UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010

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

Commission file number: 000-25141

________________

MetroCorp Bancshares, Inc.

(Exact name of registrant as specified in its charter)

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

9600 Bellaire Boulevard, Suite 252

Houston, Texas 77036

(Address of principal executive offices including zip code)

(713) 776-3876

(Registrant’s telephone number, including area code)

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

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

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

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

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

As of November 2, 2010, the number of outstanding shares of Common Stock was 13,230,315.

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)

	September 30,			December 31,
	2010			2009
ASSETS
Cash and due from banks	$	24,721		$	26,087
Federal funds sold and other short-term investments		127,702			82,006
Total cash and cash equivalents		152,423			108,093
Securities available-for-sale, at fair value		156,386			98,368
Securities held-to-maturity (fair value $4,517 and $ 4,352 at September 30, 2010      and December 31, 2009, respectively)		4,044			4,044
Other investments		7,038			21,577
Loans, net of allowance for loan losses of $34,644 and $29,403 at September 30, 2010      and December 31, 2009, respectively		1,138,923			1,244,594
Accrued interest receivable		4,854			5,161
Premises and equipment, net		5,663			6,042
Goodwill		17,327			19,327
Core deposit intangibles		234			329
Customers' liability on acceptances		7,484			3,011
Foreclosed assets, net		16,141			22,291
Cash value of bank owned life insurance		29,617			28,526
Prepaid FDIC assessment		8,404			10,637
Other assets		18,921			17,548
Total assets	$	1,567,459		$	1,589,548
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing	$	198,507		$	203,427
Interest-bearing		1,101,462			1,160,740
Total deposits		1,299,969			1,364,167
Junior subordinated debentures		36,083			36,083
Other borrowings		56,205			25,513
Accrued interest payable		555			625
Acceptances outstanding		7,484			3,011
Other liabilities		7,379			4,843
Total liabilities		1,407,675			1,434,242
Commitments and contingencies		–			–
Shareholders' equity:
Preferred stock, $1.00 par value, 2,000,000 shares authorized; 45,000 shares issued and      outstanding at September 30, 2010 and December 31, 2009		45,391			44,718
Common stock, $1.00 par value, 50,000,000 shares authorized; 13,230,315 and 10,994,965      shares issued and 13,230,315 and 10,926,315 shares outstanding at September 30, 2010      and December 31, 2009, respectively		13,230			10,995
Additional paid-in-capital		33,155			29,114
Retained earnings		68,043			72,505
Accumulated other comprehensive loss		(35	)		(1,106	)
Treasury stock, at cost, 68,650 shares at December 31, 2009		–			(920	)
Total shareholders' equity		159,784			155,306
Total liabilities and shareholders' equity	$	1,567,459		$	1,589,548

See accompanying notes to condensed consolidated financial statements

2

METROCORP BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2010			2009			2010			2009
Interest income:
Loans	$	17,960		$	20,654		$	55,717		$	61,791
Securities:
Taxable		977			965			2,590			3,048
Tax-exempt		117			85			356			210
Other investments		57			89			207			386
Federal funds sold and other short-term investments		108			29			266			150
Total interest income		19,219			21,822			59,136			65,585
Interest expense:
Time deposits		2,863			4,687			9,410			15,991
Demand and savings deposits		1,301			1,761			4,397			6,190
Junior subordinated debentures		519			519			1,559			1,559
Subordinated debentures and other borrowings		287			240			798			768
Total interest expense		4,970			7,207			16,164			24,508
Net interest income		14,249			14,615			42,972			41,077
Provision for loan losses		4,700			3,596			15,028			12,710
Net interest income after provision for loan losses		9,549			11,019			27,944			28,367
Noninterest income:
Service fees		1,222			1,134			3,384			3,309
Loan-related fees		91			136			305			429
Letters of credit commissions and fees		185			256			570			769
Gain on securities, net		31			347			76			356
Total other-than-temporary impairments
(“OTTI”) on securities		(212	)		(804	)		(495	)		(1,984	)
Less: Noncredit portion of “OTTI”		48			454			135			1,335
Net impairments on securities		(164	)		(350	)		(360	)		(649	)
Other noninterest income		396			442			1,173			1,320
Total noninterest income		1,761			1,965			5,148			5,534
Noninterest expenses:
Salaries and employee benefits		5,073			4,864			15,430			15,495
Occupancy and equipment		1,882			2,014			5,780			6,006
Foreclosed assets, net		1,088			1,320			5,367			2,740
FDIC assessment		881			1,027			2,471			2,712
Goodwill impairment		–			–			2,000			–
Other noninterest expense		1,935			2,061			6,024			6,738
Total noninterest expenses		10,859			11,286			37,072			33,691
Income (loss) before provision for income taxes		451			1,698			(3,980	)		210
Provision (benefit) for income taxes		(186	)		560			(1,323	)		(46	)
Net income (loss)	$	637		$	1,138		$	(2,657	)	$	256
Dividends and discount – preferred stock		(605	)		(599	)		(1,805	)		(1,701	)
Net income (loss) available to common shareholders	$	32		$	539		$	(4,462	)	$	(1,445	)
Earnings (loss) per common share:
Basic	$	0.00		$	0.05		$	(0.38	)	$	(0.13	)
Diluted	$	0.00		$	0.05		$	(0.38	)	$	(0.13	)
Weighted average shares outstanding:
Basic		12,329			10,915			11,712			10,899
Diluted		12,345			10,923			11,712			10,899
Dividends per common share	$	–		$	–		$	–		$	0.04

See accompanying notes to condensed consolidated financial statements

3

METROCORP BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2010			2009			2010			2009
Net income (loss)	$	637		$	1,138		$	(2,657	)	$	256
Other comprehensive income (loss), net of taxes:
Change in accumulated loss on effective cash flow       hedging derivatives		(390	)		(168	)		(1,191	)		(168	)
Unrealized loss on investment securities, net:
Securities with OTTI charges during the period		(135	)		(515	)		(316	)		(1,270	)
Less: OTTI charges recognized in net income		(105	)		(225	)		(231	)		(416	)
Net unrealized losses on investment
securities with OTTI		(30	)		(290	)		(85	)		(854	)
Unrealized holding gain  arising during the
period		474			1,016			2,396			1,893
Less: reclassification adjustment for gain
included in net income		20			214			49			220
Net unrealized gains on investment
securities		454			802			2,347			1,673
Other comprehensive income		34			344			1,071			651
Total comprehensive income (loss)	$	671		$	1,482		$	(1,586	)	$	907

See accompanying notes to condensed consolidated financial statements

4

METROCORP BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Nine Months Ended September 30, 2010

(In thousands)

(Unaudited)

	Preferred Stock				Common Stock					Additional paid-in			Retained			Accumulated other comprehensive			Treasury stock, at
	Shares		Amount		Shares			Amount		capital			earnings			income (loss)			cost			Total
Balance at December 31, 2009		45	$	44,718		10,927		$	10,995	$	29,114		$	72,505		$	(1,106	)	$	(920	)	$	155,306
Re-issuance of treasury stock		–		–		78			–		(705	)		–			–			952			247
Issuance of common stock		–		–		2,235			2,235		4,766			–			–			–			7,001
Stock-based compensation expense related        to stock options recognized in earnings		–		–		–			–		(20	)		–			–			–			(20	)
Net loss		–		–		–			–		–			(2,657	)		–			–			(2,657	)
Amortization of preferred stock discount		–		107		–			–		–			(107	)		–			–			–
Forfeiture of restricted shares		–		–		(10	)		–		–			–			–			(32	)		(32	)
Other comprehensive income		–		–		–			–		–			–			1,071			–			1,071
Dividends – preferred stock		–		566		–			–		–			(1,698	)		–			–			(1,132	)
Balance at September 30, 2010		45	$	45,391		13,230		$	13,230	$	33,155		$	68,043		$	(35	)	$	–		$	159,784

See accompanying notes to condensed consolidated financial statements

5

METROCORP BANCSHARES, INC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	For the Nine Months Ended September 30,
	2010			2009
Cash flows from operating activities:
Net income (loss)	$	(2,657	)	$	256
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		1,224			1,455
Provision for loan losses		15,028			12,710
Impairment on securities		360			649
Goodwill impairment		2,000			–
Gain on securities transactions, net		(76	)		(356	)
Loss on writedown and sale of foreclosed assets		2,916			1,029
Gain on sale of premises and equipment		(7	)		(20	)
Amortization of premiums and discounts on securities, net		19			(8	)
Amortization of deferred loan fees and discounts		(992	)		(1,563	)
Amortization of core deposit intangibles		95			133
Stock-based compensation		(20	)		277
Changes in:
Accrued interest receivable		307			994
Other assets		(1,186	)		(3,813	)
Accrued interest payable		(70	)		(207	)
Other liabilities		1,346			1,408
Net cash provided by operating activities		18,287			12,944
Cash flows from investing activities:
Purchases of securities available-for-sale		(123,000	)		(46,171	)
Purchases of securities held-to-maturity		-			(4,044	)
Purchases of other investments		(50	)		(19,207	)
Proceeds from sales of securities available-for-sale		20,076			31,848
Proceeds from maturities, calls, and principal paydowns of securities available-for-sale		14,590			23,077
Proceeds from sales and maturities of other investments		48,135			27,215
Net change in loans		77,296			(2,982	)
Proceeds from sale of foreclosed assets		17,573			8,497
Proceeds from sale of premises and equipment		9			22
Purchases of premises and equipment		(847	)		(324	)
Net cash provided by investing activities		53,782			17,931
Cash flows from financing activities:
Net change in:
Deposits		(64,198	)		122,673
Other borrowings		30,692			(113,928	)
Proceeds from issuance of common stock		6,899			–
Proceeds from issuance of preferred stock with common stock warrant		-			45,000
Re-issuance of treasury stock		-			169
Cash dividends paid on preferred stock		(1,132	)		(1,307	)
Cash dividends paid on common stock		-			(869	)
Net cash (used in) provided by financing activities		(27,739	)		51,738
Net increase in cash and cash equivalents		44,330			82,613
Cash and cash equivalents at beginning of period		108,093			38,101
Cash and cash equivalents at end of period	$	152,423		$	120,714

Supplemental information:
Interest paid	$	16,235	$	24,715
Income taxes paid		3,025		648
Noncash investing and financing activities:
Issuance of common stock pursuant to incentive plan		349		-
Dividends accrued not paid on preferred stock		853		287
Foreclosed assets acquired		14,339		27,713
Loans originated to finance foreclosed assets		3,505		3,760

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 accounting principles generally accepted in the United States of America for interim financial information and with the instructions for Form 10-Q. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal and recurring adjustments, necessary for a fair statement of the Company’s financial position at September 30, 2010, results of operations for the three and nine months ended September 30, 2010 and 2009, and cash flows for the nine months ended September 30, 2010 and 2009. 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 accounting principles generally accepted in the United States of America.

Certain items in prior financial statements have been reclassified to conform to the 2010 presentation, with no impact on the balance sheet, net income (loss), shareholders’ equity, or cash flows.

These financial statements and the notes thereto should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

7

2.        SECURITIES

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

	As of September 30, 2010
	Amortized		Unrealized								Fair
	Cost		Gains		Losses			OTTI			Value
Securities available-for-sale	(In thousands)
Debt Securities
U.S. Treasury and other U.S. government      corporations and agencies	$	100,980	$	1,266	$	─		$	─		$	102,246
Obligations of state and political      subdivisions		5,955		266	─			─				6,221
Mortgage-backed securities and collateralized      mortgage obligations
Government issued or
guaranteed		32,024		897	─			─				32,921
Privately issued residential		2,099		360		(58	)		(715	)		1,686
Asset backed securities		357		49	─				(231	)		175
Equity Securities						─
Investment in CRA funds		13,105		32	─			─				13,137
Total available-for-sale      securities	$	154,520	$	2,870	$	(58	)	$	(946	)	$	156,386
Securities held-to-maturity
Obligations of state and political      subdivisions	$	4,044	$	473	$	─		$	─		$	4,517
Total held-to-maturity      securities	$	4,044	$	473	$	─		$	─		$	4,517
Other investments
FHLB/Federal Reserve Bank stock	$	5,955	$	─	$	─		$	─		$	5,955
Investment in subsidiary trust		1,083	─		─			─				1,083
Total other investments	$	7,038	$	─	$	─		$	─		$	7,038

8

	As of December 31, 2009
	Amortized		Unrealized								Fair
	Cost		Gains		Losses			OTTI			Value
	(In thousands)
Securities available-for-sale
Debt Securities
U.S. Treasury and other U.S. government corporations and      agencies	$	57,882	$	─	$	(654	)	$	─		$	57,228
Obligations of state and political      subdivisions		5,724		118		(29	)		─			5,813
Mortgage-backed securities and collateralized mortgage      obligations
Government issued or guaranteed		32,014		397		(103	)		─			32,308
Privately issued residential		3,947		233		(241	)		(1,104	)		2,835
Asset backed securities		467	─		─				(283	)		184
Total available-for-sale securities	$	100,034	$	748	$	(1,027	)	$	(1,387	)	$	98,368
Securities held-to-maturity
Obligations of state and political subdivisions	$	4,044	$	308	$	─		$	─		$	4,352
Total held-to-maturity securities	$	4,044	$	308	$	─		$	─		$	4,352
Other investments
Investment in CDARS	$	14,042	$	─	$	─		$	─		$	14,042
FHLB/Federal Reserve Bank stock		6,452		─		─			─			6,452
Investment in subsidiary trust		1,083		─		─			─			1,083
Total other investments	$	21,577	$	─	$	─		$	─		$	21,577

The following table displays the gross unrealized losses and fair value of securities available-for-sale as of September 30, 2010 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 September 30, 2010 or December 31, 2009.

	September 30, 2010
	Less Than 12 Months				Greater Than 12 Months					Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
	(In thousands)
Securities available-for-sale
Debt securities
Mortgage-backed securities and      collateralized mortgage obligations
Privately issued residential	$	─	$	─	$	419	$	(58	)	$	419	$	(58	)
Total available-for-sale securities	$	─	$	─	$	419	$	(58	)	$	419	$	(58	)

9

	December 31, 2009
	Less Than 12 Months				Greater Than 12 Months				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(In thousands)
Securities available for sale
U.S. Treasury and other U.S. government      corporations and agencies	$	52,228	$	(654)	$	─	$	─	$	52,228	$	(654)
Obligations of state and political      subdivisions		1,516		(29)		─		─		1,516		(29)
Mortgage-backed securities and      collateralized mortgage obligations
Government issued or guaranteed		10,937		(103)		─		─		10,937		(103)
Privately issued residential		86		(33)		─		─		86		(33)
Asset backed securities		─		─		488		(208)		488		(208)
Total securities	$	64,767	$	(819)	$	488	$	(208)	$	65,255	$	(1,027)

As of September 30, 2010, management does not have the intent to sell any of the securities classified as available-for-sale in the table above and believes it is more likely than not that the Company will not have to sell any such securities before a recovery of the cost.  The unrealized losses are largely due to price declines in privately issued mortgage securities related to overall market weakness in the real estate sector.  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 $58,000 of unrealized losses is temporary and the remaining $946,000 of OTTI represents an unrealized loss for which an impairment has been recognized in other comprehensive loss.

Other-Than-Temporary Impairments (OTTI)

 The following table presents a rollforward for the three and nine months ended September 30, 2010, of the credit loss component of OTTI losses that have been recognized in income, related to debt securities that the Company does not intend to sell.

	Impairment related to credit losses
	Three months ended September 30, 2010			Nine months ended September 30, 2010
	(In thousands)
Credit losses at beginning  of period	$	1,487		$	1,291
Addition of OTTI that was not previously recognized		2			6
Additions to OTTI that were previously recognized when there is no      intent to sell and no requirement to sell before recovery of amortized      cost basis		26			26
Transfers from accumulated other comprehensive income to OTTI related      to credit losses		136			328
Reclassifications from OTTI to realized losses on sales of securities		(48	)		(48	)
Credit losses at end of period	$	1,603		$	1,603

For the nine months ended September 30, 2010, credit-related losses of $308,000 on 18 non-agency residential mortgage-backed securities and $52,000 on three asset-backed securities were recognized. To measure credit losses, external credit ratings and other relevant collateral details and performance statistics on a security-by-security basis were considered. Securities exhibiting significant deterioration are subjected to further analysis. Assumptions were developed for prepayment speed, default rate, and loss severity for each security using third party sources and based on the collateral history. The resulting projections of future cash flows of the underlying collateral were then discounted by the underlying yield before any write-downs were considered to determine the net present value of the cash flows (“NPV”).  The difference between the cost basis and the NPV was taken as a credit loss in the current period to the extent that these losses have not been previously recognized. The difference between the NPV and the quoted market price is considered a noncredit related loss and was included in other comprehensive loss.

10

Other Securities Information

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

	Nine Months Ended September 30,
	2010			2009
Amortized cost	$	20,092		$	31,512
Proceeds		20,076			31,848
Gross realized gains		216			337
Gross realized losses		(232	)		—

At September 30, 2010, future contractual maturities of debt securities were as follows (in thousands):

	Securities				Securities
	Available-for-sale				Held-to-maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Within one year	$	—	$	—	$	—	$	—
Within two to five years		14,124		14,393		—		—
Within six to ten years		89,248		90,278		—		—
After ten years		3,920		3,971		4,044		4,517
Mortgage-backed securities and collateralized mortgage obligations		34,123		34,607		—		—
Total debt securities	$	141,415	$	143,249	$	4,044	$	4,517

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.

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3.        LOANS

The loan portfolio is classified by major type as follows:

	As of September 30, 2010						As of December 31, 2009
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
Commercial and industrial	$	357,803			30.43	%	$	399,235			31.27	%
Real estate mortgage
Residential		35,551			3.03			32,730			2.56
Commercial		739,210			62.87			742,974			58.20
		774,761			65.90			775,704			60.76
Real estate construction
Residential		15,539			1.32			32,257			2.52
Commercial		23,779			2.02			65,532			5.14
		39,318			3.34			97,789			7.66
Consumer and other		3,842			0.33			3,888			0.31
Gross loans		1,175,724			100.00	%		1,276,616			100.00	%
Unearned discounts, interest and deferred fees		(2,157	)					(2,619	)
Total loans		1,173,567						1,273,997
Allowance for loan losses		(34,644	)					(29,403	)
Loans, net	$	1,138,923					$	1,244,594

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

	As of and for the Three Months						As of and for the Nine Months
	Ended September 30,						Ended September 30,
	2010			2009			2010			2009
	(In thousands)
Allowance for loan losses at beginning of period	$	36,004		$	24,266		$	29,403		$	24,235
Provision for loan losses		4,700			3,596			15,028			12,710
Charge-offs		(6,115	)		(2,421	)		(10,400	)		(12,009	)
Recoveries		55			162			613			667
Allowance for loan losses at end of period		34,644			25,603			34,644			25,603
Reserve for unfunded lending commitments at beginning of period		822			1,478			1,043			1,092
Provision (reversal) for unfunded lending commitments		(110	)		(290	)		(331	)		96
Reserve for unfunded lending commitments at end of period		712			1,188			712			1,188
Allowance for credit losses	$	35,356		$	26,791		$	35,356		$	26,791

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

	As of			As of
	September 30, 2010			December 31, 2009
	(Dollars in thousands)
Nonaccrual loans	$	51,464		$	58,236
Accruing loans 90 days or more past due		-			420
Troubled debt restructurings - accruing		1,319			4,927
Troubled debt restructurings - nonaccruing		16,645			16,993
Other real estate (“ORE”)		16,141			22,291
Total nonperforming assets	$	85,569		$	102,867
Total nonperforming assets to total assets		5.46	%		6.47	%
Total nonperforming assets to total loans and ORE		7.19	%		7.94	%

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

	As of September 30, 2010		As of December 31, 2009
	(In thousands)
Impaired loans(1) with no valuation reserve	$	59,441	$	56,413
Impaired loans(1)  with a valuation reserve		9,987		23,743
Total recorded investment in impaired loans	$	69,428	$	80,156
Valuation allowance related to impaired loans	$	1,086	$	2,731

(1) Impaired loans include nonaccrual loans and troubled debt restructurings.

4.        GOODWILL

Changes in the carrying amount of the Company’s goodwill for the periods indicated below were as follows (in thousands):

	As of and for the nine months ended September 30, 2010			As of and for the year ended December 31, 2009
Balance as of January 1
Goodwill	$	21,827		$	21,827
Accumulated impairment losses		(2,500	)		-
Net balance as of January 1		19,327			21,827
Impairment losses		(2,000	)		(2,500	)
Balance as of end of period	$	17,327		$	19,327
Accumulated impairment losses	$	(4,500	)	$	(2,500	)

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.

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The Company completed its 2010 annual impairment testing based on information that was as of August 31, 2010. The review utilized guideline company and guideline transaction information where available, discounted cash flow analysis, and quoted stock prices for the Company and guideline banks to estimate the fair value of Metro United.

Due to the staleness of the bank transactions multiples and fluctuations in market capitalization of peer banks used in the market methods, management relied primarily on the income approach for the step one evaluation. The Company also performed a reconciliation of the estimated fair value to the stock price of the Company. Because the step-one impairment test failed, the Company performed the step-two analysis to derive the implied fair value of goodwill.  The estimated fair value of Metro United as of August 31, 2010 exceeded its respective carrying value in the step-two analysis; therefore, the Company determined there was no impairment of goodwill as of that date.

Under the step-two analysis, the implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. The fair value of Metro United’s assets and liabilities, including unrecognized intangible assets, is individually evaluated. The excess of the fair value of Metro United over the fair value of its net assets is the implied fair value of goodwill. The Company estimated the fair value of Metro United’s assets and liabilities, including previously unrecognized intangible assets, through a variety of valuation techniques that incorporated interest rates, credit or nonperformance risk, as well as market risk adjustments that are indicative of the current economic environment. The estimated values are based on an exit price and reflect management’s expectations regarding how a market participant would value the assets and liabilities. This evaluation and resulting conclusion were significantly affected by the estimated fair value of the loans of Metro United that were evaluated, particularly the market risk adjustment that is a consequence of the current distressed market conditions.

It is possible that future changes in the fair value of Metro United’s net assets could result in future goodwill impairment. For example, to the extent that market liquidity returns and the fair value of the individual assets 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, resulting in additional goodwill impairment. Future potential changes in valuation assumptions may impact the estimated fair value of Metro United, therefore resulting in an additional impairment of the goodwill. The stock price performance of the Company and the fair value of Metro United's loans are factors that may impact potential future goodwill impairment. Assuming all other assumptions stay the same, a 15% decline in stock price from the 15-day average price ending on August 31, 2010 of $2.78 could potentially result in a material impairment of goodwill.  Additionally, an increase in the fair value of Metro United's loans could potentially result in a material impairment of goodwill. Subsequent to the annual impairment test, the Company issued 954,000 shares of common stock at a price of $3.00 per share on September 16, 2010 in a private placement.  The issue price was based on 110% of the average closing price per share of the Company's common stock on the NASDAQ Global Market for the 15 trading days ending on and including July 30, 2010.

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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 September 30, 2010 and 2009, there were 1,700,989 and 1,812,996 antidilutive stock options, respectively.  For the nine months ended September 30, 2010 and 2009, there were 1,790,307 and 1,814,983 antidilutive stock options, respectively.  The number of potentially dilutive common shares is determined using the treasury stock method.

	As of and for the Three Months				As of and for the Nine Months
	Ended September 30,				Ended September 30,
	2010		2009		2010			2009
	(In thousands, except per share amounts)
Net income (loss) available to common shareholders	$	32	$	539	$	(4,462	)	$	(1,445	)
Weighted average common shares in basic EPS		12,329		10,915		11,712			10,899
Effect of dilutive securities		16		8		-			-
Weighted average common and potentially dilutive
common shares used in diluted EPS		12,345		10,923		11,712			10,899
Earnings (loss) per common share:
Basic	$	0.00	$	0.05	$	(0.38	)	$	(0.13	)
Diluted	$	0.00	$	0.05	$	(0.38	)	$	(0.13	)

6.        COMMITMENTS AND CONTINGENCIES

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

The contractual amount of the Company’s financial instruments with off-balance sheet risk at September 30, 2010 and December 31, 2009 is presented below:

	As of September 30, 2010		As of December 31, 2009
	(Dollars in thousands)
Unfunded loan commitments including unfunded lines of credit	$	78,427	$	121,166
Standby letters of credit		5,171		12,556
Commercial letters of credit		4,184		10,415
Operating leases		5,415		6,133
Total financial instruments with off-balance sheet risk	$	93,197	$	150,270

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.

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7.        SHAREHOLDERS’ EQUITY

On September 16, 2010, the Company issued 954,000 shares of its common stock at $3.00 per share to an accredited investor in a private placement.  The purchase price of $3.00 per share was approved by the Board of Directors of the Company on August 27, 2010 and was based upon an amount equal to 110% of the average closing price per share of the Company's common stock on the NASDAQ Global Market for the 15 trading days ending on and including July 30, 2010.  The approximate $2.9 million in net proceeds will be used by the Company for general corporate purposes.

On April 23, 2010, the Company issued 1,250,000 shares of its common stock at $3.23 per share to accredited investors in a private placement.  The purchase price of $3.23 per share was approved by the Board of Directors of the Company on March 26, 2010 and was based upon an amount equal to 110% of the average closing price per share of the Company's common stock on the NASDAQ Global Market for the 10 trading days ending on and including March 31, 2010.  The approximate $4.0 million in net proceeds was used by the Company for general corporate purposes.

The Company’s Board of Directors elected to suspend the Company’s common stock dividend indefinitely in April 2009 and to defer the dividend on the Series A Preferred Stock for the second quarter of 2010. The Board of Directors of the Company elected to resume payment of dividends for the third and fourth quarter of 2010 on the Series A Preferred Stock.   Any future determination relating to dividend policy will be made at the discretion of the Company's Board of Directors and will depend on a number of factors, including the Company's future earnings, capital requirements, financial condition, future prospects, regulatory restrictions, and other factors that the Board of Directors may deem relevant.

In the event that the Company defers paying dividends on the Series A Preferred Stock for an aggregate of six quarterly dividend periods or more (whether or not consecutive), the Company must increase the authorized number of directors then constituting its Board of Directors by two.  Holders of the Series A Preferred Stock, together with the holders of any outstanding parity stock with the same voting rights, will be entitled to elect the two additional members of the Board of Directors at the next annual meeting (or at a special meeting called for this purpose) and at each subsequent annual meeting until all accrued and unpaid dividends for all past dividend periods have been paid in full.

8.        REGULATORY MATTERS

The Banks are subject to regulations and, among others things, may be limited in their ability to pay dividends or otherwise transfer funds to the Company. Under applicable restrictions as described below, Metro United cannot declare or pay cash dividends to the Company without prior written consent from its regulator. In addition, dividends paid by the Banks to the Company would be prohibited if the effect thereof would cause the Banks’ capital to be reduced below applicable minimum capital requirements.

On August 10, 2009, MetroBank entered into a written agreement (the "Agreement") with the Office of the Comptroller of the Currency (“OCC”).  The Agreement is based on the findings of the OCC during the annual on-site examination of MetroBank performed in the first quarter of 2009 utilizing financial information as of December 31, 2008 and is primarily focused on matters related to MetroBank's asset quality.  Pursuant to the Agreement, the Board of Directors of MetroBank has appointed a compliance committee to monitor and coordinate MetroBank’s performance under the Agreement.  The Agreement provides for, among other things, the development and implementation of written programs to reduce MetroBank's credit risks, monitor and reduce the level of criticized assets and manage commercial real estate loan concentrations in light of current adverse commercial real estate market conditions generally and in its market areas. During and since the completion of the examination, management of MetroBank has made adjustments in policies and procedures in an effort to alleviate the effects of the credit challenge caused by the economic deterioration in its market areas.

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

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Under the terms of the Order, Metro United cannot declare or pay cash dividends and shall not establish any new branches or other offices without the prior written consent of certain officials of the FDIC and the CDFI.  In addition, within 90 days after the effective date of the Order, Metro United developed and submitted a written capital plan to achieve and maintain ratios of Tier 1 capital to average total assets (leverage) of at least 9% and total capital to total risk-weighted assets of at least 13% by December 31, 2010. As of September 30, 2010, Metro United's Tier 1 leverage ratio was 10.08% and its total risk-based capital ratio was 13.79%. The Order requires certain corrective steps, imposes limits on activities (such as payment of dividends), prescribes regulatory parameters (such as asset management) and requires the adoption of new or revised policies, procedures and controls on Metro United's operations.  In many cases, Metro United must adopt or revise the policies and submit them to the FDIC and CDFI for approval within the time frames prescribed.

Although Metro United meets the capital levels deemed to be “well-capitalized”, due to the capital requirement within the Order, it cannot be considered better than "adequately capitalized" for capital adequacy purposes, even if it exceeds the levels of capital set forth in the Order.  As an adequately capitalized institution, Metro United may not pay interest rates on deposits that are more than 75 basis points above the rate of the applicable market of Metro United as determined by the FDIC.  Additionally, Metro United may not accept, renew or roll over brokered deposits without prior approval of the FDIC.

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

The Company and the Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. The regulations require the Company to meet specific capital adequacy guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Banks’ capital classification is also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Banks to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of September 30, 2010, that the Company and the Banks met all capital adequacy requirements to which they were subject.

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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 September 30, 2010 to the minimum and well-capitalized regulatory standards:

	Actual					Minimum Required For Capital Adequacy Purposes					To be Categorized as Well Capitalized under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
As of September 30, 2010
Total risk-based capital ratio
MetroCorp Bancshares, Inc.	$	189,299		15.14	%	$	99,998		8.00	%		N/A		N/A	%
MetroBank, N.A.		138,191		15.01			73,644		8.00			92,055		10.00
Metro United Bank		45,456		13.79			26,369		8.00			32,961		10.00
Tier 1 risk-based capital ratio
MetroCorp Bancshares, Inc.		173,417		13.87			49,999		4.00			N/A		N/A
MetroBank, N.A.		126,507		13.74			36,822		4.00			55,233		6.00
Metro United Bank		41,255		12.52			13,185		4.00			19,777		6.00
Leverage ratio
MetroCorp Bancshares, Inc.		173,417		10.96			63,299		4.00			N/A		N/A
MetroBank, N.A.		126,507		10.72			47,215		4.00			59,018		5.00
Metro United Bank		41,255		10.08			16,365		4.00			20,456		5.00
As of December 31, 2009
Total risk-based capital ratio
MetroCorp Bancshares, Inc.	$	189,043		13.80	%	$	109,586		8.00	%		N/A		N/A	%
MetroBank, N.A.		138,342		14.01			79,012		8.00			98,766		10.00
Metro United Bank		48,625		12.74			30,537		8.00			38,171		10.00
Tier 1 risk-based capital ratio
MetroCorp Bancshares, Inc.		171,756		12.54			54,793		4.00			N/A		N/A
MetroBank, N.A.		125,853		12.74			39,506		4.00			59,259		6.00
Metro United Bank		43,832		11.48			15,268		4.00			22,903		6.00
Leverage ratio
MetroCorp Bancshares, Inc.		171,756		10.76			63,845		4.00			N/A		N/A
MetroBank, N.A.		125,853		10.69			47,113		4.00			58,891		5.00
Metro United Bank		43,832		10.47			16,750		4.00			20,937		5.00

As of September 30, 2010, the most recent notifications from the OCC with respect to MetroBank categorized MetroBank as "well capitalized" under the regulatory framework for prompt corrective action.

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

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9.       ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The balance of and changes in each component of accumulated other comprehensive income as of and for the nine months ended September 30, 2010 are as follows (net of taxes):

	Gains (Loss) on Effective Cash Hedging Derivatives			Net Unrealized Losses on Investments with OTTI			Net Unrealized Investment Gains (Losses)			Total Accumulated Other Comprehensive Income (Losses)
	(In thousands)
Balance December 31, 2009	$	(39	)	$	(888	)	$	(179	)	$	(1,106	)
Current period  change		(1,191	)		(85	)		2,347			1,071
Balance September 30, 2010	$	(1,230	)	$	(973	)	$	2,168		$	(35	)

10.     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 other liabilities in the accompanying condensed consolidated statements of cash flows.

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

The notional amount of the interest rate derivative contract outstanding at September 30, 2010 and December 31, 2009 was $17.5 million, and the estimated fair value at September 30, 2010 and December 31, 2009 was ($1.9 million) and ($61,000), respectively.  The Company obtains dealer quotations to value its interest rate derivative contract designated as hedges of cash flows.

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

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

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Amounts included in the condensed consolidated statements of income and in other comprehensive income for the period related to interest rate derivatives designated as hedges of cash flows were as follows.  There were no interest rate derivatives designated as hedges of fair value at September 30, 2010.

	Gains/(losses) recorded in income and other comprehensive income (loss) (in thousands)
Three months ended September 30, 2010	Derivatives – effective portion reclassified from AOCI into income		Hedge ineffectiveness recorded directly in income		Total income statement impact		Derivatives – effective portion recorded in OCI			Total change in OCI for period
Contract type
Interest rate	$	—	$	—	$	—	$	(609	)	$	(609	)
Three months ended September 30, 2009
Contract type
Interest rate	$	—	$	—	$	—	$	(168	)	$	(168	)

	Gains/(losses) recorded in income and other comprehensive income (loss) (in thousands)
Nine months ended September 30, 2010	Derivatives – effective portion reclassified from AOCI into income		Hedge ineffectiveness recorded directly in income		Total income statement impact		Derivatives – effective portion recorded in OCI			Total change in OCI for period
Contract type
Interest rate	$	—	$	—	$	—	$	(1,861	)	$	(1,861	)
Nine months ended September 30, 2009
Contract type
Interest rate	$	—	$	—	$	—	$	(168	)	$	(168	)

Counterparty Credit Risk. Derivative contracts involve the risk of dealing with institutional derivative counterparties and their ability to meet contractual terms. Derivative contracts are executed with a Credit Support Annex, or CSA, which is a bilateral ratings-sensitive agreement that requires collateral postings at established credit threshold levels. These agreements protect the interests of the Company and its counterparties, should either party suffer a credit rating deterioration. Institutional counterparties must have an investment grade credit rating. The Company’s credit exposure on interest rate swaps is limited to the net favorable value and interest payments of all swaps by each counterparty. Credit exposure may be reduced by the amount of collateral pledged by the counterparty. There are no credit-risk-related contingent features associated with any of the Company’s derivative contracts.  The Company had no credit exposure relating to the interest rate swap at September 30, 2010.  The amount of cash collateral posted by the Company related to derivative contracts was $1.9 million and $875,000 at September 30, 2010 and December 31, 2009, respectively.

11.      OPERATING SEGMENT INFORMATION

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

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The following is a summary of selected operating segment information as of and for the three and nine months ended September 30, 2010 and 2009:

	For the three months ended September 30, 2010											For the three months ended September 30, 2009
	MetroBank			Metro United		Other			Consolidated Company			MetroBank		Metro United		Other			Consolidated Company
	(In thousands)
Total interest income	$	14,237		$	4,965	$	17		$	19,219		$	16,135	$	5,671	$	16		$	21,822
Total interest expense		3,446			992		532			4,970			4,770		1,917		520			7,207
Net interest income		10,791			3,973		(515	)		14,249			11,365		3,754		(504	)		14,615
Provision for loan losses		4,300			400		-			4,700			2,611		985	─				3,596
Net interest income after      provision for loan losses		6,491			3,573		(515	)		9,549			8,754		2,769		(504	)		11,019
Noninterest income		1,990			72		(301	)		1,761			2,190		107		(332	)		1,965
Noninterest expenses		8,242			2,589		28			10,859			8,680		2,604		2			11,286
Income (loss) before income      tax provision		239			1,056		(844	)		451			2,264		272		(838	)		1,698
Provision (benefit) for income      taxes		(109	)		320		(397	)		(186	)		769		46		(255	)		560
Net income (loss)	$	348		$	736	$	(447	)	$	637		$	1,495	$	226	$	(583	)	$	1,138

	For the nine months ended September 30, 2010											For the nine months ended September 30, 2009
	MetroBank		Metro United			Other			Consolidated Company			MetroBank		Metro United			Other			Consolidated Company
	(In thousands)
Total interest income	$	43,353	$	15,734		$	49		$	59,136		$	48,757	$	16,781		$	47		$	65,585
Total interest expense		10,706		3,867			1,591			16,164			16,345		6,593			1,570			24,508
Net interest income		32,647		11,867			(1,542	)		42,972			32,412		10,188			(1,523	)		41,077
Provision for loan losses		10,300		4,728		─				15,028			9,138		3,572		─				12,710
Net interest income after      provision for loan losses		22,347		7,139			(1,542	)		27,944			23,274		6,616			(1,523	)		28,367
Noninterest income		5,827		254			(933	)		5,148			6,240		315			(1,021	)		5,534
Noninterest expenses		26,387		10,592			93			37,072			25,765		7,851			75			33,691
Income before income tax      provision		1,787		(3,199	)		(2,568	)		(3,980	)		3,749		(920	)		(2,619	)		210
Provision (benefit) for      income taxes		205		(622	)		(906	)		(1,323	)		1,137		(412	)		(771	)		(46	)
Net income (loss)	$	1,582	$	(2,577	)	$	(1,662	)	$	(2,657	)	$	2,612	$	(508	)	$	(1,848	)	$	256

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	As of September 30, 2010									As of September 30, 2009
	MetroBank		Metro United		Other			Consolidated Company		MetroBank		Metro United		Other			Consolidated Company
	(In thousands)
Net loans	$	817,697	$	321,226	$	─		$	1,138,923	$	929,885	$	356,050	$	─		$	1,285,935
Total assets		1,162,650		410,251		(5,442	)		1,567,459		1,177,347		455,713		(3,328	)		1,629,732
Deposits		995,184		319,337		(14,552	)		1,299,969		1,011,435		387,720		(7,329	)		1,391,826

12.     FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  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 September 30, 2010 and December 31, 2009:

	Fair Value Measurements, using
	(In thousands)							Fair Value
September 30, 2010	Level 1		Level 2			Level 3		Measurements
Securities available-for-sale
U.S. Treasury and other U.S. government      corporations and agencies	$	–	$	102,246		$	–	$	102,246
Obligations of state and political      subdivisions		–		6,221			–		6,221
Mortgage-backed securities and collateralized      mortgage obligations							–
Government issued or guaranteed		–		32,921			–		32,921
Privately issued residential		–		1,686			–		1,686
Asset backed securities		–		175			–		175
Investment in CRA funds		13,137		–			–		13,137
Total available-for-sale securities	$	13,137	$	143,249		$	–	$	156,386
Derivative liabilities
Interest rate swap	$	–	$	(1,922	)	$	–	$	(1,922	)
December 31, 2009
Securities available-for-sale
U.S. Treasury and other U.S. government      corporations and agencies	$	–	$	57,228		$	–	$	57,228
Obligations of state and political      subdivisions		–		5,813			–		5,813
Mortgage-backed securities and collateralized      mortgage obligations							–
Government issued or guaranteed		–		32,308			–		32,308
Privately issued residential		–		2,835			–		2,835
Asset backed securities		–		184			–		184
Total available-for-sale securities	$	–	$	98,368		$	–	$	98,368
Derivative liabilities
Interest rate swap	$	–	$	(61	)	$	–	$	(61	)

Certain non-financial assets measured at fair value on a recurring basis include reporting units measured at fair value in the first step of a goodwill impairment test. Certain non-financial assets measured at fair value on a non-recurring basis include non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible assets measured at fair value for impairment assessment, as well as foreclosed assets.  Certain financial assets are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

Non-financial and financial assets measured at fair value on a non-recurring basis include the following:

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

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

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Impaired Loans. Certain impaired loans with a valuation reserve are measured for impairment using the practical expedient, whereby fair value of the loan is based on the fair value of the loan’s collateral, provided the loan is collateral dependent.  The fair value measurements of loan collateral can include real estate appraisals, comparable real estate sales information, cash flow projections, realization estimates, etc., all of which can include observable and unobservable inputs.  As a result, the categorization of collateral dependent impaired loans can be either Level 2 or Level 3 of the fair value hierarchy, depending on the nature of the inputs used for measuring the related collateral’s fair value.

The following presents assets carried at fair value on a nonrecurring basis by caption on the condensed consolidated balance sheets and by valuation hierarchy (as described above) at September 30, 2010 and 2009 (in thousands):

	As of September 30, 2010				Losses
	Level 2		Level 3		Three months ended September 30, 2010		Nine months ended September 30, 2010
Assets
Goodwill	$	-	$	17,327	$	-	$	2,000
Foreclosed assets (1)		-		16,141		551		3,178
Impaired loans (2)		4,290		-		105		105

	As of September 30, 2009				Losses
	Level 2		Level 3		Three months ended September 30, 2009		Nine months ended September 30, 2009
Assets
Goodwill	$	-	$	21,827	$	-	$	-
Foreclosed assets (1)		-		23,012		337		775
Impaired loans (2)		12,633		232		-		424

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

(2) Loans represent collateral dependent impaired loans with a specific valuation allowance. Losses on these loans represent charge-offs which are netted against the allowance for loan losses.

Fair Value of Financial Instruments

The following table summarizes the carrying value and estimated fair values of financial instruments as of September 30, 2010 and December 31, 2009:

	As of September 30, 2010				As of December 31, 2009
	Carrying or Contract Amount		Estimated Fair Value		Carrying or Contract Amount		Estimated Fair Value
	(In thousands)
Financial Assets
Cash and cash equivalents	$	152,423	$	152,423	$	108,093	$	108,093
Investment securities available-for-sale		156,386		156,386		98,368		98,368
Investment securities held-to-maturity		4,044		4,517		4,044		4,352
Other investments		7,038		7,038		21,577		21,577
Loans, net		1,138,923		1,022,010		1,244,594		1,133,959
Cash value of bank owned life insurance		29,617		29,617		28,526		28,526
Accrued interest receivable		4,854		4,854		5,161		5,161
Financial Liabilities
Deposits
Transaction accounts		708,816		708,816		705,987		705,987
Time deposits		591,153		591,136		658,180		659,296
Total deposits		1,299,969		1,299,952		1,364,167		1,365,283
Other borrowings		56,205		59,035		25,513		27,429
Junior subordinated debentures		36,083		45,476		36,083		37,883
Interest rate derivative		1,922		1,922		61		61
Accrued interest payable		555		555		625		625
Off-balance sheet financial instruments
Unfunded loan commitments, including unfunded lines of credit		—		177		—		224
Standby letters of credit		—		17		—		16

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

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

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

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

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

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

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

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

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

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

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

13.      INCOME TAXES

Income tax benefit for the three months ended September 30, 2010 was $186,000, compared with income tax expense of $560,000 for the same period in 2009. The Company’s effective tax rate was 41.2% and 33.0% for the three months ended September 30, 2010 and 2009, respectively. The increase in the effective tax rate for the three months ended September 30, 2010 was primarily the result of the Texas margin tax which bases taxes on a concept of gross receipts rather than net income. Income tax benefit for the nine months ended September 30, 2010 and 2009 was $1.3 million and $46,000, respectively. The Company’s effective tax rate was 33.2% and 21.9% for the nine months ended September 30, 2010 and 2009, respectively. The increase in the effective tax rate for the nine months ended September 30, 2010 was due primarily to non-deductible goodwill impairment.

As of September 30, 2010, the Company had approximately $16.6 million in net deferred tax assets.  Deferred tax assets are subject to an evaluation of whether it is more likely than not that they will be realized.  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 in 2009 and for the nine months ended September 30, 2010, and if the Company is unable to generate sufficient taxable income in the future, then the Company may not be able to conclude it is more likely than not that the benefits of the deferred tax assets will be fully realized and may be required to recognize a valuation allowance and a corresponding income tax expense equal to the portion of the deferred tax asset that may not be realized.

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14.      RELATED PARTY TRANSACTIONS

In February 2010, the Company issued a promissory note to each of the Company's Chairman of the Board and an affiliate of one of the Company's 5% or more shareholders.  Each note was issued for a principal amount of $500,000.  The notes mature February 10, 2011 and bear interest on the principal amount at a fixed rate per annum equal to 5.0% due quarterly beginning March 31, 2010.  The proceeds from issuance of the promissory notes were used for general corporate purposes.

On April 23, 2010, the Company issued 300,000 shares of its common stock at $3.23 per share to an affiliate of one of the Company's 5% or more shareholders in a private placement which totaled 1,250,000 shares.  The purchase price of $3.23 per share was approved by the Board of Directors of the Company on March 26, 2010 and was based upon an amount equal to 110% of the average closing price per share of the Company's common stock on the NASDAQ Global Market for the 10 trading days ending on and including March 31, 2010.  The proceeds from issuance of the common stock  were used for general corporate purposes.

15.     NEW AUTHORITATIVE ACCOUNTING GUIDANCE

Accounting Standards Update (“ASU”)  No. 2010-20, "Receivables (Topic 830) - Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses." ASU 2010-20 requires entities to provide disclosures designed to facilitate financial statement users' evaluation of (i) the nature of credit risk inherent in the entity's portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses. Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses, and class of financing receivable, which is generally a disaggregation of portfolio segment. The required disclosures include, among other things, a rollforward of the allowance for credit losses as well as information about modified, impaired, non-accrual and past due loans and credit quality indicators. ASU 2010-20 will be effective for the Company's financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period. Disclosures that relate to activity during a reporting period will be required for the Company's financial statements that include periods beginning on or after January 1, 2011.

ASU No. 2009-17, "Consolidations (Topic 810) - Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities." ASU 2009-17 amends prior guidance to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The new authoritative accounting guidance requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. The new authoritative accounting guidance under ASC Topic 810 was effective January 1, 2010 and did not have a significant impact on the Company’s financial condition, results of operations, or cash flows. 

ASU No. 2009-16, "Transfers and Servicing (Topic 860) - Accounting for Transfers of Financial Assets." ASU 2009-16 amends prior accounting guidance to enhance reporting about transfers of financial assets, including securitization, and where companies have continuing exposure to the risks related to the transferred financial assets.  The new authoritative accounting guidance eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets.  The new authoritative accounting guidance also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period.  The new authoritative accounting guidance under ASC Topic 860 was effective January 1, 2010 and did not have a significant impact on the Company’s financial condition, results of operations, or cash flows. 

ASU No. 2010-06, "Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures About Fair Value Measurements."  ASU 2010-06 provides amendments to Topic 820 that provides more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3.  The new disclosures and clarifications of existing disclosures were effective January 1, 2010 and the required disclosures are reported in Note 12 – “Fair Value” as applicable.   Disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements will be required for the Company beginning January 1, 2011.

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

• the Company’s ability to raise additional capital;

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

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

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

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

• the failure of 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;

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

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

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

• increases in FDIC deposit insurance assessments;

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

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

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

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

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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 $637,000 for the three months ended September 30, 2010, a decrease of $501,000 compared with the same quarter in 2009. The Company’s diluted earnings per common share for the three months ended September 30, 2010 was $0.00, a decrease of $0.05 per diluted common share compared with diluted earnings per common share of $0.05 for the same quarter in 2009. Diluted earnings (loss) per common share is computed by dividing net income (after deducting dividends and accretion of discount on preferred stock) by the weighted-average number of common shares and potentially dilutive common shares outstanding during the period. Preferred stock dividends accrued and discount accreted were $605,000 or $0.05 per diluted share, and $599,000 or $0.05 per diluted share for the three months ended September 30, 2010 and 2009, respectively. The Company recorded a net loss of $2.7 million for the nine months ended September 30, 2010, a decrease of $2.9 million compared with the same period in 2009. The Company’s diluted loss per common share for the nine months ended September 30, 2010 was ($0.38), a decrease of $0.25 per diluted share compared with diluted loss per common share of ($0.13) for the same period in 2009.  Preferred stock dividends accrued and discount accreted were $1.8 million or $0.15 per diluted share and $1.7 million or $0.16 per diluted shared for the nine months ended September 30, 2010 and 2009, respectively. Details of the changes in the various components of net income are further discussed below.

Total assets were $1.57 billion at September 30, 2010, a decrease of $22.1 million or 1.4% from $1.59 billion at December 31, 2009. Available-for-sale investment securities at September 30, 2010 were $156.4 million, an increase of $58.0 million or 59.0% from $98.4 million at December 31, 2009. Net loans at September 30, 2010 were $1.14 billion, a decrease of $105.7 million or 8.5% from $1.24 billion at December 31, 2009. Total deposits at September 30, 2010 were $1.30 billion, a decrease of $64.2 million or 4.7% from $1.36 billion at December 31, 2009. Other borrowings at September 30, 2010 were $56.2 million, an increase of $30.7 million or 120.3% from $25.5 million at December 31, 2009. The Company’s return on average assets (“ROAA”) for the three months ended September 30, 2010 and 2009 was 0.16% and 0.28%, respectively. The Company’s return on average equity (“ROAE”) for the three months ended September 30, 2010 and 2009 was 1.60% and 2.74%, respectively. The Company’s ROAA for the nine months ended September 30, 2010 and 2009 was (0.22)% and 0.02%, respectively. The Company’s ROAE for the nine months ended September 30, 2010 and 2009 was (2.25)% and 0.21%, respectively.   Shareholders’ equity at September 30, 2010 was $159.8 million compared to $155.3 million at December 31, 2009, an increase of $4.5 million or 2.9%.  Details of the changes in the various balance sheet items are further discussed below.

Recent Developments

Private Placement of Common Stock. On September 16, 2010, the Company issued 954,000 shares of its common stock at $3.00 per share to an accredited investor in a private placement.  The purchase price of $3.00 per share was approved by the Board of Directors of the Company on August 27, 2010 and was based upon an amount equal to 110% of the average closing price per share of the Company's common stock on the NASDAQ Global Market for the 15 trading days ending on and including July 30, 2010.  The approximate $2.86 million in net proceeds will be used by the Company for general corporate purposes.

Passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. In July 2010, Congress enacted regulatory reform legislation known as the Dodd–Frank Wall Street Reform and Consumer Protection Act (the "Dodd–Frank Act"), which the President signed into law on July 21, 2010.  Many aspects of the Dodd–Frank Act are subject to further rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact to the Company, MetroBank, Metro United or across the industry.  This new law broadly affects the financial services industry by implementing changes to the financial regulatory landscape aimed at strengthening the sound operation of the financial services sector, including provisions that, among other things, will:

•     Create a new agency, the Consumer Financial Protection Bureau, responsible for implementing, examining and enforcing compliance with federal consumer financial laws;

•     Apply the same leverage and risk–based capital requirements that apply to insured depository institutions to most bank holding companies, which, among other things, will require the Company to deduct all trust preferred securities issued on or after May 19, 2010 from the Company's Tier 1 capital.  Existing trust preferred securities issued prior to May 19, 2010 for all bank holding companies with less than $15.0 billion in total consolidated assets as of December 31, 2009 are exempt from this requirement and as a result, the Company is exempt from this provision;

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•     Require bank holding companies to be well–capitalized and well–managed in order to engage in expanded financial activities permissible for financial holding companies and to acquire banks located outside their home state;

•     Broaden the base for FDIC insurance assessments from the amount of insured deposits to average total consolidated assets less average tangible equity during the assessment period, which generally is expected to result in an increase in the level of assessments;

•     Permanently increase FDIC deposit insurance to $250,000 and provide unlimited FDIC deposit insurance beginning December 31, 2010 until January 1, 2013 for noninterest bearing demand transaction accounts at all insured depository institutions;

•     Permit national banks and insured state banks to engage in de novo interstate branching if the laws of the state where the new branch is to be established would permit the establishment of the branch if the national bank or insured state bank were chartered by such state;

•     Implement corporate governance revisions, including with regard to executive compensation and proxy access by shareholders, that apply to all public companies, not just financial institutions; and

•     Repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.

The Company's management is actively reviewing the provisions of the Dodd–Frank Act and assessing its probable impact on the business, financial condition, and results of operations of the Company, MetroBank and Metro United.  Provisions in the legislation that affect deposit insurance assessments and payment of interest on demand deposits could increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate.  Provisions in the legislation that revoke the Tier 1 capital treatment of newly issued trust preferred securities could require the Company to seek other sources of capital in the future.

Results of Operations

Net Interest Income and Net Interest Margin. For the three months ended September 30, 2010, net interest income, before the provision for loan losses, was $14.2 million, a decrease of $366,000 or 2.5% compared with $14.6 million for the same period in 2009, primarily due to a decline in average total loans, partially offset by lower deposit costs. Average interest-earning assets for the three months ended September 30, 2010 were $1.50 billion, a decrease of $118,000 or 0.0% compared with $1.50 billion for the same period in 2009, primarily due to lower loan volume, partially offset by growth in federal funds sold.  The weighted average yield on interest-earning assets for the third quarter of 2010 was 5.08%, a decrease of 69 basis points compared with 5.77% for the same quarter in 2009. Average interest-bearing liabilities for the three months ended September 30, 2010 were $1.23 billion, an increase of $6.7 million or 0.6% compared with $1.22 billion for the same period in 2009, primarily due to growth in savings and money market accounts and other borrowings, partially offset by a decrease in time deposits. The weighted average interest rate paid on interest-bearing liabilities for the third quarter 2010 was 1.61%, a decrease of 74 basis points compared with 2.35% for the same quarter in 2009.

For the nine months ended September 30, 2010, net interest income, before the provision for loan losses, was $43.0 million, an increase of $1.9 million or 4.6% compared with $41.1 million for the same period in 2009, primarily due to lower deposit cost. Average interest-earning assets for the nine months ended September 30, 2010 were $1.50 billion, a decrease of $12.0 million or 0.8% compared with $1.51 billion for the same period in 2009, primarily due to lower loan volume, partially offset by growth in federal funds sold. The weighted average yield on interest-earning assets for the nine months ended September 30, 2010 was 5.26%, down 53 basis points compared with 5.79% for the same period in 2009.  Average interest-bearing liabilities for the nine months ended September 30, 2010 were $1.24 billion, an increase of $7.6 million or 0.6% compared with $1.23 billion for the same period in 2009, primarily due to an increase in savings and money market accounts and other borrowings, partially offset by a decrease in time deposits. The weighted average rate paid on interest-bearing liabilities for the nine months ended September 30, 2010 was 1.75%, down 92 basis points compared with 2.67% for the same period in 2009.

30

The net interest margin for the three months ended September 30, 2010 was 3.77%, a decrease of 9 basis points compared with 3.86% for the same period in 2009. The decrease was primarily the result of a decline in the cost of earning assets of 60 basis points, partially offset by a decrease in the yield on earning assets of 69 basis points. The net interest margin for the nine months ended September 30, 2010 was 3.82%, an increase of 19 basis points compared with 3.63% for the same period in 2009.  For the nine months ended September 30, 2010, the yield on average earning assets decreased 53 basis points, which was partially offset by a 72 basis point decrease in the cost of average earning assets.  The decrease in yield on earning assets and the cost of earning assets for the three and nine months ended September 30, 2010 was due primarily to lower loan volume, partially offset by lower deposit cost.

Total Interest Income. Total interest income for the three months ended September 30, 2010 was $19.2 million, a decrease of approximately $2.6 million or 11.9% compared with $21.8 million for the same period in 2009.  Total interest income for the nine months ended September 30, 2010 was $59.1 million, a decrease of $6.5 million or 9.8% compared with $65.6 million for the same period in 2009. The decrease for the three and nine months ended September 30, 2010 was primarily due to lower loan volume and yields.

Interest Income from Loans. Interest income from loans for the three months ended September 30, 2010 was $18.0 million, a decrease of $2.7 million or 13.0% compared with $20.7 million for the same quarter in 2009. Average total loans for the three months ended September 30, 2010 were $1.20 billion compared to $1.32 billion for the same period in 2009, a decrease of $117.6 million or 8.9%. For the third quarter of 2010, the average yield on loans was 5.92%, a decrease of 28 basis points compared to 6.20% for the same quarter in 2009. Interest income from loans for the nine months ended September 30, 2010 was $55.7 million, a decrease of $6.1 million or 9.8% compared with $61.8 million for the same period in 2009. The decrease for the three and nine months ended September 30, 2010 was the result of lower loan volume and yields.   Average total loans for the nine months ended September 30, 2010 were $1.24 billion, a decrease of $88.4 million or 6.7% compared with average total loans for the same period in 2009 of $1.33 billion. For the nine months ended September 30, 2010, the yield on average total loans was 6.01%, down 21 basis points compared with 6.22% for the same period in 2009.

Approximately $818.7 million or 69.6% 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.  At September 30, 2010, the average yield on total loans was approximately 276 basis points above the prime rate primarily because of interest rate floors.   At September 30, 2010, approximately $655.2 million in loans or 55.7% of the total loan portfolio were variable rate loans with interest rate floors that carried a weighted average interest rate of 6.29%.  At September 30, 2009, variable rate loans with interest rate floors carried a weighted average interest rate of 6.34% and comprised 56.1% of the total loan portfolio.

Interest Income from Investments. Interest income from investments (which includes investment securities, Federal funds sold, and other investments) for the three months ended September 30, 2010 was $1.3 million, an increase of $91,000 or 7.8% compared to $1.2 million for the same period in 2009, primarily due to an increase federal funds sold and investment securities.  Average total investments for the three months ended September 30, 2010 were $298.0 million compared to average total investments for the same period in 2009 of $180.3 million, an increase of $117.7 million or 65.3%.  For the third quarter 2010, the average yield on total investments was 1.68% compared to 2.57% for the same quarter in 2009, a decrease of 89 basis points primarily due to a higher balance in lower yielding federal funds sold.

Interest income from investments for the nine months ended September 30, 2010 was $3.4 million, down $375,000 or 9.9% compared with $3.8 million for the same period in 2009, primarily the result of declining interest rates and a higher balance in lower yielding federal funds sold.  Average total investments for the nine months ended September 30, 2010 were $263.5 million compared with average total investments for the same quarter in 2009 of $187.1 million, an increase of $76.4 million or 40.8%.  For the nine months ended September 30, 2010, the average yield on investments was 1.73% compared with 2.71% for the same quarter in 2009, a decrease of 98 basis points. The increase in average total investments for the three and nine months ended September 30, 2010 was primarily the result of an increase in federal funds sold.

Total Interest Expense. Total interest expense for the three months ended September 30, 2010 was $5.0 million, a decrease of $2.2 million or 31.0% compared to $7.2 million for the same period in 2009. Total interest expense for the nine months ended September 30, 2010 was $16.2 million, down $8.3 million or 34.0% compared with $24.5 million for the same period in 2009. Interest expense decreased for both the three and nine months ended September 30, 2010 primarily due to lower cost of funds.

Interest Expense on Deposits. Interest expense on interest-bearing deposits for the three months ended September 30, 2010 was $4.2 million, a decrease of $2.3 million or 35.4% compared to $6.4 million for the same period in 2009. Average interest-bearing deposits for the three months ended September 30, 2010 were $1.13 billion compared to $1.15 billion for the same period in 2009, a decrease of $21.3 million or 1.8%. The average interest rate paid on interest-bearing deposits for the third quarter of 2010 was 1.46% compared to 2.22% for the same quarter in 2009, a decrease of 76 basis points. The decline in interest expense and the average interest rate paid on interest-bearing deposits was primarily due to declining interest rates in the deposit market.

Interest expense on interest-bearing deposits for the nine months ended September 30, 2010 was $13.8 million, down $8.4 million or 37.8% compared with $22.2 million for the same period in 2009.  Average interest-bearing deposits for the nine months ended September 30, 2010 were $1.16 billion compared with average interest-bearing deposits for the same period in 2009 of $1.15 billion, an increase of $4.1 million or 0.4%. The average interest rate incurred on interest-bearing deposits for the nine months ended September 30, 2010 was 1.60% compared with 2.58% for the same period in 2009, a decrease of 98 basis points.  The decline in interest expense and the average interest rate paid on interest-bearing deposits was primarily due to declining interest rates in the deposit market.

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Interest Expense on Junior Subordinated Debentures.  Interest expense on junior subordinated debentures for the three months ended September 30, 2010 and 2009 was $519,000. Interest expense on junior subordinated debentures for the nine months ended September 30, 2010 and 2009 was $1.6 million. Average junior subordinated debentures for the three and nine months ended September 30, 2010 and 2009 were $36.1 million. The average interest rate incurred on junior subordinated debentures for the three and nine months ended September 30, 2010 and 2009 was 5.76%. The junior subordinated debentures accrue interest at a fixed rate of 5.76% until December 15, 2010, at which time the debentures will accrue interest at a floating rate equal to the 3-month LIBOR plus 1.55%.  Related to these debentures, the Company entered into a forward-starting interest rate swap contract. Under the swap, beginning December 15, 2010, the Company will pay a fixed interest rate of 5.38% and receive a variable interest rate of three-month LIBOR plus a margin of 1.55% on a total notional amount of $17.5 million, with quarterly settlements beginning March 2011. 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 September 30, 2010 was $287,000, an increase of $47,000 compared to $240,000 for the same period in 2009. Interest expense on other borrowed funds for the nine months ended September 30, 2010 was $798,000, an increase of $30,000 compared with $768,000 for the same period in 2009.  Average borrowed funds, consisting primarily of security repurchase agreements and borrowings from the Federal Home Loan Bank (“FHLB”), for the three months ended September 30, 2010 were $56.8 million an increase of $28.0 million compared to $28.8 million for the same period in 2009. Other borrowings increased primarily due to FHLB San Francisco advances obtained for liquidity purposes.  The average interest rate paid on borrowed funds for the third quarter of 2010 was 2.00% compared to 3.31% for the same quarter in 2009.  The average interest rate decreased as a result of an increase in lower cost short-term FHLB borrowings, which were partially offset by existing higher cost long-term borrowings.  Average borrowed funds for the nine months ended September 30, 2010 were $43.8 million, an increase of $3.6 million compared to $40.2 million for the same period in 2009. Other borrowings increased primarily due to an increase in FHLB borrowings.  The average interest rate paid on borrowed funds for the nine months ended September 30, 2010 was 2.44% compared to 2.55% for the same period in 2009.

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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 September 30,
	2010								2009
	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	$	1,203,013		$	17,960		5.92	%	$	1,320,601		$	20,654		6.20	%
Taxable securities		126,875			977		3.06			110,336			965		3.47
Tax-exempt securities		10,057			117		4.62			6,787			85		4.97
Other investments (2)		8,625			57		2.62			19,873			89		1.78
Federal funds sold and other short-term      investments		152,402			108		0.28			43,257			29		0.27
Total interest-earning assets		1,500,972			19,219		5.08			1,500,854			21,822		5.77
Allowance for loan losses		(37,568	)							(24,918	)
Total interest-earning assets, net of allowance      for loan losses		1,463,404								1,475,936
Noninterest-earning assets		140,480								130,296
Total assets	$	1,603,884							$	1,606,232
Liabilities and shareholders' equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	55,481		$	65		0.46	%	$	54,727		$	69		0.50	%
Savings and money market accounts		461,140			1,236		1.06			418,335			1,692		1.60
Time deposits		615,808			2,863		1.84			680,621			4,687		2.73
Junior subordinated debentures		36,083			519		5.76			36,083			519		5.76
Other borrowings		56,791			287		2.00			28,808			240		3.31
Total interest-bearing liabilities		1,225,303			4,970		1.61			1,218,574			7,207		2.35
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		202,780								210,040
Other liabilities		17,680								13,104
Total liabilities		1,445,763								1,441,718
Shareholders' equity		158,121								164,514
Total liabilities and shareholders' equity	$	1,603,884							$	1,606,232
Net interest income				$	14,249							$	14,615
Net interest spread							3.47	%							3.42	%
Net interest margin							3.77	%							3.86	%

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

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	For The Nine Months Ended September 30,
	2010								2009
	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	$	1,238,835		$	55,717		6.01	%	$	1,327,198		$	61,791		6.22	%
Taxable securities		105,514			2,590		3.28			103,808			3,048		3.93
Tax-exempt securities		10,160			356		4.68			5,669			210		4.95
Other investments (2)		14,489			207		1.91			20,968			386		2.46
Federal funds sold and other short-term      investments		133,312			266		0.27			56,669			150		0.35
Total interest-earning assets		1,502,310			59,136		5.26			1,514,312			65,585		5.79
Allowance for loan losses		(34,766	)							(24,525	)
Total interest-earning assets, net of allowance      for loan losses		1,467,544								1,489,787
Noninterest-earning assets		143,530								123,359
Total assets	$	1,611,074							$	1,613,146
Liabilities and shareholders' equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	55,317		$	206		0.50	%	$	54,776		$	209		0.51	%
Savings and money market accounts		464,788			4,191		1.21			400,240			5,981		2.00
Time deposits		635,628			9,410		1.98			696,643			15,991		3.07
Junior subordinated debentures		36,083			1,559		5.76			36,083			1,559		5.76
Other borrowings		43,771			798		2.44			40,196			768		2.55
Total interest-bearing liabilities		1,235,587			16,164		1.75			1,227,938			24,508		2.67
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		201,916								208,595
Other liabilities		16,011								14,245
Total liabilities		1,453,514								1,450,778
Shareholders' equity		157,560								162,368
Total liabilities and shareholders' equity	$	1,611,074							$	1,613,146
Net interest income				$	42,972							$	41,077
Net interest spread							3.51	%							3.12	%
Net interest margin							3.82	%							3.63	%

(1)	Annualized.
(2)	Other investments include CDARS, 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 nine months ended September 30, 2010 compared with the three and nine months ended September 30, 2009. For purposes of this table, changes attributable to both rate and volume have been allocated to each accordingly.

	Three Months Ended September 30,									Nine Months Ended September 30,
	2010 vs 2009									2010 vs 2009
	Increase (Decrease)									Increase (Decrease)
	Due to									Due to
	Volume			Rate			Total			Volume			Rate			Total
	(In thousands)
Interest-earning assets:
Loans	$	(1,839	)	$	(855	)	$	(2,694	)	$	(4,114	)	$	(1,960	)	$	(6,074	)
Taxable securities		145			(133	)		12			50			(508	)		(458	)
Tax-exempt securities		41			(9	)		32			166			(20	)		146
Other investments		(50	)		18			(32	)		(119	)		(60	)		(179	)
Federal funds sold and other short-term      investments		73			6			79			203			(87	)		116
Total decrease in interest income		(1,630	)		(973	)		(2,603	)		(3,814	)		(2,635	)		(6,449	)
Interest-bearing liabilities:
Interest-bearing demand deposits		1			(5	)		(4	)		2			(5	)		(3	)
Savings and money market accounts		173			(629	)		(456	)		965			(2,755	)		(1,790	)
Time deposits		(446	)		(1,378	)		(1,824	)		(1,401	)		(5,180	)		(6,581	)
Junior subordinated debentures		-			-			-			-			-			-
Other borrowings		233			(186	)		47			68			(38	)		30
Total decrease in interest expense		(39	)		(2,198	)		(2,237	)		(366	)		(7,978	)		(8,344	)
Increase (decrease) in net interest income	$	(1,591	)	$	1,225		$	(366	)	$	(3,448	)	$	5,343		$	1,895

Provision for Loan Losses. Provisions for loan losses are charged to income to bring the Company’s allowance for loan losses to a level which management considers adequate to absorb probable losses inherent in the loan portfolio. The provision for loan losses for the three months ended September 30, 2010 was $4.7 million, an increase of $1.1 million, compared with $3.6 million for the same period in 2009. The provision for loan losses for the nine months ended September 30, 2010 was $15.0 million, an increase of $2.3 million, compared with $12.7 million for the same period in 2009. The increase for the three and nine months ended September 30, 2010 was primarily due to an increase in nonperforming loans compared with their level at September 30, 2009, charge-offs, and changes in the assumptions used in the qualitative components that reflect current market conditions in the methodology the Company employs for determining the allowance for loan losses. The allowance for loan losses as a percent of total loans was 2.95% at September 30, 2010, 2.31% at December 31, 2009, and 1.95% at September 30, 2009.

Noninterest Income.  Noninterest income for the three months ended September 30, 2010 was $1.8 million, a decrease of $204,000 or 10.4% compared with the same period in 2009. The decrease was primarily due to a decline in gains on securities, partially offset by a decline in other than temporary impairment (“OTTI”) on securities.  Noninterest income for the nine months ended September 30, 2010 was $5.1 million, a decrease of $386,000 or 7.0% compared with the same period in 2009. The decrease for the nine months ended September 30, 2010 was primarily due to declines in gains on securities and letters of credit commissions and fees, partially offset by a decline in OTTI on securities.

Noninterest Expense. Noninterest expense for the three months ended September 30, 2010 was $10.9 million, a decrease of $427,000 or 3.8% compared with the same period in 2009. The decrease was mainly the result of lower expenses related to foreclosed assets and decreases in FDIC assessments, partially offset by an increase in salaries and employee benefits.  The decrease in FDIC assessments was primarily due to the one-time emergency special FDIC assessment that occurred during the third quarter of 2009.

Noninterest expense for the nine months ended September 30, 2010 was $37.1 million, an increase of $3.4 million or 10.0% compared with the same period in 2009.  The increase was primarily the result of higher expenses related to foreclosed assets and a $2.0 million goodwill impairment charge that was recorded in the first quarter of 2010, partially offset by a decrease in other noninterest expense.  Other noninterest expense decreased across most functional areas, but the decline was primarily the result of a lower provision for unfunded commitments.

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Salaries and employee benefits expense for the three months ended September 30, 2010 was $5.1 million, an increase of $209,000 or 4.3% compared with $4.9 million for the same period in 2009. The increase was primarily due to a rise in employee healthcare costs, thrift plan matching and stock-based compensation costs.   Salaries and employee benefits expense for the nine months ended September 30, 2010 was $15.4 million, a decrease of $65,000 or 0.4% compared with $15.5 million for the same period in 2009. The decrease was primarily due to lower salaries, which were partially offset by increases in employee healthcare costs, thrift plan matching and stock-based compensation costs.

Foreclosed assets expense for the three months ended September 30, 2010 was $1.1 million, a decrease of $232,000 or 17.6% compared with $1.3 million for the same period in 2009.  The decrease was primarily the result of gains on sales of foreclosed assets.  Foreclosed assets expense for the nine months ended September 30, 2010 was $5.4 million, an increase of $2.6 million or 95.9% compared with $2.7 million for the same period in 2009.  The increase was primarily due to write-downs and property taxes paid on foreclosed assets, partially offset by gains on sales.

The FDIC assessment for the three months ended September 30, 2010 was $881,000, a decrease of $146,000 or 14.2% compared with $1.0 million for the same period in 2009, primarily due to the one-time emergency special FDIC assessment that was charged during the third quarter of 2009. The FDIC assessment for the nine months ended September 30, 2010 was $2.5 million, a decrease of $241,000 or 8.9% compared with $2.7 million for the same period in 2009.

Other noninterest expense for the three months ended September 30, 2010 was $1.9 million, a decrease of $126,000 or 6.1% compared with the same quarter in 2009. The decline was primarily due to a reduction in legal fees and decreases in various other functional areas.    Other noninterest expense for the nine months ended September 30, 2010 was $6.0 million, a decrease of $714,000 or 10.6% compared with the same period in 2009. The decline was primarily due to a reduction in the provision for unfunded loan commitments and decreases in various other functional areas.

The Company’s efficiency ratio is calculated by dividing total noninterest expense, excluding loan loss provisions and goodwill impairment, by net interest income plus noninterest income, excluding impairment on securities.  The efficiency ratio for the three months ended September 30, 2010 was 67.14%, an increase from 66.66% for the same quarter in 2009. The increase was primarily due to the decrease in net interest income discussed under “net interest income” above.  The Company’s efficiency ratio for the nine months ended September 30, 2010 was 72.34%, compared with 71.29% for the same period in 2009. The increase was primarily due to increased foreclosed assets expenses, partially offset by an increase in net interest income.

Income Taxes. Income tax benefit for the three months ended September 30, 2010 was $186,000, compared with income tax expense of $560,000 for the same period in 2009. The Company’s effective tax rate was 41.2% and 33.0% for the three months ended September 30, 2010 and 2009, respectively. The increase in the effective tax rate for the three months ended September 30, 2010 was primarily the result of the Texas margin tax which bases taxes on a concept of gross receipts rather than net income. Income tax benefit for the nine months ended September 30, 2010 and 2009 was $1.3 million and $46,000, respectively. The Company’s effective tax rate was 33.2% and 21.9% for the nine months ended September 30, 2010 and 2009, respectively. The increase in the effective tax rate for the nine months ended September 30, 2010 was due primarily to non-deductible goodwill impairment.

As of September 30, 2010, the Company had approximately $16.6 million in net deferred tax assets.  Deferred tax assets are subject to an evaluation of whether it is more likely than not that they will be realized.  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 in 2009 and for the nine months ended September 30, 2010, and if the Company is unable to generate sufficient taxable income in the future, then the Company may not be able to conclude it is more likely than not that the benefits of the deferred tax assets will be fully realized and may be required to recognize a valuation allowance and a corresponding income tax expense equal to the portion of the deferred tax asset that may not be realized.

Financial Condition

Loan Portfolio. Total loans at September 30, 2010 were $1.17 billion, a decrease of $100.4 million or 7.9% compared with $1.27 billion at December 31, 2009, primarily as a result of principal reductions in conjunction with decreased demand due to weakened economic conditions in the Company’s market areas. At September 30, 2010, commercial and industrial loans, real estate mortgage loans, real estate construction loans and consumer loans decreased $41.4 million, $943,000, $58.5 million and $45,000, respectively, compared with their respective levels at December 31, 2009. At September 30, 2010 and December 31, 2009, the ratio of total loans to total deposits was 90.28%, and 93.39%, respectively. Total loans represented 74.9% and 80.1% of total assets at September 30, 2010 and December 31, 2009, respectively.

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

	As of September 30, 2010						As of December 31, 2009
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
Commercial and industrial	$	357,803			30.43	%	$	399,235			31.27	%
Real estate mortgage
Residential		35,551			3.03			32,730			2.56
Commercial		739,210			62.87			742,974			58.20
		774,761			65.90			775,704			60.76
Real estate construction
Residential		15,539			1.32			32,257			2.52
Commercial		23,779			2.02			65,532			5.14
		39,318			3.34			97,789			7.66
Consumer and other		3,842			0.33			3,888			0.31
Gross loans		1,175,724			100.00	%		1,276,616			100.00	%
Unearned discounts, interest and deferred fees		(2,157	)					(2,619	)
Total loans		1,173,567						1,273,997
Allowance for loan losses		(34,644	)					(29,403	)
Loans, net	$	1,138,923					$	1,244,594

Nonperforming Assets. At September 30, 2010, total nonperforming assets consisted of $51.5 million in nonaccrual loans, $1.3 million of accruing troubled debt restructurings, $16.6 million of nonaccruing troubled debt restructurings and $16.1 million in other real estate (“ORE”). Total nonperforming assets decreased $17.3 million to $85.6 million at September 30, 2010 from $102.9 million at December 31, 2009, which consisted of a reduction of $17.5 million in Texas, partially offset by a $232,000 increase in California.

On a linked-quarter basis, total nonperforming assets increased by $5.7 million of which $3.7 million was in Texas and $2.0 million in California. The increase in nonperforming assets in Texas consisted of an increase of $7.6 million in nonaccrual loans, which were partially offset by decreases of $2.2 million in ORE, $1.3 million in accruing troubled debt restructurings  and $227,000 in loans over 90 days past due.  The increase in nonperforming assets in California consisted primarily of increases of $4.2 million in nonaccruing troubled debt restructurings and $2.6 million in nonaccrual loans, partially offset by decreases of $4.3 million in troubled debt restructurings and $119,000 in ORE.

On a linked-quarter basis, ORE decreased by approximately $2.3 million compared with June 30, 2010, which included reductions in Texas of $2.2 million.  The reductions included the sale of a commercial land parcel, residential unit and a commercial property.  These reductions were partially offset by additions into ORE in Texas, which included a retail center and residential patio homes.  The $119,000 decline in ORE in California was the result of write-downs on two properties.

The Company is occasionally involved in the sale of certain federally guaranteed loans into the secondary market with servicing retained. Under the terms of the Small Business Administration (“SBA”) program, the Company at its option may repurchase any loan that may become classified as nonperforming. Any repurchased loans may increase the Company’s nonperforming loans until the time at which the loan repurchased is either restored to an accrual status or the Company files a claim with the SBA for the guaranteed portion of the loan.  There were no sales of SBA loans for the nine months ended September 30, 2010 or 2009.

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

	As of			As of
	September 30, 2010			December 31, 2009
	(Dollars in thousands)
Nonaccrual loans	$	51,464		$	58,236
Accruing loans 90 days or more past due		-			420
Troubled debt restructurings - accruing		1,319			4,927
Troubled debt restructurings - nonaccruing		16,645			16,993
Other real estate (“ORE”)		16,141			22,291
Total nonperforming assets		85,569			102,867
Total nonperforming assets to total assets		5.46	%		6.47	%
Total nonperforming assets to total loans and ORE		7.19	%		7.94	%

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

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

	As of September 30, 2010		As of December 31, 2009
	(In thousands)
Impaired loans(1) with no valuation reserve	$	59,441	$	56,413
Impaired loans(1)  with a valuation reserve		9,987		23,743
Total recorded investment in impaired loans	$	69,428	$	80,156
Valuation allowance related to impaired loans	$	1,086	$	2,731

(1) Impaired loans include nonaccrual loans and troubled debt restructurings.

The average recorded investment in impaired loans during the nine months ended September 30, 2010 and the year ended December 31, 2009 was $65.8 million and $49.8 million, respectively.  Interest income of $84,000 was recognized on impaired loans for the nine months ended September 30, 2010 and none for the nine months ended September 30, 2009.

Allowance for Loan Losses and Reserve for Unfunded Lending Commitments. At September 30, 2010 and 2009, the allowance for loan losses was $34.6 million and $25.6 million, respectively, or 2.95% and 1.95% of total loans, respectively.  At December 31, 2009, the allowance for loan losses was $29.4 million, or 2.31% of total loans. Net charge-offs for the three months ended September 30, 2010 were $6.1 million or (0.52)% of total loans compared with net charge-offs of $2.3 million or (0.17)% of total loans for the three months ended September 30, 2009. The charge-offs primarily consisted of $5.5 million in loans from Texas and $592,000 in loans from California.  Approximately $2.4 million of the charge-offs had associated specific reserves. Net charge-offs for the nine months ended September 30, 2010 were $9.8 million or (0.83)% of total loans compared with net charge-offs of $11.3 million or (0.86)% of total loans for the nine months ended September 30, 2009.

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.

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The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments and is maintained at levels that the Company believes are adequate to absorb probable losses inherent in the loan portfolio and unfunded lending commitments as of the date of the financial statements. The Company employs a systematic methodology for determining the allowance for loan losses that consists of four components: (1) a formula-based general reserve based on historical average losses by loan grade and grade migration, (2) specific reserves on larger individual credits that are based on the difference between the current loan balance and the loan’s collateral value, observable market price, or discounted present value, (3) a qualitative component that reflects current market conditions and other factors precedent to losses different from historical averages, and (4) a reserve for unfunded lending commitments.

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

The 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.

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

	As of and for the Three Months Ended September 30,
	2010			2009
	(Dollars in thousands)
Average total loans outstanding for the period	$	1,203,013		$	1,320,601
Total loans outstanding at end of period	$	1,173,567		$	1,311,538
Allowance for loan losses at beginning of period	$	36,004		$	24,266
Provision for loan losses		4,700			3,596
Charge-offs:
Commercial and industrial		(1,191	)		(657	)
Real estate mortgage		(4,451	)		(1,408	)
Real estate construction		(444	)		(335	)
Consumer and other		(29	)		(21	)
Total charge-offs		(6,115	)		(2,421	)
Recoveries:
Commercial and industrial		27			159
Real estate mortgage		-			2
Real estate construction		21			–
Consumer and other		7			1
Total recoveries		55			162
Net charge-offs		(6,060	)		(2,259	)
Allowance for loan losses at end of period		34,644			25,603
Reserve for unfunded lending commitments at beginning of period		822			1,478
Provision for unfunded lending commitments		(110	)		(290	)
Reserve for unfunded lending commitments at end of period		712			1,188
Allowance for credit losses at end of period	$	35,356		$	26,791
Ratio of net charge-offs to end of period total loans		(0.52	) %		(0.17	) %

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	As of and for the Nine Months Ended September 30,
	2010			2009
	(Dollars in thousands)
Average total loans outstanding for the period	$	1,238,835		$	1,327,198
Total loans outstanding at end of period	$	1,173,567		$	1,311,538
Allowance for loan losses at beginning of period	$	29,403		$	24,235
Provision for loan losses		15,028			12,710
Charge-offs:
Commercial and industrial		(2,189	)		(8,879	)
Real estate mortgage		(6,578	)		(2,016	)
Real estate construction		(1,438	)		(1,021	)
Consumer and other		(195	)		(93	)
Total charge-offs		(10,400	)		(12,009	)
Recoveries:
Commercial and industrial		418			573
Real estate mortgage		149			3
Real estate construction		21			88
Consumer and other		25			3
Total recoveries		613			667
Net charge-offs		(9,787	)		(11,342	)
Allowance for loan losses at end of period		34,644			25,603
Reserve for unfunded lending commitments at beginning of period		1,043			1,092
Provision for unfunded lending commitments		(331	)		96
Reserve for unfunded lending commitments at end of period		712			1,188
Allowance for credit losses at end of period	$	35,356		$	26,791
Ratio of allowance for loan losses to end of period total loans		2.95	%		1.95	%
Ratio of net charge-offs to end of period total loans		(0.83	) %		(0.86	) %
Ratio of allowance for loan losses to end of period total nonperforming
loans (1)		49.90	%		55.91	%

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

Securities. At September 30, 2010, the available-for-sale securities portfolio was $156.4 million, an increase of $58.0 million or 59.0% compared with $98.4 million at December 31, 2009. The increase was primarily due to purchases of U.S. government corporations and agencies securities.  At September 30, 2010 and December 31, 2009, the held-to-maturity portfolio remained at $4.0 million.  The securities portfolio is primarily comprised of mortgage-backed securities, collateralized mortgage obligations, obligations of U.S. Treasury and other U.S. government corporations and agencies and municipal securities. The securities portfolio has been funded primarily by the liquidity created from deposit growth and loan repayments in excess of loan funding requirements. Other investments, which include Federal Reserve Bank (“FRB”) and FHLB stock, the investment in subsidiary trust and CDARS One-Way Sell investments (“CDARS”) were $7.0 million at September 30, 2010, a decrease of $14.6 million or 67.4% compared with $21.6 million at December 31, 2009. The decrease was primarily the result of maturities of all remaining CDARS.

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Deposits. At September 30, 2010, total deposits were $1.30 billion, a decrease of $64.2 million or 4.7% compared with $1.36 billion at December 31, 2009. The Company’s ratio of noninterest-bearing demand deposits to total deposits at September 30, 2010 and December 31, 2009 was 15.3% and 14.9%, respectively. Interest-bearing deposits at September 30, 2010 were $1.10 billion, a decrease of $59.3 million or 5.1% compared with $1.16 billion at December 31, 2009.

The Company relies primarily on its deposit base to fund its lending and investment activities.  Historically, the Company has from time to time used brokered deposits when they represented a cost-effective funding alternative.  However, as a result of the Agreement between MetroBank and the OCC and the Order between Metro United and the FDIC and the CDFI , neither Metro United nor MetroBank can acquire, accept, renew or roll over brokered deposits without the prior approval of their respective regulators.  At September 30, 2010, brokered deposits, not including CDARS, were 3.7% of the Company's total deposits having an average maturity date of August 2012.

Junior Subordinated Debentures.  Junior subordinated debentures at September 30, 2010 and December 31, 2009 were $36.1 million. The junior subordinated debentures accrue interest at a fixed rate of 5.7625% until December 15, 2010, at which time the debentures will accrue interest at a floating rate equal to the 3-month LIBOR plus 1.55%. The debentures mature on December 15, 2035, but are redeemable at the Company’s option at par plus accrued and unpaid interest on or after December 15, 2010. The debentures issued to the Company’s unconsolidated subsidiary trust MCBI Statutory Trust I, were used to fund the Company’s acquisition of Metro United.  Related to these debentures, the Company entered into a forward-starting interest rate swap contract, with the objective of protecting a portion of the quarterly interest payments from the risk of variability resulting from changes in the three-month LIBOR interest rate.   Under the swap, beginning December 2010, the Company will pay a fixed interest rate of 5.38% and receive a variable interest rate of three-month LIBOR plus a margin of 1.55% on a total notional amount of $17.5 million, with quarterly settlements beginning March 2011.  See Note 10, “Derivative Financial Instruments,” to the Condensed Consolidated Financial Statements for additional information related to this interest rate swap.

Other Borrowings. Other borrowings at September 30, 2010 were $56.2 million, an increase of $30.7 million or 120.3% compared to other borrowings of $25.5 million at December 31, 2009. Other borrowings increased primarily due to advances obtained from the FHLB San Francisco for liquidity purposes.  Other borrowings at September 30, 2010 consisted of $30.0 million of advances from the FHLB of San Francisco, $25.0 million in security repurchase agreements, $1.0 million in debentures and $0.2 million in Federal Reserve Treasury, Tax & Loan (“TT&L”).  FHLB advances bear an average interest rate of 0.49% and have remaining maturities ranging from one to seven months. The security repurchase agreements bear an average rate of 3.71% and mature on December 31, 2014. The securities collateralizing the repurchase agreements are transferred to the applicable counterparty.  The counterparty, in certain instances, is contractually entitled to sell or repledge securities accepted as collateral.  The securities collateralizing the repurchase agreements are currently puttable by the counterparty at a fixed repurchase price at the end of each calendar quarter.  In addition, securities under one repurchase agreement are puttable by either the counterparty or the Company at the replacement cost of the repurchase transaction at the end of each calendar year commencing on December 31, 2011.

In February 2010, the Company issued a promissory note to each of the Company’s Chairman of the Board and an affiliate of one of the Company’s 5% or more shareholders.  Each note was issued for a principal amount of $500,000.  The notes mature February 10, 2011 and bear interest on the principal amount at a fixed rate per annum equal to 5.0% due quarterly beginning March 31, 2010.  The proceeds from issuance of the promissory notes were used for general corporate purposes.

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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 Nine			As of and for the
	Months Ended			Year Ended
	September 30, 2010			December 31, 2009
	(Dollars in thousands)
Federal Funds Purchased:
at end of period	$	–		$	–
average during the period		1			22
maximum month-end balance during the period		–			–
Interest rate at end of period		–			–	%
Interest rate during the period		0.75	%		0.50
FHLB Notes and Advances:
at end of period	$	30,000		$	–
average during the period		17,253			10,695
maximum month-end balance during the period		30,000			55,000
Interest rate at end of period		0.49	%		–	%
Interest rate during the period		0.48			0.50
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
Debentures:
at end of period	$	1,000		$	–
average during the period		852			153
maximum month-end balance during the period		1,000			–
Interest rate at end of period		5.00	%		–	%
Interest rate during the period		5.00			7.19
Federal Reserve TT&L:
at end of period	$	205		$	513
average during the period		666			687
maximum month-end balance during the period		1,075			1,020

Liquidity. The Company’s loan to deposit ratio at September 30, 2010 and 2009 was 90.28% and 94.23%, respectively. As of September 30, 2010, the Company had commitments to fund loans in the amount of $78.4 million. At this same date, the Company had stand-by letters of credit of $5.2 million.  Available sources to fund these commitments and other cash demands of the Company come from cash and cash equivalents, sales and maturities of securities available-for-sale, loan and investment repayments, deposit inflows, and lines of credit from the FHLBs of Dallas and San Francisco, other correspondent banks as well as the FRB discount window. With its current level of collateral, the Company has the ability to borrow an additional $422.1 million from the FHLBs, $9.8 million from the FRB discount window and $12.5 million from other correspondent banks.

Capital Resources. Shareholders’ equity at September 30, 2010 was $159.8 million compared to $155.3 million at December 31, 2009, an increase of $4.5 million or 2.9%. The increase was primarily the result of net proceeds of $6.9 million from the two private offerings of common stock to accredited investors, partially offset by a net loss for the nine months ended September 30, 2010.

The Company’s Board of Directors elected to suspend its common stock dividend indefinitely in April 2009 and to defer the dividend on the Series A Preferred Stock for the second quarter of 2010. The Board of Directors of the Company elected to resume payment of dividends for the third and fourth quarter of 2010 on the Series A Preferred Stock. Any future determination relating to dividend policy will be made at the discretion of the Company's Board of Directors and will depend on a number of factors, including the Company's future earnings, capital requirements, financial condition, future prospects, regulatory restrictions, and other factors that the Board of Directors may deem relevant.

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In the event that the Company defers paying dividends on the Series A Preferred Stock for an aggregate of six quarterly dividend periods or more (whether or not consecutive), the Company must increase the authorized number of directors then constituting its Board of Directors by two.  Holders of the Series A Preferred Stock, together with the holders of any outstanding parity stock with the same voting rights, will be entitled to elect the two additional members of the Board of Directors at the next annual meeting (or at a special meeting called for this purpose) and at each subsequent annual meeting until all accrued and unpaid dividends for all past dividend periods have been paid in full.

As a result of the Order, by December 31, 2010, Metro United is required to achieve and maintain its leverage ratio at 9.0% and its total risk-based capital ratio at 13.0%.  Due to the capital requirement within Metro United's Order, Metro United cannot be considered to be any better than "adequately capitalized" for capital adequacy purposes even if it exceeds the capital levels set forth in the Order. The following table provides a comparison of the Company’s and each of the Banks’ leverage and risk-weighted capital ratios as of September 30, 2010 to the minimum and well-capitalized regulatory standards:

	Minimum			To Be Categorized as
	Required For			Well Capitalized Under
	Capital Adequacy			Prompt Corrective			Actual Ratio At
	Purposes			Action Provisions			September 30, 2010
The Company
Leverage ratio		4.00	% (1)		N/A	%		10.96	%
Tier 1 risk-based capital ratio		4.00			N/A			13.87
Risk-based capital ratio		8.00			N/A			15.14
MetroBank
Leverage ratio		4.00	% (2)		5.00	%		10.72	%
Tier 1 risk-based capital ratio		4.00			6.00			13.74
Risk-based capital ratio		8.00			10.00			15.01
Metro United
Leverage ratio		4.00	% (3)		5.00	%		10.08	%
Tier 1 risk-based capital ratio		4.00			6.00			12.52
Risk-based capital ratio		8.00			10.00			13.79

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

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

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

Critical Accounting Estimates

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

Allowance for loan losses.  The Company believes the allowance for loan losses is a critical accounting estimate that requires the most significant judgments and estimates used in the preparation of its consolidated financial statements. In estimating the allowance for loan losses, management reviews the effect of changes in the local real estate market on collateral values, the effect of current economic indicators on the loan portfolio and their probable impact on borrowers and increases or decreases in nonperforming and impaired loans. Changes in these factors may cause management’s estimate of the allowance to increase or decrease and result in adjustments to the Company’s provision for loan losses. See — “Financial Condition — Allowance for Loan Losses and the Reserve for Unfunded Lending Commitments”.

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

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Annual Evaluation

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

For the discounted cash flow analysis, multi-year financial forecasts were developed by projecting net income for the next five years and discounting the average terminal values based on the valuation multiples listed in the previous paragraph in a normalized market. The financial forecasts considered several key business drivers such as anticipated loan and deposit growth, forward interest rates, historical performance, and industry and economic trends, among other considerations. For the test as of August 31, 2010, the Company used an average growth rate of 1% for the 5-year period and discounted Metro United’s terminal value using a 10% rate of return. The Company also performed a sensitivity analysis utilizing additional discount rates ranging from 8% to 15%.

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

• Metro United’s assets as a percentage of total assets

• Metro United’s loans as a percentage of total loans

• Metro United’s deposits as a percentage of total deposits

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

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

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

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

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, therefore resulting in additional impairment of the goodwill. 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. Assuming all other assumptions stay the same, a 15% decline in stock price from the 15-day average price ending on August 31, 2010 of $2.78 could potentially result in a material impairment of goodwill. Additionally, an increase in the fair value of Metro United's loans could potentially result in a material impairment of goodwill. Subsequent to the annual impairment test, the Company issued 954,000 shares of common stock at a price of $3.00 per share on September 16, 2010 in a private placement.  The issue price was based on 110% of the average closing price per share of the Company's common stock on the NASDAQ Global Market for the 15 trading days ending on and including July 30, 2010.

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Under the step-two analysis and based on the fair value of Metro United’s assets and liabilities at August 31, 2010, the implied fair value of goodwill exceeded its carrying value; therefore, the Company determined there was no impairment of goodwill as of that date.

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

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

Stock-based compensation.The Company believes stock-based compensation is a critical accounting estimate that requires significant judgment and estimates used in the preparation of its consolidated financial statements. The Company accounts for stock-based compensation in accordance with the fair value recognition provisions of FASB accounting guidance. The Company uses the Black-Scholes option-pricing model which requires the input of highly subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (“expected term”), the estimated volatility of the Company’s common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements (“forfeitures”). Changes inthe subjective assumptions can materially affect the estimate of fair value of stock-based compensation and, consequently, the related amount recognized on the consolidated statements of income.

Fair Value. The Company believes that the determination of fair value is a critical accounting estimate that requires significant judgment used in the preparation of its consolidated financial statements. Certain portions of the Company’s assets are reported on a fair value basis. Fair value is used on a recurring basis for certain assets in which fair value is the primary basis of accounting. An example of this recurring use of fair value includes available-for-sale securities. Additionally, fair value is used on a non-recurring basis to evaluate assets for impairment or for disclosure purposes. Examples of these non-recurring uses of fair value include goodwill and intangible assets. Depending on the nature of the asset various valuation techniques and assumptions are used when estimating fair value.

Fair value is the price that could be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value determination in accordance with ASC Topic 820-10 requires that a number of significant judgments are made. First, where prices for identical assets and liabilities are not available, application of the three-level hierarchy would require that similar assets are identified. If observable market prices are unavailable or impracticable to obtain, then fair value is estimated using modeling techniques such as discounted cash flow analyses. These modeling techniques incorporate the Company’s assessments regarding assumptions that market participants would use in pricing the asset or the liability, including assumptions about the risks inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset, and the risk of nonperformance. Assessments with respect to assumptions that market participants would make are inherently difficult to determine and use of different assumptions could result in material changes to these fair value measurements. The use of significant, unobservable inputs would be described in Note 12, “Fair Value,” to the Condensed Consolidated Financial Statements.

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

46

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

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

Item 3.    Quantitative and Qualitative Disclosures about Market Risk.

There have been no material changes in the market risk information previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. 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 not effective as of the end of the period covered by this report, due to a material weakness in internal control over financial reporting related to internal controls over staffing and monitoring of nonperforming loans that was identified and reported as a material weakness in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.  As of September 30, 2010, this material weakness in internal control over financial reporting has not been fully remediated.

Changes in Internal Control over Financial Reporting. In order to remediate the material weakness identified in its assessment of the Company’s internal controls over financial reporting as of December 31, 2009, management assigned dedicated and experienced resources at the Company with the responsibility of monitoring loans and related risk grade changes. The Company intends to continue to monitor, evaluate and test the operating effectiveness of these controls.Other than the identification of the material weakness described above, there have been no other changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

The Company anticipates the actions described above and resulting improvements in controls will strengthen the internal control over financial reporting and will address the related material weakness identified as of December 31, 2009 that has remained as a material weakness as of September 30, 2010. However, because the internal control process requires repeatable process execution and approval, the successful execution of controls, for at least several quarters, may be required prior to management being able to definitively conclude that the material weakness has been fully remediated.

47

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.

Except for the addition of the risk factors described below, 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, 2009 filed with the Securities and Exchange Commission on March 18, 2010, the Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 filed with the Securities and Exchange Commission on May 7, 2010, and the Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 filed with the Securities and Exchange Commission on August 6, 2010.

Future losses or insufficient core earnings may result in the Company's inability to fully realize its net deferred tax asset, which could have a material adverse effect on the Company's earnings and capital.

As of September 30, 2010, the Company had a net deferred tax asset of $16.6 million.  The Company regularly assesses the realization of its deferred tax asset and is required to record a valuation allowance if it is more likely than not that the Company will not realize all or a portion of the deferred tax asset.  The Company's assessment is primarily dependent on historical taxable income and projections of future taxable income, which are directly related to the Company's core earnings (earnings that exclude non-recurring income items) capacity and its prospects to generate core earnings in the future.  Projections of core earnings and taxable income require the Company to apply significant judgment and are inherently speculative because they require estimates that cannot be made with certainty.

The Company did not establish a valuation allowance against the net deferred tax asset as of September 30, 2010 as management believes that it is more likely than not that the Company will have sufficient future earnings to utilize this asset to offset future income tax liabilities.  If the Company were to determine at some point in the future that it will not achieve sufficient future taxable income to realize its net deferred tax asset, the Company would be required under generally accepted accounting principles to establish a full or partial valuation allowance. If the Company determines that a valuation allowance is necessary, the Company would incur a charge to operations that could have a material adverse effect on its earnings and capital.

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

Not applicable

Item 3.    Defaults Upon Senior Securities.

Not applicable

Item 4.    [Removed and Reserved]

Item 5.    Other Information.

Not applicable

48

Item 6.    Exhibits.

Exhibit
Number	Identification of Exhibit
3.1	Amended and Restated Articles of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-62667) (the "Registration Statement")).
3.2	Articles of Amendment to Amended and Restated Articles of Incorporation of the Company (incorporated herein by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007).
3.3	Statement of Designations establishing the terms of the Series A Preferred Stock of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on January 21, 2009).
3.4	Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on November 19, 2007).
4.1	Specimen form of certificate evidencing the Common Stock (incorporated herein by reference to Exhibit 4 to the Registration Statement).
4.2	Warrant, dated January 16, 2009, to purchase 771,429 shares of the Company's Common Stock (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on January 21, 2009).
4.3	Form of Certificate for the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $1.00 per share (incorporated herein by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed on January 21, 2009).
11	Computation of Earnings Per Common Share, included as Note 5 to the unaudited Condensed Consolidated Financial Statements of this Form 10-Q.
31.1*	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2*	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1**	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith.

** Furnished herewith.

49

SIGNATURES

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

	METROCORP BANCSHARES, INC.
	By:	/s/ George M. Lee
Date: November 8, 2010		George M. Lee  Executive Vice Chairman, President and
		Chief Executive Officer (principal executive officer)
Date: November 8, 2010	By:	/s/ David C. Choi
		David C. Choi
		Chief Financial Officer (principal financial officer/ principal accounting officer)

50

EXHIBIT INDEX

Exhibit
Number	Identification of Exhibit
3.1	Amended and Restated Articles of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-62667) (the "Registration Statement")).
3.2	Articles of Amendment to Amended and Restated Articles of Incorporation of the Company (incorporated herein by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007).
3.3	Statement of Designations establishing the terms of the Series A Preferred Stock of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on January 21, 2009).
3.4	Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on November 19, 2007).
4.1	Specimen form of certificate evidencing the Common Stock (incorporated herein by reference to Exhibit 4 to the Registration Statement).
4.2	Warrant, dated January 16, 2009, to purchase 771,429 shares of the Company's Common Stock (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on January 21, 2009).
4.3	Form of Certificate for the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $1.00 per share (incorporated herein by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed on January 21, 2009).
11	Computation of Earnings Per Common Share, included as Note 5 to the unaudited Condensed Consolidated Financial Statements of this Form 10-Q.
31.1*	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2*	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1**	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith.

** Furnished herewith.