MetroCorp Bancshares 10-Q 2013 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2013
☐	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 ☑     No ☐

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

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

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

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

As of August 1, 2013, the number of outstanding shares of Common Stock was 18,700,028.

1

PART I

FINANCIAL INFORMATION

Item 1.Financial Statements.

METROCORP BANCSHARES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

	June 30, 2013			December 31, 2012
ASSETS
Cash and due from banks	$	21,237		$	31,203
Federal funds sold and other short-term investments		105,331			128,246
Total cash and cash equivalents		126,568			159,449
Interest-bearing time deposits in banks		15,501			15,321
Securities available-for-sale, at fair value		146,459			119,422
Securities available-for-sale pledged with creditors’ right to repledge, at fair value		37,105			44,626
Total securities available-for-sale		183,564			164,048
Securities held-to-maturity (fair value $4,445 and $4,757 at June 30, 2013 and December 31, 2012, respectively)		4,047			4,046
Other investments		6,001			5,592
Loans, net of allowance for loan losses of $21,832 and $24,592 at June 30, 2013 and December 31, 2012, respectively		1,156,456			1,075,745
Accrued interest receivable		4,316			4,120
Premises and equipment, net		3,878			4,046
Goodwill		14,327			14,327
Deferred tax asset, net		15,089			13,110
Customers' liability on acceptances		7,797			7,045
Foreclosed assets, net		10,960			12,555
Cash value of bank owned life insurance		33,431			32,794
Prepaid FDIC assessment		—			3,439
Other assets		3,851			4,175
Total assets	$	1,585,786		$	1,519,812
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing	$	322,504		$	309,696
Interest-bearing		983,659			957,334
Total deposits		1,306,163			1,267,030
Junior subordinated debentures		36,083			36,083
Other borrowings		46,000			25,000
Accrued interest payable		283			233
Acceptances outstanding		7,797			7,045
Other liabilities		11,740			7,390
Total liabilities		1,408,066			1,342,781
Commitments and contingencies		—			—
Shareholders' equity:
Common stock, $1.00 par value, 50,000,000 shares authorized; 18,776,765 and 18,766,765 shares issued and 18,713,530 and 18,746,385 shares outstanding at June 30, 2013 and December 31, 2012, respectively		18,777			18,767
Additional paid-in-capital		75,140			74,998
Retained earnings		88,330			82,881
Accumulated other comprehensive (loss) income		(3,915	)		567
Treasury stock, at cost, 63,235 and 20,380 shares at June 30, 2013 and December 31, 2012, respectively		(612	)		(182	)
Total shareholders' equity		177,720			177,031
Total liabilities and shareholders' equity	$	1,585,786		$	1,519,812

See accompanying notes to condensed consolidated financial statements.

2

METROCORP BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2013			2012			2013			2012
Interest income:
Loans	$	14,006		$	14,754		$	27,835		$	29,753
Securities:
Taxable		847			1,004			1,638			2,031
Tax-exempt		166			145			313			262
Other investments		64			44			114			87
Federal funds sold and other short-term investments (1)		192			234			392			446
Total interest income		15,275			16,181			30,292			32,579
Interest expense:
Time deposits		1,316			1,370			2,535			2,906
Demand and savings deposits		389			586			816			1,221
Junior subordinated debentures		329			333			645			669
Other borrowings		260			247			493			494
Total interest expense		2,294			2,536			4,489			5,290
Net interest income		12,981			13,645			25,803			27,289
(Reduction in) provision for loan losses		(25	)		200			(475	)		600
Net interest income after provision for loan losses		13,006			13,445			26,278			26,689
Noninterest income:
Service fees		1,002			1,131			1,911			2,248
Loan-related fees		169			117			299			187
Letters of credit commissions and fees		175			190			374			387
Gain on securities, net		23			72			37			84
Total other-than-temporary impairments (“OTTI”) on securities		(53	)		(48	)		(93	)		(87	)
Less: Noncredit portion of OTTI		(14	)		(10	)		(27	)		(10	)
Net impairments on securities		(39	)		(38	)		(66	)		(77	)
Gain on sale of loans		71		–				71		–
Other noninterest income		543			288			968			734
Total noninterest income		1,944			1,760			3,594			3,563
Noninterest expense:
Salaries and employee benefits		5,933			5,997			12,225			11,918
Occupancy and equipment		1,678			1,743			3,328			3,432
Foreclosed assets, net		82			362			(759	)		1,363
FDIC assessment		517			485			977			882
Other noninterest expense		2,498			2,725			5,239			4,650
Total noninterest expense		10,708			11,312			21,010			22,245
Income before provision for income taxes		4,242			3,893			8,862			8,007
Provision for income taxes		1,446			1,267			3,039			2,613
Net income	$	2,796		$	2,626		$	5,823		$	5,394
Dividends and discount – preferred stock	–				(811	)	–				(1,409	)
One-time adjustment from repurchase of preferred stock	–				706		–				706
Net income available to common shareholders	$	2,796		$	2,521		$	5,823		$	4,691
Earnings per common share:
Basic	$	0.15		$	0.16		$	0.32		$	0.33
Diluted	$	0.15		$	0.16		$	0.31		$	0.32
Weighted average shares outstanding:
Basic		18,366			15,493			18,349			14,331
Diluted		18,713			15,753			18,713			14,497
Dividends per common share	$	0.02		–			$	0.02		–

__________________

(1) Includes interest-bearing time deposits in banks

See accompanying notes to condensed consolidated financial statements.

3

METROCORP BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In thousands)

(Unaudited)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2013			2012			2013			2012
Net income	$	2,796		$	2,626		$	5,823		$	5,394
Other comprehensive income, net of taxes:
Change in accumulated gain (loss) on effective cash flow hedging derivatives		135			(9	)		231			34
Unrealized loss on investment securities, net:
Securities with OTTI charges during the period		(34	)		(31	)		(59	)		(56	)
Less: OTTI charges recognized in net income		(24	)		(25	)		(41	)		(50	)
Net unrealized losses on investment securities with OTTI		(10	)		(6	)		(18	)		(6	)
Unrealized holding (loss) gain arising during the period		(4,246	)		482			(4,671	)		503
Less: reclassification adjustment for gain included in net income		15			46			24			54
Net unrealized (losses) gains on investment securities		(4,261	)		436			(4,695	)		449
Other comprehensive (loss) income, net of taxes		(4,136	)		421			(4,482	)		477
Total comprehensive (loss) income	$	(1,340	)	$	3,047		$	1,341		$	5,871

See accompanying notes to condensed consolidated financial statements.

4

METROCORP BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Six Months Ended June 30, 2013

(In thousands)

(Unaudited)

	Common Stock				Additional paid-in		Retained			Accumulated other comprehensive income			Treasury Stock at
	Shares		At par		capital		earnings			(loss)			cost			Total
Balance at December 31, 2012		18,767	$	18,767	$	74,998	$	82,881		$	567		$	(182	)	$	177,031
Issuance of common stock		10		10		94	–			–			–				104
Repurchase of common stock	–		–		–		–			–				(430	)		(430	)
Stock-based compensation expense related to stock options recognized in earnings	–		–			48	–			–			–				48
Net income	–		–		–			5,823		–			–				5,823
Other comprehensive loss	–		–		–		–				(4,482	)	–				(4,482	)
Dividends – common stock ($0.02 per share)	–		–		–			(374	)	–			–				(374	)
Balance at June 30, 2013		18,777	$	18,777	$	75,140	$	88,330		$	(3,915	)	$	(612	)	$	177,720

See accompanying notes to condensed consolidated financial statements.

5

METROCORP BANCSHARES, INC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	For the Six Months Ended June 30,
	2013			2012
Cash flows from operating activities:
Net income	$	5,823		$	5,394
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		463			543
(Reduction in) provision for loan losses		(475	)		600
Impairment on securities		66			77
Gain on securities transactions, net		(37	)		(84	)
(Gain) loss on writedown and sale of foreclosed assets		(1,047	)		525
Gain on sale of premises and equipment		(1	)		—
Gain on sale of loans		(71	)		—
Amortization of premiums and discounts on securities, net		377			276
Amortization of deferred loan fees and discounts		(579	)		(545	)
Amortization of core deposit intangibles		19			28
Stock-based compensation		48			38
Changes in:
Accrued interest receivable		(196	)		(84	)
Other assets		3,481			(2,172	)
Accrued interest payable		50			(49	)
Preferred stock repurchase payable		—			42,941
Other liabilities		4,206			673
Net cash provided by operating activities		12,127			48,161
Cash flows from investing activities:
Net change in interest-bearing deposits in banks		(180	)		—
Purchases of securities available-for-sale		(42,650	)		(47,072	)
Purchases of other investments		(649	)		(1	)
Proceeds from maturities, calls, and principal paydowns of securities available-for-sale		15,516			51,206
Proceeds from sales and maturities of other investments		60			604
Net change in loans		(86,265	)		(56,481	)
Proceeds from sale of foreclosed assets		9,321			9,878
Purchases of premises and equipment		(294	)		(188	)
Net cash used in investing activities		(105,141	)		(42,054	)
Cash flows from financing activities:
Net change in:
Deposits		39,133			7,895
Other borrowings		21,000			(315	)
Proceeds from issuance of common stock		—			45,247
Repurchase of common stock		—			(125	)
Repurchase of preferred stock		—			(43,034	)
Cash dividends paid on preferred stock		—			(1,125	)
Net cash provided by financing activities		60,133			8,543
Net (decrease) increase in cash and cash equivalents		(32,881	)		14,650
Cash and cash equivalents at beginning of period		159,449			193,609
Cash and cash equivalents at end of period	$	126,568		$	208,259
Supplemental information:
Interest paid	$	4,440		$	5,339
Income taxes paid		900			2,144
Noncash investing and financing activities:
Issuance of common stock – restricted shares		104			2,302
Foreclosed assets acquired		6,679			5,799
Loans originated to finance foreclosed assets		6,120			4,071

See accompanying notes to condensed consolidated financial statements.

6

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 June 30, 2013, results of operations for the three and six months ended June 30, 2013 and 2012, and cash flows for the six months ended June 30, 2013 and 2012. Interim period results are not necessarily indicative of results for a full year period. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. generally accepted accounting principles.

Certain items in prior financial statements have been reclassified to conform to the 2013 presentation, with no impact on the balance sheet, net income, shareholders’ equity or cash flows.

These unaudited 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, 2012.

7

2.     SECURITIES

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

	As of June 30, 2013
	Amortized		Unrealized								Fair
	Cost		Gains		Losses			OTTI			Value
	(Dollars in thousands)
Securities available-for-sale
Debt securities
U.S. Treasury and other U.S. government sponsored enterprises and agencies	$	91,382	$	18	$	(3,773	)	$	-		$	87,627
Obligations of state and political subdivisions		18,661		176		(844	)		-			17,993
Corporate		6,068		193		-			-			6,261
Mortgage-backed securities and collateralized mortgage obligations
Government issued or guaranteed		57,101		682		(859	)		-			56,924
Privately issued residential		639		349		(1	)		(317	)		670
Asset backed securities		164		145		-			(162	)		147
Equity Securities
Community Reinvestment Act (“CRA”) funds		14,278		-		(336	)		-			13,942
Total available-for-sale securities	$	188,293	$	1,563	$	(5,813	)	$	(479	)	$	183,564
Securities held-to-maturity
Obligations of state and political subdivisions	$	4,047	$	398	$	-		$	-		$	4,445
Total held-to-maturity securities	$	4,047	$	398	$	-		$	-		$	4,445
Other investments
Federal Home Loan Bank (“FHLB”)(1)/Federal Reserve Bank stock (2)	$	4,918	$	-	$	-		$	-		$	4,918
Investment in subsidiary trust (3)		1,083		-		-			-			1,083
Total other investments	$	6,001	$	-	$	-		$	-		$	6,001

8

	As of December 31, 2012
	Amortized		Unrealized								Fair
	Cost		Gains		Losses			OTTI			Value
Securities available-for-sale
Debt securities
U.S. Treasury and other U.S. government sponsored enterprises and agencies	$	70,892	$	362	$	(73	)	$	—		$	71,181
Obligations of state and political subdivisions		12,810		579		—			—			13,389
Corporate		6,080		270		—			—			6,350
Mortgage-backed securities and collateralized mortgage obligations:
Government issued or guaranteed		56,572		1,369		—			—			57,941
Privately issued residential		718		330		—			(365	)		683
Asset backed securities		187		129		—			(173	)		143
Equity securities
Investment in CRA funds		14,128		233		—			—			14,361
Total available-for-sale securities	$	161,387	$	3,272	$	(73	)	$	(538	)	$	164,048
Securities held-to-maturity
Obligations of state and political subdivisions	$	4,046	$	711	$	—		$	—		$	4,757
Total held-to-maturity securities	$	4,046	$	711	$	—		$	—		$	4,757
Other investments
FHLB (1)/Federal Reserve Bank (2) stock		4,509		—		—			—			4,509
Investment in subsidiary trust (3)		1,083		—		—			—			1,083
Total other investments	$	5,592	$	—	$	—		$	—		$	5,592

_____________________ 

(1)	FHLB stock held by the Banks is subject to certain restrictions under a credit policy of the FHLB dated May 1, 1997. Redemption of FHLB stock is dependent upon repayment of borrowings, if any, from the FHLB.
(2)	Federal Reserve Bank stock held by MetroBank is subject to certain restrictions under Federal Reserve Bank Policy.
(3)	The Company’s ownership of common securities of MCBI Trust I is carried at cost.

9

The following table displays the fair value and gross unrealized losses on securities available-for-sale as of June 30, 2013 and December 31, 2012 for which other-than-temporary impairments (“OTTI”) has 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 June 30, 2013 or December 31, 2012.

	As of June 30, 2013
	Less Than 12 Months					Greater Than 12 Months				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in thousands)
Securities available-for-sale
U.S. Treasury and other U.S. government sponsored enterprises and agencies	$	82,617	$	(3,773	)	$	—	$	—	$	82,617	$	(3,773	)
Obligations of state and political subdivisions		14,289		(844	)		—		—		14,289		(844	)
Mortgage-backed securities and collateralized mortgage obligations
Government issued or guaranteed		31,360		(859	)		—		—		31,360		(859	)
Asset backed securities		64		(1	)						64		(1	)
CRA funds		13,941		(336	)						13,941		(336	)
Total securities	$	142,271	$	(5,813	)	$	—	$	—	$	142,271	$	(5,813	)

	As of December 31, 2012
	Less Than 12 Months					Greater Than 12 Months				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in thousands)
Securities available-for-sale
U.S. Treasury and other U.S. government sponsored enterprises and agencies	$	9,921	$	(73	)	$	—	$	—	$	9,921	$	(73	)
Mortgage-backed securities and collateralized mortgage obligations
Privately issued residential		—		—			72		—		72		—
Total securities	$	9,921	$	(73	)	$	72	$	—	$	9,993	$	(73	)

As of June 30, 2013, management did not have the intent to sell any of the securities classified as available-for-sale in unrealized loss positions 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. However, if strategic opportunities arise, the Company may consider selling selected securities.  Any unrealized losses on such selected securities would be charged to earnings.

The unrealized losses are largely due to increases in the market interest rates over the yields available at the time the underlying securities were purchased. 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 any of the unrealized losses above are due to credit quality. Accordingly, management believes the $5.8 million of unrealized losses as of June 30, 2013 is temporary and as of June 30, 2013 represents unrealized losses for which an impairment has been recognized in other comprehensive loss.

10

Other-Than-Temporary Impairments (OTTI)

The following table presents a rollforward for the three and six months ended June 30, 2013, of the credit loss component of OTTI losses that have been recognized in earnings related to debt securities that the Company does not intend to sell.

	Impairment related to credit losses
	Three months ended June 30, 2013		Six months ended June 30, 2013
	(In thousands)
Credit losses at beginning of period	$	1,732	$	1,716
Transfers from accumulated other comprehensive income (loss) to OTTI related to credit losses		16		32
Credit losses at end of period	$	1,748	$	1,748

For the six months ended June 30, 2013, credit-related losses of $21,000 on three non-agency residential mortgage-backed securities and $11,000 on one asset-backed security were recognized. There were no credit-related impairments included in accumulated other comprehensive income (loss) for the three or six months ended June 30, 2013.

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 income (loss).

Other Securities Information

 There were no sales of available-for-sale securities or sales or transfers of held-to-maturity securities for the six months ended June 30, 2013 or 2012.

At June 30, 2013, future contractual maturities of debt securities were as follows (in thousands):

	Securities Available-for-sale				Securities Held-to-maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Within one year	$	701	$	702	$	—	$	—
Within two to five years		22,556		22,460		—		—
Within six to ten years		75,677		72,283		—		—
After ten years		17,341		16,583		4,047		4,445
Mortgage-backed securities and collateralized mortgage obligations		57,740		57,594		—		—
Total debt securities	$	174,015	$	169,622	$	4,047	$	4,445

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

11

3.     LOANS

The loan portfolio is classified by major type as follows:

	As of June 30, 2013						As of December 31, 2012
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
Commercial and industrial	$	438,529			37.13	%	$	383,641			34.78	%
Real estate mortgage
Residential		36,730			3.11			36,807			3.34
Commercial		695,210			58.88			665,244			60.32
		731,940			61.99			702,051			63.66
Real estate construction
Residential		2,016			0.17			2,420			0.22
Commercial		2,712			0.23			7,284			0.66
		4,728			0.40			9,704			0.88
Consumer and other		5,623			0.48			7,531			0.68
Gross loans		1,180,820			100.00	%		1,102,927			100.00	%
Unearned discounts, interest and deferred fees		(2,532	)					(2,590	)
Total loans		1,178,288						1,100,337
Allowance for loan losses		(21,832	)					(24,592	)
Loans, net	$	1,156,456					$	1,075,745

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 a previous direct write-down of the loan.

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

June 30, 2013	Gross Loan Balance		Deferred Loan Fees			Accrued Interest Receivable		Recorded Investment in Loans
Commercial and industrial	$	438,529	$	(846	)	$	1,155	$	438,838
Real estate mortgage		731,940		(1,445	)		2,060		732,555
Real estate construction		4,728		(81	)		18		4,665
Consumer and other		5,623		(160	)		16		5,479
Total	$	1,180,820	$	(2,532	)	$	3,249	$	1,181,537

December 31, 2012	Gross Loan Balance		Deferred Loan Fees			Accrued Interest Receivable		Recorded Investment in Loans
Commercial and industrial	$	383,641	$	(814	)	$	1,078	$	383,905
Real estate mortgage		702,051		(1,595	)		2,024		702,480
Real estate construction		9,704		(30	)		18		9,692
Consumer and other		7,531		(151	)		21		7,401
Total	$	1,102,927	$	(2,590	)	$	3,141	$	1,103,478

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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 timely identify changes in asset quality 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 limit. MetroBank generally does not make loans larger than $13 million to one borrower and Metro United generally does not make loans larger than $8 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 Lending Officer, Chief Credit Officer, the Loan Committee or the Director’s Loan Committee based on the size of the loan relationship and its risk rating. Loans originated by Metro United are approved by the Management Credit Committee or Director’s Credit Committee except for certain consumer loans, which are approved under individual authority. Control systems and procedures are in place to ensure all loans are approved in accordance with credit policies.

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.  

13

Consumer Loans. The Company, through its subsidiary Metro United, offers a 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 involve 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 is the responsibility of the Loan Review/Compliance Officer. Differences of opinion are resolved among the Loan Officer, Loan Review/Compliance Officer and the Chief Credit Officer. See “Allowance for Loan Losses and Reserve for Unfunded Lending Commitments” for additional discussion on loan grades.

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

In addition, the Company reviews the real estate values, and when necessary, orders new appraisals 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 June 30, 2013	Commercial and industrial		Real estate mortgage		Real estate construction		Consumer and other		Total
Grade:
1-6 - “Pass”	$	424,013	$	664,222	$	4,665	$	5,479	$	1,098,379
7 - “Special Mention”/ “Watch”		2,900		21,786		—		—		24,686
8 - “Substandard”		11,925		46,547		—		—		58,472
9 -“Doubtful"		—		—		—		—		—
Total	$	438,838	$	732,555	$	4,665	$	5,479	$	1,181,537

14

As of December 31, 2012	Commercial and industrial		Real estate mortgage		Real estate construction		Consumer and other		Total
Grade:
1-6 - “Pass”	$	366,571	$	611,159	$	5,163	$	7,401	$	990,294
7 - “Special Mention”/ “Watch”		4,393		14,593		—		—		18,986
8 - “Substandard”		12,941		76,728		4,529		—		94,198
9 -“Doubtful"		—		—		—		—		—
Total	$	383,905	$	702,480	$	9,692	$	7,401	$	1,103,478

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.

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 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.

The Company requires that nonperforming assets be monitored by the special assets department or senior lenders for MetroBank, and by 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.

15

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

As of June 30, 2013	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	$	4,266	$	4,442	$	1,410	$	10,118	$	428,720	$	438,838	$	—
Real estate mortgage:
Residential		71		—		133		204		36,609		36,813		—
Commercial		19,687		1,974		8,994		30,655		665,087		695,742		—
Real estate construction:
Residential		—		—		—		—		2,007		2,007		—
Commercial		—		—		—		—		2,658		2,658		—
Consumer and other		12		9		—		21		5,458		5,479		—
Total	$	24,036	$	6,425	$	10,537	$	40,998	$	1,140,539	$	1,181,537	$	—

As of December 31, 2012	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	$	2,233	$	817	$	1,308	$	4,358	$	379,547	$	383,905	$	—
Real estate mortgage:
Residential		—		—		239		239		36,667		36,906		—
Commercial		114		3,817		18,141		22,072		643,502		665,574		—
Real estate construction:
Residential		—		—		1,426		1,426		984		2,410		—
Commercial		150		—		3,103		3,253		4,029		7,282		—
Consumer and other		—		—		—		—		7,401		7,401		—
Total	$	2,497	$	4,634	$	24,217	$	31,348	$	1,072,130	$	1,103,478	$	—

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	June 30, 2013		December 31, 2012
Commercial and industrial	$	1,680	$	1,308
Real estate mortgage:
Residential		816		239
Commercial		13,668		22,501
Real estate construction:
Residential		—		1,426
Commercial		—		3,103
Total	$	16,164	$	28,577

16

             Information on impaired loans, which includes nonaccrual loans and troubled debt restructurings, and the related specific allowance for loan losses on such loans at June 30, 2013 and December 31, 2012, is presented below (in thousands):

As of June 30, 2013	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment
Impaired loans with no allowance
Commercial and industrial	$	839	$	839	$	—	$	2,511
Real estate mortgage:
Residential		816		813		—		345
Commercial		13,378		13,391		—		16,594
Real estate construction:
Residential		—		—		—		1,299
Commercial		—		—		—		2,339
Impaired loans with an allowance
Commercial and industrial	$	841	$	841	$	464	$	221
Real estate mortgage:
Commercial		684		685		191		3,548
Total:
Commercial and industrial	$	1,680	$	1,680	$	464	$	2,732
Real estate mortgage		14,878		14,889		191		20,487
Real estate construction		—		—		—		3,638

As of December 31, 2012	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment
Impaired loans with no allowance
Commercial and industrial	$	1,287	$	1,289	$	—	$	5,162
Real estate mortgage:
Residential		239		239		—		213
Commercial		18,369		18,369		—		19,732
Real estate construction:
Residential		1,426		1,426		—		1,529
Commercial		3,103		3,103		—		3,171
Impaired loans with an allowance
Commercial and industrial	$	21	$	21	$	21	$	1,434
Real estate mortgage:
Commercial		4,533		4,535		503		6,836
Total:
Commercial and industrial	$	1,308	$	1,310	$	21	$	6,596
Real estate mortgage		23,141		23,143		503		26,781
Real estate construction		4,529		4,529		—		4,700

17

For the six months ended June 30, 2013 and 2012, interest income of $11,000 and $93,000 was recognized on impaired loans, which consisted of nonaccrual loans that were paid in full and accruing troubled debt restructurings (“TDRs”). 

Troubled Debt Restructurings

Loans are classified as a TDR 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.

As of June 30, 2013, there were no commitments to lend additional funds on loans that were modified as TDRs.   As of June 30, 2013, there were no defaults on any loans that were modified as TDRs during the preceding twelve months.

The following table presents the recorded investment in TDRs that occurred for the three and six months ended June 30, 2013 (dollars in thousands):

	Three Months Ended June 30, 2013
Troubled Debt Restructurings	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial and industrial		1	$	229	$	211
Real estate mortgage:
Residential		2		696		683
Commercial		5		3,074		2,899

	Six Months Ended June 30, 2013
Troubled Debt Restructurings	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial and industrial		1	$	229	$	211
Real estate mortgage:
Residential		2		696		683
Commercial		5		3,074		2,899

For the three and six months ended June 30, 2013, TDR activity was as follows:

Prior to restructure, one participation purchased by MetroBank and one participation purchased by Metro United secured by a mixed use property containing residential condominium, retail space and subterranean parking were classified as nonaccrual. A 72% principal reduction was received by each Metro Bank and Metro United and the participations were restructured into two loans for each Bank with more than sufficient collateral coverage based on the fair value of the collateral. Since the loans were classified and on nonaccrual status both before and after restructuring, the modifications had an insignificant impact on the Company’s determination of the allowance for loan losses.

18

Two land loans to the same borrower were restructured as TDRs.  The loans, previously on accrual status and paid according to contractual terms, had matured and were renewed without a principal reduction.  The loans were classified and on accrual status both before and after restructuring.  Prior to restructuring, the Company’s determination of the allowance for loan losses was based on Financial Accounting Standards Board Codification (“FASB Codification”) 450-20; after restructuring, the determination of the allowance for loan losses was based on FASB Codification 310-10-35 and therefore insignificantly reduced the allowance for loan losses.

One commercial retail loan was restructured by extending with no principal reduction at below market terms. The loan was classified and on accrual status before the restructuring and reclassified to nonaccrual status after the restructuring. Prior to restructuring, the Company’s determination of the allowance for loan losses was based on FASB codification 450-20; after restructuring, the determination of the allowance for loan losses was based on FASB codification 310-10-35 and therefore insignificantly reduced the allowance for loan losses.

One sufficiently collateralized land loan was previously on nonaccrual status and reported as an impaired loan prior to restructuring. The loan was restructured with no principal reduction at below market terms. Since 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.

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 to be uncollectible in whole or in part. Recoveries are recorded when cash payments are received. In developing the assessment, the Company relies on estimates and exercises judgment regarding matters where the ultimate outcome is uncertain. Circumstances may change and future assessments of credit risk may yield materially different results, resulting in an increase or decrease in the allowance for credit losses.

The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments and is maintained at levels that the Company believes are adequate to absorb probable losses inherent in the loan portfolio and unfunded lending commitments as of the date of the financial statements. The Company employs a systematic methodology for determining the allowance for credit losses that consists of four components: (1) a formula-based general reserve derived from  historical average losses by loan grade, (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 in response to changes in circumstances, economic conditions or other factors on an ongoing basis.

The Company follows a loan review program to evaluate the credit risk in the loan portfolio as discussed under “Nonperforming Assets.” 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 are those loans with 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 are those loans which 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 those loans which are charged off.

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  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 for approval by each Bank’s Board of Directors. 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 at the dates indicated (in thousands):

As of and for the three months ended June 30, 2013	Commercial and industrial			Real estate- mortgage			Real estate - construction			Consumer and other			Unallocated			Total
Allowance for loan losses at beginning of period	$	7,053		$	13,217		$	180		$	79		$	2,303		$	22,832
(Reduction in) provision for loan losses		394			1,027			(126	)		(5	)		(1,315	)		(25	)
Charge-offs		(2	)		(1,095	)		(9	)		(7	)		—			(1,113	)
Recoveries		78			27			30			3			—			138
Allowance for loan losses at end of period	$	7,523		$	13,176		$	75		$	70		$	988		$	21,832
Ending allowance for loan losses balance for loans individually evaluated for impairment	$	464		$	190		$	—		$	—					$	654
Ending allowance for loan losses balance for loans collectively evaluated for impairment	$	7,059		$	12,986		$	75		$	70					$	20,190
Loans:
Recorded investment in loans	$	438,838		$	732,555		$	4,665		$	5,479					$	1,181,537
Recorded investment in loans individually evaluated for impairment	$	1,680		$	14,878		$	—		$	—					$	16,558
Recorded investment in loans collectively evaluated for impairment	$	437,158		$	717,677		$	4,665		$	5,479					$	1,164,979

20

As of and for the three months ended June 30, 2012	Commercial and industrial			Real estate- mortgage			Real estate - construction			Consumer and other			Unallocated			Total
Allowance for loan losses at beginning of period	$	9,223		$	16,598		$	235		$	100		$	1,910		$	28,066
(Reduction in) provision for loan losses		(314	)		47			633			20			(186	)		200
Charge-offs		(10	)		(945	)		(683	)		(19	)		—			(1,657	)
Recoveries		247			452			—			3			—			702
Allowance for loan losses at end of period	$	9,146		$	16,152		$	185		$	104		$	1,724		$	27,311
Ending allowance for loan losses balance for loans individually evaluated for impairment	$	26		$	790		$	—		$	—					$	816
Ending allowance for loan losses balance for loans collectively evaluated for impairment	$	9,120		$	15,362		$	185		$	104					$	24,771
Loans:
Recorded investment in loans	$	376,173		$	708,699		$	7,711		$	5,005					$	1,097,588
Recorded investment in loans individually evaluated for impairment	$	8,386		$	20,182		$	5,517		$	1					$	34,086
Recorded investment in loans collectively evaluated for impairment	$	367,787		$	688,517		$	2,194		$	5,004					$	1,063,502

21

As of and for the six months ended June 30, 2013	Commercial and industrial			Real estate- mortgage			Real estate - construction			Consumer and other			Unallocated			Total
Allowance for loan losses at beginning of period	$	8,255		$	14,748		$	216		$	143		$	1,230		$	24,592
(Reduction in) provision for loan losses		(14	)		(4	)		(167	)		(48	)		(242	)		(475	)
Charge-offs		(886	)		(1,645	)		(9	)		(32	)		—			(2,572	)
Recoveries		168			77			35			7			—			287
Allowance for loan losses at end of period	$	7,523		$	13,176		$	75		$	70		$	988		$	21,832
Ending allowance for loan losses balance for loans individually evaluated for impairment	$	464		$	190		$	—		$	—					$	654
Ending allowance for loan losses balance for loans collectively evaluated for impairment	$	7,059		$	12,986		$	75		$	70					$	20,190
Loans:
Recorded investment in loans	$	438,838		$	732,555		$	4,665		$	5,479					$	1,181,537
Recorded investment in loans individually evaluated for impairment	$	1,680		$	14,878		$	—		$	—					$	16,558
Recorded investment in loans collectively evaluated for impairment	$	437,158		$	717,677		$	4,665		$	5,479					$	1,164,979

22

As of and for the six months ended June 30, 2012	Commercial and industrial			Real estate- mortgage			Real estate - construction			Consumer and other			Unallocated		Total
Allowance for loan losses at beginning of period	$	7,966		$	19,213		$	320		$	137		$	685	$	28,321
(Reduction in) provision for loan losses		1,609			(2,591	)		529			14			1,039		600
Charge-offs		(794	)		(1,285	)		(683	)		(61	)		—		(2,823	)
Recoveries		365			815			19			14			—		1,213
Allowance for loan losses at end of period	$	9,146		$	16,152		$	185		$	104		$	1,724	$	27,311
Ending allowance for loan losses balance for loans individually evaluated for impairment	$	26		$	790		$	—		$	—				$	816
Ending allowance for loan losses balance for loans collectively evaluated for impairment	$	9,120		$	15,362		$	185		$	104				$	24,771
Loans:
Recorded investment in loans	$	376,173		$	708,699		$	7,711		$	5,005				$	1,097,588
Recorded investment in loans individually evaluated for impairment	$	8,386		$	20,182		$	5,517		$	1				$	34,086
Recorded investment in loans collectively evaluated for impairment	$	367,787		$	688,517		$	2,194		$	5,004				$	1,063,502

4.     GOODWILL

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

2012 Annual Evaluation

The Company completed its 2012 annual impairment test based on information as of August 31, 2012. The impairment analysis utilized guideline company and guideline transaction information where available, discounted cash flow analysis, and the market capitalization of the Company to estimate the fair value of Metro United.

 Due to the limited number of bank transaction multiples, management allocated more weight on the income approach for the step-one analysis. The Company also performed a reconciliation of the estimated fair value of the reporting unit to the stock price of the Company. This reconciliation is performed by first determining the fair value of the reporting unit from various valuation techniques (i.e., guideline transactions, discounted cash flows, and quoted market prices). The fair value is compared to the allocated value of the reporting unit based on the Company’s market value using the stock price as of the valuation date. The Company allocates the total market value to both of its segments, MetroBank and Metro United. For each Bank, the allocation is based upon the following internal ratios:

Balance Sheet Ratios

• Total Bank assets as a percentage of total assets;

• Total Bank loans as a percentage of total loans;

• Total Bank deposits as a percentage of total deposits; and

• Total Bank shareholder's equity as a percentage of total shareholders' equity.

23

Performance Ratios

• Total Bank nonperforming assets as a percentage of total assets;

• Last twelve months return on assets; and

• Last twelve months return on equity.

In allocating the market value between the two Banks, more weight was assigned to the Performance Ratios than the Balance Sheet Ratios in order to account for the differences in market valuation as a result of different financial performance. The allocated market value of Metro United is then reconciled to the weighted average fair value derived from each valuation technique (i.e., guideline transactions, discounted cash flows, and quoted market prices) by assigning an estimated control premium of 20% to the allocated market value.

Under the discounted cash flow method, the Company used an average asset growth rate of 9.8% for the next five-year period and discounted Metro United’s cash flow and terminal value using a 13.2% discount rate. The derived fair value of Metro United was lower than the carrying value of its equity; therefore Metro United failed the step-one impairment test.

The Company then performed the step-two analysis to derive the implied fair value of goodwill. The size of the implied goodwill under the step-two analysis was significantly affected by the estimated fair value of the loans pertaining to Metro United. The significant market risk adjustment, which is a consequence of the current market conditions such as the interest rate environment, risk premium requirement on performing and nonperforming loans, supply and demand of loans for sale, macroeconomic conditions and political and regulatory environment, were all substantial contributors to the valuation discounts associated with Metro United’s loan portfolio. The implied fair value of goodwill at the evaluation date exceeded the carrying value; therefore the Company determined there was no impairment of goodwill as of that date.

To the extent that market liquidity returns and the fair value of the individual assets or loans of Metro United increases at a faster rate than the fair value of Metro United as a whole, that may cause the implied goodwill to be lower than the carrying value of goodwill. Future potential changes in valuation assumptions may also impact the estimated fair value of Metro United, resulting in impairment of goodwill under the step-two analysis. The stock price performance of the Company and the fair value of Metro United's loans are factors that may impact the potential future goodwill impairment.

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.

Balance as of January 1, 2013
Goodwill		21,827
Accumulated impairment losses		7,500
Net goodwill	$	14,327
Impairment losses for the six months ended June 30, 2013		—
Balance as of June 30, 2013
Goodwill		21,827
Accumulated impairment losses		7,500
Net goodwill	$	14,327

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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 June 30, 2013 and 2012, there were 244,801 and 453,090 antidilutive stock options, respectively.  For the six months ended June 30, 2013 and 2012, there were 258,954 and 600,491 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 Ended June 30,				As of and for the Six Months Ended June 30,
	2013		2012		2013		2012
	(In thousands, except per share amounts)
Net income available to common shareholders	$	2,796	$	2,521	$	5,823	$	4,691
Weighted average common shares in basic EPS		18,366		15,493		18,349		14,331
Effect of dilutive securities		347		260		364		166
Weighted average common and potentially dilutive common shares used in diluted EPS		18,713		15,753		18,713		14,497
Earnings per common share:
Basic	$	0.15	$	0.16	$	0.32	$	0.33
Diluted	$	0.15	$	0.16	$	0.31	$	0.32

6.     COMMITMENTS AND CONTINGENCIES

The Company is a 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 June 30, 2013 and December 31, 2012 is presented below (in thousands):

	As of June 30, 2013		As of December 31, 2012
Unfunded loan commitments including unfunded lines of credit	$	162,605	$	99,474
Standby letters of credit		6,035		10,387
Commercial letters of credit		7,742		1,595
Operating leases		6,512		7,337
Total financial instruments with off-balance sheet risk	$	182,894	$	118,793

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.     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.  In addition, dividends paid by the Banks to the Parent 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 was based on the findings of the OCC during the annual on-site examination of MetroBank performed in the first quarter of 2009 and was primarily focused on matters related to MetroBank’s asset quality. The Board of Directors of MetroBank was officially informed on June 12, 2013 by the OCC that the Agreement had been terminated effective as of June 12, 2013.

As of June 30, 2013, the most recent notifications from the OCC with respect to MetroBank, and the CDFI with respect to Metro United categorized the Banks 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 the Banks’ level of capital adequacy.

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The Company’s and the Banks’ actual capital amounts and ratios at the dates indicated are presented in the following table (dollars in thousands):

	Actual					Minimum Required For Capital Adequacy Purposes					To be Categorized as Well Capitalized under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
As of June 30, 2013
Total risk-based capital ratio
MetroCorp Bancshares, Inc.	$	217,914		17.10	%	$	101,953		8.00	%	$	N/A		N/A	%
MetroBank, N.A.		149,083		16.07			74,199		8.00			92,749		10.00
Metro United Bank		54,222		15.73			27,582		8.00			34,477		10.00
Tier 1 risk-based capital ratio
MetroCorp Bancshares, Inc.		201,902		15.84			50,977		4.00		N/A		N/A
MetroBank, N.A.		137,437		14.82			37,100		4.00			55,649		6.00
Metro United Bank		49,882		14.47			13,791		4.00			20,686		6.00
Leverage ratio
MetroCorp Bancshares, Inc.		201,902		12.87			62,743		4.00		N/A		N/A
MetroBank, N.A.		137,437		12.09			45,479		4.00			56,848		5.00
Metro United Bank		49,882		11.55			17,273		4.00			21,591		5.00

As of December 31, 2012
Total risk-based capital ratio
MetroCorp Bancshares, Inc.	$	212,083	17.95	%	$	94,509	8.00	%	$	N/A	N/A%
MetroBank, N.A.		152,613	17.80			68,587	8.00			85,734		10.00
Metro United Bank		52,714	16.34			25,814	8.00			32,267		10.00
Tier 1 risk-based capital ratio
MetroCorp Bancshares, Inc.		197,077	16.68			47,255	4.00		N/A		N/A
MetroBank, N.A.		141,702	16.53			34,293	4.00			51,440		6.00
Metro United Bank		48,636	15.07			12,907	4.00			19,360		6.00
Leverage ratio
MetroCorp Bancshares, Inc.		197,077	13.18			59,812	4.00		N/A		N/A
MetroBank, N.A.		141,702	12.70			44,613	4.00			55,766		5.00
Metro United Bank		48,636	12.76			15,243	4.00			19,053		5.00

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8.     ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The tax effects allocated to each component of other comprehensive income (loss) were as follows (in thousands):

	Three months ended June 30, 2013									Three months ended June 30, 2012
	Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount			Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount
Change in accumulated gain (loss) on effective cash flow derivatives	$	210		$	75		$	135		$	(15	)	$	(6	)	$	(9	)
Unrealized losses on investment securities with OTTI:
Securities with OTTI charges during the period		(53	)		(19	)		(34	)		(48	)		(17	)		(31	)
Less: OTTI charges recognized in net income		(39	)		(15	)		(24	)		(38	)		(13	)		(25	)
Net unrealized losses on investment securities with OTTI		(14	)		(4	)		(10	)		(10	)		(4	)		(6	)
Unrealized (losses) gain on investment securities:
Unrealized holding (loss) gain arising during the period		(6,664	)		(2,418	)		(4,246	)		756			274			482
Less: reclassification adjustment for gains included in net income		23			8			15			72			26			46
Net unrealized (losses) gains on investment securities		(6,687	)		(2,426	)		(4,261	)		684			248			436
Other comprehensive (loss) income	$	(6,491	)	$	(2,355	)	$	(4,136	)	$	659		$	238		$	421

	Six months ended June 30, 2013									Six months ended June 30, 2012
	Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount			Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount
Change in accumulated gain on effective cash flow derivatives	$	361		$	130		$	231		$	53		$	19		$	34
Unrealized losses on investment securities with OTTI:
Securities with OTTI charges during the period		(93	)		(34	)		(59	)		(87	)		(31	)		(56	)
Less: OTTI charges recognized in net income		(66	)		(25	)		(41	)		(77	)		(27	)		(50	)
Net unrealized losses on investment securities with OTTI		(27	)		(9	)		(18	)		(10	)		(4	)		(6	)
Unrealized (losses) gains on investment securities:
Unrealized holding (loss) gain arising during the period		(7,327	)		(2,656	)		(4,671	)		787			284			503
Less: reclassification adjustment for gains included in net income		37			13			24			84			30			54
Net unrealized (losses) gains on investment securities		(7,364	)		(2,669	)		(4,695	)		703			254			449
Other comprehensive (loss) income	$	(7,030	)	$	(2,548	)	$	(4,482	)	$	746		$	269		$	477

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The balance of and changes in each component of accumulated other comprehensive income (loss) as of and for the six months ended June 30, 2013 are as follows (net of taxes) (in thousands):

	Gains (Losses) on Effective Cash Hedging Derivatives			Net Unrealized Gains (Losses) on Investments with OTTI			Net Unrealized Investment Gains (Losses)			Total Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) December 31, 2012	$	(1,136	)	$	(1,017	)	$	2,720		$	567
Other comprehensive income (losses) before reclassifications		231			(18	)		(4,671	)		(4,458	)
Amounts reclassified from other comprehensive income (loss) (1)		—			—			(24	)		(24	)
Net current-period other comprehensive income (loss)		231			(18	)		(4,695	)		(4,482	)
Accumulated other comprehensive loss June 30, 2013	$	(905	)	$	(1,035	)	$	(1,975	)	$	(3,915	)

______________________________

(1) Amounts reclassified from other comprehensive income were transferred to gain (loss) on securities, net.

9.   DERIVATIVE FINANCIAL INSTRUMENTS

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

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

28

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 June 30, 2013 and December 31, 2012 are presented in the following table (in thousands):

	June 30, 2013					December 31, 2012
	Notional Amount		Estimated Fair Value			Notional Amount		Estimated Fair Value
Interest rate derivative contract designated as a hedge of cash flows	$	17,500	$	(1,415	)	$	17,500	$	(1,775	)
Interest rate derivative contract not designated as a hedge of cash flows	$	15,000	$	83		$	15,000	$	41

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

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

	Gains/(losses) recorded in income and other comprehensive income (loss), net of tax (in thousands)
Three months ended June 30, 2013	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	$	—	$	—	$	—	$	210		$	210
Three months ended June 30, 2012
Interest rate derivative designated as a hedge of cash flows:
Interest rate swap	$	—	$	—	$	—	$	(15	)	$	(15	)

	Gains/(losses) recorded in income and other comprehensive income (loss), net of tax (in thousands)
Six months ended June 30, 2013	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	$	—	$	—	$	—	$	360	$	360
Six months ended June 30, 2012
Interest rate derivative designated as a hedge of cash flows:
Interest rate swap	$	—	$	—	$	—	$	53	$	53

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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 June 30,					Six Months Ended June 30,
	2013		2012			2013		2012
Non-hedging interest rate derivative:
Other non-interest income	$	34	$	(75	)	$	42	$	(108	)

Counterparty Credit Risk. Derivative contracts involve the risk of dealing with institutional derivative counterparties and their ability to meet contractual terms. Derivative contracts are executed with a Credit Support Annex, or CSA, which is a bilateral ratings-sensitive agreement that requires collateral postings at established credit threshold levels. These agreements protect the interests of the Company and its counterparties, should either party suffer a credit rating deterioration. Institutional counterparties must have an investment grade credit rating. The Company’s credit exposure on interest rate swaps is limited to the net favorable value and interest payments of all swaps by each counterparty. Credit exposure may be reduced by the amount of collateral pledged by the counterparty. There are no credit-risk-related contingent features associated with any of the Company’s derivative contracts.   The Company had no credit exposure relating to the interest rate swap at June 30, 2013.  The amount of cash collateral posted by the Company related to derivative contracts was $2.3 million at both June 30, 2013 and December 31, 2012.

10.   OPERATING SEGMENT INFORMATION

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

       The following is a summary of selected operating segment information as of and for the three and six months ended June 30, 2013 and 2012:

	For the Three Months Ended June 30, 2013											For the Three Months Ended June 30, 2012
	MetroBank		Metro United			Other			Consolidated Company			MetroBank		Metro United		Other			Consolidated Company
	(Dollars in thousands)
Total interest income	$	11,108	$	4,163		$	4		$	15,275		$	12,147	$	4,027	$	7		$	16,181
Total interest expense		1,328		640			326			2,294			1,614		576		346			2,536
Net interest income		9,780		3,523			(322	)		12,981			10,533		3,451		(339	)		13,645
(Reduction in) provision for loan losses	─			(25	)	─				(25	)		200	─		─				200
Net interest income after provision for loan losses		9,780		3,548			(322	)		13,006			10,333		3,451		(339	)		13,445
Noninterest income		2,097		193			(346	)		1,944			2,005		92		(337	)		1,760
Noninterest expenses		7,608		2,645			455			10,708			8,349		2,782		181			11,312
Income (loss) before income tax provision		4,269		1,096			(1,123	)		4,242			3,989		761		(857	)		3,893
Provision (benefit) for income taxes		1,358		461			(373	)		1,446			1,312		251		(296	)		1,267
Net income (loss)	$	2,911	$	635		$	(750	)	$	2,796		$	2,677	$	510	$	(561	)	$	2,626

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	For the Six Months Ended June 30, 2013												For the Six Months Ended June 30, 2012
	MetroBank			Metro United			Other			Consolidated Company			MetroBank		Metro United		Other			Consolidated Company
	(Dollars in thousands)
Total interest income	$	21,957		$	8,329		$	6		$	30,292		$	24,557	$	8,008	$	14		$	32,579
Total interest expense		2,637			1,214			638			4,489			3,351		1,245		694			5,290
Net interest income		19,320			7,115			(632	)		25,803			21,206	$	6,763	$	(680	)	$	27,289
(Reduction in) provision for loan losses		(450	)		(25	)	─				(475	)		600	─		─				600
Net interest income after provision for loan losses		19,770			7,140			(632	)		26,278			20,606		6,763		(680	)		26,689
Noninterest income		4,002			299			(707	)		3,594			4,062		176		(675	)		3,563
Noninterest expenses		15,026			5,056			928			21,010			16,862		5,173		210			22,245
Income (loss) before income tax provision		8,746			2,383			(2,267	)		8,862			7,806		1,766		(1,565	)		8,007
Provision (benefit) for income taxes		2,793			1,009			(763	)		3,039			2,472		674		(533	)		2,613
Net income (loss)	$	5,953		$	1,374		$	(1,504	)	$	5,823		$	5,334	$	1,092	$	(1,032	)	$	5,394

	As of June 30, 2013									As of June 30, 2012
	MetroBank		Metro United		Other			Consolidated Company		MetroBank		Metro United		Other			Consolidated Company
	(Dollars in thousands)
Net loans	$	807,081	$	349,375	$	—		$	1,156,456	$	760,874	$	306,048	$	—		$	1,066,922
Total assets		1,131,360		456,822		(2,396	)		1,585,786		1,161,189		393,163		(418	)		1,553,934
Deposits		943,710		381,041		(18,588	)		1,306,163		982,195		330,553		(53,278	)		1,259,470

11.   FAIR VALUE

Fair value is the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants at 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 to prices from other sources for reasonableness. The Company has not adjusted the values from the pricing service.

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

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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 June 30, 2013 and December 31, 2012:

	Fair Value Measurements, using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Fair Value Measurements
Securities available-for-sale at June 30, 2013
U.S. Treasury and other U.S. government sponsored enterprises and agencies	$	—	$	87,627		$	—	$	87,627
Obligations of state and political subdivisions		—		17,993			—		17,993
Corporate		—		6,261			—		6,261
Mortgage-backed securities and collateralized mortgage obligations:							—
Government issued or guaranteed		—		56,924			—		56,924
Privately issued residential		—		670			—		670
Asset backed securities		—		147			—		147
Investment in CRA funds		13,942		—			—		13,942
Total available-for-sale securities		13,942		169,622			—		183,564
Derivative assets
Interest rate cap		—		83			—		83
Total assets measured at fair value on a recurring basis	$	13,942	$	169,705		$	—	$	183,647
Derivative liabilities at June 30, 2013
Interest rate swap	$	—	$	(1,415	)	$	—	$	(1,415	)

Securities available-for-sale at December 31, 2012
U.S. Treasury and other U.S. government sponsored enterprises and agencies	$	—	$	71,181		$	—	$	71,181
Obligations of state and political subdivisions		—		13,389			—		13,389
Corporate		—		6,350			—		6,350
Mortgage-backed securities and collateralized mortgage obligations:							—
Government issued or guaranteed		—		57,941			—		57,941
Privately issued residential		—		683			—		683
Asset backed securities		—		143			—		143
Investment in CRA funds		14,361		—			—		14,361
Total available-for-sale securities		14,361		149,687			—		164,048
Derivative assets
Interest rate cap		—		41			—		41
Total assets measured at fair value on a recurring basis	$	14,361	$	149,728		$	—	$	164,089
Derivative liabilities at December 31, 2012
Interest rate swap	$	—	$	(1,775	)	$	—	$	(1,775	)

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

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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:

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, and subsequent to initial recognition based on updated appraisals or other factors, may remeasure foreclosed assets to fair value through a write-down included in other non-interest expense.

Impaired Loans. Certain impaired loans with a valuation reserve are measured for impairment using the practical expedient, whereby fair value of the loan is based on the fair value of the loan’s collateral, provided the loan is collateral dependent. The fair value measurements of loan collateral can include real estate appraisals, comparable real estate sales information, cash flow projections, realization estimates, etc., all of which can include observable and unobservable inputs. As a result, the categorization of impaired loans can be either Level 2 or Level 3 of the fair value hierarchy, depending on the nature of the inputs used for measuring the related collateral’s fair value. As of June 30, 2013 and December 31, 2012, certain impaired loans were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for loan losses based upon the fair value of the underlying collateral.

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) at June 30, 2013 and December 31, 2012 (in thousands):

	As of June 30, 2013				As of December 31, 2012
	Level 2		Level 3		Level 2		Level 3
Assets
Foreclosed assets	$	—	$	10,960	$	—	$	12,555
Impaired loans (1)		870		—		4,646		—

___________________________________ 

(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 six months ended June 30, 2013 and 2012 related to assets held at those dates (in thousands):

	Three Months ended June 30,				Six Months ended June 30,
	2013		2012		2013		2012
Losses related to:
Foreclosed assets (1)	$	39	$	845	$	103	$	922
Impaired loans (2)		50		451		50		451

__________________________________

(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 are netted against the allowance for loan losses.

 Fair Value of Financial Instruments

FASB ASC Topic 825 requires disclosure of the fair value of financial assets and liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis.

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The estimated fair values of financial instruments that are reported at amortized cost in the Company’s consolidated balance sheets, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value, were as follows:

	As of June 30, 2013				As of December 31, 2012
	Carrying or Contract Amount		Estimated Fair Value		Carrying or Contract Amount		Estimated Fair Value
	(In thousands)
Financial Assets
Level 2 inputs:
Cash and cash equivalents	$	126,568	$	126,568	$	159,449	$	159,449
Interest-bearing deposits in banks		15,501		15,501		15,321		15,321
Investment securities held-to-maturity		4,047		4,445		4,046		4,757
Other investments		6,001		6,001		5,592		5,592
Cash value of bank owned life insurance		33,431		33,431		32,794		32,794
Accrued interest receivable		4,316		4,316		4,120		4,120
Level 3 inputs:
Loans held-for-investment, net		1,156,456		1,142,858		1,075,745		1,062,432
Financial Liabilities
Level 2 inputs:
Deposit transaction accounts		766,222		766,222		808,377		808,377
Junior subordinated debentures		36,083		36,083		36,083		36,083
Accrued interest payable		283		283		233		233
Level 3 inputs:
Time deposits		539,941		542,549		458,653		461,672
Other borrowings		46,000		47,699		25,000		25,008
Off-balance sheet financial instruments
Unfunded loan commitments, including unfunded lines of credit		—		247		—		251
Standby letters of credit		—		30		—		24

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, interest-bearing 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 risks.

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

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

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

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            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 approximates the carrying value as the debentures reprice quarterly.

Commitments to Extend Credit and Letters of Credit. The fair value of such instruments is estimated using the unamortized portion of fees collected for execution of such credit facility.

12.   INCOME TAXES

The Company’s effective tax rate was 34.1% for three months ended June 30, 2013 compared with 32.5% for the three months ended June 30, 2012. The increase in the effective income tax rate in 2013 as compared to 2012 was partially the result of state income taxes, bank owned life insurance investment income and foreign taxes. Additionally, the effective income tax rates for the three months ended June 30, 2013 and 2012 were impacted by the amount of other non-deductible expense and non-taxable income in each respective period, and also relative to the pre-tax income upon which the effective income tax rate was calculated. The Texas state tax is based on the Company’s gross margin with limited deductions. Because the Texas state tax allows only limited deductions the tax may not correlate, from year to year, with pre-tax income. The California state 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 six months ended June 30, 2013 was $3.0 million, compared with $2.6 million for the same period in 2012. The Company’s effective tax rate was 34.3% for the six months ended June 30, 2013 compared with 32.6% for the six months ended June 30, 2012.

As of June 30, 2013, the Company had approximately $15.1 million in 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 deferred tax assets at June 30, 2013 and  December 31, 2012 due 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, 2010 and 2009, 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 assets that may not be realized.

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.

13.   NEW AUTHORITATIVE ACCOUNTING GUIDANCE

Accounting Standards Update (“ASU”) No.2013-11 – “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”.ASU No. 2013-11 eliminates the diversity in reporting an unrecognized tax benefit when a net operating loss carryforward or similar tax loss exists. ASU No. 2013-11 requires, in most circumstances, that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward or similar tax loss. The ASU will be effective for the Company for annual and interim periods beginning on January 1, 2014 and is not expected to have a material impact on the Company's financial condition, results of operations or cash flows.

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ASU No. 2013-10 – “Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes”.ASU No. 2013-10 permits the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to Treasury obligations of the U.S. government (UST) and London Interbank Offered Rate (LIBOR). The amendments also remove the restriction on using different benchmark rates for similar hedges. The ASU was effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013 and did not have a material impact on the Company’s financial condition, results of operation or cash flows.

ASU No. 2013-02–“Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”.  ASU No. 2013-02 does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts ASU No. 2013-02 was effective for the Company for annual and interim periods beginning on January 1, 2013 and did not have a material impact on the Company's financial condition, results of operations or cash flows.

ASU No. 2013-01 – “Balance Sheet (Topic 210) – Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities”.  ASU No. 2013-01 addresses implementation issues about the scope of ASU No. 2011-11“Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities”and clarifies that ASU No. 2011-11 applies to derivatives accounted for in accordance withTopic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. ASU No. 2013-01 was effective for the Company for annual and interim periods beginning on January 1, 2013 and did not have a material impact on the Company's financial condition, results of operations or cash flows.

ASU No. 2012-06 – “Business Combinations (Topic 805) - Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution”.  ASU No. 2012-06 states that when a reporting entity recognizes an indemnification asset (in accordance with Subtopic 805-20) as a result of a government-assisted acquisition of a financial institution and subsequently a change in the cash flows expected to be collected on the indemnification asset occurs, the reporting entity should subsequently account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement (that is, the lesser of the term of the indemnification agreement and the remaining life of the indemnified assets).  ASU No. 2012-06 was effective for the Company for annual and interim periods beginning on January 1, 2013 and did not have a material impact on the Company's financial condition, results of operations or cash flows.

ASU No. 2012-04 – “Technical Corrections and Improvements”.  The amendments in ASU No. 2012-04 represent changes to clarify the FASB Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities.  The amendments are categorized as (1) source literature amendments (2) guidance clarification and reference corrections and (3) relocated guidance.  Additionally, the amendments are intended to make the Codification easier to understand and the fair value measurement guidance easier to apply by eliminating inconsistencies and providing needed clarifications.  The amendments in ASU No. 2012-04 that do not have transition guidance were effective October 1, 2012. The amendments that are subject to the transition guidance were effective for fiscal periods beginning on January 1, 2013. ASU No. 2012-04 did not have a material impact on the Company's financial condition, results of operations or cash flows.

ASU No. 2012-02 "Intangibles – Goodwill and Other (Topic 350) – Testing Indefinite-Lived Intangible Assets for Impairment".  ASU No. 2012-02 gives entities the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events or circumstances, an entity determines it is more likely than not that an indefinite-lived intangible asset is impaired, then the entity must perform the quantitative impairment test. If, under the quantitative impairment test, the carrying amount of the intangible asset exceeds its fair value, an entity should recognize an impairment loss in the amount of that excess. Permitting an entity to assess qualitative factors when testing indefinite-lived intangible assets for impairment results in guidance that is similar to the goodwill impairment testing guidance in ASU No. 2011-08. ASU No. 2012-02 was effective for the Company beginning January 1, 2013 and did not have a significant impact on the Company's financial condition, results of operations or cash flows.

ASU No. 2011-11, "Balance Sheet (Topic 210) - "Disclosures about Offsetting Assets and Liabilities".  ASU No. 2011-11 amends Topic 210, "Balance Sheet," to require an entity to disclose both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject to a master netting arrangement or similar agreement. ASU No. 2011-11 was effective for the Company for annual and interim periods beginning on January 1, 2013 and did not have a material impact on the Company's financial condition, results of operations or cash flows.

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

Special Cautionary Notice Regarding Forward-looking Statements

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 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;

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• 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;

• 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;

• the potential payment of interest on commercial demand deposit accounts in order to effectively complete for clients;

• adverse conditions in Asia;

• potential interruptions or breaches in security of the Company’s information systems; and

• possible noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statues and regulations.

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.

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

Overview

The Company recorded net income of $2.8 million for the three months ended June 30, 2013, an increase of $170,000 compared with the same quarter in 2012. The Company’s diluted earnings per common share for the three months ended June 30, 2013 were $0.15 (based on 18.7 million diluted shares), compared with $0.16 (based on 15.8 million diluted shares) for the same quarter in 2012. Diluted earnings per share is computed by dividing net income (after deducting dividends on preferred stock) by the weighted-average number of common shares and potentially dilutive common shares outstanding at the end of the period. The Company recorded net income of $5.8 million for the six months ended June 30, 2013, an increase of $429,000 compared with $5.4 million for the same period in 2012. The Company’s diluted earnings per common share for the six months ended June 30, 2013 were $0.31 (based on 18.7 million diluted shares), compared with $0.32 (based on 14.5 million diluted shares) for the same quarter in 2012. Details of the changes in the various components of net income are further discussed below.

Total assets were $1.59 billion at June 30, 2013, an increase of $66.0 million or 4.3% from $1.52 billion at December 31, 2012. Available-for-sale investment securities at June 30, 2013 were $183.6 million, an increase of $19.5 million or 11.9% from $164.0 million at December 31, 2012. Net loans at June 30, 2013 were $1.16 billion, an increase of $80.7 million or 7.5% from $1.08 billion at December 31, 2012. Total deposits at June 30, 2013 were $1.31 billion, an increase of $39.1 million or 3.1% from $1.27 billion at December 31, 2012. Other borrowings at June 30, 2013 were $46.0 million, an increase of $21.0 million or 84.0% from $25.0 million at December 31, 2012. The Company’s return on average assets (“ROAA”) for the three months ended June 30, 2013 and 2012 was 0.71% and 0.69%, respectively. The Company’s return on average equity (“ROAE”) for the three months ended June 30, 2013 and 2012 was 6.20% and 5.62%, respectively. The Company’s ROAA for the six months ended June 30, 2013 and 2012 was 0.75% and 0.72%, respectively. The Company’s ROAE for the six months ended June 30, 2013 and 2012 was 6.53% and 6.11%, respectively.   Shareholders’ equity at June 30, 2013 was $177.7 million compared with $177.0 million at December 31, 2012, an increase of $689,000 or 0.4%.  Details of the changes in the various balance sheet items are further discussed below.

Recent Developments

Formal Agreement -The Board of Directors of MetroBank was officially informed on June 12, 2013 by the OCC that the Agreement had been terminated as of June 12, 2013.

Deposit Insurance Assessments – In November 2009, the FDIC issued a rule that required all insured depository institutions, with limited exceptions, to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. As required by the rule, any institution’s remaining prepaid assessment would be returned to the institution by June 30, 2013. On June 28, 2013, the FDIC returned $3.0 million of remaining prepaid FDIC assessment to the Banks.

Results of Operations

Net Interest Income and Net Interest Margin. For the three months ended June 30, 2013, net interest income, before the provision for loan losses, was $13.0 million, a decrease of $664,000 or 4.9% compared with $13.6 million for the same period in 2012, primarily due to a decline in the yield on loans, partially offset by increases in loan volume and lower cost of deposits. Average interest-earning assets for the three months ended June 30, 2013 were $1.49 billion, an increase of $50.0 million or 3.5% compared with $1.44 billion for the same period in 2012, primarily due to an increase in loans, partially offset by a decrease in federal funds sold. The weighted average yield on interest-earning assets for the second quarter of 2013 was 4.12%, a decrease of 41 basis points compared with 4.53% for the same quarter in 2012. Average interest-bearing liabilities for the three months ended June 30, 2013 were $1.06 billion, a decrease of $2.7 million or 0.3% compared with $1.07 billion for the same period in 2012, primarily due to a decline in savings and money market accounts partially offset by an increase in time deposits and other borrowings. The weighted average interest rate paid on interest-bearing liabilities for the second quarter 2013 was 0.87%, a decrease of nine basis points compared with 0.96% for the same quarter in 2012.

For the six months ended June 30, 2013, net interest income, before the provision for loan losses, was $25.8 million, a decrease of $1.5 million or 5.4% compared with $27.3 million for the same period in 2012, primarily due to a decline in the yield on loans, partially offset by increases in loan volume and lower cost of deposits. Average interest-earning assets for the six months ended June 30, 2013 were $1.46 billion, an increase of $47.4 million or 3.3% compared with $1.42 billion for the same period in 2012, primarily due to loan growth, partially offset by a decline in taxable securities and federal funds sold. The weighted average yield on interest-earning assets for the six months ended June 30, 2013 was 4.17%, down 46 basis points compared with 4.63% for the same period in 2012.  Average interest-bearing liabilities for the six months ended June 30, 2013 were $1.05 billion, a decrease of $13.1 million or 1.2% compared with $1.06 billion for the same period in 2012, primarily due to a decline in savings and money market accounts, partially offset by an increase in time deposits. The weighted average rate paid on interest-bearing liabilities for the six months ended June 30, 2013 was 0.86%, down 14 basis points compared with 1.00% for the same period in 2012.

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            The net interest margin for the three months ended June 30, 2013 was 3.50%, a decrease of 32 basis points compared with 3.82% for the same period in 2012. The yield on average earning assets decreased 41 basis points, and the cost of average earning assets decreased nine basis points for the same periods. The net interest margin for the six months ended June 30, 2013 was 3.55%, a decrease of 32 basis points compared with 3.87% for the same period in 2012. The yield on average earning assets decreased 46 basis points, and the cost of average earning assets decreased 14 basis points for the same periods.

Total Interest Income. Interest income for the three months ended June 30, 2013 was $15.3 million, down $906,000 or 5.6% compared with $16.2 million for the same period in 2012, primarily due to lower yield on loans and securities, partially offset by an increase in the volume of loans. Average earning assets increased $50.0 million or 3.5% to $1.49 billion for the second quarter of 2013, compared with $1.44 billion for the same period in 2012. Average total loans increased $83.0 million or 7.8% to $1.14 billion for the second quarter of 2013 compared with $1.06 billion for the second quarter of 2012. The yield on average earning assets for the second quarter of 2013 was 4.12% compared with 4.53% for the second quarter of 2012.

Interest income for the six months ended June 30, 2013 was $30.3 million, down $2.3 million or 7.0% compared with $32.6 million for the same period in 2012, primarily due to lower yield on loans and securities, partially offset by an increase in the volume of loans. Average earning assets increased $47.4 million or 3.3% to $1.46 billion for the six months ended June 30, 2013, compared with $1.42 billion for the same period in 2012. Average total loans increased $64.9 million or 6.2% to $1.12 billion for the six months ended June 30, 2013 compared with $1.05 billion for the same period of 2012. The yield on average earning assets for the six months ended June 30, 2013 was 4.17% compared with 4.63% for the six months ended June 30, 2012.

Interest Income from Loans. Interest income from loans for the three months ended June 30, 2013 was $14.0 million, a decrease of $748,000 or 5.1% compared with $14.8 million for the same quarter in 2012. Average total loans for the three months ended June 30, 2013 were $1.14 billion compared with $1.06 billion for the same period in 2012, an increase of $83.0 million or 7.8%. For the second quarter of 2013, the average yield on loans was 4.91%, a decrease of 68 basis points compared with 5.59% for the same quarter in 2012. Interest income from loans for the six months ended June 30, 2013 was $27.8 million, a decrease of $2.0 million or 6.4% compared with $29.8 million for the same period in 2012. The decrease for the three and six months ended June 30, 2013 was the result of lower loan yields offset by higher loan volume.   Average total loans for the six months ended June 30, 2013 were $1.12 billion, an increase of $64.9 million or 6.2% compared with average total loans for the same period in 2012 of $1.05 billion. For the six months ended June 30, 2013, the yield on average total loans was 5.01%, a decrease of 66 basis points compared with 5.67% for the same period in 2012.

Approximately $750.6 million or 63.6% 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 six months ended June 30, 2013, the average yield on total loans was approximately 176 basis points above the prime rate primarily because of interest rate floors and credit spreads.   At June 30, 2013, approximately $607.2 million in loans or 51.4% of the total loan portfolio were variable rate loans with interest rate floors that carried a weighted average interest rate of 5.33%.  At June 30, 2012, variable rate loans with interest rate floors comprised 58.2% of the total loan portfolio and carried a weighted average interest rate of 5.90%.

Interest Income from Investments. Interest income from investments (which includes investment securities, Federal funds sold and other investments) for the three months ended June 30, 2013 was $1.3 million, a decrease of $158,000 or 11.1% from the same period in 2012.  Average total investments for the three months ended June 30, 2013 were $343.2 million compared with average total investments for the same period in 2012 of $376.1 million, a decrease of $33.0 million or 8.8%.  The decrease in average total investments was primarily the result of a decrease in federal funds sold which provided for loan growth.  For the second quarter of 2013, the average yield on total investments was 1.48% compared with 1.53% for the same quarter in 2012, a decrease of five basis points primarily due to decline in volume and yield of taxable securities.

Interest income from investments for the six months ended June 30, 2013 was $2.5 million, a decrease of $369,000 or 13.1% compared with $2.8 million for the same period in 2012, primarily due to a decrease in the yield and volume of taxable investment securities and federal funds sold.  Average total investments for the six months ended June 30, 2013 were $343.8 million compared with the same quarter in 2012 of $361.4 million, a decrease of $17.6 million or 4.9%. The decrease was primarily the result of a decrease in taxable securities and federal funds sold which provided for loan growth.  For the six months ended June 30, 2013, the average yield on investments was 1.44% compared with 1.57% for the same quarter in 2012, a decrease of 13 basis points.

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Total Interest Expense. Interest expense for the three months ended June 30, 2013 was $2.3 million, down $242,000 or 9.5% compared with $2.5 million for the same period in 2012, primarily due to lower cost on both deposits and other borrowings, partially offset by an increase in other borrowings and time deposits. Interest expense for the six months ended June 30, 2013 was $4.5 million, down $801,000 or 15.1% compared with $5.3 million for the same period in 2012, primarily due to lower cost on both deposits and other borrowings, partially offset by an increase in certificates of deposits and other borrowings.

Interest Expense on Deposits. Interest expense on interest-bearing deposits for the three months ended June 30, 2013 was $1.7 million, a decrease of $251,000 or 12.8% compared with $2.0 million for the same period in 2012. Average interest-bearing deposits for the three months ended June 30, 2013 were $991.3 million compared with $1.00 billion for the same period in 2012, a decrease of $12.1 million or 1.2%. The average interest rate paid on interest-bearing deposits for the second quarter of 2013 was 0.69% compared with 0.78% for the same quarter in 2012, a decrease of nine 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 six months ended June 30, 2013 was $3.4 million, a decrease of $776,000 or 18.8% compared with $4.1 million for the same period in 2012.  Average interest-bearing deposits for the six months ended June 30, 2013 were $982.9 million compared with the same period in 2012 of $1.00 billion, a decrease of $19.2 million or 1.9%. The average interest rate incurred on interest-bearing deposits for the six months ended June 30, 2013 was 0.69% compared with 0.83% for the same period in 2012, a decrease of 14 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 June 30, 2013 was $329,000, a decrease of $4,000 or 1.2% from $333,000 at June 30, 2012. Interest expense on junior subordinated debentures for the six months ended June 30, 2013 was $645,000, a decrease of $24,000 or 3.6% from $669,000 at June 30, 2012.  Average junior subordinated debentures for the three and six months ended June 30, 2013 and 2012 were $36.1 million. The average interest rate incurred on junior subordinated debentures for the three months ended June 30, 2013 and 2012 was 3.61% and 3.65%, respectively. The average interest rate incurred on junior subordinated debentures for the six months ended June 30, 2013 and 2012 was 3.56% and 3.67%, respectively.

The junior subordinated debentures accrue interest at a floating rate equal to the 3-month LIBOR plus 1.55%.  Related to these debentures, the Company entered into a forward-starting interest rate swap contract. Under the swap, beginning December 15, 2010, the Company 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 March 2011. The interest rate swap contract was entered into 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.   See Note 10, “Derivative Financial Instruments,” to the Condensed Consolidated Financial Statements for additional information related to this interest rate swap.

Interest Expense on Other Borrowings. Interest expense on other borrowings for the three months ended June 30, 2013 was $260,000, an increase of $13,000 compared with $247,000 for the same period in 2012. Average borrowed funds, consisting of security repurchase agreements and Federal Home Loan Bank (“FHLB”) advances, for the three months ended June 30, 2013 were $35.4 million an increase of $9.4 million compared with $26.0 million for the same period in 2012. Other borrowings increased primarily due to advances issued from the FHLB of Dallas and FHLB of San Francisco.  The average interest rate paid on borrowed funds for the second quarter of 2013 was 2.95% compared with 3.82% for the same quarter in 2012.  The cost decreased due primarily to the issuance of FHLB advances with lower market rates compared to the existing long-term debt.

 Interest expense on other borrowed funds for the six months ended June 30, 2013 was $493,000, a decrease of $1,000 compared with $494,000 for the same period in 2012. Average borrowed funds for the six months ended June 30, 2013 were $32.1 million, an increase of $6.1 million compared with $26.0 million for the same period in 2012, primarily due to advances issued from the FHLB of Dallas and FHLB San Francisco.  The average interest rate paid on borrowed funds for the six months ended June 30, 2013 was 3.09% compared with 3.82% for the same period in 2012.

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

	For The Three Months Ended June 30,
	2013								2012
	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	$	1,144,151		$	14,006		4.91	%	$	1,061,193		$	14,754		5.59	%
Taxable securities		165,310			847		2.06			168,478			1,004		2.40
Tax-exempt securities		20,934			166		3.18			15,919			145		3.66
Other investments (2)		5,555			64		4.62			6,055			44		2.92
Federal funds sold and other short-term investments		151,368			192		0.51			185,686			234		0.51
Total interest-earning assets		1,487,318			15,275		4.12			1,437,331			16,181		4.53
Allowance for loan losses		(22,308	)							(27,932	)
Total interest-earning assets, net of allowance for loan losses		1,465,010								1,409,399
Noninterest-earning assets		117,303								124,634
Total assets	$	1,582,313							$	1,534,033
Liabilities and shareholders' equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	73,555		$	23		0.13	%	$	66,448		$	21		0.13	%
Savings and money market accounts		388,625			366		0.38			462,432			565		0.49
Time deposits		529,086			1,316		1.00			474,524			1,370		1.16
Junior subordinated debentures		36,083			329		3.61			36,083			333		3.65
Other borrowings		35,396			260		2.95			26,000			247		3.82
Total interest-bearing liabilities		1,062,745			2,294		0.87			1,065,487			2,536		0.96
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		323,789								262,413
Other liabilities		14,833								18,074
Total liabilities		1,401,367								1,345,974
Shareholders' equity		180,946								188,059
Total liabilities and shareholders' equity	$	1,582,313							$	1,534,033
Net interest income				$	12,981							$	13,645
Net interest spread							3.25	%							3.57	%
Net interest margin							3.50	%							3.82	%

______________________________

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

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	For The Six Months Ended June 30,
	2013								2012
	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	$	1,119,903		$	27,835		5.01	%	$	1,054,955		$	29,753		5.67	%
Taxable securities		157,654			1,638		2.10			170,694			2,031		2.39
Tax-exempt securities		19,033			313		3.32			13,771			262		3.83
Other investments (2)		5,567			114		4.13			6,260			87		2.79
Federal funds sold and other short-term investments		161,568			392		0.49			170,651			446		0.53
Total interest-earning assets		1,463,725			30,292		4.17			1,416,331			32,579		4.63
Allowance for loan losses		(23,279	)							(28,320	)
Total interest-earning assets, net of allowance for loan losses		1,440,446								1,388,011
Noninterest-earning assets		119,375								125,712
Total assets	$	1,559,821							$	1,513,723
Liabilities and shareholders' equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	72,173		$	44		0.12	%	$	65,143		$	42		0.13	%
Savings and money market accounts		400,371			772		0.39			450,439			1,179		0.53
Time deposits		510,361			2,535		1.00			486,544			2,906		1.20
Junior subordinated debentures		36,083			645		3.56			36,083			669		3.67
Other borrowings		32,133			493		3.09			26,003			494		3.82
Total interest-bearing liabilities		1,051,121			4,489		0.86			1,064,212			5,290		1.00
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		314,994								254,722
Other liabilities		13,965								17,245
Total liabilities		1,380,080								1,336,179
Shareholders' equity		179,741								177,544
Total liabilities and shareholders' equity	$	1,559,821							$	1,513,723
Net interest income				$	25,803							$	27,289
Net interest spread							3.31	%							3.63	%
Net interest margin							3.55	%							3.87	%

_____________________________ 

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

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The following table presents the dollar amount of changes in interest income and interest expense for the major components of interest-earning assets and interest-bearing liabilities and distinguishes between changes in outstanding balances and changes in interest rates for the three and six months ended June 30, 2013 compared with the three and six months ended June 30, 2012. For purposes of this table, changes attributable to both rate and volume have been allocated to each accordingly.

	Three Months Ended June 30,									Six Months Ended June 30,
	2013 vs 2012									2013 vs 2012
	Increase (Decrease) Due to									Increase (Decrease) Due to
	Volume			Rate			Total			Volume			Rate			Total
	(In thousands)
Interest-earning assets:
Loans	$	1,197		$	(1,945	)	$	(748	)	$	1,744		$	(3,662	)	$	(1,918	)
Taxable securities		(16	)		(141	)		(157	)		(160	)		(233	)		(393	)
Tax-exempt securities		46			(25	)		21			99			(48	)		51
Other investments		(4	)		24			20			(10	)		37			27
Federal funds sold and other short-term investments		(43	)		1			(42	)		(25	)		(29	)		(54	)
Total decrease in interest income		1,180			(2,086	)		(906	)		1,648			(3,935	)		(2,287	)
Interest-bearing liabilities:
Interest-bearing demand deposits		2			-			2			4			(2	)		2
Savings and money market accounts		(89	)		(110	)		(199	)		(134	)		(273	)		(407	)
Time deposits		162			(216	)		(54	)		134			(505	)		(371	)
Junior subordinated debentures		-			(4	)		(4	)		-			(24	)		(24	)
Other borrowings		90			(77	)		13			115			(116	)		(1	)
Total decrease in interest expense		165			(407	)		(242	)		119			(920	)		(801	)
Increase (decrease) in net interest income	$	1,015		$	(1,679	)	$	(664	)	$	1,529		$	(3,015	)	$	(1,486	)

Provision for Loan Losses. Provisions for loan losses are charged to income to bring the Company’s allowance for loan losses to a level which management considers adequate to absorb probable losses inherent in the loan portfolio. The provision for loan losses for the three months ended June 30, 2013 was a reversal of ($25,000), a decrease of $225,000 compared with a provision of $200,000 for the same period in 2012. The provision for loan losses for the six months ended June 30, 2013 was a reversal of ($475,000), a decrease of $1.1 million compared with a provision of $600,000 for the same period in 2012. The decrease for the three and six months ended June 30, 2013 was primarily due to a reduction in classified assets, partially offset by an increase in loan volume. The allowance for loan losses as a percent of total loans was 1.85% at June 30, 2013, 2.23% at December 31, 2012, and 2.50% at June 30, 2012.

Noninterest Income.  Noninterest income for the three months ended June 30, 2013 was $1.9 million, an increase of $184,000 or 10.5% compared with $1.8 million for the same period in 2012. The increase for the three months ended June 30, 2013 was primarily due to an increase in other noninterest income and gain on sale of loans, partially offset by a decrease in service fees. Other noninterest income increased as a result of gains in foreign currency transactions, partially offset by a decline in other real estate (“ORE”) rental income. Noninterest income for the six months ended June 30, 2013 and 2012 was $3.6 million and was held steady by increases in other noninterest income, other loan-related fees and gain on sale of loans, partially offset by a decline in service fees. Other noninterest income increased as a result of gains in foreign currency transactions, partially offset by a decline in ORE rental income.

Noninterest Expense. Noninterest expense for the three months ended June 30, 2013 was $10.7 million, a decrease of $604,000 or 5.3% compared with $11.3 million for the same period in 2012. The decrease was mainly the result of a decline in ORE expenses due to net gains on sale of ORE and a decline in other noninterest expense. Noninterest expense for the six months ended June 30, 2013 was $21.0 million, a decrease of $1.2 million or 5.6% compared with $22.2 million for the same period in 2012. The decrease was mainly the result of a $1.2 million net gain on sales of ORE properties and a decline in other ORE expenses. These reductions were partially offset by increases in other noninterest expense and salaries and employee benefits.

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Salaries and employee benefits expense for the three months ended June 30, 2013 was $5.9 million, a decrease of $64,000 or 1.1% compared with $6.0 million for the same period in 2012. Salaries and employee benefits expense for the six months ended June 30, 2013 was $12.2 million, an increase of $307,000 or 2.6% compared with $11.9 million for the same period in 2012, primarily as a result of merit increases.

Foreclosed assets expense for the three months ended June 30, 2013 was $82,000, a decrease of $280,000 or 77.3% compared with $362,000 for the same period in 2012.   Foreclosed assets expense for the six months ended June 30, 2013 was a net gain of $759,000, a decrease of $2.1 million or 155.7% compared with expense of $1.4 million for the same period in 2012.  The decrease for both periods was primarily the result of gains on sales of foreclosed assets combined with reductions in write-downs and in property taxes paid on foreclosed assets.  

Other noninterest expense for the three months ended June 30, 2013 was $2.5 million, a decrease of $227,000 or 8.3% compared with $2.7 million for the same quarter in 2012, primarily due to decreases in the provision for unfunded commitments, professional fees (due to fees associated with the 2012 public offering), and other loan expenses. These items were partially offset by an increase in data processing expenses as a result of a core processing system conversion.   Other noninterest expense for the six months ended June 30, 2013 was $5.2 million and increase of $589,000 or 12.7% compared with $4.7 million for the same period in 2012, primarily due to a rise in data processing expenses and operational losses but partially offset by decreases in the provision for unfunded commitments, professional fees, and other loan expenses.

The Company’s efficiency ratio is calculated by dividing total noninterest expense, excluding loan loss provisions, goodwill impairment, provisions for unfunded commitments, writedowns on foreclosed assets and gains and losses on sales of foreclosed assets by net interest income plus noninterest income, excluding impairment on securities and gains and losses on securities transactions. The efficiency ratio for the three months ended June 30, 2013 was 73.58%, a decrease from 74.24% for the same quarter in 2012. The Company’s efficiency ratio for the six months ended June 30, 2013 was 75.51%, compared with 70.59% for the same period in 2012.

Income Taxes. The Company’s effective tax rate was 34.1% for three months ended June 30, 2013 compared with 32.5% for the three months ended June 30, 2012. The increase in the effective income tax rate in 2013 as compared to 2012 was partially the result of state income taxes, bank owned life insurance investment income and foreign taxes. Additionally, the effective income tax rates for the three months ended June 30, 2013 and 2012 were impacted by the amount of other non-deductible expense and non-taxable income in each respective period, and also relative to the pre-tax accounting income/loss upon which the effective income tax rate was calculated. The Texas state tax is based on the Company’s gross margin with limited deductions. Because the Texas state tax allows only limited deductions the tax may not correlate, from year to year, with pre-tax income. The California state 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 six months ended June 30, 2013 was $3.0 million, compared with $2.6 million for the same period in 2012. The Company’s effective tax rate was 34.3% for the six months ended June 30, 2013 compared with 32.6% for the six months ended June 30, 2012.

As of June 30, 2013, the Company had approximately $15.1 million in 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 deferred tax assets at June 30, 2013 and  December 31, 2012 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, 2010 and 2009, 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.

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.

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Financial Condition

Loan Portfolio. Total loans at June 30, 2013 were $1.18 billion, an increase of $78.0 million or 7.1% compared with $1.10 billion at December 31, 2012, due to organic growth. At June 30, 2013, commercial and industrial loans and real estate mortgage loans increased $54.9 million and $29.9 million, respectively, while real estate construction loans decreased $5.0 million, compared with their respective levels at December 31, 2012. At June 30, 2013 and December 31, 2012, the ratio of total loans to total deposits was 90.21%, and 86.84%, respectively. Total loans represented 74.30% and 72.40% of total assets at June 30, 2013 and December 31, 2012, respectively.

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

	As of June 30, 2013						As of December 31, 2012
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
Commercial and industrial	$	438,529			37.13	%	$	383,641			34.78	%
Real estate mortgage
Residential		36,730			3.11			36,807			3.34
Commercial		695,210			58.88			665,244			60.32
		731,940			61.99			702,051			63.66
Real estate construction
Residential		2,016			0.17			2,420			0.22
Commercial		2,712			0.23			7,284			0.66
		4,728			0.40			9,704			0.88
Consumer and other		5,623			0.48			7,531			0.68
Gross loans		1,180,820			100.00	%		1,102,927			100.00	%
Unearned discounts, interest and deferred fees		(2,532	)					(2,590	)
Total loans		1,178,288						1,100,337
Allowance for loan losses		(21,832	)					(24,592	)
Loans, net	$	1,156,456					$	1,075,745

Nonperforming Assets. At June 30, 2012, total nonperforming assets were $27.5 million ($23.4 million from Texas and $4.1 million from California) compared with $41.5 million at December 31, 2012 ($32.5 million from Texas and $9.0 million from California), a decrease of $14.0 million or 33.7%. The ratio of total nonperforming assets to total assets decreased to 1.74% at June 30, 2013 from 2.73% at December 31, 2012.

On a linked-quarter basis, total nonperforming assets decreased by $6.2 million, which consisted of a $2.4 million decrease in Texas and a $3.8 million decrease in California. The decrease in nonperforming assets in Texas consisted primarily of declines of $1.9 million in nonaccrual loans and a net reduction of $1.2 million in ORE, partially offset by an increase of $659,000 in nonaccrual troubled debt restructurings (“TDRs”). In Texas, nonaccrual loans including nonaccrual TDRs decreased primarily due to $2.7 million in paydowns on loans and a $1.4 million note sale but partially offset by the addition of four loans totaling approximately $2.9 million. The decline in nonperforming assets in California primarily consisted of decreases of $3.3 million in nonaccrual loans and $886,000 in nonaccrual TDRs, partially offset by an increase of $394,000 in accruing TDRs. In California, nonaccrual loans including nonaccrual TDRs decreased primarily due to a $3.6 million loan being returned to accrual status and a $2.7 million paydown on a loan, partially offset by the transfer of three loans in the amount of $2.2 million to nonaccrual status.

On a linked-quarter basis, ORE at June 30, 2013 decreased $1.2 million compared with March 31, 2013 and was primarily the result of the sale of two properties in Texas.

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.  

46

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

	As of June 30, 2013			As of December 31, 2012
	(Dollars in thousands)
Nonaccrual loans (1)	$	12,304		$	23,568
Accruing loans 90 days or more past due (1)		—			—
Troubled debt restructurings – accruing (1)		394			400
Troubled debt restructurings – nonaccruing (1)		3,871			5,014
Other real estate (“ORE”)		10,960			12,555
Total nonperforming assets	$	27,529		$	41,537
Total nonperforming assets to total assets		1.74	%		2.73	%
Total nonperforming assets to total loans and ORE		2.31	%		3.73	%

___________________________

(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 (in thousands):

As of June 30, 2013	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment
Impaired loans with no allowance
Commercial and industrial	$	839	$	839	$	—	$	2,511
Real estate mortgage:
Residential		816		813		—		345
Commercial		13,378		13,391		—		16,594
Real estate construction:
Residential		—		—		—		1,299
Commercial		—		—		—		2,339
Impaired loans with an allowance
Commercial and industrial	$	841	$	841	$	464	$	221
Real estate mortgage:
Commercial		684		685		191		3,548
Total:
Commercial and industrial	$	1,680	$	1,680	$	464	$	2,732
Real estate mortgage		14,878		14,889		191		20,487
Real estate construction		—		—		—		3,638

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As of December 31, 2012	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment
Impaired loans with no allowance
Commercial and industrial	$	1,287	$	1,289	$	—	$	5,162
Real estate mortgage:
Residential		239		239		—		213
Commercial		18,369		18,369		—		19,732
Real estate construction:
Residential		1,426		1,426		—		1,529
Commercial		3,103		3,103		—		3,171
Impaired loans with an allowance
Commercial and industrial	$	21	$	21	$	21	$	1,434
Real estate mortgage:
Commercial		4,533		4,535		503		6,836
Total:
Commercial and industrial	$	1,308	$	1,310	$	21	$	6,596
Real estate mortgage		23,141		23,143		503		26,781
Real estate construction		4,529		4,529		—		4,700

For the six months ended June 30, 2013 and 2012, interest income of $11,000 and $93,000 was recognized on impaired loans, which consisted of nonaccrual loans that were paid in full and accruing TDRs. 

Allowance for Loan Losses and Reserve for Unfunded Lending Commitments. At June 30, 2013 and 2012, the allowance for loan losses was $21.8 million and $27.3 million, respectively, or 1.85% and 2.50% of total loans, respectively.  At December 31, 2012, the allowance for loan losses was $24.6 million, or 2.23% of total loans. Net charge-offs for the three months ended June 30, 2013 were $975,000 or 0.08% of total loans compared with net charge-offs of $955,000 or 0.09% of total loans for the three months ended June 30, 2012. The net charge-offs for the second quarter of 2013 consisted of $487,000 in loans from Texas and $488,000 in loans from California. Net charge-offs for the six months ended June 30, 2013 were $2.3 million or 0.19% of total loans compared with net charge-offs of $1.6 million or 0.15% of total loans for the same period in 2012. The net charge-offs for the six months ended June 30, 2013 consisted of $1.4 million in loans from Texas and $877,000 in loans from California.

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.

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

	As of and for the Three Months Ended June 30,
	2013			2012
	(Dollars in thousands)
Average total loans outstanding for the period	$	1,144,151		$	1,061,193
Total loans outstanding at end of period	$	1,178,288		$	1,094,233
Allowance for loan losses at beginning of period	$	22,832		$	28,066
(Reduction in) provision for loan losses		(25	)		200
Charge-offs:
Commercial and industrial		(2	)		(10	)
Real estate mortgage		(1,095	)		(945	)
Real estate construction		(9	)		(683	)
Consumer and other		(7	)		(19	)
Total charge-offs		(1,113	)		(1,657	)
Recoveries:
Commercial and industrial		78			247
Real estate mortgage		27			452
Real estate construction		30			—
Consumer and other		3			3
Total recoveries		138			702
Net charge-offs		(975	)		(955	)
Allowance for loan losses at end of period		21,832			27,311
Reserve for unfunded lending commitments at beginning of period		949			800
(Reduction in) provision for unfunded lending commitments		(150	)		157
Reserve for unfunded lending commitments at end of period		799			957
Allowance for credit losses at end of period	$	22,631		$	28,268
Ratio of net charge-offs to end of period total loans		(0.08	)%		(0.09	)%

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	As of and for the Six Months Ended June 30,
	2013			2012
	(Dollars in thousands)
Average total loans outstanding for the period	$	1,119,903		$	1,054,955
Total loans outstanding at end of period	$	1,178,288		$	1,094,233
Allowance for loan losses at beginning of period	$	24,592		$	28,321
(Reduction in) provision for loan losses		(475	)		600
Charge-offs:
Commercial and industrial		(886	)		(794	)
Real estate mortgage		(1,645	)		(1,285	)
Real estate construction		(9	)		(683	)
Consumer and other		(32	)		(61	)
Total charge-offs		(2,572	)		(2,823	)
Recoveries:
Commercial and industrial		168			365
Real estate mortgage		77			815
Real estate construction		35			19
Consumer and other		7			14
Total recoveries		287			1,213
Net charge-offs		(2,285	)		(1,610	)
Allowance for loan losses at end of period		21,832			27,311
Reserve for unfunded lending commitments at beginning of period		961			1,012
(Reduction in) provision for unfunded lending commitments		(162	)		(55	)
Reserve for unfunded lending commitments at end of period		799			957
Allowance for credit losses at end of period	$	22,631		$	28,268
Ratio of allowance for loan losses to end of period total loans		1.85	%		2.50	%
Ratio of net charge-offs to end of period total loans		(0.19	)%		(0.15	)%
Ratio of allowance for loan losses to end of period total nonperforming loans (1)		131.76	%		79.93	%

_________________________

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

Securities. At June 30, 2013, the available-for-sale securities portfolio was $183.6 million, an increase of $19.5 million or 11.9% compared with $164.0 million at December 31, 2012. The increase was primarily due to purchases of U.S. government corporations and agencies securities and obligations of state and political subdivision securities, partially offset by unrealized losses and paydowns of government issued or guaranteed mortgage-backed securities and declines in unrealized gains on securities.  At June 30, 2013 and December 31, 2012, the held-to-maturity portfolio, which is carried at amortized cost, remained steady at $4.0 million.  The securities portfolio is primarily comprised of obligations of 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 $6.0 million at June 30, 2013, an increase of $409,000 or 7.3% compared with $5.6 million at December 31, 2012.

Deposits. At June 30, 2013, total deposits were $1.31 billion, an increase of $39.1 million or 3.1% compared with $1.27 billion at December 31, 2012. The Company’s ratio of noninterest-bearing demand deposits to total deposits at June 30, 2013 and December 31, 2012 was 24.7% and 24.4%, respectively. Interest-bearing deposits at June 30, 2013 were $983.7 million, an increase of $26.3 million or 2.7% compared with $957.3 million at December 31, 2012.

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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.   At June 30, 2013, brokered deposits were 3.0% of the Company's total deposits and on average mature in 40 months.

 Junior Subordinated Debentures.  Junior subordinated debentures at June 30, 2013 and December 31, 2012 were $36.1 million. The debentures mature on December 15, 2035, but are redeemable at the Company’s option at par plus accrued and unpaid interest. The debentures, issued to the Company’s unconsolidated subsidiary trust MCBI Statutory Trust I, were used to fund the Company’s acquisition of Metro United. The junior subordinated debentures accrued interest at a fixed rate of 5.76% until December 15, 2012, at which time the debentures began accruing interest at a floating rate equal to the 3-month LIBOR plus 1.55%. Related to these debentures, the Company entered into a forward-starting interest rate swap contract during the third quarter of 2009. Under the swap, the Company pays a fixed interest rate of 5.38% and receives 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.  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 June 30, 2013 were $46.0 million, an increase of $21.0 million or 84.0% compared to other borrowings of $25.0 million at December 31, 2012.  Other borrowings at June 30, 2013 primarily include $25.0 million in security repurchase agreements and $21.0 million in FHLB advances.  The security repurchase agreements bear interest at an average rate of 3.71% and mature on December 31, 2014.  The FHLB advances, $10.0 million from the FHLB of San Francisco and $11.0 million from the FHLB of Dallas, bear interest at an average rate of 1.18% and have maturity dates ranging from June 2016 to June 2018. Securities sold under securities 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.

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, were to mature February 10, 2013 and bore interest on the principal amount at a fixed rate per annum equal to 5.0% due quarterly and began March 31, 2010; however, the promissory notes were repaid in the fourth quarter of 2012.  

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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 Six Months Ended June 30, 2013			As of and for the Year Ended December 31, 2012
	(Dollars in thousands)
FHLB Notes and Advances:
at end of period	$	21,000		$	—
average during the period		7,133			—
maximum month-end balance during the period		21,000			3
Interest rate at end of period		1.18	%		—	%
Interest rate during the period		0.94			0.02
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	$	—		$	—
average during the period		—			926
maximum month-end balance during the period		—			1,000
Interest rate at end of period		—	%		5.00	%
Interest rate during the period		—			5.00

Liquidity. The Company’s loan to deposit ratio at June 30, 2013 and December 31, 2012 was 90.21% and 86.84%, respectively. As of June 30, 2013, the Company had commitments to fund loans in the amount of $162.6 million. At this same date, the Company had stand-by letters of credit of $6.0 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 $388.6 million from the FHLBs, $9.9 million from the FRB discount window and $5.0 million from other correspondent banks.

Capital Resources. Shareholders’ equity at June 30, 2013 was $177.7 million compared to $177.0 million at December 31, 2012, an increase of $689,000. The increase was primarily the result of $5.8 million of net income for the six months ending June 30, 2013, primarily offset by a decrease in other comprehensive income of $4.5 million.

On June 12, 2013, the Company declared a quarterly cash dividend of $374,000 or $0.02 per share on shares of its common stock, payable on July 15, 2013. The Company paid no dividends on common stock for the six months ended June 30, 2012.  Preferred dividends of $1.1 million were paid for the six months ended June 30, 2012, and no preferred dividends were paid for the six months ended June 30, 2013.

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The following table provides a comparison of the Company’s and each of the Banks’ leverage and risk-weighted capital ratios as of June 30, 2013 to the minimum and well-capitalized regulatory standards:

	Minimum Required For Capital Adequacy Purposes				To Be Categorized as Well Capitalized Under Prompt Corrective Action Provisions			Actual Ratio At June 30, 2013
The Company
Leverage ratio		4.00	%	(1)	N/A		%		12.87	%
Tier 1 risk-based capital ratio		4.00			N/A				15.84
Risk-based capital ratio		8.00			N/A				17.10
MetroBank
Leverage ratio		4.00	%	(2)		5.00	%		12.09	%
Tier 1 risk-based capital ratio		4.00				6.00			14.82
Risk-based capital ratio		8.00				10.00			16.07
Metro United
Leverage ratio		4.00	%	(3)		5.00	%		11.55	%
Tier 1 risk-based capital ratio		4.00				6.00			14.47
Risk-based capital ratio		8.00				10.00			15.73

 _______________________

(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 policies which govern the application of accounting principles generally accepted in the United States in the preparation of the Company’s consolidated financial statements. Certain accounting policies involve significant judgments and assumptions by management which have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, and 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. The allowance for loan losses is increased by provisions charged against current earnings and is reduced by net charge-offs. Loans are charged off when they are deemed to be uncollectible in whole or in part. Recoveries are recorded when cash payments are received. In developing the assessment, the Company relies on estimates and exercises judgment regarding matters where the ultimate outcome is uncertain. Circumstances may change and future assessments of credit risk may yield materially different results, resulting in an increase or decrease in the allowance for credit losses.

The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments and is maintained at levels that the Company believes are adequate to absorb probable losses inherent in the loan portfolio and unfunded lending commitments as of the date of the financial statements. The Company employs a systematic methodology for determining the allowance for credit losses that consists of four components: (i) a formula-based general reserve based on historical average losses by loan grade and grade migration, (ii) specific reserves on larger individual impaired 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, (iii) a qualitative component that reflects current market conditions and other factors precedent to losses different from historical averages, and (iv) a reserve for unfunded lending commitments.

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.”

53

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.

In determining the fair value of Metro United, the Company uses a review of the valuation of recent guideline bank acquisitions, if available, pricing of publicly traded comparables, as well as a discounted cash flow analysis and the market capitalization of the Company. The guideline bank transactions are 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 estimated fair value as of the valuation date. For discounted cash flow analyses, financial forecasts are developed by projecting operations for the next five years and discounting the cash flows and the terminal values. The financial forecasts consider 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 are used. The fair values of the reporting unit separately derived from each valuation technique (i.e., guideline transactions, discounted cash flows, and quoted market prices) are used to assess whether there is any goodwill impairment.

            The Company also considers the fair value of Metro United in relationship to the Company’s stock price by performing a reconciliation to the Company’s market value. This reconciliation is performed by first determining the fair value of the reporting unit from the valuation technique mentioned previously (i.e. guideline transactions, discounted cash flows and quoted market prices).  The fair value is compared to the allocated value of the reporting unit based on the Company’s market value using the stock price as of the valuation date.  The Company allocates the total market value to both of its segments, MetroBank and Metro United. For each Bank, the allocation is based upon the following internal ratios:

Balance Sheet Ratios

• Total Bank assets as a percentage of total assets;

• Total Bank loans as a percentage of total loans;

• Total Bank deposits as a percentage of total deposits; and

• Total Bank shareholder's equity as a percentage of total shareholders' equity.

Performance Ratios

• Total Bank nonperforming assets as a percentage of total assets;

• Last Bank twelve months return on assets; and

• Last Bank twelve months return on equity.

In allocating the market value between the two Banks, more weight was assigned to the Performance Ratios than the Balance Sheet Ratios in order to account for the differences in market valuation as a result of different financial performance. The allocated market value of Metro United Bank is then reconciled to the weighted average fair value derived from each valuation technique (i.e. guideline transactions, discounted cash flows and quoted market prices) by assigning an estimated control premium of 20% to the allocated market value.

 The derived fair value of Metro United is then compared with the carrying value of its equity. If the carrying value of its equity exceeds the fair value at the evaluation date, then the step-one impairment test would have failed, and the Company would 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.

Impairment of investment securities. The Company believes impairment of investment securities is a critical accounting estimate that requires significant judgment and estimates to be used in the preparation of its consolidated financial statements. 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.

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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 3 - “Securities” to the 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 generally accepted accounting principles. 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 of certain assets 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 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 is described in Note 11 - “Fair Value” to the 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 believes that the determination of income taxes is a critical accounting estimate that requires significant judgment used in the preparation of its consolidated financial statements.  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.

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Item 3.    Quantitative and Qualitative Disclosures about Market Risk.

There have been no material changes in the market risk information previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. 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.

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PART II

OTHER INFORMATION

Item 1.   Legal Proceedings.

The Company is involved in various litigation that arises from time to time in the normal course of business.  In the opinion of management, after 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, 2012 filed with the Securities and Exchange Commission on March 21, 2013.

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

The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company’s common stock during the three months ended June 30, 2013:

Period	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan (2)	Maximum Number of Shares That May Yet Be Purchased Under the Plan (2)
May 1, 2013 to May 31, 2013		15,643	$	9.92	N/A	N/A
June 1, 2013 to June 30, 2013		2,978		9.72	N/A	N/A
Total		18,621	$	9.89	N/A	N/A

________________________

(1)	All shares of common stock reported in the table above were repurchased by the Company at the fair market value of the Company’s common stock in connection with the satisfaction of tax withholding obligations under restricted stock agreements between us and certain key employees and directors.
(2)	The Company has no publicly announced plans or programs.

Item 3.   Defaults Upon Senior Securities.

Not applicable

Item 4.   Mine Safety Disclosures.

Not applicable

Item 5.    Other Information.

Not applicable

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Item 6.    Exhibits.

Exhibit
Number	Identification of Exhibit
3.1	Amended and Restated Articles of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-62667) (the "Registration Statement")).
3.2	Articles of Amendment to Amended and Restated Articles of Incorporation 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, 2008).
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).
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.

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SIGNATURES

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

	METROCORP BANCSHARES, INC.
	By:	/s/ George M. Lee
Date: August 8, 2013		George M. Lee  Executive Vice Chairman, President and
		Chief Executive Officer (principal executive officer)
Date: August 8, 2013	By:	/s/ David C. Choi
		David C. Choi
		Chief Financial Officer (principal financial officer/ principal accounting officer)

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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, 2008).
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).
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.

60