. The allowance for loan losses is increased by provisions charged against current earnings and is reduced by net charge-offs. Loans are charged off when they are deemed to be uncollectible in whole or in part. Recoveries are recorded when cash payments are received. 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 loan 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 loan losses that consists of four components: (1) a formula-based general reserve based on historical average losses by loan grade and grade migration, (2) specific reserves on larger individual credits that are based on the difference between the current loan balance and the loan’s collateral value, observable market price, or discounted present value, (3) a qualitative component that reflects current market conditions and other factors precedent to losses different from historical averages, and (4) a reserve for unfunded lending commitments.

In setting the qualitative reserve portion of the allowance for loan losses, the factors the Company may consider include, but are not limited to, concentrations of credit, common characteristics 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, changes in value of the collateral securing loans, results of portfolio stress tests, trends and delinquencies, nonperforming loans and changes in lending processes, procedures and personnel. After the aforementioned assessment of the loan portfolio, the general economic environment and other relevant factors, management determines the appropriate allowance for loan loss level and makes the provision necessary to achieve that level. This methodology is consistently followed so that the level of the allowance for loan losses is reevaluated in response to changes in circumstances, economic conditions or other factors on an ongoing basis.

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,
	2011			2010
	(Dollars in thousands)
Average total loans outstanding for the period	$	1,062,275		$	1,203,013

Total loans outstanding at end of period	$	1,059,165		$	1,173,567

Allowance for loan losses at beginning of period	$	30,393		$	36,004
Provision for loan losses		875			4,700
Charge-offs:
Commercial and industrial		(597	)		(1,191	)
Real estate mortgage		(1,350	)		(4,451	)
Real estate construction		—			(444	)
Consumer and other		(18	)		(29	)

Total charge-offs		(1,965	)		(6,115	)

Recoveries:
Commercial and industrial		261			27
Real estate mortgage		395			—
Real estate construction		6			21
Consumer and other		4			7

Total recoveries		666			55

Net charge-offs		(1,299	)		(6,060	)

Allowance for loan losses at end of period		29,969			34,644

Reserve for unfunded lending commitments at beginning of period		1,093			822
Provision for unfunded lending commitments		81			(110	)

Reserve for unfunded lending commitments at end of period		1,174			712

Allowance for credit losses at end of period	$	31,143		$	35,356
	��
Ratio of net charge-offs to end of period total loans		(0.12)	%		(0.52)	%

	As of and for the Nine Months Ended September 30,
	2011			2010
	(Dollars in thousands)
Average total loans outstanding for the period	$	1,086,860		$	1,238,835

Total loans outstanding at end of period	$	1,059,165		$	1,173,567

Allowance for loan losses at beginning of period	$	33,757		$	29,403
Provision for loan losses		2,450			15,028
Charge-offs:
Commercial and industrial		(3,222	)		(2,189	)
Real estate mortgage		(4,673	)		(6,578	)
Real estate construction		—			(1,438	)
Consumer and other		(49	)		(195	)

Total charge-offs		(7,944	)		(10,400	)

Recoveries:
Commercial and industrial		496			418
Real estate mortgage		460			149
Real estate construction		722			21
Consumer and other		28			25

Total recoveries		1,706			613

Net charge-offs		(6,238	)		(9,787	)

Allowance for loan losses at end of period		29,969			34,644

Reserve for unfunded lending commitments at beginning of period		602			1,043
Provision for unfunded lending commitments		572			(331	)

Reserve for unfunded lending commitments at end of period		1,174			712

Allowance for credit losses at end of period	$	31,143		$	35,356

Ratio of allowance for loan losses to end of period total loans		2.83	%		2.95	%
Ratio of net charge-offs to end of period total loans		(0.59	)%		(0.83	)%
Ratio of allowance for loan losses to end of period total nonperforming loans (1)		61.98	%		49.90	%

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

Securities. At September 30, 2011, the available-for-sale securities portfolio was $149.6 million, a decrease of $26.1 million or 14.8% compared with $175.7 million at December 31, 2010. The decrease was primarily due to calls of U.S. government corporations and agencies securities, partially offset by purchases of government issued or guaranteed mortgage-backed and agency securities. At September 30, 2011 and December 31, 2010, the held-to-maturity portfolio remained at $4.0 million. The securities portfolio is primarily comprised of obligations of U.S. Treasury and other U.S. government corporations and agencies, mortgage-backed securities, collateralized mortgage obligations, 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 Federal Reserve Bank (“FRB”) and FHLB stock and the investment in subsidiary trust were $6.6 million at September 30, 2011, a decrease of $331,000 or 4.8% compared with $6.9 million at December 31, 2010.

Deposits. At September 30, 2011, total deposits were $1.24 billion, a decrease of $52.7 million or 4.1% compared with $1.29 billion at December 31, 2010. The Company’s ratio of noninterest-bearing demand deposits to total deposits at September 30, 2011 and December 31, 2010 was 20.25% and 17.24%, respectively. Interest-bearing deposits at September 30, 2011 were $990.1 million, a decrease of $80.9 million or 7.6% compared with $1.07 billion at December 31, 2010.

The Company relies primarily on its deposit base to fund its lending and investment activities. Historically, the Company has from time to time used brokered deposits when they represented a cost-effective funding alternative. However, as a result of the Agreement between MetroBank and the OCC and the Order issued by the FDIC and CDFI to Metro United, neither Metro United nor MetroBank can acquire, accept, renew or roll over brokered deposits without the prior approval of their respective regulators. At September 30, 2011, brokered deposits, not including CDARS (Promontory Interfinancial Network LLC’s Certificate of Deposit Account Registry Service), were 2.6% of the Company's total deposits and had an average maturity date of March 2013.

Junior Subordinated Debentures. Junior subordinated debentures at September 30, 2011 and December 31, 2010 were $36.1 million. The junior subordinated debentures accrued interest at a fixed rate of 5.7625% until December 15, 2010, at which time the debentures began accruing 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. Related to these debentures, the Company entered into a forward-starting interest rate swap contract, with the objective of protecting a portion of the quarterly interest payments from the risk of variability resulting from changes in the three-month LIBOR interest rate. Under the swap, in December 2010, the Company began paying a fixed interest rate of 5.38% and receiving 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 that began in March 2011. See Note 10, “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, 2011 were $36.4 million, a decrease of $20.4 million or 35.9% compared with other borrowings of $56.8 million at December 31, 2010. Other borrowings decreased primarily due to partial repayment of advances from the FHLB San Francisco. Other borrowings at September 30, 2011 consisted of $10.0 million of advances from the FHLB of San Francisco, $25.0 million in security repurchase agreements, $1.0 million in debentures and $416,000 in Federal Reserve Treasury, Tax & Loan (“TT&L”). The FHLB advance bears an interest rate of 0.35% and matures in October 2011. 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. The securities collateralizing the repurchase agreements are currently puttable by the counterparty at a fixed repurchase price at the end of each calendar quarter. In addition, securities under one repurchase agreement are puttable by either the counterparty or the Company at the replacement cost of the repurchase transaction at the end of each calendar year commencing on December 31, 2011.

In February 2010, the Company issued an unsecured debenture to each of the Company's Chairman of the Board and an affiliate of one of the Company's 5.0% or more shareholders. Each debenture was issued for a principal amount of $500,000. The debentures, as amended, mature February 10, 2012 and bear interest on the principal amount at a fixed rate per annum equal to 5.0% due quarterly beginning March 31, 2010.

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, 2011			As of and for the Year Ended December 31, 2010
	(Dollars in thousands)
Federal Funds Purchased:
at end of period	$	–		$	–
average during the period		–			2
maximum month-end balance during the period		–			–
Interest rate at end of period		–	%		–	%
Interest rate during the period		–			0.73

FHLB Notes and Advances:
At end of period	$	10,000		$	30,000
average during the period		18,498			20,466
maximum month-end balance during the period		30,000			30,000
Interest rate at end of period		0.35	%		0.49	%
Interest rate during the period		0.45			0.49

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			3.71

Unsecured debentures:
at end of period	$	1,000		$	1,000
average during the period		1,000			889
maximum month-end balance during the period		1,000			1,000
Interest rate at end of period		5.00	%		5.00	%
Interest rate during the period		5.00			5.00

Federal Reserve TT&L:
At end of period	$	416		$	804
average during the period		510			660
maximum month-end balance during the period		742			1,075

Liquidity. The Company’s loan to deposit ratio at September 30, 2011 and 2010 was 85.31% and 90.28%, respectively. As of September 30, 2011, the Company had commitments to fund loans in the amount of $74.7 million. At this same date, the Company had stand-by letters of credit of $15.2 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 $414.6 million from the FHLBs, $10.2 million from the FRB discount window and $5.0 million from other correspondent banks.

Capital Resources. Shareholders’ equity at September 30, 2011 was $165.7 million compared with $158.8 million at December 31, 2010, an increase of $6.9 million or 4.4%. The increase was primarily the result of net income for the nine months ended September 30, 2011 and an increase in other comprehensive income, partially offset by dividends paid on preferred stock.

The Company’s Board of Directors elected to suspend its common stock dividend indefinitely in April 2009 and to defer the dividend on the Series A Preferred Stock for the second quarter of 2010. The Board of Directors of the Company later elected to resume payment of dividends on the Series A Preferred Stock for the third quarter of 2010, and in the third quarter of 2011 paid the dividend that was deferred from the second quarter of 2010. The payment of future dividends paid by the Company will be made at the discretion of the Company's Board of Directors and will be subject to any regulatory restrictions imposed by the Federal Reserve Board. Additionally, future determination of dividends will depend on a number of factors, including but not limited to current and prospective earnings, capital requirements, financial condition, and other factors that the Board of Directors may deem relevant to the Company and its subsidiary banks.

As a result of the Order, by December 31, 2010, Metro United was required to achieve and maintain its leverage ratio at 9.0% and its total risk-based capital ratio at 13.0%. Due to the capital requirement within Metro United's Consent Order, Metro United cannot be considered to be any better than "adequately capitalized" for capital adequacy purposes even if it exceeds the capital levels set forth in the Order.

	Minimum Required For Capital Adequacy Purposes			To Be Categorized as Well Capitalized Under Prompt Corrective Action Provisions		Actual Ratio At September 30, 2011
The Company
Leverage ratio	4.00	%	(1)	N/A	%		12.03	%
Tier 1 risk-based capital ratio	4.00			N/A			15.65
Risk-based capital ratio	8.00			N/A			16.93
MetroBank
Leverage ratio	4.00	%	(2)	5.00	%		11.42	%
Tier 1 risk-based capital ratio	4.00			6.00			15.05
Risk-based capital ratio	8.00			10.00			16.33
Metro United
Leverage ratio	4.00	%	(3)	5.00	%		11.75	%
Tier 1 risk-based capital ratio	4.00			6.00			14.88
Risk-based capital ratio	8.00			10.00			16.15

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

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

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

Critical Accounting Estimates

The Company has established various accounting estimates which govern the application of U.S. generally accepted accounting principles 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”.

Impairment of Goodwill. The Company believes impairment of 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.

The Company also considered the fair value of Metro United in relationship to the Company’s stock price and performed 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, MetroBank 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 shareholder's equity as a percentage of total shareholders' equity

In determining the fair value of Metro United, the Company uses a review of the valuation of recent guideline bank acquisitions as well as a 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. For the discounted cash flow analysis, financial forecasts were developed by projecting operations for the next five years and discounting the average terminal values based on the valuation multiples listed in the previous paragraph in a normalized market. The financial forecasts considered several key business drivers such as anticipated loan and deposit growth, forward interest rates, historical performance, and industry and economic trends, among other considerations. 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) were evaluated to assess whether goodwill was impaired.

The derived fair value of Metro United was then compared with the carrying value of its equity. If the carrying value of its equity exceeded the fair value at the evaluation date, the step-one impairment test failed and the Company will perform the step-two analysis to derive the implied fair value of goodwill.

Under the step-two analysis, the implied fair value of goodwill is determined in the same manner as goodwill is recognized in a business combination. The fair value of Metro United’s assets and liabilities, including previously unrecognized intangible assets, is individually determined. The excess between the fair value of Metro United over the fair value of its net assets is the implied goodwill.

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.

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 to sell and whether or not it is 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 an other-than-temporary impairment exists and the Company does not intend to sell the security or if it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, the impairment is separated into the amount that is credit-related and the amount due to all other factors. The credit-related impairment is recognized in 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” to the Condensed Consolidated Financial Statements 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.

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 12, “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.

Income Taxes. The Company must make estimates and judgments in determining income tax expense for financial statement purposes. The estimates and judgments occur in the calculation of tax credits, benefits, and deductions, in the calculation of certain tax assets and liabilities that arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. Significant changes in these estimates may result in an increase or decrease to the Company’s tax provision in a subsequent period.

The Company must assess the likelihood that it will be able to recover its deferred tax assets. If recovery is not likely, it must increase the provision for taxes by recording a valuation allowance against the deferred tax assets that it estimates will not ultimately be recoverable. The Company believes that it will ultimately recover the deferred tax assets recorded in its consolidated balance sheets. However, should there be a change in the Company’s ability to recover its deferred tax assets, the tax provision would increase in the period in which it has determined that the recovery was not likely.

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, 2010. 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.

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, results of operations or cash flows.

Item 1A. Risk Factors.

There have been no material changes in the risk factors previously described under "Item 1A. Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission on March 15, 2011.

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

Not applicable

Item 3. Defaults Upon Senior Securities.

Not applicable

Item 4. [Removed and Reserved]

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 5 to the unaudited Condensed Consolidated Financial Statements of this Form 10-Q.
31.1*		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2*		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1**		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*		Interactive Data File.

* 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 10, 2011		George M. Lee Executive Vice Chairman, President and
		Chief Executive Officer (principal executive officer)


Date: November 10, 2011	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 5 to the unaudited Condensed Consolidated Financial Statements of this Form 10-Q.
31.1*		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2*		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1**		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*		Interactive Data File.

* Filed herewith.

** Furnished herewith.

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

MetroCorp Bancshares Inactive 10-Q2011 Q3 Quarterly report

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