Note 8 - Regulatory Matters

6 Months Ended

Jun. 30, 2012

Regulatory Capital Disclosures for Business Combinations

8.     REGULATORY MATTERS

The Banks are subject to regulations and, among others things, may be limited in their ability to pay dividends or otherwise transfer funds to the holding company. Under applicable restrictions as of June 30, 2012, no dividends could be paid by the Company, or by MetroBank and Metro United to the Company without regulatory approval. In addition, dividends paid by the Banks to the holding company would be prohibited if the effect thereof would cause the Banks’ capital to be reduced below applicable minimum capital requirements.

On August 10, 2009, MetroBank entered into a written agreement (the “Agreement”) with the OCC. The Agreement is based on the findings of the OCC during the annual on-site examination of MetroBank performed in the first quarter of 2009 and is primarily focused on matters related to MetroBank’s asset quality. Pursuant to the Agreement, the Board of Directors of MetroBank has appointed a compliance committee to monitor and coordinate MetroBank’s performance under the Agreement. The Agreement provides for, among other things, the development and implementation of written programs to reduce MetroBank’s credit risks, monitor and reduce the level of criticized assets and manage commercial real estate loan concentrations in light of current adverse commercial real estate market conditions generally and in its market areas. In addition, MetroBank may not accept, renew or roll over brokered deposits without prior approval of the OCC.  During and since the completion of the examination, management of MetroBank has proactively made adjustments to policies and procedures in an effort to alleviate the effects of the credit challenge caused by the economic deterioration and market conditions generally and in its market areas.

 Management, and the Boards of Directors of the Company and MetroBank, have taken steps to address the findings of the exam and are working with the OCC to comply with the requirements of the Agreement.  Failure by MetroBank to meet the requirements and conditions imposed by the Agreement, 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.  Any such failure and resulting regulatory action could have a material adverse effect on the financial condition and results of operations of the Company and MetroBank.

On July 22, 2010, Metro United entered into a Stipulation to the Issuance of a Consent Order ("Stipulation") with the FDIC and the CDFI.  Pursuant to the Stipulation, Metro United consented to the issuance of a Consent Order ("Order") by the FDIC and CDFI, which was also effective as of July 22, 2010.  The Order was 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 represented the agreements between Metro United, the FDIC and the CDFI as to areas of Metro United's operations that warranted improvement and required the submission of plans for making those improvements. The Order imposed no fines or penalties on Metro United.

Although Metro United meets the capital levels deemed to be “well-capitalized” as of June 30, 2012, due to the capital requirement within the Order and prior to the termination of the Order as of July 20, 2012, it could not be considered better than "adequately capitalized" for capital adequacy purposes, even if it exceeded the levels of capital set forth in the Order.  As an adequately capitalized institution, Metro United could not pay interest rates on deposits that were more than 75 basis points above the rate of the applicable market of Metro United as determined by the FDIC.  Additionally, prior to the termination of the Order, Metro United could not accept, renew or roll over brokered deposits without prior approval of the the FDIC and CDFI.

The Board of Directors of Metro United was officially informed on July 20, 2012 by the FDIC and CDFI that the Order had been terminated effective as of July 20, 2012.

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 June 30, 2012, that the Company and the Banks met all capital adequacy requirements to which they were subject.

            As of June 30, 2012, the most recent notifications from the OCC with respect to MetroBank categorized MetroBank as “well capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events since the notifications that management believes have changed MetroBank’s level of capital adequacy.

Although regulatory standards require the ratios stated below, as a result of the Order, Metro United was required to maintain a leverage ratio at least 9.0% and a total risk-based capital ratio of at least 13.0%.  As of June 30, 2012, due to the capital requirement within Metro United's Order, Metro United could not be considered to be any better than "adequately capitalized" for capital adequacy purposes even if it exceeded the capital levels set forth in the Order.  As a result of the termination of the Order effective as of July 20, 2012, Metro United will be considered a well-capitalized bank under applicable regulatory standards.

The following table provides a comparison of the Company’s and each of the Banks’ leverage and risk-weighted capital ratios as of June 30, 2012 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 June 30, 2012
Total risk-based capital ratio
MetroCorp Bancshares, Inc.	$	205,984		17.36	%	$	94,917		8.00	%	$	N/A		N/A	%
MetroBank, N.A.		148,914		17.01			70,050		8.00			87,562		10.00
Metro United Bank		50,585		16.41			24,657		8.00			30,821		10.00
Tier 1 risk-based capital ratio
MetroCorp Bancshares, Inc.		190,858		16.09			47,458		4.00			N/A		N/A
MetroBank, N.A.		137,717		15.73			35,025		4.00			52,537		6.00
Metro United Bank		46,689		15.15			12,329		4.00			18,493		6.00
Leverage ratio
MetroCorp Bancshares, Inc.		190,858		12.57			60,758		4.00			N/A		N/A
MetroBank, N.A.		137,717		12.09			45,561		4.00			56,951		5.00
Metro United Bank		46,689		12.22			15,285		4.00			19,106		5.00
As of December 31, 2011
Total risk-based capital ratio
MetroCorp Bancshares, Inc.	$	195,765		17.30	%	$	90,552		8.00	%	$	N/A		N/A	%
MetroBank, N.A.		140,510		16.82			66,831		8.00			83,539		10.00
Metro United Bank		48,778		16.48			23,674		8.00			29,593		10.00
Tier 1 risk-based capital ratio
MetroCorp Bancshares, Inc.		181,368		16.02			45,276		4.00			N/A		N/A
MetroBank, N.A.		129,864		15.55			33,416		4.00			50,124		6.00
Metro United Bank		45,034		15.22			11,837		4.00			17,756		6.00
Leverage ratio
MetroCorp Bancshares, Inc.		181,368		12.16			59,659		4.00			N/A		N/A
MetroBank, N.A.		129,864		11.67			44,514		4.00			55,643		5.00
Metro United Bank		45,034		11.80			15,269		4.00			19,086		5.00