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 JUNE 30, 2012

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

Commission file number: 000-25141

MetroCorp Bancshares, Inc.

(Exact name of registrant as specified in its charter)

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

9600 Bellaire Boulevard, Suite 252

Houston, Texas 77036

(Address of principal executive offices including zip code)

(713) 776-3876

(Registrant’s telephone number, including area code)

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

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

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

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

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

As of August 2, 2012, the number of outstanding shares of Common Stock was 18,744,712.

1

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

METROCORP BANCSHARES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

	June 30, 2012			December 31, 2011
ASSETS
Cash and due from banks	$	22,310		$	28,798
Federal funds sold and other short-term investments		185,949			164,811
Total cash and cash equivalents		208,259			193,609
Securities available-for-sale, at fair value		117,537			121,633
Securities available-for-sale pledged with creditors’ right to repledge, at fair value		51,142			50,756
Total securities available-for-sale		168,679			172,389
Securities held-to-maturity (fair value $4,610 and $4,536 at June 30, 2012 and December 31, 2011, respectively)		4,046			4,046
Other investments		5,880			6,484
Loans, net of allowance for loan losses of $27,311 and $28,321 at June 30, 2012 and December 31, 2011, respectively		1,066,922			1,015,095
Loans, held-for-sale		–			1,200
Accrued interest receivable		4,411			4,327
Premises and equipment, net		4,342			4,697
Goodwill		14,327			14,327
Deferred tax asset, net		14,418			14,995
Customers' liability on acceptances		6,572			5,152
Foreclosed assets, net		14,414			19,018
Cash value of bank owned life insurance		32,115			31,427
Prepaid FDIC assessment		4,360			5,204
Other assets		5,189			2,561
Total assets	$	1,553,934		$	1,494,531
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing	$	271,545		$	259,397
Interest-bearing		987,925			992,178
Total deposits		1,259,470			1,251,575
Junior subordinated debentures		36,083			36,083
Other borrowings		26,000			26,315
Accrued interest payable		261			310
Acceptances outstanding		6,572			5,152
Preferred stock repurchase payable		42,941			–
Other liabilities		10,552			9,913
Total liabilities		1,381,879			1,329,348
Commitments and contingencies		–			–
Shareholders' equity:
Preferred stock, $1.00 par value, 2,000,000 shares authorized; 1,260 shares and 45,000 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively		1,548			45,003
Common stock, $1.00 par value, 50,000,000 shares authorized; 18,696,565 and 13,340,815 shares issued and 18,681,709 and 13,340,815 outstanding at June 30, 2012 and December 31, 2011, respectively		18,697			13,341
Additional paid-in-capital		74,451			33,816
Retained earnings		77,172			73,188
Accumulated other comprehensive loss		312			(165	)
Treasury stock, at cost, 14,856 and no shares at June 30, 2012 and December 31, 2011, respectively		(125	)		–
Total shareholders' equity		172,055			165,183
Total liabilities and shareholders' equity	$	1,553,934		$	1,494,531

See accompanying notes to condensed consolidated financial statements.

2

METROCORP BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2012			2011			2012			2011
Interest income:
Loans	$	14,754		$	15,330		$	29,753		$	31,332
Securities:
Taxable		1,004			1,160			2,031			2,388
Tax-exempt		145			99			262			197
Other investments		44			42			87			84
Federal funds sold and other short-term investments		234			106			446			187
Total interest income		16,181			16,737			32,579			34,188
Interest expense:
Time deposits		1,370			1,974			2,906			4,200
Demand and savings deposits		586			927			1,221			1,847
Junior subordinated debentures		333			325			669			649
Subordinated debentures and other borrowings		247			263			494			544
Total interest expense		2,536			3,489			5,290			7,240
Net interest income		13,645			13,248			27,289			26,948
Provision for loan losses		200			1,245			600			1,575
Net interest income after provision for loan losses		13,445			12,003			26,689			25,373
Noninterest income:
Service fees		1,131			1,034			2,248			2,090
Loan-related fees		117			82			187			179
Letters of credit commissions and fees		190			165			387			349
Gain (loss) on securities, net		72			(24	)		84			(74	)
Total other-than-temporary impairments (“OTTI”) on securities		(48	)		(78	)		(87	)		(183	)
Less: Noncredit portion of “OTTI”		(10	)		(1	)		(10	)		(18	)
Net impairments on securities		(38	)		(77	)		(77	)		(165	)
Other noninterest income		288			391			734			851
Total noninterest income		1,760			1,571			3,563			3,230
Noninterest expense:
Salaries and employee benefits		5,997			5,243			11,918			10,488
Occupancy and equipment		1,743			1,847			3,432			3,649
Foreclosed assets, net		362			844			1,363			1,519
FDIC assessment		485			523			882			1,384
Other noninterest expense		2,725			1,566			4,650			4,746
Total noninterest expense		11,312			10,023			22,245			21,786
Income before provision for income taxes		3,893			3,551			8,007			6,817
Provision for income taxes		1,267			1,188			2,613			2,328
Net income	$	2,626		$	2,363		$	5,394		$	4,489
Dividends and discount – preferred stock		(811	)		(605	)		(1,409	)		(1,210	)
One-time adjustment from repurchase of preferred stock		706			—			706			—
Net income available to common shareholders	$	2,521		$	1,758		$	4,691		$	3,279
Earnings per common share:
Basic	$	0.16		$	0.13		$	0.33		$	0.25
Diluted	$	0.16		$	0.13		$	0.32		$	0.25
Weighted average shares outstanding:
Basic		15,493			13,142			14,331			13,139
Diluted		15,753			13,234			14,497			13,215
Dividends per common share	$	–		$	–		$	–		$	–

See accompanying notes to condensed consolidated financial statements.

3

METROCORP BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2012			2011			2012			2011
Net income	$	2,626		$	2,363		$	5,394		$	4,489
Other comprehensive income, net of taxes:
Change in accumulated loss on effective cash flow hedging derivatives		(9	)		(241	)		34			(92	)
Unrealized loss on investment securities, net:
Securities with OTTI charges during the period		(31	)		(50	)		(56	)		(117	)
Less: OTTI charges recognized in net income		(25	)		(49	)		(50	)		(105	)
Net unrealized losses on investment securities with OTTI		(6	)		(1	)		(6	)		(12	)
Unrealized holding gain arising during the period		482			1,584			503			1,122
Less: reclassification adjustment for gain (loss) included in net income		46			(15	)		54			(47)
Net unrealized gains on investment securities		436			1,599			449			1,169
Other comprehensive income, net of taxes		421			1,357			477			1,065
Total comprehensive income	$	3,047		$	3,720		$	5,871		$	5,554

See accompanying notes to condensed consolidated financial statements.

4

METROCORP BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Six Months Ended June 30, 2012

(In thousands)

(Unaudited)

	Preferred Stock						Common Stock				Additional paid-in		Retained			Accumulated other comprehensive income			Treasury Stock, at
	Shares			At par			Shares		At par		capital		earnings			(loss)			cost			Total
Balance at December 31, 2011		45		$	45,003			13,341	$	13,341	$	33,816	$	73,188		$	(165	)	$	–		$	165,183
Issuance of common stock		–			–			5,356		5,356		39,891		–			–			–			45,247
Repurchase of common stock		–			–			–		–		–		–			–			(125	)		(125	)
Repurchase of preferred stock		(44	)		(43,740	)		–		–		706		–			–			–			(43,034	)
Stock-based compensation expense related to stock options recognized in earnings		–			–			–		–		38		–			–			–			38
Net income		–			–			–		–		–		5,394			–			–			5,394
Amortization  of preferred stock discount		–			285			–		–		–		(285	)		–			–			–
Other comprehensive income		–			–			–		–		–		–			477			–			477
Dividends – preferred stock		–			–			–		–		–		(1,125	)		–						(1,125	)
Balance at June 30, 2012		1		$	1,548			18,697	$	18,697	$	74,451	$	77,172		$	312		$	(125	)	$	172,055

See accompanying notes to condensed consolidated financial statements.

5

METROCORP BANCSHARES, INC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	For the Six Months Ended June 30,
	2012			2011
Cash flows from operating activities:
Net income	$	5,394		$	4,489
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		543			723
Provision for loan losses		600			1,575
Impairment on securities		77			165
Gain (loss) on securities transactions, net		(84	)		74
Loss on writedown and sale of foreclosed assets		525			698
Amortization of premiums and discounts on securities, net		276			39
Amortization of deferred loan fees and discounts		(545	)		(576	)
Amortization of core deposit intangibles		28			43
Stock-based compensation		38			43
Changes in:
Accrued interest receivable		(84	)		428
Other assets		(2,172	)		425
Accrued interest payable		(49	)		(100	)
Preferred stock repurchase payable		42,941			—
Other liabilities		673			2,614
Net cash provided by operating activities		48,161			10,640
Cash flows from investing activities:
Purchases of securities available-for-sale		(47,072	)		(35,922	)
Purchases of other investments		(1	)		(1	)
Proceeds from sales of securities available-for-sale		—			186
Proceeds from maturities, calls, and principal paydowns of securities available-for-sale		51,206			39,263
Proceeds from sales and maturities of other investments		604			221
Net change in loans		(56,481	)		64,984
Proceeds from sale of foreclosed assets		9,878			13,240
Proceeds from sale of premises and equipment		—			—
Purchases of premises and equipment		(188	)		(227	)
Net cash (used in) provided by investing activities		(42,054	)		81,744
Cash flows from financing activities:
Net change in:
Deposits		7,895			(53,382	)
Other borrowings		(315	)		(20,452	)
Proceeds from issuance of common stock		45,247			—
Repurchase of common stock		(125	)		—
Repurchase of preferred stock		(43,034	)		—
Cash dividends paid on preferred stock		(1,125	)		(1,139	)
Net cash provided by (used in) financing activities		8,543			(74,973	)
Net increase in cash and cash equivalents		14,650			17,411
Cash and cash equivalents at beginning of period		193,609			151,725
Cash and cash equivalents at end of period	$	208,259		$	169,136
Supplemental information:
Interest paid	$	5,339		$	7,340
Income taxes paid		2,144			692
Noncash investing and financing activities:
Issuance of common stock pursuant to incentive plan		—			397
Issuance of common stock – restricted shares		2,302			—
Foreclosed assets acquired		5,799			9,796
Loans originated to finance foreclosed assets		4,071			2,676

See accompanying notes to condensed consolidated financial statements.

6

METROCORP BANCSHARES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.     BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements include the accounts of MetroCorp Bancshares, Inc. (the “Company”) and wholly-owned subsidiaries, MetroBank, National Association (“MetroBank”) and Metro United Bank (“Metro United”), in Texas and California, respectively (collectively, the “Banks”).  MetroBank is engaged in commercial banking activities through its thirteen branches in the greater Houston and Dallas, Texas metropolitan areas, and Metro United is engaged in commercial banking activities through its six branches in the San Diego, Los Angeles and San Francisco, California metropolitan areas. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain principles which significantly affect the determination of financial position, results of operations and cash flows are summarized below.

A legal entity is referred to as a Variable Interest Entity (“VIE”) if any of the following conditions exist: (1) the total equity at risk is insufficient to permit the legal entity to finance its activities without additional subordinated financial support from other parties, or (2) the entity has equity investors that cannot make significant decisions about the entity’s operations or that do not absorb their proportionate share of the expected losses or receive the expected returns of the entity.  In addition, as specified in VIE accounting guidance, a VIE must be consolidated by the Company if it is deemed to be the primary beneficiary of the VIE. The primary beneficiary is the party that has both (1) the power to direct the activities of an entity that most significantly impact the VIE’s economic performance, and (2) through its interests in the VIE, the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.  All facts and circumstances are taken into consideration when determining whether the Company has variable interest that would deem it the primary beneficiary and, therefore, require consolidation of the related VIE or otherwise rise to the level where disclosure would provide useful information to the users of the Company’s financial statements.  In the case of the Company’s sole VIE, MCBI Statutory Trust I,  it is qualitatively clear based on the extent of the Company’s involvement that the Company is not the primary beneficiary of the VIE.  Accordingly, the accounts of this entity are not consolidated in the Company’s financial statements.

The accompanying unaudited condensed consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal and recurring adjustments, necessary for a fair statement of the Company’s financial position at June 30, 2012, results of operations for the three and six months ended June 30, 2012 and 2011, and cash flows for the six months ended June 30, 2012 and 2011. Interim period results are not necessarily indicative of results for a full year period. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. generally accepted accounting principles.

Certain items in prior financial statements have been reclassified to conform to the 2012 presentation, with no impact on the balance sheet, net income, shareholders’ equity or cash flows.

These unaudited financial statements and the notes thereto should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

7

2.     SECURITIES

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

	As of June 30, 2012
	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	$	73,476	$	507	$	─		$	─		$	73,983
Obligations of state and political subdivisions		11,709		340		(48	)		─			12,001
Corporate		6,091		144								6,235
Mortgage-backed securities and collateralized mortgage obligations:
Government issued or guaranteed		60,091		1,431		─			─			61,522
Privately issued residential		798		273		(9	)		(409	)		653
Asset backed securities		204		91		─			(178	)		117
Equity Securities						─
Investment in CRA funds		13,882		286		─			─			14,168
Total available-for-sale securities	$	166,251	$	3,072	$	(57	)	$	(587	)	$	168,679
Securities held-to-maturity
Obligations of state and political subdivisions	$	4,046	$	564	$	─		$	─		$	4,610
Total held-to-maturity securities	$	4,046	$	564	$	─		$	─		$	4,610
Other investments
FHLB/Federal Reserve Bank stock (1)	$	4,797	$	─	$	─		$	─		$	4,797
Investment in subsidiary trust (1)		1,083		─		─			─			1,083
Total other investments	$	5,880	$	─	$	─		$	─		$	5,880

8

	As of December 31, 2011
			Unrealized
	Amortized Cost		Gains		Losses			OTTI			Fair Value
	(In thousands)
Securities available-for-sale
Debt securities
U.S. Treasury and other U.S. government corporations and agencies	$	91,660	$	546	$	(7	)	$	—		$	92,199
Obligations of state and political subdivisions		5,467		279		(40	)		—			5,706
Corporate		6,102		57		(18	)		—			6,141
Mortgage-backed securities and collateralized mortgage obligations:
Government issued or guaranteed		52,594		1,160		(15	)		—			53,739
Privately issued residential		900		232		(23	)		(442	)		667
Asset backed securities		231		56		—			(185	)		102
Equity securities
Investment in CRA funds		13,700		135		—			—			13,835
Total available-for-sale securities	$	170,654	$	2,465	$	(103	)	$	(627	)	$	172,389
Securities held-to-maturity
Obligations of state and political subdivisions	$	4,046	$	490	$	—		$	—		$	4,536
Total held-to-maturity securities	$	4,046	$	490	$	—		$	—		$	4,536
Other investments
FHLB /Federal Reserve Bank stock(1)		5,401		—		—			—			5,401
Investment in subsidiary trust(1)		1,083		—		—			—			1,083
Total other investments	$	6,484	$	—	$	—		$	—		$	6,484

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

9

The following table displays the gross unrealized losses and fair value of securities available-for-sale as of June 30, 2012 for which other-than-temporary impairments (“OTTI”) has not been recognized, that were in a continuous unrealized loss position for the periods indicated.  There were no securities held-to-maturity in a continuous unrealized loss position as of June 30, 2012 or December 31, 2011.

	June 30, 2012
	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
Obligations of state and political subdivisions	$	3,665	$	(48	)	$	—	$	—		$	3,665	$	(48	)
Mortgage-backed securities and collateralized mortgage obligations:
Government issued or guaranteed		16		—			—		—			16		—
Privately issued residential		—		—			170		(9	)		170		(9	)
Total available-for-sale securities	$	3,681	$	(48	)	$	170	$	(9	)	$	3,851	$	(57	)

	As of December 31, 2011
	Less Than 12 Months					Greater Than 12 Months					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
	(In thousands)
Securities available-for-sale
Debt securities
U.S. Treasury and other U.S. government corporations and agencies	$	4,993	$	(7	)	$	—	$	—		$	4,993	$	(7	)
Obligations of state and political subdivisions		1,580		(40	)		—		—			1,580		(40	)
Corporate		3,017		(18	)		—		—			3,017		(18	)
Mortgage-backed securities and collateralized mortgage obligations:
Government issued or guaranteed		8,786		(15	)		10		—			8,796		(15	)
Privately issued residential		—		—			168		(23	)		168		(23	)
Total available-for-sale securities	$	18,376	$	(80	)	$	178	$	(23	)	$	18,554	$	(103	)

As of June 30, 2012, management did not have the intent to sell any of the securities classified as available-for-sale in unrealized loss positions and believes it is not more likely than not that the Company will have to sell any such securities before a recovery of the cost. However, if strategic opportunities arise, the Company may consider selling selected securities.  Any unrealized losses on such selected securities would be charged to earnings.

The unrealized losses are largely due to increases in the market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such securities decline. Management does not believe any of the unrealized losses above are due to credit quality. Accordingly, management believes the $57,000 of unrealized losses as of June 30, 2012 is temporary and the remaining $587,000 of OTTI as of June 30, 2012 represents an unrealized loss for which an impairment has been recognized in other comprehensive loss.

10

Other-Than-Temporary Impairments (OTTI)

The following table presents a rollforward for the three and six months ended June 30, 2012, 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 June 30, 2012		Six months ended June 30, 2012
	(In thousands)
Credit losses at beginning  of period	$	1,634	$	1,595
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		25		46
Transfers from accumulated other comprehensive income to OTTI related to credit losses		13		31
Credit losses at end of period	$	1,672	$	1,672

For the six months ended June 30, 2012, credit-related losses of $70,000 on eight non-agency residential mortgage-backed securities and $7,000 on one asset-backed security were recognized. There were no noncredit impairments included in accumulated other comprehensive income (loss) for the six months ended June 30, 2012.

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

Other Securities Information

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 for the six months ended June 30, 2012 or 2011.

	Six Months Ended June 30,
	2012		2011
Amortized cost	$	—	$	292
Proceeds		—		186
Gross realized gains		—		—
Gross realized losses		—		(105	)

11

At June 30, 2012, future contractual maturities of debt securities were as follows (in thousands):

	Securities Available-for-sale				Securities Held-to-maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Within one year	$	—	$	—	$	—	$	—
Within two to five years		14,794		14,982		—		—
Within six to ten years		66,269		66,845		—		—
After ten years		10,417		10,509		4,046		4,610
Mortgage-backed securities and collateralized mortgage obligations		60,889		62,175		—		—
Total debt securities	$	152,369	$	154,511	$	4,046	$	4,610

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

3.     LOANS

The loan portfolio is classified by major type as follows:

	As of June 30, 2012						As of December 31, 2011
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
Commercial and industrial	$	375,897			34.27	%	$	345,265			32.98	%
Real estate mortgage:
Residential		43,282			3.95			42,682			4.08
Commercial		664,808			60.61			644,727			61.58
		708,090			64.56			687,409			65.66
Real estate construction:
Residential		4,540			0.41			6,984			0.67
Commercial		3,172			0.29			3,324			0.32
		7,712			0.70			10,308			0.99
Consumer and other		5,198			0.47			3,936			0.37
Gross loans		1,096,897			100.00	%		1,046,918			100.00	%
Unearned discounts, interest and deferred fees		(2,664	)					(2,302	)
Total loans		1,094,233						1,044,616
Allowance for loan losses		(27,311	)					(28,321	)
Loans, net	$	1,066,922					$	1,016,295

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

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

June 30, 2012	Gross Loan Balance		Deferred Loan Fees			Accrued Interest Receivable		Recorded Investment in Loans
Commercial and industrial	$	375,897	$	(830	)	$	1,106	$	376,173
Real estate-mortgage		708,090		(1,620	)		2,229		708,699
Real estate-construction		7,712		(8	)		7		7,711
Consumer and other		5,198		(206	)		13		5,005
Total	$	1,096,897	$	(2,664	)	$	3,355	$	1,097,588

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December 31, 2011	Gross Loan Balance		Deferred Loan Fees			Accrued Interest Receivable		Recorded Investment in Loans
Commercial and industrial	$	345,265	$	(777	)	$	1,077	$	345,565
Real estate-mortgage		687,409		(1,327	)		2,270		688,352
Real estate-construction		10,308		(2	)		29		10,335
Consumer and other		3,936		(196	)		14		3,754
Total	$	1,046,918	$	(2,302	)	$	3,390	$	1,048,006

Loan Origination/Risk Management

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

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

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

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

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

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

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

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

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

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

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

As of June 30, 2012	Commercial and industrial		Real estate- mortgage		Real estate - construction		Consumer and other		Total
Grade:
1-6 - “Pass”	$	341,665	$	606,042	$	2,194	$	5,004	$	954,905
7 - “Special Mention”/ “Watch”		9,234		15,728		—		—		24,962
8 - “Substandard”		25,274		86,929		5,517		1		117,721
9 -“Doubtful"		—		—		—		—		—
Total	$	376,173	$	708,699	$	7,711	$	5,005	$	1,097,588

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As of December 31, 2011	Commercial and industrial		Real estate- mortgage		Real estate - construction		Consumer and other		Total
Grade:
1-6 - “Pass”	$	310,626	$	551,496	$	3,078	$	3,753	$	868,953
7 - “Special Mention”/ “Watch”		10,735		30,491		—		—		41,226
8 - “Substandard”		24,204		106,160		7,257		1		137,622
9 -“Doubtful"		—		205		—		—		205
Total	$	345,565	$	688,352	$	10,335	$	3,754	$	1,048,006

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

Nonperforming Assets

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

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

Loans are classified as a troubled debt restructuring in cases where a borrower is experiencing financial difficulty and the Banks make concessionary modifications to contractual terms. Restructured loans typically involve a modification of terms such as a reduction of the stated interest rate and/or an extension of the maturity date(s). Generally, a nonaccrual loan that is restructured remains on nonaccrual for a minimum period of six months to demonstrate that the borrower can meet the restructured terms. Once performance has been demonstrated the loan may be returned to performing status after the calendar year end.

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

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

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

As of June 30, 2012	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Recorded Investment in Loans		Recorded Investment 90 Days and Accruing
Commercial and industrial	$	726	$	928	$	8,144	$	9,798	$	366,375	$	376,173	$	—
Real estate mortgage:
Residential		102		2,345		249		2,696		40,700		43,396		63
Commercial		9,524		1,928		11,343		22,795		642,508		665,303		—
Real estate construction:
Residential		—		—		—		—		4,539		4,539		—
Commercial		—		—		3,172		3,172		—		3,172		—
Consumer and other		366		—		1		367		4,638		5,005		—
Total	$	10,718	$	5,201	$	22,909	$	38,828	$	1,058,760	$	1,097,588	$	63

As of December 31, 2011	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Recorded Investment in Loans		Recorded Investment 90 Days and Accruing
Commercial and industrial	$	2,018	$	121	$	9,433	$	11,572	$	333,993	$	345,565	$	—
Real estate mortgage:
Residential		105		—		251		356		42,440		42,796		—
Commercial		7,361		4,002		15,559		26,922		618,634		645,556		—
Real estate construction:
Residential		—		—		—		—		7,011		7,011		—
Commercial		—		3,324		—		3,324		—		3,324		—
Consumer and other		—		5		1		6		3,748		3,754		—
Total	$	9,484	$	7,452	$	25,244	$	42,180	$	1,005,826	$	1,048,006	$	—

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

Recorded investment in nonaccrual loans	June 30, 2012		December 31, 2011
Commercial and industrial	$	8,386	$	10,665
Real estate mortgage:
Residential		185		251
Commercial		15,864		30,600
Real estate construction:
Residential		2,345		—
Commercial		3,172		3,324
Consumer and other		1		1
Total	$	29,953	$	44,841

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Information on impaired loans, which includes nonaccrual loans and troubled debt restructurings, and the related specific allowance for loan losses on such loans at June 30, 2012 and December 31, 2011, is presented below (in thousands):

As of June 30, 2012	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment
Impaired loans with no allowance
Commercial and industrial	$	8,360	$	8,369	$	—	$	5,824
Real estate mortgage:
Residential		185		185		—		235
Commercial		15,385		15,399		—		18,922
Real estate construction:
Residential		2,345		2,345		—		586
Commercial		3,172		3,172		—		2,440
Impaired loans with an allowance
Commercial and industrial	$	26	$	26	$	26	$	4,649
Real estate mortgage:
Commercial		4,612		4,609		790		9,580
Total:
Commercial and industrial	$	8,386	$	8,395	$	26	$	10,473
Real estate mortgage		20,182		20,193		790		28,737
Real estate construction		5,517		5,517		—		3,026

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As of December 31, 2011	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment
Impaired loans with no allowance
Commercial and industrial	$	3,647	$	3,652	$	—	$	8,901
Real estate mortgage:
Residential		251		251		—		263
Commercial		19,922		19,913		—		26,256
Real estate construction:
Commercial		3,324		3,324		—		831
Impaired loans with an allowance
Commercial and industrial	$	7,018		7,025		224		4,835
Real estate mortgage:
Commercial		10,678		10,696		710		14,042
Total:
Commercial and industrial	$	10,665	$	10,677	$	224	$	13,736
Real estate mortgage		30,851		30,860		710		40,561
Real estate construction		3,324		3,324		—		831

For the six months ended June 30, 2012 and 2011, interest income of $93,000 and $96,000 was recognized on impaired loans, which consisted of nonaccrual loans that were paid in full and accruing troubled debt restructurings (“TDRs”). 

Troubled Debt Restructurings

Loans are classified as a TDRs in cases where a borrower is experiencing financial difficulty and the Banks make concessionary modifications to contractual terms. Restructured loans typically involve a modification of terms such as a reduction of the stated interest rate and/or an extension of the maturity date(s). Generally, a nonaccrual loan that is restructured remains on nonaccrual for a minimum period of six months to demonstrate that the borrower can meet the restructured terms. Once performance has been demonstrated, the loan may be returned to performing status after the calendar year end.  

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The following table presents the recorded investment in TDRs that occurred for the three and six months ended June 30, 2012 (dollars in thousands):

	Three Months Ended June 30, 2012
Troubled Debt Restructurings	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Real estate mortgage:
Commercial		1	$	3,308	$	3,731
Real estate construction:
Commercial		2		401		401

	Six Months Ended June 30, 2012
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Real estate mortgage:
Commercial		2	$	6,007	$	6,348
Real estate construction:
Commercial		2		401		401

For the three months ended June 30, 2012, one commercial real estate loan relationship was restructured as a TDR. The loan relationship identified as a TDR was previously on nonaccrual status and reported as an impaired loan prior to restructuring.  The borrower was under the protection of the Federal Bankruptcy Act and the court approved and imposed a reorganization plan which modified the existing payment terms.  The Company had previously written the loan down to the fair market value of the property. Subsequent to the write down and prior to the reorganization, the loan was further paid down from excess cash flow from the property.  The loan was restructured based on the appraised fair value of the property, which increased the post-modification recorded investment, and as a result, insignificantly increased the allowance for loan losses.

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

For the six months ended June 30, 2012, in addition to the loans mention above, one loan was identified and classified as a TDR.  The TDR was previously on nonaccrual status and reported as an impaired loan prior to restructuring.  The borrower was under the protection of the Federal Bankruptcy Act and the court approved and imposed a reorganization plan which modified the existing payment terms.  Since the loan was classified and on nonaccrual status both before and after restructuring, the modification did not impact the Company’s determination of the allowance for loan losses.  As of June 30, 2012, commitments to lend additional funds on loans that were modified as TDRs were insignificant.   As of June 30, 2012, there have been no defaults on any loans that were modified as TDRs during the preceding twelve months.

Allowance for Loan Losses and Reserve for Unfunded Lending Commitments

The allowance for loan losses provides for the risk of losses inherent in the lending process and the Company allocates the allowance for loan losses according to management’s assessments of risk inherent in the portfolio. The allowance for loan losses is increased by provisions charged against current earnings and is reduced by net charge-offs. Loans are charged off when they are deemed to be uncollectible in whole or in part. Recoveries are recorded when cash payments are received. In developing the assessment, the Company relies on estimates and exercises judgment regarding matters where the ultimate outcome is uncertain. Circumstances may change and future assessments of credit risk may yield materially different results, resulting in an increase or decrease in the allowance for credit losses.

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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 credit losses that consists of four components: (1) a formula-based general reserve based on historical average losses by loan grade and grade migration, (2) specific reserves on larger impaired individual credits that are based on the difference between the current loan balance and the loan’s collateral value, observable market price, or discounted present value, (3) a qualitative component that reflects current market conditions and other factors precedent to losses different from historical averages, and (4) a reserve for unfunded lending commitments.

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

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

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

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

The Company maintains a reserve for unfunded commitments to provide for the risk of loss inherent in its unfunded lending related commitments. The process used in determining the reserve is consistent with the process used for the allowance for loan losses discussed above.

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

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

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As of and for the three months ended June 30, 2011	Commercial and industrial			Real estate- mortgage			Real estate - construction			Consumer and other			Unallocated		Total
Allowance for loan losses at beginning of period	$	8,218		$	20,668		$	1,012		$	247		$	1,738	$	31,883
Provision for loan losses		1,282			286			(522	)		(88	)		287		1,245
Charge-offs		(2,493	)		(418	)		—			(10	)		—		(2,921	)
Recoveries		129			54			—			3			—		186
Allowance for loan losses at end of period	$	7,136		$	20,590		$	490		$	152		$	2,025	$	30,393
Ending allowance for loan losses balance for loans individually evaluated for impairment	$	462		$	794		$	—		$	—				$	1,256
Ending allowance for loan losses balance for loans collectively evaluated for impairment	$	6,674		$	19,796		$	490		$	152				$	27,112
Loans:
Recorded investment in loans	$	334,646		$	723,311		$	6,717		$	3,951				$	1,068,625
Recorded investment in loans individually evaluated for impairment	$	15,996		$	45,154		$	—		$	—				$	61,150
Recorded investment in loans collectively evaluated for impairment	$	318,650		$	678,157		$	6,717		$	3,951				$	1,007,475

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

As of and for the six months ended  June 30, 2011	Commercial and industrial			Real estate- mortgage			Real estate - construction			Consumer and other			Unallocated		Total
Allowance for loan losses at beginning of period	$	8,187		$	22,016		$	1,993		$	194		$	1,367	$	33,757
Provision for loan losses		1,339			1,832			(2,219	)		(35	)		658		1,575
Charge-offs		(2,625	)		(3,323	)		—			(31	)		—		(5,979	)
Recoveries		235			65			716			24			—		1,040
Allowance for loan losses at end of period	$	7,136		$	20,590		$	490		$	152		$	2,025	$	30,393
Ending allowance for loan losses balance for loans individually evaluated for impairment	$	462		$	794		$	—		$	—				$	1,256
Ending allowance for loan losses balance for loans collectively evaluated for impairment	$	6,674		$	19,796		$	490		$	152				$	27,112
Loans:
Recorded investment in loans	$	334,646		$	723,311		$	6,717		$	3,951				$	1,068,625
Recorded investment in loans  individually evaluated for impairment	$	15,996		$	45,154		$	—		$	—				$	61,150
Recorded investment in loans  collectively evaluated for impairment	$	318,650		$	678,157		$	6,717		$	3,951				$	1,007,475

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4.     GOODWILL

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

Balance as of January 1, 2011
Goodwill	$	21,827
Accumulated impairment losses		4,500
Net goodwill		17,327
Impairment losses		3,000
Balance as of December 31, 2011
Goodwill		21,827
Accumulated impairment losses		7,500
Net goodwill		14,327
Impairment losses		—
Balance as of June 30, 2012
Goodwill		21,827
Accumulated impairment losses		7,500
Net goodwill	$	14,327

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

Annual Evaluation

The Company completed its 2011 annual impairment test based on information as of August 31, 2011. The review utilized guideline company and guideline transaction information where available, discounted cash flow analysis and the market capitalization of the Company to estimate the fair value of Metro United.

Due to the limited number of bank transaction multiples and fluctuations in market capitalization of peer banks used in the market methods, management put more weight on the income approach for the step-one analysis. The Company also performed a reconciliation of the estimated fair value to the stock price of the Company which was performed by first using the Company’s market price on a minority basis with an estimated control premium of 30%. The Company then allocated the total fair value to both of its reporting units, MetroBank and Metro United.

Under the discounted cash flow method, the Company used an average asset growth rate of 6.5% for the five-year period and discounted Metro United’s terminal value using a 10% rate of return. The Company also performed a sensitivity analysis utilizing additional discount rates ranging from 8% to 15%. An 8% discount rate indicated a fair value that was $9.8 million greater than carrying value, an 11% discount rate indicated that fair value and carrying value were approximately equal, and a 15% discount rate indicated a fair value that was $9.8 million less than the carrying value. The derived fair value of Metro United was compared with the carrying value of its equity. The fair value at the evaluation date exceeded the carrying value, therefore the Company determined there was no impairment of goodwill as of that date.

Year End Evaluation

The Company’s stock price continued to trade below book value per share after the annual test and an additional goodwill impairment test was conducted as of December 31, 2011. The test was similar to the annual test but the conclusion of value was mainly based on utilizing the market capitalization of the Company.  Under the step-one analysis, the Company allocated the market capitalization of the Company, adjusted for a 20% control premium, to Metro United based on a pro rata basis using various balance sheet metrics of Metro United and MetroBank.

The derived fair value of Metro United was lower than the carrying value of its equity; and therefore Metro United failed the step-one impairment test.

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 The Company then performed the step-two analysis to derive the implied fair value of goodwill.  As a result of improved market liquidity and the increase in fair value of loan assets, the implied fair value of goodwill was below the carrying value as of the evaluation date by $3.0 million; and as a result, the Company recorded a goodwill impairment of $3.0 million as of December 31, 2011.

Second Quarter Evaluation

 Although the Company’s stock price traded slightly above its book value during the second quarter of 2012, the Company performed an impairment test as of June 30, 2012.  The test was similar to the annual test, but the conclusion of value was mainly based on utilizing the market capitalization of the Company.  Under the step-one analysis, the Company allocated the market capitalization of the Company, adjusted for a 20% control premium, to Metro United based on a pro rata basis using various balance sheet metrics of Metro United and MetroBank.

The derived fair value of Metro United was lower than the carrying value of its equity; and therefore Metro United failed the step-one impairment test, which was consistent with the year end test. The Company performed the step-two analysis to derive the implied fair value of goodwill.  In this analysis, the estimated fair value of Metro United as of June 30, 2012 exceeded its respective carrying value in the step-two analysis; therefore, the Company determined there was no impairment of goodwill as of that date.

The size of the implied goodwill under the step-two analysis was significantly affected by the estimated fair value of the loans pertaining to Metro United and the Company’s stock price. The significant market risk adjustment, which is a consequence of the current market conditions, was a substantial contributor to the valuation discounts associated with Metro United’s loan portfolio. To the extent that market liquidity returns and the fair value of the individual assets or loans of Metro United increases at a faster rate than the fair value of Metro United as a whole, that may cause the implied goodwill to be lower than the carrying value of goodwill. Future potential changes in valuation assumptions may also impact the estimated fair value of Metro United, resulting in additional impairment of the goodwill under the step-two analysis. The stock price performance of the Company and the fair value of Metro United's loans are factors that may impact the potential future goodwill impairment.

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

5.     EARNINGS PER COMMON SHARE

Basic earnings per common share (“EPS”) is computed by dividing net income (after deducting dividends on preferred stock) by the weighted-average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income available to common shareholders by the weighted-average number of common shares and potentially dilutive common shares outstanding during the period. Stock options, restricted common shares and warrants can be dilutive common shares and are therefore considered in the earnings per share calculation, if dilutive.  Stock options, restricted common shares and warrants that are antidilutive are excluded from earnings per share calculation.  Stock options, restricted common shares and warrants are antidilutive when the exercise price is higher than the current market price of the Company’s common stock. For the three months ended June 30, 2012 and 2011, there were 453,090 and 1,044,068 antidilutive stock options, respectively.  For the six months ended June 30, 2012 and 2011, there were 600,491 and 1,179,781 antidilutive stock options, respectively.  The number of potentially dilutive common shares is determined using the treasury stock method.

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	As of and for the Three Months Ended June 30,				As of and for the Six Months Ended June 30,
	2012		2011		2012		2011
	(In thousands, except per share amounts)
Net income available to common shareholders	$	2,521	$	1,758	$	4,691	$	3,279
Weighted average common shares in basic EPS		15,493		13,142		14,331		13,139
Effect of dilutive securities		260		92		166		76
Weighted average common and potentially dilutive common shares used in diluted EPS		15,753		13,234		14,497		13,215
Earnings per common share:
Basic	$	0.16	$	0.13	$	0.33	$	0.25
Diluted	$	0.16	$	0.13	$	0.32	$	0.25

6.     COMMITMENTS AND CONTINGENCIES

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

The contractual amount of the Company’s financial instruments with off-balance sheet risk as of June 30, 2012 and December 31, 2011 is presented below (in thousands):

	As of June 30, 2012		As of December 31, 2011
Unfunded loan commitments including unfunded lines of credit	$	119,581	$	105,049
Standby letters of credit		10,835		15,765
Commercial letters of credit		10,582		5,818
Operating leases		7,667		8,058
Total financial instruments with off-balance sheet risk	$	148,665	$	134,690

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

7.     SHAREHOLDERS’ EQUITY

New Capital Raised

On May 21, 2012, the Company closed the public offering of 5,111,750 shares of its common stock, $1.00 par value per share (the “Offering”), at a price of $9.00 per share. The shares sold in the Offering included 666,750 shares sold pursuant to the underwriter’s full exercise of its option to purchase additional shares to cover over-allotments. The shares were sold in accordance with an underwriting agreement between the Company and Keefe, Bruyette & Woods, Inc., the sole underwriter.

Proceeds to the Company, after deducting the underwriting discount,commissions and Offering expenses, were approximately $42.9 million.

The Offering was made pursuant to a registration statement on Form S-3 (File No. 333-180889) of the Company, which became effective on May 7, 2012. A prospectus supplement, dated May 16, 2012, to the base prospectus, dated May 7, 2012, forming a part of the registration statement was filed on May 17, 2012 with the Securities and Exchange Commission under Rule 424(b)(2) of the Securities Act of 1933, as amended.

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Repurchase of Troubled Asset Relief Program (“TARP”) Preferred Stock

The Company repurchased 43,740 shares of the Company’s 45,000 outstanding shares of preferred stock (“Preferred Stock”) from the U.S. Department of the Treasury (“Treasury”), which were issued to the Treasury in connection with the Company’s participation in the TARP Capital Purchase Program (“CPP”).  The repurchase of $43.7 million in stated value of Preferred Stock at a discount of 1.883% (or an actual cost of $42.9 million) resulted in a one-time adjustment, net of settlement costs, to capital totaling $706,000 offset by the amortization of $249,000 in the Preferred Stock discount.  Although the transaction date occurred during the second quarter of 2012, actual payment for the repurchase of Preferred Stock took place on July 3, 2012.  As such, the Company recorded a payable in the amount of $42.9 million listed as “Preferred Stock repurchase payable” on the Consolidated Balance Sheet as of June 30, 2012.  The remaining 1,260 shares of Preferred Stock were sold by the Treasury to other investors.  The warrants to purchase common stock associated with the TARP program are still held by the Treasury.

As a result of participation in the CPP, among other things, the Company was subject to the Treasury’s standards for executive compensation and corporate governance for the period during which the Treasury held the Company’s Preferred Stock, including the second quarter of 2012.  These standards were most recently set forth in the Interim Final Rule on TARP Standards for Compensation and Corporate Governance, published June 15, 2009.  Because the Treasury sold all of the Preferred Stock in the auction, these executive compensation and corporate governance standards are no longer applicable to the Company on a going forward basis.

The Company paid no common dividends for the six months ended June 30, 2012 and 2011.  Preferred dividends of $1.1 million were paid for each of the six months ended June 30, 2012 and 2011.

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.

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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.

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The following table provides a comparison of the Company’s and each of the Banks’ leverage and risk-weighted capital ratios as of June 30, 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

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9.     ACCUMULATED OTHER COMPREHENSIVE INCOME

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

	Three months ended June 30, 2012									Three months ended June 30, 2011
	Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount			Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount
Change in accumulated gain (loss) on effective cash flow derivatives	$	(15	)	$	(6	)	$	(9	)	$	(377	)	$	(136	)	$	(241	)
Unrealized gain (loss) on investment securities with OTTI:
Securities with OTTI charges during the period		(48	)		(17	)		(31	)		(78	)		(28	)		(50	)
Less: OTTI charges recognized in net income		(38	)		(13	)		(25	)		(77	)		(28	)		(49	)
Net unrealized losses on investment securities with OTTI		(10	)		(4	)		(6	)		(1	)		—			(1	)
Unrealized gain (loss) on investment securities:
Unrealized holding gain arising during the period		756			274			482			2,474			890			1,584
Less: reclassification adjustment for gain (loss) included in net income		72			26			46			(24	)		(9	)		(15	)
Net unrealized gains on investment securities		684			248			436			2,498			899			1,599
Other comprehensive income	$	659		$	238		$	421		$	2,120		$	763		$	1,357

	Six months ended June 30, 2012									Six months ended June 30, 2011
	Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount			Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount
Change in accumulated gain (loss) on effective cash flow derivatives	$	53		$	19		$	34		$	(144	)	$	(52	)	$	(92	)
Unrealized gain (loss) on investment securities with OTTI:
Securities with OTTI charges during the period		(87	)		(31	)		(56	)		(183	)		(66	)		(117	)
Less: OTTI charges recognized in net income		(77	)		(27	)		(50	)		(165	)		(60	)		(105	)
Net unrealized losses on investment securities with OTTI		(10	)		(4	)		(6	)		(18	)		(6	)		(12	)
Unrealized gain on investment securities:
Unrealized holding gain arising during the period		787			284			503			1,752			630			1,122
Less: reclassification adjustment for gain included in net income		84			30			54			(74	)		(27	)		(47	)
Net unrealized gains on investment securities		703			254			449			1,826			657			1,169
Other comprehensive income	$	746		$	269		$	477		$	1,664		$	599		$	1,065

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The balance of and changes in each component of accumulated other comprehensive income as of and for the six months ended June 30, 2012 are as follows (net of taxes):

	Gains (Losses) on Effective Cash Hedging Derivatives			Net Unrealized Losses on Investments with OTTI			Net Unrealized Investment Gains		Total Accumulated Other Comprehensive Income (Loss)
Balance December 31, 2011	$	(1,275	)	$	(1,000	)	$	2,110	$	(165	)
Current period  change		34			(6	)		449		477
Balance June 30, 2012	$	(1,241	)	$	(1,006	)	$	2,559	$	312

10.   DERIVATIVE FINANCIAL INSTRUMENTS

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

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

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

The notional amount of the interest rate derivative contract outstanding at June 30, 2012 and December 31, 2011 was $17.5 million, and  the estimated fair value at June 30, 2012 and December 31, 2011 was ($1.9 million) and ($2.0 million), 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 the interest rate swap above.  To qualify for hedge accounting, a derivative must be highly effective at reducing the risk associated with the exposure being hedged. In addition, for a derivative to be designated as a hedge, the risk management objective and strategy must be documented. Hedge documentation must identify the derivative hedging instrument, the asset or liability and type of risk to be hedged, and how the effectiveness of the derivative will be assessed prospectively and retrospectively. To assess effectiveness, the Company compares the dollar-value of the change in the fair value of the derivative to the change in the fair value or cash flows of the hedged item. The extent to which a derivative has been, and is expected to continue to be, effective at offsetting changes in the fair value or cash flows of the hedged item must be assessed and documented at least quarterly. Any hedge ineffectiveness (i.e., the amount by which the gain or loss on the designated derivative instrument does not exactly offset the gain or loss on the hedged item attributable to the hedged risk) must be reported in current-period earnings. If it is determined that a derivative is not highly effective at hedging the designated exposure, hedge accounting is discontinued.

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

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The Company obtains dealer quotations to value its interest rate derivative contract designated as a hedge of cash flows and its non-hedging interest rate derivative.  The notional amounts and estimated fair values of interest rate derivative contracts outstanding at June 30, 2012 and December 31, 2011 are presented in the following table (in thousands).

	June 30, 2012					December 31, 2011
	Notional Amount		Estimated Fair Value			Notional Amount		Estimated Fair Value
Interest rate derivative contract designated as a hedge of cash flows	$	17,500	$	(1,939	)	$	17,500	$	(1,992	)
Interest rate derivative contract not designated as a hedge of cash flows	$	15,000	$	85		$	15,000	$	194

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

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

Amounts included in the Condensed Consolidated Statements of Operations and in the Condensed Consolidated Statement of Comprehensive Income for the period related to the interest rate derivative designated as a hedge of cash flows were as follows.  There were no interest rate derivatives designated as hedges of fair value at June 30, 2012.

	Gains/(losses) recorded in income and other comprehensive income (loss) (in thousands)
Three months ended June 30, 2012	Derivative effective portion reclassified from AOCI into income		Hedge ineffectiveness recorded directly in income		Total income statement impact		Derivative effective portion recorded in OCI			Total change in OCI for period
Interest rate derivative designated as a hedge of cash flows:
Interest rate swap	$	—	$	—	$	—	$	(15	)	$	(15	)
Three months ended June 30, 2011
Interest rate derivative designated as a hedge of cash flows:
Interest rate swap	$	—	$	—	$	—	$	(378	)	$	(378	)

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	Gains/(losses) recorded in income and other comprehensive income (loss) (in thousands)
Six months ended June 30, 2012	Derivative effective portion reclassified from AOCI into income		Hedge ineffectiveness recorded directly in income		Total income statement impact		Derivative effective portion recorded in OCI			Total change in OCI for period
Interest rate derivative designated as a hedge of cash flows:
Interest rate swap	$	—	$	—	$	—	$	53		$	53
Six months ended June 30, 2011
Interest rate derivative designated as a hedge of cash flows:
Interest rate swap	$	—	$	—	$	—	$	(144	)	$	(144	)

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

	Three Months Ended  June 30,					Six Months Ended  June 30,
	2012			2011		2012			2011
Non-hedging interest rate derivative:
Other non-interest income	$	(75	)	$	11	$	(108	)	$	11

Counterparty Credit Risk. Derivative contracts involve the risk of dealing with institutional derivative counterparties and their ability to meet contractual terms. Derivative contracts are generally executed with a Credit Support Annex, (“CSA”), which is a bilateral ratings-sensitive agreement that requires collateral postings at established credit threshold levels.  CSA agreements protect the interests of the Company and its counterparties, should either party suffer a credit rating deterioration. Institutional counterparties must have an investment grade credit rating. There was no CSA on the interest rate cap contract because the counterparty was the FHLB of Dallas, a government sponsored enterprise. The Company’s credit exposure on interest rate swaps is limited to the net favorable value and interest payments of all swaps by each counterparty. The Company’s credit exposure on the interest rate cap is the value of the expected interest payments that would be collected over the life of the cap contract.   Credit exposure may be reduced by the amount of collateral pledged by the counterparty. There are no credit-risk-related contingent features associated with any of the Company’s derivative contracts.  The Company had no credit exposure relating to the interest rate swap at June 30, 2012.  The amount of cash collateral posted by the Company related to derivative contracts was $2.3 million at both June 30, 2012 and December 31, 2011.

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 six months ended June 30, 2012 and 2011:

	For the three months ended June 30, 2012									For the three months ended June 30, 2011
	MetroBank		Metro United		Other			Consolidated Company		MetroBank		Metro United		Other			Consolidated Company
	(In thousands)
Total interest income	$	12,147	$	4,027	$	7		$	16,181	$	12,628	$	4,103	$	6		$	16,737
Total interest expense		1,614		576		346			2,536		2,357		794		338			3,489
Net interest income	$	10,533	$	3,451	$	(339	)	$	13,645		10,271	$	3,309	$	(332	)	$	13,248
Provision for loan losses		200		—		—			200		1,200		45		-			1,245
Net interest income after provision for loan losses		10,333		3,451		(339	)		13,445		9,071		3,264		(332	)		12,003
Noninterest income		2,005		92		(337	)		1,760		1,836		66		(331	)		1,571
Noninterest expenses		8,349		2,782		181			11,312		7,496		2,528		(1	)		10,023
Income (loss) before income tax provision		3,989		761		(857	)		3,893		3,411		802		(662	)		3,551
Provision (benefit) for income taxes		1,312		251		(296	)		1,267		1,099		311		(222	)		1,188
Net income (loss)	$	2,677	$	510	$	(561	)	$	2,626	$	2,312	$	491	$	(440	)	$	2,363

	For the six months ended June 30, 2012									For the six months ended June 30, 2011
	MetroBank		Metro United		Other			Consolidated Company		MetroBank		Metro United		Other			Consolidated Company
	(In thousands)
Total interest income	$	24,557	$	8,008	$	14		$	32,579	$	25,690	$	8,486	$	12		$	34,188
Total interest expense		3,351		1,245		694			5,290		4,928		1,638		674			7,240
Net interest income	$	21,206	$	6,763	$	(680	)	$	27,289		20,762	$	6,848	$	(662	)	$	26,948
Provision for loan losses		600		—		—			600		1,500		75		—			1,575
Net interest income after provision for loan losses		20,606		6,763		(680	)		26,689		19,262		6,773		(662	)		25,373
Noninterest income		4,062		176		(675	)		3,563		3,749		143		(662	)		3,230
Noninterest expenses		16,862		5,173		210			22,245		16,498		5,245		43			21,786
Income before income tax provision		7,806		1,766		(1,565	)		8,007		6,513		1,671		(1,367	)		6,817
Provision (benefit) for income taxes		2,472		674		(533	)		2,613		2,093		693		(458	)		2,328
Net income (loss)	$	5,334	$	1,092	$	(1,032	)	$	5,394	$	4,420	$	978	$	(909	)	$	4,489

	As of June 30, 2012									As of June 30, 2011
	MetroBank		Metro United		Other			Consolidated Company		MetroBank		Metro United		Other			Consolidated Company
	(In thousands)
Net loans	$	760,874	$	306,048	$	—		$	1,066,922	$	742,139	$	292,635	$	—		$	1,034,774
Total assets		1,161,189		393,163		(418	)		1,553,934		1,096,543		396,575		(2,173	)		1,490,945
Deposits		982,195		330,553		(53,278	)		1,259,470		926,204		323,055		(8,457	)		1,240,802

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12.   FAIR VALUE

Fair value is the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Fair value is reported based on a hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The three levels of inputs that may be used to measure fair value are:

· Level 1 – Quoted prices in active markets for identical assets or liabilities.

· Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

· Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.  Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

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

Securities. Where quoted prices are available in an active market, securities are reported at fair value utilizing Level 1 inputs. Level 1 securities are comprised of bond funds. If quoted market prices are not available, the Company obtains fair values from an independent pricing service. The fair value measurements consider data that may include proprietary pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities are comprised of highly liquid government bonds, and collateralized mortgage and debt obligations. Market values provided by the pricing service are compared to prices from other sources for reasonableness. The Company has not adjusted the values from the pricing service.

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

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The following table presents the financial instruments carried at fair value on a recurring basis by caption on the consolidated balance sheets and by valuation hierarchy (as described above) at June 30, 2012 and December 31, 2011:

	Fair Value Measurements, using
	(In thousands)
June 30, 2012	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value Measurements
Securities available-for-sale
U.S. Treasury and other U.S. government corporations and agencies	$	–	$	73,983	$	–	$	73,983
Obligations of state and political subdivisions		–		12,001		–		12,001
Corporate				6,235				6,235
Mortgage-backed securities and collateralized mortgage obligations:
Government issued or guaranteed		–		61,522		–		61,522
Privately issued residential		–		653		–		653
Asset backed securities		–		117		–		117
Investment in CRA funds		14,168		–		–		14,168
Total available-for-sale securities		14,168		154,511		–		168,679
Derivative assets
Interest rate cap		–		85		–		85
Total assets measured at fair value on a recurring basis	$	14,168	$	154,596	$	–	$	168,764
Derivative liabilities
Interest rate swap	$	–	$	1,939	$	–	$	1,939
December 31, 2011
Securities available-for-sale
U.S. Treasury and other U.S. government corporations and agencies	$	—	$	92,199	$	—	$	92,199
Obligations of state and political subdivisions		—		5,706		—		5,706
Corporate		—		6,141		—		6,141
Mortgage-backed securities and collateralized mortgage obligations:						—
Government issued or guaranteed		—		53,739		—		53,739
Privately issued residential		—		667		—		667
Asset backed securities		—		102		—		102
Investment in CRA funds		13,835		—		—		13,835
Total available-for-sale securities		13,835		158,554		—		172,389
Derivative assets
Interest rate cap		—		194		—		194
Total assets measured at fair value on a recurring basis	$	13,835	$	158,748	$	—	$	172,583
Derivative liabilities
Interest rate swap	$	—	$	1,992	$	—	$	1,992

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

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

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

Impaired Loans. Certain impaired loans with a valuation reserve are measured for impairment using the practical expedient, whereby fair value of the loan is based on the fair value of the loan’s collateral, provided the loan is collateral dependent. The fair value measurements of loan collateral can include real estate appraisals, comparable real estate sales information, cash flow projections, realization estimates, etc., all of which can include observable and unobservable inputs. As a result, the categorization of impaired loans can be either Level 2 or Level 3 of the fair value hierarchy, depending on the nature of the inputs used for measuring the related collateral’s fair value. As of June 30, 2012 and December 31, 2011, certain impaired loans were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for loan losses based upon the fair value of the underlying collateral.

The following presents assets carried at fair value on a nonrecurring basis by caption on the condensed consolidated balance sheets and by valuation hierarchy (as described above) at June 30, 2012 and December 31, 2011 (in thousands):

	As of June 30, 2012						As of December 31, 2011
	Level 2			Level 3			Level 2			Level 3
Assets
Goodwill		$	—		$	14,327		$	—		$	14,327
Foreclosed assets			—			14,414			—			19,018
Impaired loans (1)			9,412			—			15,696			—

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

The following presents losses related to fair value adjustments that are included in the Consolidated Statements of Operations for the three months ended June 30, 2012 and 2011 related to assets held at those dates (in thousands):

	Three months ended June 30,						Six months ended June 30,
	2012			2011			2012			2011
Losses related to:
Goodwill		$	—		$	—		$	—		$	—
Foreclosed assets (1)			845			452			922			643
Impaired loans (2)			451			1,940			451			3,536

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

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

Fair Value of Financial Instruments

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

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

	As of June 30, 2012				As of December 31, 2011
	Carrying or Contract Amount		Estimated Fair Value		Carrying or Contract Amount		Estimated Fair Value
	(In thousands)
Financial Assets
Level 2 inputs:
Cash and cash equivalents	$	208,259	$	208,259	$	193,609	$	193,609
Investment securities held-to-maturity		4,046		4,610		4,046		4,536
Other investments		5,880		5,880		6,484		6,484
Loans held-for-sale		—		—		1,200		1,498
Cash value of bank owned life insurance		32,115		32,115		31,427		31,427
Accrued interest receivable		4,411		4,411		4,327		4,327
Level 3 inputs:
Loans held-for-investment, net		1,066,922		1,037,820		1,015,095		968,434
Financial Liabilities
Level 2 inputs:
Deposit transaction accounts		791,550		791,550		744,833		744,833
Junior subordinated debentures		36,083		36,083		36,083		36,083
Accrued interest payable		261		261		310		310
Level 3 inputs:
Time deposits		467,920		471,443		506,742		511,050
Other borrowings		26,000		25,951		26,315		26,206
Off-balance sheet financial instruments
Unfunded loan commitments, including unfunded lines of credit		—		252		—		236
Standby letters of credit		—		64		—		69

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

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

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

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

Loans held-for-sale.  The fair value of loans held-for-sale is based on contractual sales prices.

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

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

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

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

Junior Subordinated Debentures.The fair value of the junior subordinated debentures approximates the carrying value as the debentures reprice quarterly.

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

13.   INCOME TAXES

Income tax expense for the three months ended June 30, 2012 was $1.3 million, compared with $1.2 million for the same period in 2011. The Company’s effective tax rate was 32.5% for the three months ended June 30, 2012 compared with 33.5% for the three months ended June 30, 2011. The decrease in the effective income tax rate in 2012 as compared to 2011 was primarily the result of a decrease in state income taxes.  The Texas state tax is based on the Company’s gross margin with limited deductions. Because the Texas state tax allows only limited deductions, the tax may not correlate from year to year with pre-tax income. The California tax is based on the unitary income of the consolidated group which can vary disproportionately from pre-tax income depending on the apportionment of income among members of the unitary group. Income tax expense for the six months ended June 30, 2012 was $2.6 million, compared with $2.3 million for the same period in 2011. The Company’s effective tax rate was 32.6% for the six months ended June 30, 2012 compared with 34.1% for the six months ended June 30, 2011.

As of June 30, 2012, the Company had approximately $14.4 million in net deferred tax assets. Deferred tax assets are subject to an evaluation of whether it is more likely than not that they will be realized. The Company has not provided a valuation allowance for the net deferred tax assets at June 30, 2012 and December 31, 2011 due primarily to its ability to offset reversals of net deductible temporary differences against income taxes paid in previous years and expected to be paid in future years. In making such judgments, significant weight is given to evidence that can be objectively verified. Because of historical losses that were recorded by the Company for the years ended December 31, 2010 and 2009, and if the Company is unable to generate sufficient taxable income in the future, then the Company may not be able to conclude it is more likely than not that the benefits of the deferred tax assets will be fully realized and may be required to recognize a valuation allowance and a corresponding income tax expense equal to the portion of the deferred tax asset that may not be realized.

The Company forecasts sufficient taxable income, exclusive of tax planning strategies, to fully realize its deferred tax assets. The Company has projected its pretax earnings based upon business that the Company anticipates conducting in the future, which is supported by the Company’s return to an income position, rather than the loss position the Company experienced during 2010 and 2009. During 2010 and 2009, earnings were negatively affected by the large increase in the provisions for loan losses during the sharp economic downturn. The Company reduced its cost structure, and taking this into account, the Company projects that it will generate sufficient pretax earnings within a five-year period. 

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

14.   NEW AUTHORITATIVE ACCOUNTING GUIDANCE

Accounting Standards Update (“ASU”) ASU No. 2011-12 "Comprehensive Income (Topic 220) - Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05." ASU 2011-12 defers changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments to allow the FASB time to redeliberate whether to require presentation of such adjustments on the face of the financial statements to show the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. ASU 2011-12 allows entities to continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU No. 2011-05. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12. ASU 2011-12 was effective for the Company for annual and interim periods beginning on January 1, 2012 and did not have a material impact on the Company's financial condition, results of operations or cash flows.

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

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

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

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

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

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

Special Cautionary Notice Regarding Forward-looking Statements

Statements and financial discussion and analysis contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is including this statement for purposes of invoking these safe harbor provisions. These forward-looking statements include information about possible or assumed future results of the Company’s operations or performance. Words such as “believe”, “expect”, “anticipate”, “estimate”, “continue”, “intend”, “may”, “will”, “should”, or similar expressions, identifies these forward-looking statements. Many possible factors or events could affect the future financial results and performance of the Company and could cause those financial results or performance to differ materially from those expressed in the forward-looking statement. These possible events or factors include, without limitation:

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

• changes in interest rates and market prices, which could reduce the Company’s net interest margins, asset valuations and expense expectations;

• changes in the levels of loan prepayments and the resulting effects on the value of the Company’s loan portfolio;

• changes in local economic and business conditions which adversely affect the ability of the Company’s customers to transact profitable business with the Company, including the ability of borrowers to repay their loans according to their terms or a change in the value of the related collateral;

• increased competition for deposits and loans adversely affecting rates and terms;

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

• the Company’s ability to raise additional capital;

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

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

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

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

• increases in the level of nonperforming assets;

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

• changes in the availability of funds resulting in increased costs or reduced liquidity;

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

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

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

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

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

• increases in FDIC deposit insurance assessments;

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

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

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

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

• adverse conditions in Asia;

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

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

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

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

Overview

The Company recorded net income of $2.6 million for the three months ended June 30, 2012, an increase of $263,000 compared with the same quarter in 2011. The Company’s diluted earnings per common share for the three months ended June 30, 2012 was $0.16, an increase of $0.03 per diluted common share compared with $0.13 for the same quarter in 2011. 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, including the one-time adjustment for the repurchase of preferred stock during second quarter of 2012, were $105,000 or $0.01 per diluted share, and $605,000 or $0.05 per diluted share for the three months ended June 30, 2012 and 2011, respectively. The Company recorded net income of $5.4 million for the six months ended June 30, 2012, an increase of $905,000 compared with $4.5 million for the same period in 2011. The Company’s diluted earnings per common share for the six months ended June 30, 2012 was $0.32, an increase of $0.07 per diluted share compared with $0.25 for the same period in 2011.  Preferred stock dividends accrued and discount accreted, including the one-time adjustment for the repurchase of preferred stock during second quarter of 2012, were $703,000 or $0.05 per diluted share and $1.2 million or $0.09 per diluted shares for the six months ended June 30, 2012 and 2011, respectively. Details of the changes in the various components of net income are further discussed below.

Total assets were $1.55 billion at June 30, 2012, an increase of $59.4 million or 4.0% from $1.49 billion at December 31, 2011. Available-for-sale investment securities at June 30, 2012 were $168.7 million, a decrease of $3.7 million or 2.2% from $172.4 million at December 31, 2011. Net loans at June 30, 2012 were $1.07 billion, an increase of $50.6 million or 5.0% from $1.02 billion at December 31, 2011. Total deposits at June 30, 2012 were $1.26 billion, an increase of $7.9 million or 0.6% from $1.25 billion at December 31, 2011. Other borrowings at June 30, 2012 were $26.0 million, a decrease of $315,000 or 1.2% from $26.3 million at December 31, 2011. The Company’s return on average assets (“ROAA”) for the three months ended June 30, 2012 and 2011 was 0.69% and 0.63%, respectively. The Company’s return on average equity (“ROAE”) for the three months ended June 30, 2012 and 2011 was 5.62% and 5.83%, respectively. The Company’s ROAA for the six months ended June 30, 2012 and 2011 was 0.72% and 0.59%, respectively. The Company’s ROAE for the six months ended June 30, 2012 and 2011 was 6.11% and 5.61%, respectively.   Shareholders’ equity at June 30, 2012 was $172.1 million compared with $165.2 million at December 31, 2011, an increase of $6.9 million or 4.2%.  Details of the changes in the various balance sheet items are further discussed below.

Recent Developments

New Capital Raised

On May 21, 2012, the Company closed the public offering of 5,111,750 shares of its common stock, $1.00 par value per share (the “Offering”), at a price of $9.00 per share. The shares sold in the Offering included 666,750 shares sold pursuant to the underwriter’s full exercise of its option to purchase additional shares to cover over-allotments. The shares were sold in accordance with an underwriting agreement between the Company and Keefe, Bruyette & Woods, Inc., the sole underwriter.

Proceeds to the Company, after deducting the underwriting discount, commissions and Offering expenses, were approximately $42.9 million.

The Offering was made pursuant to a registration statement on Form S-3 (File No. 333-180889) of the Company, which became effective on May 7, 2012. A prospectus supplement, dated May 16, 2012, to the base prospectus, dated May 7, 2012, forming a part of the registration statement was filed on May 17, 2012 with the Securities and Exchange Commission under Rule 424(b)(2) of the Securities Act of 1933, as amended.

Repurchase of Troubled Asset Relief Program (“TARP”) Preferred Stock

The Company repurchased 43,740 shares of the Company’s 45,000 outstanding shares of preferred stock (“Preferred Stock”) from the U.S. Department of the Treasury (“Treasury”), which were issued to the Treasury in connection with the Company’s participation in the TARP Capital Purchase Program (“CPP”).  The repurchase of $43.7 million in stated value of Preferred Stock at a discount of 1.883% (or an actual cost of $42.9 million) resulted in a one-time adjustment, net of settlement costs, to capital totaling $706,000 offset by the amortization of $249,000 in the Preferred Stock discount.  Although the transaction date occurred during the second quarter of 2012, actual payment for the repurchase of Preferred Stock took place on July 3, 2012.  As such, the Company recorded a payable in the amount of $42.9 million listed as “Preferred stock repurchase payable” on the Consolidated Balance Sheet as of June 30, 2012.  The remaining 1,260 shares of Preferred Stock were sold by the Treasury to other investors.  The warrants to purchase common stock associated with the TARP program are still held by the Treasury.

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As a result of participation in the CPP, among other things, the Company was subject to the Treasury’s standards for executive compensation and corporate governance for the period during which the Treasury held the Company’s Preferred Stock, including the second quarter of 2012.  These standards were most recently set forth in the Interim Final Rule on TARP Standards for Compensation and Corporate Governance, published June 15, 2009.  Because the Treasury sold all of the Preferred Stock in the auction, these executive compensation and corporate governance standards are no longer applicable to the Company on a going forward basis.

Consent Order

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 as of July 20, 2012.

Results of Operations

Net Interest Income and Net Interest Margin. For the three months ended June 30, 2012, net interest income, before the provision for loan losses, was $13.6 million, an increase of $397,000 or 3.0% compared with $13.2 million for the same period in 2011, primarily due to lower cost and volume of deposits, partially offset by a decline in average total loans. Average interest-earning assets for the three months ended June 30, 2012 were $1.44 billion, an increase of $24.1 million or 1.7% compared with $1.41 billion for the same period in 2011, primarily due to an increase in federal funds sold and interest-bearing deposits, as a result of the new capital raised. The weighted average yield on interest-earning assets for the second quarter of 2012 was 4.53%, a decrease of 22 basis points compared with 4.75% for the same quarter in 2011. Average interest-bearing liabilities for the three months ended June 30, 2012 were $1.07 billion, a decrease of $32.8 million or 3.0% compared with $1.10 billion for the same period in 2011, primarily due to a decline in time deposits and other borrowings, partially offset by an increase in savings and money market accounts. The weighted average interest rate paid on interest-bearing liabilities for the second quarter 2012 was 0.96%, a decrease of 31 basis points compared with 1.27% for the same quarter in 2011.

For the six months ended June 30, 2012, net interest income, before the provision for loan losses, was $27.3 million, an increase of $341,000 or 1.3% compared with $26.9 million for the same period in 2011, primarily due to lower cost and volume of deposits, partially offset by a decline in average total loans. Average interest-earning assets for the six months ended June 30, 2012 were $1.42 billion, a decrease of $12.1 million or 0.8% compared with $1.43 billion for the same period in 2011, primarily due to lower loan volume, partially offset by growth in federal funds sold and interest-bearing deposits. The weighted average yield on interest-earning assets for the six months ended June 30, 2012 was 4.63%, down 20 basis points compared with 4.83% for the same period in 2011.  Average interest-bearing liabilities for the six months ended June 30, 2012 were $1.06 billion, a decrease of $56.3 million or 5.0% compared with $1.12 billion for the same period in 2011, primarily due to a decline in time deposits and other borrowings, partially offset by an increase in savings and money market accounts. The weighted average rate paid on interest-bearing liabilities for the six months ended June 30, 2012 was 1.00%, down 30 basis points compared with 1.30% for the same period in 2011.

           The net interest margin for the three months ended June 30, 2012 was 3.82%, an increase of six basis points compared with 3.76% for the same period in 2011. The yield on average earning assets decreased 22 basis points, and the cost of average earning assets decreased 28 basis points for the same periods.  The net interest margin for the six months ended June 30, 2012 was 3.87%, an increase of seven basis points compared with 3.80% for the same period in 2011. The yield on average earning assets decreased 20 basis points, and the cost of average earning assets decreased 27 basis points for the same periods.  The decreases in yield on earning assets and the cost of earning assets for the three and six months ended June 30, 2012 were due primarily to a decline in average total loans and yields and by lower volume and cost of deposits.

Total Interest Income. Total interest income for the three months ended June 30, 2012 was $16.2 million, a decrease of  $556,000 or 3.3% compared with $16.7 million for the same period in 2011.  Total interest income for the six months ended June 30, 2012 was $32.6 million, a decrease of $1.6 million or 4.7% compared with $34.2 million for the same period in 2011. The decrease for the three and six months ended June 30, 2012 was primarily due to lower loan volume and yield and lower yield on securities, partially offset by an increase in the yield and volume of federal funds sold and other short-term investments.

Interest Income from Loans. Interest income from loans for the three months ended June 30, 2012 was $14.8 million, a decrease of $576,000 or 3.8% compared with $15.3 million for the same quarter in 2011. Average total loans for the three months ended June 30, 2012 were $1.06 billion compared with $1.07 billion for the same period in 2011, a decrease of $12.4 million or 1.2%. For the second quarter of 2012, the average yield on loans was 5.59%, a decrease of 14 basis points compared with 5.73% for the same quarter in 2011. Interest income from loans for the six months ended June 30, 2012 was $29.8 million, a decrease of $1.6 million or 5.0% compared with $31.3 million for the same period in 2011. The decrease for the three and six months ended June 30, 2012 was the result of lower loan volume and yields.   Average total loans for the six months ended June 30, 2012 were $1.05 billion, a decrease of $44.6 million or 4.1% compared with average total loans for the same period in 2011 of $1.10 billion. For the six months ended June 30, 2012, the yield on average total loans was 5.67%, a decrease of eight basis points compared with 5.75% for the same period in 2011.

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Approximately $796.0 million or 72.6% of the total loan portfolio are variable rate loans that periodically reprice and are sensitive to changes in market interest rates.  To lessen interest rate sensitivity in the event of a falling interest rate environment, the Company originates variable rate loans with interest rate floors.  For the six months ended June 30, 2012, the average yield on total loans was approximately 234 basis points above the prime rate primarily because of interest rate floors and credit spreads.   At June 30, 2012, approximately $638.3 million in loans or 58.2% of the total loan portfolio were variable rate loans with interest rate floors that carried a weighted average interest rate of 5.90%.  At June 30, 2011, variable rate loans with interest rate floors comprised 59.2% of the total loan portfolio and carried a weighted average interest rate of 6.17%.

Interest Income from Investments. Interest income from investments (which includes investment securities, Federal funds sold, and other investments) for the three months ended June 30, 2012 and 2011 was $1.4 million.  Average total investments for the three months ended June 30, 2012 were $376.1 million compared with average total investments for the same period in 2011 of $339.6 million, an increase of $36.5 million or 10.7%.  The increase in average total investments was primarily the result of an increase in federal funds sold and interest-bearing deposits, primarily due to the new capital raised and growth of non-interest bearing deposits.  For the second quarter 2012, the average yield on total investments was 1.53% compared with 1.66% for the same quarter in 2011, a decrease of 13 basis points primarily due to lower yielding taxable securities.

Interest income from investments for the six months ended June 30, 2012 was $2.8 million, a decrease of $30,000 or 1.1% compared with $2.9 million for the same period in 2011, primarily due to a decrease in the yield on taxable investment securities, partially offset by an increase in the volume and yield on federal funds sold and interest-bearing deposits.  Average total investments for the six months ended June 30, 2012 were $361.4 million compared with average total investments for the same quarter in 2011 of $328.9 million, an increase of $32.5 million or 9.9%. The increase was primarily the result of an increase in federal funds sold and interest-bearing deposits primarily due to the new capital raised.  For the six months ended June 30, 2012, the average yield on investments was 1.57% compared with 1.75% for the same quarter in 2011, a decrease of 18 basis points.

Total Interest Expense. Total interest expense for the three months ended June 30, 2012 was $2.5 million, a decrease of $953,000 or 27.3% compared with $3.5 million for the same period in 2011. Total interest expense for the six months ended June 30, 2012 was $5.3 million, a decrease of $1.9 million or 26.9% compared with $7.2 million for the same period in 2011. Interest expense decreased for both the three and six months ended June 30, 2012 primarily due to lower deposit cost and lower time deposit volume.

Interest Expense on Deposits. Interest expense on interest-bearing deposits for the three months ended June 30, 2012 was $2.0 million, a decrease of $945,000 or 32.6% compared with $2.9 million for the same period in 2011. Average interest-bearing deposits for the three months ended June 30, 2012 were $1.00 billion compared with $1.02 billion for the same period in 2011, a decrease of $16.6 million or 1.6%. The average interest rate paid on interest-bearing deposits for the second quarter of 2012 was 0.78% compared with 1.14% for the same quarter in 2011, a decrease of 36 basis points. The decline in interest expense and the average interest rate paid on interest-bearing deposits was primarily due to lower deposit volume and declining interest rates in the deposit market.

Interest expense on interest-bearing deposits for the six months ended June 30, 2012 was $4.1 million, a decrease of $1.9 million or 31.8% compared with $6.0 million for the same period in 2011.  Average interest-bearing deposits for the six months ended June 30, 2012 were $1.00 billion compared with the same period in 2011 of $1.04 billion, a decrease of $32.9 million or 3.2%. The average interest rate incurred on interest-bearing deposits for the six months ended June 30, 2012 was 0.83% compared with 1.18% for the same period in 2011, a decrease of 35 basis points.  The decline in interest expense and the average interest rate paid on interest-bearing deposits was primarily due to lower deposit volume and declining interest rates in the deposit market.

Interest Expense on Junior Subordinated Debentures.  Interest expense on junior subordinated debentures for the three months ended June 30, 2012 was $333,000, an increase of $8,000 or 2.5% from $325,000 at June 30, 2011. Interest expense on junior subordinated debentures for the six months ended June 30, 2012 was $669,000, an increase of $20,000 or 3.1% from $649,000 at June 30, 2011.  Average junior subordinated debentures for the three and six months ended June 30, 2012 and 2011 were $36.1 million. The average interest rate incurred on junior subordinated debentures for the three months ended June 30, 2012 and 2011 was 3.65% and 3.56%, respectively. The average interest rate incurred on junior subordinated debentures for the six months ended June 30, 2012 and 2011 was 3.67% and 3.58%, respectively.

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The junior subordinated debentures accrue interest at a floating rate equal to the 3-month LIBOR plus 1.55%.  Related to these debentures, the Company entered into a forward-starting interest rate swap contract. Under the swap, beginning December 15, 2010, the Company began paying a fixed interest rate of 5.38% and receiving a variable interest rate of three-month LIBOR plus a margin of 1.55% on a total notional amount of $17.5 million, with quarterly settlements that began March 2011. The interest rate swap contract was entered into with the objective of protecting a portion of the quarterly interest payments from the risk of variability resulting from changes in the three-month LIBOR interest rate.   See Note 10, “Derivative Financial Instruments,” to the Condensed Consolidated Financial Statements for additional information related to this interest rate swap.

Interest Expense on Other Borrowings. Interest expense on other borrowings for the three months ended June 30, 2012 was $247,000, a decrease of $16,000 compared with $263,000 for the same period in 2011. Average borrowed funds, consisting primarily of security repurchase agreements and unsecured debentures, for the three months ended June 30, 2012 were $26.0 million a decrease of $16.3 million compared with $42.3 million for the same period in 2011. Other borrowings decreased primarily due to repayment of FHLB San Francisco advances in the second quarter of 2011.  The average interest rate paid on borrowed funds for the second quarter of 2012 was 3.82% compared with 2.50% for the same quarter in 2011.  The cost increased due primarily to the repayment of the short-term advances with lower market rates compared to the existing long-term debt.

 Interest expense on other borrowed funds for the six months ended June 30, 2012 was $494,000, a decrease of $50,000 compared with $544,000 for the same period in 2011. Average borrowed funds for the six months ended June 30, 2012 were $26.0 million, a decrease of $23.4 million compared with $49.4 million for the same period in 2011, due to repayment of FHLB San Francisco advances in the second quarter of 2011.  The average interest rate paid on borrowed funds for the six months ended June 30, 2012 was 3.82% compared with 2.22% for the same period in 2011. The cost increased due primarily to the repayment of the short-term advances with lower market rates compared to the existing long-term debt.

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

	For The Three Months Ended June 30,
	2012								2011
	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	$	1,061,193		$	14,754		5.59	%	$	1,073,549		$	15,330	5.73	%
Taxable securities		168,478			1,004		2.40			167,400			1,160	2.78
Tax-exempt securities		15,919			145		3.66			8,398			99	4.73
Other investments (2)		6,055			44		2.92			6,760			42	2.49
Federal funds sold and other short-term investments		185,686			234		0.51			157,077			106	0.27
Total interest-earning assets		1,437,331			16,181		4.53			1,413,184			16,737	4.75
Allowance for loan losses		(27,932	)							(32,235	)
Total interest-earning assets, net of allowance for loan losses		1,409,399								1,380,949
Noninterest-earning assets		124,634								129,797
Total assets	$	1,534,033							$	1,510,746
Liabilities and shareholders' equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	66,448		$	21		0.13	%	$	62,885		$	67	0.43	%
Savings and money market accounts		462,432			565		0.49			410,271			860	0.84
Time deposits		474,524			1,370		1.16			546,822			1,974	1.45
Junior subordinated debentures		36,083			333		3.65			36,083			325	3.56
Other borrowings		26,000			247		3.82			42,271			263	2.50
Total interest-bearing liabilities		1,065,487			2,536		0.96			1,098,332			3,489	1.27
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		262,413								231,918
Other liabilities		18,074								17,846
Total liabilities		1,345,974								1,348,096
Shareholders' equity		188,059								162,650
Total liabilities and shareholders' equity	$	1,534,033							$	1,510,746
Net interest income				$	13,645							$	13,248
Net interest spread							3.57	%						3.48	%
Net interest margin							3.82	%						3.76	%

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

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	For The Six Months Ended June 30,
	2012								2011
	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	$	1,054,955		$	29,753		5.67	%	$	1,099,546		$	31,332	5.75	%
Taxable securities		170,694			2,031		2.39			169,089			2,388	2.85
Tax-exempt securities		13,771			262		3.83			8,399			197	4.73
Other investments (2)		6,260			87		2.79			6,838			84	2.48
Federal funds sold and other short-term investments		170,651			446		0.53			144,591			187	0.26
Total interest-earning assets		1,416,331			32,579		4.63			1,428,463			34,188	4.83
Allowance for loan losses		(28,320	)							(33,427	)
Total interest-earning assets, net of allowance for loan losses		1,388,011								1,395,036
Noninterest-earning assets		125,712								129,660
Total assets	$	1,513,723							$	1,524,696
Liabilities and shareholders' equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	65,143		$	42		0.13	%	$	60,086		$	127	0.43	%
Savings and money market accounts		450,439			1,179		0.53			410,608			1,720	0.84
Time deposits		486,544			2,906		1.20			564,369			4,200	1.50
Junior subordinated debentures		36,083			669		3.67			36,083			649	3.58
Other borrowings		26,003			494		3.82			49,390			544	2.22
Total interest-bearing liabilities		1,064,212			5,290		1.00			1,120,536			7,240	1.30
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		254,722								227,129
Other liabilities		17,245								15,652
Total liabilities		1,336,179								1,363,317
Shareholders' equity		177,544								161,379
Total liabilities and shareholders' equity	$	1,513,723							$	1,524,696
Net interest income				$	27,289							$	26,948
Net interest spread							3.63	%						3.53	%
Net interest margin							3.87	%						3.80	%

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

48

The following table presents the dollar amount of changes in interest income and interest expense for the major components of interest-earning assets and interest-bearing liabilities and distinguishes between changes in outstanding balances and changes in interest rates for the three and six months ended June 30, 2012 compared with the three and six months ended June 30, 2011. For purposes of this table, changes attributable to both rate and volume have been allocated to each accordingly.

	Three Months Ended June 30,									Six Months Ended June 30,
	2012 vs 2011									2012 vs 2011
	Increase (Decrease Due to)									Increase (Decrease) Due to
	Volume			Rate			Total			Volume			Rate			Total
	(In thousands)
Interest-earning assets:
Loans	$	(218	)	$	(358	)	$	(576	)	$	(1,187	)	$	(392	)	$	(1,579	)
Taxable securities		4			(160	)		(156	)		29			(386	)		(357	)
Tax-exempt securities		88			(42	)		46			127			(62	)		65
Other investments		(4	)		6			2			(7	)		10			3
Federal funds sold and other short-term investments		19			109			128			34			225			259
Total decrease in interest income		(111	)		(445	)		(556	)		(1,004	)		(605	)		(1,609	)
Interest-bearing liabilities:
Interest-bearing demand deposits		4			(50	)		(46	)		11			(96	)		(85	)
Savings and money market accounts		107			(402	)		(295	)		172			(713	)		(541	)
Time deposits		(266	)		(338	)		(604	)		(569	)		(725	)		(1,294	)
Junior subordinated debentures		-			8			8			4			16			20
Other borrowings		(102	)		86			(16	)		(257	)		207			(50	)
Total decrease in interest expense		(257	)		(696	)		(953	)		(639	)		(1,311	)		(1,950	)
Increase (decrease) in net interest income	$	146		$	251		$	397		$	(365	)	$	706		$	341

Provision for Loan Losses. Provisions for loan losses are charged to income to bring the Company’s allowance for loan losses to a level which management considers adequate to absorb probable losses inherent in the loan portfolio. The provision for loan losses for the three months ended June 30, 2012 was $200,000, a decrease of $1.0 million compared with $1.2 million for the same period in 2011.  The provision for loan losses for the six months ended June 30, 2012 was $600,000, a decrease of $975,000 compared with $1.6 million for the same period in 2011.  The decrease for the three and six months ended June 30, 2012 was primarily due to a reduction in nonperforming assets. The allowance for loan losses as a percent of total loans was 2.50% at June 30, 2012, 2.71% at December 31, 2011, and 2.85% at June 30, 2011.

Noninterest Income.  Noninterest income for the three months ended June 30, 2012 was $1.8 million, an increase of $189,000 or 12.0% compared with the same period in 2011. Noninterest income for the six months ended June 30, 2012 was $3.6 million, an increase of $333,000 or 10.3% compared with the same period in 2011.  The increase for the three and six months ended June 30, 2012 was primarily due to increases in service fees and gains on securities transactions, partially offset by a decrease in other noninterest income.  Other noninterest income decreased primarily due to fair value adjustments on an interest rate derivative, lower earnings on bank-owned life insurance (“BOLI”), and a decline in earnings on foreign exchange transactions.

Noninterest Expense. Noninterest expense for the three months ended June 30, 2012 was $11.3 million, an increase of $1.3 million or 12.9% compared with $10.0 million for the same period in 2011.  The increase was mainly the result of increases in other noninterest expense and salaries and employee benefits, partially offset by decreases in expenses related to foreclosed assets and occupancy.

Noninterest expense for the six months ended June 30, 2012 was $22.2 million, an increase of $459,000 or 2.1% compared with $21.8 million for the same period in 2011.  The increase was mainly the result of increases in salaries and employee benefits, partially offset by decreases in the FDIC assessment, occupancy expenses and expenses related to foreclosed assets.

49

Salaries and employee benefits expense for the three months ended June 30, 2012 was $6.0 million, an increase of $754,000 or 14.4% compared with $5.2 million for the same period in 2011. The increase was primarily due to increases in salary expense (as a result of increased lending and credit staff in both Texas and California), bonus accruals and stock based compensation costs.  Salaries and employee benefits expense for the six months ended June 30, 2012 was $11.9 million, an increase of $1.4 million or 13.6% compared with $10.5 million for the same period in 2011. The increase was primarily due to increases in salary expense (as a result of increased lending and credit staff in both Texas and California), bonus accruals and employee healthcare costs.

Foreclosed assets expense for the three months ended June 30, 2012 was $362,000, a decrease of $482,000 or 57.1% compared with $844,000 for the same period in 2011.   Foreclosed assets expense for the six months ended June 30, 2012 was $1.4 million, a decrease of $156,000 or 10.3% compared with $1.5 million for the same period in 2011.  The decrease for both periods was primarily the result of gains on sales of foreclosed assets, partially offset by increases in writedowns and property taxes paid on foreclosed assets.  

The FDIC assessment for the three months ended June 30, 2012 was $485,000, a decrease of $38,000 or 7.3% compared with $523,000 for the same period in 2011. The FDIC assessment for the six months ended June 30, 2012 was $882,000, a decrease of $502,000 or 36.3% compared with $1.4 million for the same period in 2011. The decrease for both periods resulted from a reduction in the FDIC assessment rate.

Other noninterest expense for the three months ended June 30, 2012 was $2.7 million, an increase of $1.2 million or 74.0% compared with the same quarter in 2011, primarily due to an increase in the provision for unfunded commitments and loan related expenses.   Other noninterest expense for the six months ended June 30, 2012 and 2011 was $4.7 million.

The Company’s efficiency ratio is calculated by dividing total noninterest expense, excluding loan loss provisions, goodwill impairment, provisions for unfunded commitments, writedowns on foreclosed assets and gains and losses on sales of foreclosed assets by net interest income plus noninterest income, excluding impairment on securities and gains and losses on securities transactions. The efficiency ratio for the three months ended June 30, 2012 was 74.24%, an increase from 67.55% for the same quarter in 2011. The increase was primarily due to the increase in other noninterest expense described above. The Company’s efficiency ratio for the six months ended June 30, 2012 was 70.59%, compared with 67.71% for the same period in 2011. The increase was primarily due to the increase in salaries and employee benefits described above.

Income Taxes. Income tax expense for the three months ended June 30, 2012 was $1.3 million, compared with $1.2 million for the same period in 2011. The Company’s effective tax rate was 32.5% for the three months ended June 30, 2012 compared with 33.5% for the three months ended June 30, 2011. The decrease in the effective income tax rate in 2012 as compared to 2011 was primarily the result of a decrease in state income taxes.  The Texas state tax is based on the Company’s gross margin with limited deductions. Because the Texas state tax allows only limited deductions, the tax may not correlate from year to year with pre-tax income. The California tax is based on the unitary income of the consolidated group which can vary disproportionately from pre-tax income depending on the apportionment of income among members of the unitary group. Income tax expense for the six months ended June 30, 2012 was $2.6 million, compared with $2.3 million for the same period in 2011. The Company’s effective tax rate was 32.6% for the six months ended June 30, 2012 compared with 34.1% for the six months ended June 30, 2011.

As of June 30, 2012, the Company had approximately $14.4 million in net deferred tax assets. Deferred tax assets are subject to an evaluation of whether it is more likely than not that they will be realized. The Company has not provided a valuation allowance for the net deferred tax assets at June 30, 2012 and December 31, 2011 due primarily to its ability to offset reversals of net deductible temporary differences against income taxes paid in previous years and expected to be paid in future years. In making such judgments, significant weight is given to evidence that can be objectively verified. Because of historical losses that were recorded by the Company for the years ended December 31, 2010 and 2009, and if the Company is unable to generate sufficient taxable income in the future, then the Company may not be able to conclude it is more likely than not that the benefits of the deferred tax assets will be fully realized and may be required to recognize a valuation allowance and a corresponding income tax expense equal to the portion of the deferred tax asset that may not be realized.

The Company forecasts sufficient taxable income, exclusive of tax planning strategies, to fully realize its deferred tax assets. The Company has projected its pretax earnings based upon business that the Company anticipates conducting in the future, which is supported by the Company’s return to an income position, rather than the loss position the Company experienced during 2010 and 2009. During 2010 and 2009, earnings were negatively affected by the large increase in the provisions for loan losses during the sharp economic downturn. The Company reduced its cost structure, and taking this into account, the Company projects that it will generate sufficient pretax earnings within a five-year period. 

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

50

Financial Condition

Loan Portfolio. Total loans at June 30, 2012 were $1.09 billion, an increase of $49.6 million or 4.7% compared with $1.04 billion at December 31, 2011, primarily as a result of strategic growth initiatives. At June 30, 2012, commercial and industrial loans and real estate mortgage loans increased $30.6 million and $20.7 million, respectively while real estate construction loans decreased $2.6 million, compared with their respective levels at December 31, 2011. At June 30, 2012 and December 31, 2011, the ratio of total loans to total deposits was 86.88%, and 83.46%, respectively. Total loans represented 70.42% and 69.90% of total assets at June 30, 2012 and December 31, 2011, respectively.

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

	As of June 30, 2012						As of December 31, 2011
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
Commercial and industrial	$	375,897			34.27	%	$	345,265			32.98	%
Real estate mortgage:
Residential		43,282			3.95			42,682			4.08
Commercial		664,808			60.61			644,727			61.58
		708,090			64.56			687,409			65.66
Real estate construction:
Residential		4,540			0.41			6,984			0.67
Commercial		3,172			0.29			3,324			0.32
		7,712			0.70			10,308			0.99
Consumer and other		5,198			0.47			3,936			0.37
Gross loans		1,096,897			100.00	%		1,046,918			100.00	%
Unearned discounts, interest and deferred fees		(2,664	)					(2,302	)
Total loans		1,094,233						1,044,616
Allowance for loan losses		(27,311	)					(28,321	)
Loans, net	$	1,066,922					$	1,016,295

Nonperforming Assets. At June 30, 2012, total nonperforming assets consisted of $24.7 million in nonaccrual loans, $62,000 of accruing loans 90 days or more past due, $4.1 million of accruing troubled debt restructurings, $5.3 million of nonaccruing troubled debt restructurings and $14.4 million in other real estate (“ORE”). Total nonperforming assets decreased $15.3 million to $48.6 million at June 30, 2012 from $63.9 million at December 31, 2011, which consisted of reductions of $8.6 million in Texas and $6.7 million in California.

On a linked-quarter basis, total nonperforming assets decreased by $8.8 million, which consisted of a $2.5 million decrease in Texas and a $6.3 million decrease in California.  The decline in Texas consisted primarily of a decrease of $7.4 million in nonaccrual TDRs and a $1.0 million decline in ORE, partially offset by a $5.9 million increase in nonaccrual loans. In Texas, nonaccrual TDRs decreased primarily due to a $7.2 million note sale with an associated charge-off of $80,000. Nonaccrual loans increased primarily due to the reclassification of $10.4 million from accrual loans (primarily from three loans), partially offset by $2.0 million in transfers to ORE, $1.8 million in paydowns and payoffs and $1.2 million in charge-offs. The decrease in nonperforming assets in California primarily consisted of decreases of $7.0 million in nonaccrual loans, which were primarily due to the upgrade of $3.0 million in three loans to accrual status, $3.9 million in two loans that were transferred to ORE and then sold, and the sale of one ORE property of $144,000. Other nonperforming asset activity included the restructure of three nonaccruing TDR loans to accruing TDR status.
 

On a linked-quarter basis, ORE at June 30, 2012, decreased $1.2 million compared with March 31, 2012, which included a decrease of $1.0 million in Texas and $167,000 in California.  The decrease in Texas was primarily the result of the sale of two properties and writedowns on four properties, partially offset by $2.0 million in transfers from nonaccrual loans.

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 six months ended June 30, 2012 or 2011.

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

	As of June 30, 2012			As of December 31, 2011
	(Dollars in thousands)
Nonaccrual loans (1)	$	24,664		$	31,099
Accruing loans 90 days or more past due (1)		62			—
Troubled debt restructurings – accruing (1)		4,126			—
Troubled debt restructurings – nonaccruing (1)		5,315			13,763
Other real estate (“ORE”)		14,414			19,018
Total nonperforming assets	$	48,581		$	63,880
Total nonperforming assets to total assets		3.13	%		4.27	%
Total nonperforming assets to total loans and ORE		4.38	%		6.01	%

(1) Represents the unpaid principal balance. 

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

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

As of June 30, 2012	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment
Impaired loans with no allowance
Commercial and industrial	$	8,360	$	8,369	$	—	$	5,824
Real estate mortgage:
Residential		185		185		—		235
Commercial		15,385		15,399		—		18,922
Real estate construction:
Residential		2,345		2,345		—		586
Commercial		3,172		3,172		—		2,440
Impaired loans with an allowance
Commercial and industrial	$	26	$	26	$	26	$	4,649
Real estate mortgage:
Commercial		4,612		4,609		790		9,580
Total:
Commercial and industrial	$	8,386	$	8,395	$	26	$	10,473
Real estate mortgage		20,182		20,193		790		28,737
Real estate construction		5,517		5,517		—		3,026

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As of December 31, 2011	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment
Impaired loans with no allowance
Commercial and industrial	$	3,647	$	3,652	$	—	$	8,901
Real estate mortgage:
Residential		251		251		—		263
Commercial		19,922		19,913		—		26,256
Real estate construction:
Commercial		3,324		3,324		—		831
Impaired loans with an allowance
Commercial and industrial		7,018		7,025		224		4,835
Real estate mortgage:
Commercial		10,678		10,696		710		14,042
Total:
Commercial and industrial	$	10,665	$	10,677	$	224	$	13,736
Real estate mortgage		30,851		30,860		710		40,561
Real estate construction		3,324		3,324		—		831

For the three months ended June 30, 2012 and 2011, interest income of $93,000 and $96,000 was recognized on impaired loans, which consisted of nonaccrual loans that were paid in full and accruing TDRs.

Allowance for Loan Losses and Reserve for Unfunded Lending Commitments. At June 30, 2012 and 2011, the allowance for loan losses was $27.3 million and $30.4 million, respectively, or 2.50% and 2.85% of total loans, respectively.  At December 31, 2011, the allowance for loan losses was $28.3 million, or 2.71% of total loans. Net charge-offs for the three months ended June 30, 2012 were $955,000 or 0.09% of total loans compared with net charge-offs of $2.7 million or 0.26% of total loans for the three months ended June 30, 2011. The net charge-offs for the second quarter of 2012 primarily consisted of $1.08 million net charge-offs from Texas and $121,000 of net recoveries from California.  Net charge-offs for the six months ended June 30, 2012 were $1.6 million or 0.15% of total loans compared with net charge-offs of $4.9 million or 0.46% of total loans for the six months ended June 30, 2011. The net charge-offs for the six months ended June 30, 2012 primarily consisted of net charge-offs from Texas.

The allowance for loan losses provides for the risk of losses inherent in the lending process and the Company allocates the allowance for loan losses according to management’s assessments of risk inherent in the loan portfolio.  The allowance for loan losses is increased by provisions charged against current earnings and is reduced by net charge-offs. Loans are charged off when they are deemed to be uncollectible in whole or in part. Recoveries are recorded when cash payments are received. In developing the assessment, the Company relies on estimates and exercises judgment regarding matters where the ultimate outcome is uncertain. Circumstances may change and future assessments of credit risk may yield materially different results, resulting in an increase or decrease in the allowance for loan losses.

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

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

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The Company maintains a reserve for unfunded commitments to provide for the risk of loss inherent in its unfunded lending related commitments. The process used in determining the reserve is consistent with the process used for the allowance for loan losses discussed above.

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

	As of and for the Three Months Ended June 30,
	2012			2011
	(Dollars in thousands)
Average total loans outstanding for the period	$	1,061,193		$	1,073,549
Total loans outstanding at end of period	$	1,094,233		$	1,065,167
Allowance for loan losses at beginning of period	$	28,066		$	31,883
Provision for loan losses		200			1,245
Charge-offs:
Commercial and industrial		(10	)		(2,493	)
Real estate mortgage		(945	)		(417	)
Real estate construction		(683	)		—
Consumer and other		(19	)		(11	)
Total charge-offs		(1,657	)		(2,921	)
Recoveries:
Commercial and industrial		247			128
Real estate mortgage		452			54
Consumer and other		3			4
Total recoveries		702			186
Net charge-offs		(955	)		(2,735	)
Allowance for loan losses at end of period		27,311			30,393
Reserve for unfunded lending commitments at beginning of period		800			1,703
Provision for unfunded lending commitments		157			(610	)
Reserve for unfunded lending commitments at end of period		957			1,093
Allowance for credit losses at end of period	$	28,268		$	31,486
Ratio of net charge-offs to end of period total loans		(0.09	) %		(0.26	) %

54

	As of and for the Six Months Ended June 30,
	2012			2011
	(Dollars in thousands)
Average total loans outstanding for the period	$	1,054,955		$	1,099,546
Total loans outstanding at end of period	$	1,094,233		$	1,065,167
Allowance for loan losses at beginning of period	$	28,321		$	33,757
Provision for loan losses		600			1,575
Charge-offs:
Commercial and industrial		(794	)		(2,625	)
Real estate mortgage		(1,285	)		(3,323	)
Real estate construction		(683	)		—
Consumer and other		(61	)		(31	)
Total charge-offs		(2,823	)		(5,979	)
Recoveries:
Commercial and industrial		365			235
Real estate mortgage		815			65
Real estate construction		19			716
Consumer and other		14			24
Total recoveries		1,213			1,040
Net charge-offs		(1,610	)		(4,939	)
Allowance for loan losses at end of period		27,311			30,393
Reserve for unfunded lending commitments at beginning of period		1,012			602
Provision for unfunded lending commitments		(55	)		491
Reserve for unfunded lending commitments at end of period		957			1,093
Allowance for credit losses at end of period	$	28,268		$	31,486
Ratio of allowance for loan losses to end of period total loans		2.50	%		2.85	%
Ratio of net charge-offs to end of period total loans		(0.15	)%		(0.46	)%
Ratio of allowance for loan losses to end of period total nonperforming loans (1)		79.93	%		49.49	%

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

Securities. At June 30, 2012, the available-for-sale securities portfolio was $168.7 million, a decrease of $3.7 million or 2.2% compared with $172.4 million at December 31, 2011. The decrease was primarily due to calls of U.S. government corporations and agencies securities, partially offset by purchases of government issued or guaranteed mortgage-backed and agency securities and obligations of state and political subdivision securities.  At June 30, 2012 and December 31, 2011, the held-to-maturity portfolio remained at $4.0 million.  The securities portfolio is primarily comprised of obligations of U.S. government corporations and agencies, mortgage-backed securities, collateralized mortgage obligations, and municipal securities. The securities portfolio has been funded primarily by the liquidity created from deposit growth and loan repayments in excess of loan funding requirements. Other investments, which include Federal Reserve Bank (“FRB”) and FHLB stock and the investment in subsidiary trust were $5.9 million at June 30, 2012, a decrease of $604,000 or 9.3% compared with $6.5 million at December 31, 2011.

Deposits. At June 30, 2012, total deposits were $1.26 billion, an increase of $7.9 million or 0.6% compared with $1.25 billion at December 31, 2011. The Company’s ratio of noninterest-bearing demand deposits to total deposits at June 30, 2012 and December 31, 2011 was 21.6% and 20.7%, respectively. Interest-bearing deposits at June 30, 2012 were $987.9 million, a decrease of $4.3 million or 0.4% compared with $992.2 million at December 31, 2011.

55

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 Written Agreement between MetroBank and the OCC MetroBank  may not acquire, accept, renew or roll over brokered deposits without the prior approval of the OCC.  Additionally, prior to the termination of the Order on July 20, 2012, Metro United could not accept, renew or roll over brokered deposits without prior approval of the the FDIC and CDFI.

 At June 30, 2012, brokered deposits were 1.6% of the Company's total deposits having an average maturity date of November 2013.

Junior Subordinated Debentures.  Junior subordinated debentures at June 30, 2012 and December 31, 2011 were $36.1 million. The debentures mature on December 15, 2035, but are redeemable at the Company’s option at par plus accrued and unpaid interest. The debentures, issued to the Company’s unconsolidated subsidiary trust MCBI Statutory Trust I, were used to fund the Company’s acquisition of Metro United. The junior subordinated debentures accrued interest at a fixed rate of 5.76% until December 15, 2011, at which time the debentures began accruing interest at a floating rate equal to the 3-month LIBOR plus 1.55%. Related to these debentures, the Company entered into a forward-starting interest rate swap contract during the third quarter of 2009. Under the swap, the Company pays a fixed interest rate of 5.38% and receives a variable interest rate of three-month LIBOR plus a margin of 1.55% on a total notional amount of $17.5 million, with quarterly settlements which began in March 2011.  See Note 10, “Derivative Financial Instruments,” to the Condensed Consolidated Financial Statements for additional information related to this interest rate swap.

Other Borrowings. Other borrowings at June 30, 2012 were $26.0 million, a decrease of $315,000 or 1.2% compared to other borrowings of $26.3 million at December 31, 2011.  Other borrowings at June 30, 2012 primarily include $25.0 million in security repurchase agreements and $1.0 million in unsecured debentures.  The security repurchase agreements bear an average rate of 3.71% and mature on December 31, 2014.  Securities sold under securities repurchase agreements are currently puttable by the counterparty at a fixed repurchase price at the end of each calendar quarter. In addition, securities under one repurchase agreement are puttable by either the counterparty or the Company at the replacement cost of the repurchase transaction at the end of each calendar year.

In February 2010, the Company issued an unsecured debenture to each of the Company's Chairman of the Board and an affiliate of one of the Company's 5.0% or more shareholders.  Each debenture was issued for a principal amount of $500,000.  The debentures, as amended, mature February 10, 2013 and bear interest on the principal amount at a fixed rate per annum equal to 5.0% due quarterly and began March 31, 2010.  The proceeds from issuance of the debentures 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 Six Months Ended			As of and for the Year Ended
	June 30, 2012			December 31, 2011
	(Dollars in thousands)
FHLB Notes and Advances:
at end of period	$	—		$	—
average during the period		—			14,548
maximum month-end balance during the period		—			30,000
Interest rate at end of period		—	%		—	%
Interest rate during the period		—			0.44
Security Repurchase Agreements:
at end of period	$	25,000		$	25,000
average during the period		25,000			25,000
maximum month-end balance during the period		25,000			25,000
Interest rate at end of period		3.71	%		3.71	%
Interest rate during the period		3.71			3.71
Unsecured debentures:
at end of period	$	1,000		$	1,000
average during the period		1,000			1,000
maximum month-end balance during the period		1,000			1,000
Interest rate at end of period		5.00	%		5.00	%
Interest rate during the period		5.00			5.00
Federal Reserve TT&L:
at end of period	$	—		$	315
average during the period		—			467
maximum month-end balance during the period		—			742

Liquidity. The Company’s loan to deposit ratio at June 30, 2012 and 2011 was 86.88% and 85.85%, respectively. As of June 30, 2012, the Company had commitments to fund loans in the amount of $89.6 million. At this same date, the Company had stand-by letters of credit of $10.8 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 $420.0 million from the FHLBs, $10.3 million from the FRB discount window and $5.0 million from other correspondent banks.

Capital Resources. Shareholders’ equity at June 30, 2012 was $172.1 million compared to $165.2 million at December 31, 2011, an increase of $6.9 million. The increase was primarily the result of net income for the six months ending June 30, 2012, and the capital raised in the common stock public offering, offset by the repurchase of the Company’s TARP-related Preferred Stock.  See Note 7 “Shareholders’ Equity” for more information.

The Company paid no dividends on common stock for the six months ended June 30, 2012 and 2011.  Preferred dividends of $1.1 million were paid for each of the six months ended June 30, 2012 and 2011.

As a result of the Order, by December 31, 2010, Metro United was required to achieve and maintain its leverage ratio at 9.0% and its total risk-based capital ratio at 13.0%. Although Metro United meets the capital levels deemed to be “well-capitalized”, 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 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.

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The following table provides a comparison of the Company’s and each of the Banks’ leverage and risk-weighted capital ratios as of June 30, 2012 to the minimum and well-capitalized regulatory standards:

	Minimum Required For Capital Adequacy Purposes			To Be Categorized as Well Capitalized Under Prompt Corrective Action Provisions		Actual Ratio At June 30, 2012
The Company
Leverage ratio	4.00	%	(1)	N/A	%		12.57	%
Tier 1 risk-based capital ratio	4.00			N/A			16.09
Risk-based capital ratio	8.00			N/A			17.36
MetroBank
Leverage ratio	4.00	%	(2)	5.00	%		12.09	%
Tier 1 risk-based capital ratio	4.00			6.00			15.73
Risk-based capital ratio	8.00			10.00			17.01
Metro United
Leverage ratio	4.00	%	(3)	5.00	%		12.22	%
Tier 1 risk-based capital ratio	4.00			6.00			15.15
Risk-based capital ratio	8.00			10.00			16.41

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

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

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

Critical Accounting Estimates

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

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

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

In determining the fair value of Metro United, the Company uses a review of the valuation of recent guideline bank acquisitions as well as a discounted cash flow analysis and the market capitalization of the Company. The guideline bank transactions are selected from a similar geographic footprint as Metro United or having a similar market focus, based on publicly available information. Valuation multiples such as price-to-book, price-to-tangible book, price-to-deposits and price-to-earnings from the guideline transactions are compared with Metro United’s operating results to derive its implied goodwill as of the valuation date. For discounted cash flow analyses, financial forecasts are developed by projecting operations for the next five years and discounting the average terminal values based on the valuation multiples listed earlier in a normalized market. The financial forecasts consider several key business drivers such as anticipated loan and deposit growth, forward interest rates, historical performance, and industry and economic trends, among other considerations. In addition, as a third method of determining fair value, quoted stock prices as of the valuation date for the Company and its peer guideline banks are used 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.

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The Company also considers the fair value of Metro United in relationship to the Company’s stock price and performs a reconciliation to market price. This reconciliation is performed by first using the Company’s market price on a minority basis with an estimated control premium of 30% for the annual evaluation. The Company then allocates the total fair value to both of its segments, MetroBank and Metro United. The allocation is 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; and

• Metro United’s shareholder's equity as a percentage of total shareholders' equity.

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

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

Observable market information is utilized to the extent available and relevant. The estimated fair values reflect management’s assumptions regarding how a market participant would value the net assets and includes appropriate credit, liquidity and market risk adjustments that are indicative of the current environment.

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

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

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

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

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

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

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

Item 3.    Quantitative and Qualitative Disclosures about Market Risk.

There have been no material changes in the market risk information previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. See Form 10-K, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Interest Rate Sensitivity and Liquidity.”

Item 4.    Controls and Procedures.

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

Changes in Internal Control over Financial Reporting. There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II

OTHER INFORMATION

Item 1.    Legal Proceedings.

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

Item 1A. Risk Factors.

There have been no material changes in the risk factors previously described under "Item 1A. Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission on March 19, 2012, as updated by the risk factors previously disclosed under "Item 1A. Risk Factors" in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 filed with the Securities and Exchange Commission on May 15, 2012.

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

The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company’s common stock during the six months ended June 30, 2012:

Period	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan (2)		Maximum Number of Shares That May Yet Be Purchased Under the Plan (2)
February 1, 2012 to February 29, 2012		12,682	$	8.12		N/A		N/A
March 1, 2012 to March 31, 2012		244		8.16		N/A		N/A
Total		12,926	$	8.12		N/A		N/A

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

Item 3.    Defaults Upon Senior Securities.

Not applicable

Item 4.    Mine Safety Disclosures.

Not applicable

Item 5.    Other Information.

Not applicable

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Item 6.    Exhibits.

Exhibit
Number	Identification of Exhibit
3.1	Amended and Restated Articles of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-62667) (the "Registration Statement")).
3.2	Articles of Amendment to Amended and Restated Articles of Incorporation of the Company (incorporated herein by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008).
3.3	Statement of Designations establishing the terms of the Series A Preferred Stock of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on January 21, 2009).
3.4	Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on November 19, 2007).
4.1	Specimen form of certificate evidencing the Common Stock (incorporated herein by reference to Exhibit 4 to the Registration Statement).
4.2	Warrant, dated January 16, 2009, to purchase 771,429 shares of the Company's Common Stock (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on January 21, 2009).
4.3	Form of Certificate for the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $1.00 per share (incorporated herein by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed on January 21, 2009).
11	Computation of Earnings Per Common Share, included as Note 5 to the unaudited Condensed Consolidated Financial Statements of this Form 10-Q.
31.1*	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2*	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1**	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*	Interactive Data File.

* Filed herewith.

** Furnished herewith.

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SIGNATURES

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

	METROCORP BANCSHARES, INC.
	By:	/s/ George M. Lee
Date: August 10, 2012		George M. Lee  Executive Vice Chairman, President and
		Chief Executive Officer (principal executive officer)
Date: August 10, 2012	By:	/s/ David C. Choi
		David C. Choi
		Chief Financial Officer (principal financial officer/ principal accounting officer)

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EXHIBIT INDEX

Exhibit
Number	Identification of Exhibit
3.1	Amended and Restated Articles of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-62667) (the "Registration Statement")).
3.2	Articles of Amendment to Amended and Restated Articles of Incorporation of the Company (incorporated herein by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008).
3.3	Statement of Designations establishing the terms of the Series A Preferred Stock of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on January 21, 2009).
3.4	Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on November 19, 2007).
4.1	Specimen form of certificate evidencing the Common Stock (incorporated herein by reference to Exhibit 4 to the Registration Statement).
4.2	Warrant, dated January 16, 2009, to purchase 771,429 shares of the Company's Common Stock (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on January 21, 2009).
4.3	Form of Certificate for the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $1.00 per share (incorporated herein by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed on January 21, 2009).
11	Computation of Earnings Per Common Share, included as Note 5 to the unaudited Condensed Consolidated Financial Statements of this Form 10-Q.
31.1*	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2*	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1**	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*	Interactive Data File.

* Filed herewith.

** Furnished herewith.

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