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 MARCH 31, 2008o
            
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934





Commission
file number: 0-25141


________________





MetroCorp
Bancshares, Inc.


(Exact
name of registrant as specified in its charter)





Texas
              (State
      or other jurisdiction ofincorporation
      or organization)
            76-0579161
              (I.R.S.
      EmployerIdentification
      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 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 RNon-accelerated
      Filer £  (Do
      not check if a smaller reporting company)
            
            Smaller
      Reporting Company £





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





As of
April 30, 2008, the number of outstanding shares of Common Stock was
10,851,496.











PART I





FINANCIAL
INFORMATION





Item 1.
Financial
Statements.





METROCORP
BANCSHARES, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS


(In
thousands, except share and per share amounts)


(Unaudited)





March
      31,
            
            
            December
      31,2008
            
            
            2007ASSETSCash
      and due from banks
            
            $
            34,444
            
            
            $
            28,889Federal
      funds sold and other short-term investments
            
            
            24,394
            
            
            
            17,381Total
      cash and cash equivalents
            
            
            58,838
            
            
            
            46,270Securities
      available-for-sale, at fair value
            
            
            128,511
            
            
            
            137,749Other
      investments
            
            
            8,143
            
            
            
            6,886Loans,
      net of allowance for loan losses of $14,588 and $13,125,
      respectively
            
            
            1,227,676
            
            
            
            1,188,786Accrued
      interest receivable
            
            
            5,885
            
            
            
            6,462Premises
      and equipment, net
            
            
            8,353
            
            
            
            8,795Goodwill
            
            
            21,827
            
            
            
            21,827Core
      deposit intangibles
            
            
            693
            
            
            
            756Customers'
      liability on acceptances
            
            
            13,180
            
            
            
            5,967Foreclosed
      assets, net
            
            
            1,264
            
            
            
            1,474Other
      assets
            
            
            35,414
            
            
            
            34,734Total
      assets
            
            $
            1,509,784
            
            
            $
            1,459,706LIABILITIES
      AND SHAREHOLDERS' EQUITYDeposits:Noninterest-bearing
            
            $
            205,228
            
            
            $
            209,223Interest-bearing
            
            
            991,720
            
            
            
            981,820Total
      deposits
            
            
            1,196,948
            
            
            
            1,191,043Junior
      subordinated debentures
            
            
            36,083
            
            
            
            36,083Other
      borrowings
            
            
            132,367
            
            
            
            99,796Accrued
      interest payable
            
            
            1,340
            
            
            
            1,727Acceptances
      outstanding
            
            
            13,180
            
            
            
            5,967Other
      liabilities
            
            
            9,624
            
            
            
            7,680Total
      liabilities
            
            
            1,389,542
            
            
            
            1,342,296Commitments
      and contingencies
            
            
            –
            
            
            
            –Shareholders'
      equity:Common
      stock, $1.00 par value, 50,000,000 shares authorized; 10,994,965 shares
      issued and 10,846,011 and 10,825,837 shares outstanding at March 31, 2008
      and December 31, 2007, respectively
            
            
            10,995
            
            
            
            10,995Additional
      paid-in-capital
            
            
            27,549
            
            
            
            27,386Retained
      earnings
            
            
            84,013
            
            
            
            82,211Accumulated
      other comprehensive loss
            
            
            (241
            )
            
            
            (786
            )Treasury
      stock, at cost, 148,954 and 169,128 shares at March 31, 2008 and December
      31, 2007, respectively
            
            
            (2,074
            )
            
            
            (2,396
            )Total
      shareholders' equity
            
            
            120,242
            
            
            
            117,410Total
      liabilities and shareholders' equity
            
            $
            1,509,784
            
            
            $
            1,459,706





See
accompanying notes to condensed consolidated financial statements





1





METROCORP
BANCSHARES, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME


(In
thousands, except per share amounts)


(Unaudited)





For
      the Three MonthsEnded
      March 31,2008
            
            
            2007Interest
      income:Loans
            
            $
            23,400
            
            
            $
            20,621Securities:Taxable
            
            
            1,372
            
            
            
            1,864Tax-exempt
            
            
            73
            
            
            
            85Other
      investments
            
            
            87
            
            
            
            68Federal
      funds sold and other short-term investments
            
            
            137
            
            
            
            968Total
      interest income
            
            
            25,069
            
            
            
            23,606Interest
      expense:Time
      deposits
            
            
            7,601
            
            
            
            7,601Demand
      and savings deposits
            
            
            2,065
            
            
            
            1,525Junior
      subordinated debentures
            
            
            520
            
            
            
            520Other
      borrowings
            
            
            888
            
            
            
            324Total
      interest expense
            
            
            11,074
            
            
            
            9,970Net
      interest income
            
            
            13,995
            
            
            
            13,636Provision
      for loan losses
            
            
            1,584
            
            
            
            137Net
      interest income after provision for loan losses
            
            
            12,411
            
            
            
            13,499Noninterest
      income:Service
      fees
            
            
            1,243
            
            
            
            1,216Loan-related
      fees
            
            
            181
            
            
            
            177Letters
      of credit commissions and fees
            
            
            267
            
            
            
            204Gain
      on securities transactions, net
            
            
            24
            
            
            
            –Gain
      on sale of loans
            
            
            51
            
            
            
            –Other
      noninterest income
            
            
            363
            
            
            
            69Total
      noninterest income
            
            
            2,129
            
            
            
            1,666Noninterest
      expenses:Salaries
      and employee benefits
            
            
            6,486
            
            
            
            5,746Occupancy
      and equipment
            
            
            1,959
            
            
            
            1,970Foreclosed
      assets, net
            
            
            57
            
            
            
            42Other
      noninterest expense
            
            
            2,461
            
            
            
            2,467Total
      noninterest expenses
            
            
            10,963
            
            
            
            10,225Income
      before provision for income taxes
            
            
            3,577
            
            
            
            4,940Provision
      for income taxes
            
            
            1,342
            
            
            
            1,850Net
      income
            
            $
            2,235
            
            
            $
            3,090Earnings
      per common share:Basic
            
            $
            0.21
            
            
            $
            0.28Diluted
            
            $
            0.21
            
            
            $
            0.28Weighted
      average shares outstanding:Basic
            
            
            10,811
            
            
            
            10,953Diluted
            
            
            10,897
            
            
            
            11,163Dividends
      per common share
            
            $
            0.04
            
            
            $
            0.04





See
accompanying notes to condensed consolidated financial statements


2




METROCORP
BANCSHARES, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


(In
thousands)


(Unaudited)





For
      the Three MonthsEnded
      March 31,2008
            
            
            2007Net
      income
            
            $
            2,235
            
            
            $
            3,090Other
      comprehensive income, net of tax:Unrealized
      gain on investment securities, net:Unrealized
      holding gain arising during the period
            
            
            560
            
            
            
            367Less:
      reclassification adjustment for gain included in net
income
            
            
            15
            
            
            
            –Other
      comprehensive income
            
            
            545
            
            
            
            367Total
      comprehensive income
            
            $
            2,780
            
            
            $
            3,457








METROCORP
BANCSHARES, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY


For
the Three Months Ended March 31, 2008


(In
thousands)


(Unaudited)





Additional
            
            
            
            
            
            Accumulated
      Other
            
            
            TreasuryCommon
      Stock
            
            
            Paid-In
            
            
            Retained
            
            
            Comprehensive
            
            
            Stock,
      AtShares
            
            
            At
      Par
            
            
            Capital
            
            
            Earnings
            
            
            Income
      (Loss)
            
            
            Cost
            
            
            TotalBalance
      at December 31, 2007
            
            
            10,826
            
            
            $
            10,995
            
            
            $
            27,386
            
            
            $
            82,211
            
            
            $
            (786
            )
            
            $
            (2,396
            )
            
            $
            117,410Re-issuance
      of treasury stock
            
            
            20
            
            
            
            –
            
            
            
            (65
            )
            
            
            –
            
            
            
            –
            
            
            
            322
            
            
            
            257Stock-based
      compensation expense recognized in earnings
            
            
            –
            
            
            
            –
            
            
            
            228
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            228Net
      income
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            2,235
            
            
            
            –
            
            
            
            –
            
            
            
            2,235Other
      comprehensive income
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            545
            
            
            
            –
            
            
            
            545Cash
      dividends ($0.04 per share)
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            (433
            )
            
            
            –
            
            
            
            –
            
            
            
            (433
            )Balance
      at March 31, 2008
            
            
            10,846
            
            
            $
            10,995
            
            
            $
            27,549
            
            
            $
            84,013
            
            
            $
            (241
            )
            
            $
            (2,074
            )
            
            $
            120,242





See
accompanying notes to condensed consolidated financial statements





3





METROCORP
BANCSHARES, INC


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(In
thousands)


(Unaudited)





For
      the Three Months Ended
              March
      31,2008
            
            
            2007Cash
      flows from operating activities:Net
      income
            
            $
            2,235
            
            
            $
            3,090Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
            
            
            532
            
            
            
            433Provision
      for loan losses
            
            
            1,584
            
            
            
            137Gain
      on securities transactions, net
            
            
            (24
            )
            
            
            –Gain
      on sale of foreclosed assets
            
            
            (1
            )
            
            
            –Loss
      on sale of premises and equipment
            
            
            9
            
            
            
            –Gain
      on sale of loans, net
            
            
            (51
            )
            
            
            –Amortization
      of premiums and discounts on securities
            
            
            17
            
            
            
            8Amortization
      of deferred loan fees and discounts
            
            
            (578
            )
            
            
            (650
            )Amortization
      of core deposit intangibles
            
            
            63
            
            
            
            87Stock-based
      compensation
            
            
            228
            
            
            
            230Changes
      in:Accrued
      interest receivable
            
            
            577
            
            
            
            (269
            )Other
      assets
            
            
            (988
            )
            
            
            (553
            )Accrued
      interest payable
            
            
            (387
            )
            
            
            (48
            )Other
      liabilities
            
            
            1,943
            
            
            
            330Net
      cash provided by operating activities
            
            
            5,159
            
            
            
            2,795Cash
      flows from investing activities:Purchases
      of securities available-for-sale
            
            
            (16,856
            )
            
            
            (89
            )Proceeds
      from maturities, calls, and principal paydowns of securities
      available-for-sale
            
            
            25,697
            
            
            
            7,476Net
      change in loans
            
            
            (39,845
            )
            
            
            (118,745
            )Proceeds
      from sale of foreclosed assets
            
            
            211
            
            
            
            90Proceeds
      from sale of premises and equipment
            
            
            7
            
            
            
            –Purchases
      of premises and equipment
            
            
            (106
            )
            
            
            (762
            )Net
      cash used in investing activities
            
            
            (30,892
            )
            
            
            (112,030
            )Cash
      flows from financing activities:Net
      change in:Deposits
            
            
            5,905
            
            
            
            9,086Other
      borrowings
            
            
            32,571
            
            
            
            (514
            )Proceeds
      from stock option exercises
            
            
            –
            
            
            
            75Re-issuance
      of treasury stock
            
            
            257
            
            
            
            88Dividends
      paid
            
            
            (432
            )
            
            
            (437
            )Net
      cash provided by financing activities
            
            
            38,301
            
            
            
            8,298Net
      increase (decrease) in cash and cash equivalents
            
            
            12,568
            
            
            
            (100,937
            )Cash
      and cash equivalents at beginning of period
            
            
            46,270
            
            
            
            151,358Cash
      and cash equivalents at end of period
            
            $
            58,838
            
            
            $
            50,421





See
accompanying notes to condensed consolidated financial statements





4





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 twelve branches in Houston and Dallas, Texas, and Metro United is
engaged in commercial banking activities through its six branches in San Diego,
Los Angeles and San Francisco, California. 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.





The
Company determines whether it has a controlling financial interest in an entity
by first evaluating whether the entity is a voting interest entity or a variable
interest entity under accounting principles generally accepted in the United
States.  Voting interest entities are entities in which the total
equity investment at risk is sufficient to enable the entity to finance itself
independently and provides the equity holders with the obligation to absorb
losses, the right to receive residual returns and the right to make decisions
about the entity’s activities.  The Company consolidates voting
interest entities in which it has all, or at least a majority of, the voting
interest.  As defined in applicable accounting standards, variable
interest entities, (“VIEs”) are entities that lack one or more of the
characteristics of a voting interest entity.  A controlling financial
interest is present when an enterprise has a variable interest, or a combination
of variable interests, that will absorb a majority of the entity’s expected
losses, receive a majority of the entity’s expected residual returns, or
both.  The enterprise with a controlling financial interest, known as
the primary beneficiary, consolidates the VIE.  The Company’s wholly
owned subsidiary, MCBI Statutory Trust I, is a VIE for which the Company is not
the primary beneficiary.  Accordingly, the accounts of this entity are
not consolidated in the Company’s financial statements.





The
accompanying unaudited condensed consolidated financial statements were prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions for Form
10-Q. In the opinion of management, the unaudited condensed consolidated
financial statements reflect all adjustments, consisting only of normal and
recurring adjustments, necessary for a fair statement of the Company’s financial
position at March 31, 2008, results of operations for the three months
ended March 31, 2008 and 2007, and cash flows for the three months ended
March 31, 2008 and 2007. Interim period results are not necessarily
indicative of results for a full-year period.  The year-end condensed
balance sheet data was derived from audited financial statements, but does not
include all disclosures required by accounting principles generally accepted in
the United States of America.





These
financial statements and the notes thereto should be read in conjunction with
the Company’s Annual Report on Form 10-K for the year ended December 31,
2007.





5




2.         SECURITIES





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





As
      of March 31, 2008
            
            
            As
      of December 31, 2007Amortized
      Cost
            
            
            Gross
      Unrealized Gains
            
            
            Gross
      Unrealized Losses
            
            
            Fair
      Value
            
            
            Amortized
      Cost
            
            
            Gross
      Unrealized Gains
            
            
            Gross
      Unrealized Losses
            
            
            Fair
      Value(Dollars
      in thousands)Securities
      available for saleU.S.
      Government agencies
            
            $
            23
            
            
            $
            2
            
            
            $
            (1
            )
            
            $
            24
            
            
            $
            24
            
            
            $
            2
            
            
            $
            (1
            )
            
            $
            25U.S.
      Government sponsored enterprises
            
            
            16,396
            
            
            
            110
            
            
            
            (51
            )
            
            
            16,455
            
            
            
            20,473
            
            
            
            10
            
            
            
            (10
            )
            
            
            20,473Obligations
      of state and political subdivisions
            
            
            5,936
            
            
            
            179
            
            
            ─
            
            
            
            6,115
            
            
            
            5,936
            
            
            
            162
            
            
            
            (7
            )
            
            
            6,091Mortgage-backed
      securities and collateralized mortgage obligations
            
            
            86,624
            
            
            
            664
            
            
            
            (732
            )
            
            
            86,556
            
            
            
            92,673
            
            
            
            173
            
            
            
            (1,123
            )
            
            
            91,723Other
      debt securities
            
            
            19
            
            
            ─
            
            
            ─
            
            
            
            19
            
            
            
            33
            
            
            ─
            
            
            ─
            
            
            
            33Investment
      in ARM and CRA funds
            
            
            19,909
            
            
            
            70
            
            
            
            (637
            )
            
            
            19,342
            
            
            
            19,858
            
            
            
            39
            
            
            
            (493
            )
            
            
            19,404Total
      available for sale securities
            
            $
            128,907
            
            
            $
            1,025
            
            
            $
            (1,421
            )
            
            $
            128,511
            
            
            $
            138,997
            
            
            $
            386
            
            
            $
            (1,634
            )
            
            $
            137,749Other
      investmentsFHLB/Federal
      Reserve Bank stock
            
            $
            7,060
            
            
            $
            ─
            
            
            $
            ─
            
            
            $
            7,060
            
            
            $
            5,803
            
            
            $
            ─
            
            
            $
            ─
            
            
            
            5,803Investment
      in subsidiary trust
            
            
            1,083
            
            
            
            ─
            
            
            
            ─
            
            
            
            1,083
            
            
            
            1,083
            
            
            
            ─
            
            
            
            ─
            
            
            
            1,083Total
      other investments
            
            $
            8,143
            
            
            $
            ─
            
            
            $
            ─
            
            
            $
            8,143
            
            
            $
            6,886
            
            
            $
            ─
            
            
            $
            ─
            
            
            $
            6,886





The
following table displays the gross unrealized losses and fair value of
securities available for sale as of March 31, 2008 that were in a continuous
unrealized loss position for the periods indicated:





Less
      Than 12 Months
            
            
            Greater
      Than 12 Months
            
            
            TotalFair
      Value
            
            
            Gross
      Unrealized Losses
            
            
            Fair
      Value
            
            
            Gross
      Unrealized Losses
            
            
            Fair
      Value
            
            
            Gross
      Unrealized Losses(Dollars
      in thousands)Securities
      available for saleU.S.
      Government agencies
            
            $
            10
            
            
            $
            (1
            )
            
            $
            ─
            
            
            $
            ─
            
            
            $
            10
            
            
            $
            (1
            )U.S.
      Government sponsored enterprises
            
            
            4,893
            
            
            
            (51
            )
            
            ─
            
            
            ─
            
            
            
            4,893
            
            
            
            (51
            )Mortgage-backed
      securities and collateralized mortgage obligations
            
            
            8,301
            
            
            
            (56
            )
            
            
            22,903
            
            
            
            (676
            )
            
            
            31,204
            
            
            
            (732
            )Investment
      in ARM and CRA funds
            
            ─
            
            
            ─
            
            
            
            14,541
            
            
            
            (637
            )
            
            
            14,541
            
            
            
            (637
            )Total
      securities
            
            $
            13,204
            
            
            $
            (108
            )
            
            $
            37,444
            
            
            $
            (1,313
            )
            
            $
            50,648
            
            
            $
            (1,421
            )





Declines
in the fair value of individual securities below their cost that are other than
temporary would result in write-downs, as a realized loss, of the individual
securities to their fair value. Management believes that based upon the credit
quality of the debt securities and the Company’s intent and ability to hold the
securities until their recovery, none of the unrealized losses on securities
should be considered other than temporary.





6





3.         ALLOWANCE
FOR LOAN LOSSES





Changes
in the allowance for loan losses are as follows:




As
      of and for the
                three
      months ended
                March 31, 2008
              
              
              As
      of and for the
                three
      months ended
                March
      31, 2007(Dollars
      in thousands)Allowance
      for loan losses at beginning of period
              
              $
              13,125
              
              
              $
              11,436Provision
      for loan losses
              
              
              1,584
              
              
              
              137Charge-offs
              
              
              (136
              )
              
              
              (226
              )Recoveries
              
              
              15
              
              
              
              553Allowance
      for loan losses at end of period
              
              $
              14,588
              
              
              $
              11,900


In
addition to the allowance for loan losses, the Company maintains a reserve for
unfunded commitments to provide for the risk of loss inherent in its unfunded
lending related commitments.  The reserve for unfunded commitments was
$907,000 and $919,000 at March 31, 2008 and 2007, respectively.






4.         INCOME
TAXES




The
Company had no unrecognized tax benefits as of March 31, 2008, and as a result
there is no impact on the Company's effective tax rate. Additionally, the
Company does not anticipate a significant change in the balance of unrecognized
tax benefits within the next 12 months. As of March 31, 2008, the Company has
not accrued any interest and penalties related to unrecognized tax
benefits.





The
Company is subject to taxation in the United States and Texas and
California.  State income tax returns are generally subject to
examination for a period of three to five years after filing.  The
state impact of any changes made to the federal return remains subject to
examination by various states for a period up to one year after formal
notification to the state.  The Company is open to federal tax
authority examinations for the tax years ended December 31, 2004 through
December 31, 2007.






5.         EARNINGS
PER COMMON SHARE





Basic
earnings per share (“EPS”) is computed by dividing net income available to
common shareholders 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
can be dilutive common shares and are therefore considered in the earnings per
share calculation, if dilutive.  Stock options that are antidilutive
are excluded from earnings per share calculation.  Stock options are
antidilutive when the exercise price is higher than the current market price of
the Company’s common stock.  As of March 31, 2008 and 2007, there were
257,460 and 47,408 antidilutive stock options, respectively.  The
number of potentially dilutive common shares is determined using the treasury
stock method.





7




For
      the Three MonthsEnded
      March 31,2008
            
            
            2007(In
      thousands, except per share amounts)Net
      income available to common shareholders
            
            $
            2,235
            
            
            $
            3,090Weighted
      average common shares in basic EPS
            
            
            10,811
            
            
            
            10,953Effect
      of dilutive securities
            
            
            86
            
            
            
            210Weighted
      average common and potentially dilutive  common shares used in
      diluted EPS
            
            
            10,897
            
            
            
            11,163Earnings
      per common share:Basic
            
            $
            0.21
            
            
            $
            0.28Diluted
            
            $
            0.21
            
            
            $
            0.28






6.         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.         OFF-BALANCE
SHEET ACTIVITIES





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





The
contractual amount of the Company’s financial instruments with off-balance sheet
risk at March 31, 2008 and December 31, 2007 is presented below:





As
      of
              March
      31, 2008
            
            
            As
      of
              December
      31, 2007(Dollars
      in thousands)Unfunded
      loan commitments including unfunded lines of credit
            
            $
            321,532
            
            
            $
            315,370Standby
      letters of credit
            
            
            11,483
            
            
            
            9,290Commercial
      letters of credit
            
            
            23,169
            
            
            
            12,853Operating
      leases
            
            
            9,357
            
            
            
            9,754Total
      financial instruments with off-balance sheet risk
            
            $
            365,541
            
            
            $
            347,267






8.         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.





8





The
following is a summary of selected operating segment information as of and for
the three months ended March 31, 2008:





MetroBank
            
            
            Metro
      United
            
            
            Other
            
            
            Consolidated(Dollars
      in thousands)Total
      interest income
            
            $
            18,556
            
            
            $
            6,496
            
            
            $
            17
            
            
            $
            25,069Total
      interest expense
            
            
            7,241
            
            
            
            3,313
            
            
            
            520
            
            
            
            11,074Net
      interest income
            
            
            11,315
            
            
            
            3,183
            
            
            
            (503
            )
            
            
            13,995Provision
      for loan losses
            
            
            690
            
            
            
            894
            
            
            
            –
            
            
            
            1,584Net
      interest income after provision for loan losses
            
            
            10,625
            
            
            
            2,289
            
            
            
            (503
            )
            
            
            12,411Noninterest
      income
            
            
            2,361
            
            
            
            106
            
            
            
            (338
            )
            
            
            2,129Noninterest
      expense
            
            
            7,998
            
            
            
            2,727
            
            
            
            238
            
            
            
            10,963Income
      before income tax provision
            
            
            4,988
            
            
            
            (332
            )
            
            
            (1,079
            )
            
            
            3,577Provision
      for income taxes
            
            
            1,700
            
            
            
            (61
            )
            
            
            (297
            )
            
            
            1,342Net
      income
            
            $
            3,288
            
            
            $
            (271
            )
            
            $
            (782
            )
            
            $
            2,235Net
      loans
            
            $
            885,305
            
            
            $
            342,371
            
            
            $
            –
            
            
            $
            1,227,676Total
      assets
            
            
            1,110,318
            
            
            
            399,651
            
            
            
            (185
            )
            
            
            1,509,784Deposits
            
            
            908,800
            
            
            
            291,468
            
            
            
            (3,320
            )
            
            
            1,196,948






9.         FAIR
VALUE





Effective
January 1, 2008, the Company adopted FASB Statement No. 157, “Fair Value
Measurements” (“SFAS 157”), which defines fair value, establishes a framework
for measuring fair value, and expands disclosures about fair value
measurements.  In accordance with Financial Accounting Standards Board
Staff Position (FSP) No. 157-2, “Effective Date of FASB Statement No. 157,” the
Company will delay application of SFAS 157 for non-financial assets and
non-financial liabilities, until January 1, 2009.





SFAS 157
defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date.  SFAS 157 also
establishes a fair value hierarchy which requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring
fair value.  The standard describes three levels of inputs that may be
used to measure fair value:





·
            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.





Following
is a description of the valuation methodologies used for instruments measured at
fair value, as well as the general classification of such instruments pursuant
to the valuation hierarchy.





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
ARM and CRA funds.  If quoted market prices are not available, the
Company obtains fair values from an independent pricing service.  The
fair value measurements consider observable data that may include pricing
models, quoted prices of securities with similar characteristics, or discounted
cash flows.  Level 2 securities are comprised of U.S. Government
agencies and U.S. Government sponsored enterprises bonds, obligations of state
and political subdivisions and collateralized mortgage and debt
obligations.





9





Impaired
Loans.  Certain impaired loans are reported at the fair value
of the underlying collateral if repayment is expected solely from the
collateral.  Collateral values are estimated using Level 3 inputs
based on the fair value of the underlying collateral determined by independent
appraisals.





The
following table presents the financial instruments carried at fair value as of
March 31, 2008, by caption on the consolidated balance sheets and by SFAS 157
valuation hierarchy (as described above):





Assets
measured at fair value on a recurring basis





Fair
      Value Measurements at March 31, 2008, Using(Dollars
      in thousands)Quoted
      Prices in Active Markets for Identical Assets (Level 1)
            
            
            Significant
      Other Observable Inputs (Level 2)
            
            
            Significant
      Unobservable Inputs (Level 3)
            
            
            Fair
      Value Measurements March 31, 2008Securities
      available-for-sale
            
            $
            19,342
            
            
            $
            109,169
            
            
            $
            –
            
            
            $
            128,511





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, as well
as intangible assets measured at fair value for impairment assessment. As stated
above, SFAS 157 will be applicable to these fair value measurements beginning
January 1, 2009.





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). Financial assets measured at fair value on a
non-recurring basis were not significant at March 31, 2008.





Effective
January 1, 2008, the Company adopted the provisions of SFAS No. 159, “The Fair
Value Option for Financial Assets and Financial Liabilities - Including an
amendment of FASB Statement No. 115” (“SFAS 159”).  SFAS 159 permits
an entity to choose to measure eligible items at fair value at specified
election dates. Unrealized gains and losses on items for which the fair value
measurement option has been elected are reported in earnings at each subsequent
reporting date. The fair value option (i) may be applied instrument by
instrument, with certain exceptions, (ii) is irrevocable (unless a new election
date occurs) and (iii) is applied only to entire instruments and not to portions
of instruments. The Company did not elect to measure any instruments at fair
value and as a result, adoption of SFAS 159 on January 1, 2008 did not have a
significant impact on the Company’s financial statements.






10.         NEW
ACCOUNTING PRONOUNCEMENTS





In March
2008, the FASB issued Statement No. 161, “Disclosures About Derivative
Instruments and Hedging Activities, an Amendment of FASB Statement No. 133”.
Statement No. 161 amends Statement No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” to amend and expand the disclosure
requirements of Statement No. 133 to provide greater transparency about (i) how
and why an entity uses derivative instruments, (ii) how derivative instruments
and related hedge items are accounted for under Statement No. 133 and its
related interpretations, and (iii) how derivative instruments and related hedged
items affect an entity's financial position, results of operations and cash
flows. To meet those objectives, Statement No. 161 requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of gains and losses on derivative
instruments and disclosures about credit-risk-related contingent features in
derivative agreements. Statement No. 161 is effective for the Company beginning
January 1, 2009.  The adoption of Statement No. 161 is not expected to
have a material impact on the financial condition, results of operations, or
cash flows of the Company.





In
December 2007, the FASB issued Statement No. 160, “Noncontrolling
Interests in Consolidated Financial Statements an amendment of ARB No. 51”,
which establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary, and
clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements.  The statement will affect only
those entities that have an outstanding noncontrolling interest in one or more
subsidiaries or that deconsolidate a subsidiary.  Statement No. 160 is
effective for the Company beginning January 1, 2009. The adoption of Statement
No. 160 is not expected to have a material impact on the financial condition,
results of operations, or cash flows of the Company.




In
December 2007, the FASB issued Statement No. 141(R), “Business
Combinations”, which replaces FASB Statement No. 141, “Business Combinations”,
and retains the fundamental requirements in Statement 141 that the acquisition
method of accounting (which Statement 141 called the purchase method) be used
for all business combinations and for an acquirer to be identified for each
business combination. By applying the same method of accounting—the acquisition
method—to all transactions and other events in which one entity obtains control
over one or more other businesses, the Statement is intended to improve the
comparability of the information about business combinations provided in
financial reports.  Statement No. 141(R) is effective for the Company
beginning January 1, 2009. The adoption of Statement No. 141(R) is not expected
to have a material impact on the financial condition, results of operations, or
cash flows of the Company.


10




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 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
      Company’s ability to identify suitable acquisition
    candidates;





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





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





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





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





•
            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 our capital levels and regulatory capital
  ratios;





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





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





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





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





11





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 $2.2 million for the three months ended
March 31, 2008, a decrease of approximately $855,000 compared with net
income of $3.1 million for the same quarter in 2007. The Company’s diluted
earnings per share (“EPS”) for the three months ended March 31, 2008 was
$0.21, a decrease of $0.07 per diluted share compared with diluted EPS of $0.28
for the same quarter in 2007.





Total
assets were $1.51 billion at March 31, 2008, an increase of
approximately $50.1 million or 3.4% from $1.46 billion at December 31,
2007. Available for sale investment securities at March 31, 2008 were
$128.5 million, a decrease of approximately $9.2 million or 6.7% from
$137.7 million at December 31, 2007. Net loans at March 31, 2008
were $1.23 billion, an increase of approximately $38.9 million or 3.3% from
$1.19 billion at December 31, 2007. Total deposits at March 31,
2008 were $1.20 billion, an increase of approximately $5.9 million or
0.50% from $1.19 billion at December 31, 2007. Other borrowings at
March 31, 2008 were $132.4 million, an increase of approximately $32.6
million or 32.6% from $99.8 million at December 31, 2007. The Company’s
return on average assets (“ROAA”) for the three months ended March 31, 2008
and 2007 was 0.61% and 0.99%, respectively. The Company’s return on average
equity (“ROAE”) for the three months ended March 31, 2008 and 2007 was 7.51% and
11.59%, respectively.  Shareholders’ equity at March 31, 2008 was
$120.2 million compared to $117.4 million at December 31, 2007, an
increase of approximately $2.8 million or 2.4%.  The second
representative office of MetroBank in China, located in the city of Chongqing,
opened during the first quarter of 2008.  Details of the changes in
the various components of net income are further discussed below.





Results
of Operations





Net Interest Income and Net Interest
Margin. For the three months ended March 31, 2008, net interest
income, before the provision for loan losses, was $14.0 million, an
increase of approximately $359,000 or 2.6% compared with $13.6 million for
the same period in 2007. Average interest-earning assets for the three months
ended March 31, 2008 were $1.38 billion, an increase of approximately
$179.8 million or 15.0% compared with $1.20 billion for the same
period in 2007. The increase was primarily due to loan growth.  The
weighted average yield on interest-earning assets for the first quarter of 2008
was 7.33%, a decrease of 67 basis points compared with 8.0% for the same quarter
in 2007. Average interest-bearing liabilities for the three months ended
March 31, 2008 were $1.13 billion, an increase of approximately
$195.9 million or 21.0% compared with $934.8 million for the same
period in 2007, primarily due to an increase in money market accounts and other
borrowings. The weighted average interest rate paid on interest-bearing
liabilities for the first quarter 2008 was 3.94%, a decrease of 39 basis points
compared with 4.33% for the same quarter in 2007.





The net
interest margin for the three months ended March 31, 2008 was 4.09%, a
decrease of 53 basis points compared with 4.62% for the same period in 2007. The
decrease was primarily the result of a decrease in the yield on earning assets
of 67 basis points, partially offset by a decrease in the cost of earning assets
of 14 basis points.  The decrease in yield on earning assets and the
cost of earning assets was due primarily to interest rate cuts by the Federal
Reserve.





Total Interest Income. Total
interest income for the three months ended March 31, 2008 was
$25.1 million, an increase of approximately $1.5 million or 6.2% compared
with $23.6 million for the same period in 2007. The increase was primarily
the result of increased interest income from a higher volume of loans which was
partially offset by a decrease in interest income from a lower volume of
securities.





Interest Income from Loans.
Interest income from loans for the three months ended March 31, 2008 was
$23.4 million, an increase of approximately $2.8 million or 13.5% compared
with $20.6 million for the same quarter in 2007. The increase was the
result of growth in the loan portfolio.   Average total loans for
the three months ended March 31, 2008 were $1.22 billion compared to
$933.8 million for the same period in 2007, an increase of approximately
$281.9 million or 30.2%. For the first quarter of 2008, the average yield
on loans was 7.74% compared to 8.96% for the same quarter in 2007, a decrease of
122 basis points. The decline in yield for the three months ended March 31, 2008
was the result of interest rate cuts by the Federal Reserve.





Approximately
$854.8 million or 68.6% of the total loan portfolio are variable rate loans that
periodically reprice and are sensitive to changes in market interest
rates.  At March 31, 2008, the average yield on total loans was
approximately 150 basis points above the prime rate.  To lessen
interest rate sensitivity in the event of a falling interest rate environment,
the Company originates variable rate loans with interest rate
floors.  At March 31, 2008, approximately $568.3 million in loans or
45.6% of the total loan portfolio were variable rate loans with interest rate
floors that carried a weighted average interest rate of 7.34%.  At
March 31, 2007, variable rate loans with interest rate floors carried a weighted
average interest rate of 9.0% and comprised 48.5% of the total loan
portfolio.





12





Interest Income from
Investments. Interest income from investments (which includes investment
securities, Federal funds sold, and other investments) for the three months
ended March 31, 2008 was $1.7 million, a decrease of approximately
$1.3 million or 44.1% compared to $3.0 million for the same period in
2007.  The decrease was primarily due to normal paydowns, calls and
maturities of investment securities, which were used to fund loan growth.
Average total investments for the three months ended March 31, 2008 were
$160.0 million compared to average total investments for the same period in
2007 of $262.1 million, a decrease of approximately $102.1 million or
38.9%.  For the first quarter 2008, the average yield on total
investments was 4.19% compared to 4.62% for the same quarter in 2007, a decrease
of 43 basis points.





Total Interest Expense. Total
interest expense for the three months ended March 31, 2008 was
$11.1 million, an increase of approximately $1.1 million or 11.1% compared
to $10.0 million for the same period in 2007. The increase primarily
reflected an increase in interest-bearing deposits and other
borrowings.





Interest Expense on Deposits.
Interest expense on interest-bearing deposits for the three months ended
March 31, 2008 was $9.7 million, an increase of approximately $540,000
or 5.9% compared to $9.1 million for the same period in 2007. The increase
was primarily due to a higher volume of money market accounts. Average
interest-bearing deposits for the three months ended March 31, 2008 were
$980.9 million compared to average interest-bearing deposits for the same
period in 2007 of $872.0 million, an increase of $108.9 million or
12.5%. The average interest rate paid on interest-bearing deposits for the first
quarter of 2008 was 3.96% compared to 4.24% for the same quarter in 2007, a
decrease of 28 basis points. The decline in interest rates paid for the three
months ended March 31, 2008 was the result of interest rate cuts by the Federal
Reserve.





Interest Expense on Other
Borrowings. Interest expense on other borrowings for the three months
ended March 31, 2008 was $888,000, an increase of $564,000 compared to
$324,000 for the same period in 2007. Average borrowed funds for the three
months ended March 31, 2008 and 2007 were $113.6 million and
$26.7 million, respectively. The average interest rate paid on borrowed
funds for the first quarter of 2008 was 3.14%, compared to 4.92% for the same
quarter in 2007.





13





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 March 31,2008
            
            
            2007Average
            
            
            Interest
            
            
            Average
            
            
            Average
            
            
            Interest
            
            
            AverageOutstanding
            
            
            Earned/
            
            
            Yield/
            
            
            Outstanding
            
            
            Earned/
            
            
            Yield/Balance
            
            
            Paid
            
            
            Rate(1)
            
            
            Balance
            
            
            Paid
            
            
            Rate(1)Assets
            
            (Dollars
      in thousands)Loans
            
            $
            1,215,736
            
            
            $
            23,400
            
            
            
            7.74
            %
            
            $
            933,829
            
            
            $
            20,621
            
            
            
            8.96
            %Taxable
      securities
            
            
            128,524
            
            
            
            1,372
            
            
            
            4.29
            
            
            
            174,833
            
            
            
            1,864
            
            
            
            4.32Tax-exempt
      securities
            
            
            5,936
            
            
            
            73
            
            
            
            4.95
            
            
            
            6,895
            
            
            
            85
            
            
            
            5.00Other
      investments (2)
            
            
            7,561
            
            
            
            87
            
            
            
            4.63
            
            
            
            4,938
            
            
            
            68
            
            
            
            5.58Federal
      funds sold and other short-term investments
            
            
            18,025
            
            
            
            137
            
            
            
            3.06
            
            
            
            75,476
            
            
            
            968
            
            
            
            5.20Total
      interest-earning assets
            
            
            1,375,782
            
            
            
            25,069
            
            
            
            7.33
            
            
            
            1,195,971
            
            
            
            23,606
            
            
            
            8.00Allowance
      for loan losses
            
            
            (13,933
            )
            
            
            
            
            
            
            
            
            
            
            (11,641
            )Total
      interest-earning assets, net of allowance for loan losses
            
            
            1,361,849
            
            
            
            
            
            
            
            
            
            
            
            1,184,330Noninterest-earning
      assets
            
            
            108,614
            
            
            
            
            
            
            
            
            
            
            
            77,216Total
      assets
            
            $
            1,470,463
            
            
            
            
            
            
            
            
            
            
            $
            1,261,546Liabilities
      and shareholders' equityInterest-bearing
      liabilities:Interest-bearing
      demand deposits
            
            $
            58,994
            
            
            $
            143
            
            
            
            0.97
            %
            
            $
            68,341
            
            
            $
            205
            
            
            
            1.22
            %Savings
      and money market accounts
            
            
            272,486
            
            
            
            1,922
            
            
            
            2.84
            
            
            
            171,520
            
            
            
            1,320
            
            
            
            3.12Time
      deposits
            
            
            649,452
            
            
            
            7,601
            
            
            
            4.71
            
            
            
            632,118
            
            
            
            7,601
            
            
            
            4.88Junior
      subordinated debentures
            
            
            36,083
            
            
            
            520
            
            
            
            5.76
            
            
            
            36,083
            
            
            
            520
            
            
            
            5.76Other
      borrowings
            
            
            113,597
            
            
            
            888
            
            
            
            3.14
            
            
            
            26,695
            
            
            
            324
            
            
            
            4.92Total
      interest-bearing liabilities
            
            
            1,130,612
            
            
            
            11,074
            
            
            
            3.94
            
            
            
            934,757
            
            
            
            9,970
            
            
            
            4.33Noninterest-bearing
      liabilities:Noninterest-bearing
      demand deposits
            
            
            199,816
            
            
            
            
            
            
            
            
            
            
            
            202,256Other
      liabilities
            
            
            20,375
            
            
            
            
            
            
            
            
            
            
            
            16,390Total
      liabilities
            
            
            1,350,803
            
            
            
            
            
            
            
            
            
            
            
            1,153,403Shareholders'
      equity
            
            
            119,660
            
            
            
            
            
            
            
            
            
            
            
            108,143Total
      liabilities and shareholders' equity
            
            $
            1,470,463
            
            
            
            
            
            
            
            
            
            
            $
            1,261,546Net
      interest income
            
            
            
            
            
            $
            13,995
            
            
            
            
            
            
            
            
            
            
            $
            13,636Net
      interest spread
            
            
            
            
            
            
            
            
            
            
            3.39
            %
            
            
            
            
            
            
            
            
            
            
            3.68
            %Net
      interest margin
            
            
            
            
            
            
            
            
            
            
            4.09
            %
            
            
            
            
            
            
            
            
            
            
            4.62
            %




(1)
            Annualized.


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


14




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 months ended March 31,
2008 compared with the three months ended March 31, 2007. For purposes of
this table, changes attributable to both rate and volume have been allocated to
each accordingly.





Three
      Months Ended March 31,2008
      vs 2007Increase
      (Decrease)Due
      toVolume
            
            
            Rate
            
            
            Total(Dollars
      in thousands)Interest-earning
      assets:Loans
            
            $
            6,449
            
            
            $
            (3,670
            )
            
            $
            2,779Taxable
      securities
            
            
            (482
            )
            
            
            (10
            )
            
            
            (492
            )Tax-exempt
      securities
            
            
            (11
            )
            
            
            (1
            )
            
            
            (12
            )Other
      investments
            
            
            37
            
            
            
            (18
            )
            
            
            19Federal
      funds sold and other short-term investments
            
            
            (735
            )
            
            
            (96
            )
            
            
            (831
            )Total
      increase (decrease) in interest income
            
            
            5,258
            
            
            
            (3,795
            )
            
            
            1,463Interest-bearing
      liabilities:Interest-bearing
      demand deposits
            
            
            (27
            )
            
            
            (35
            )
            
            
            (62
            )Savings
      and money market accounts
            
            
            795
            
            
            
            (193
            )
            
            
            602Time
      deposits
            
            
            274
            
            
            
            (274
            )
            
            
            –Junior
      subordinated debentures
            
            
            –
            
            
            
            –
            
            
            
            –Other
      borrowings
            
            
            1,066
            
            
            
            (502
            )
            
            
            564Total
      increase (decrease) in interest expense
            
            
            2,108
            
            
            
            (1,004
            )
            
            
            1,104Increase
      (decrease) in net interest income
            
            $
            3,150
            
            
            $
            (2,791
            )
            
            $
            359





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 March 31, 2008 was $1.6 million, an
increase of approximately $1.5 million, compared to $137,000 for the same period
in 2007. The increase was primarily due to loan growth and to increase the
allowance for loan losses because of concerns about the general economic
conditions in California.   The allowance for loan losses as a
percent of total loans was 1.17% at March 31, 2008, down slightly compared with
1.18% at March 31, 2007, but up from 1.09% at December 31, 2007.





Noninterest
Income.  Noninterest income for the three months ended March
31, 2008 was $2.1 million, an increase of approximately $463,000 compared to
$1.7 million for the same period in 2007. The increase in noninterest income for
the three months ended March 31, 2008 was primarily due to increases in the cash
value of bank owned life insurance, letter of credit commissions and fees, and
the gain on sale of SBA loans.





Noninterest Expense. Total
noninterest expense for the three months ended March 31, 2008 was
$11.0 million, an increase of approximately $738,000 or 7.2% compared to
$10.2 million for the same quarter in 2007. The increase for the three
months ended March 31, 2008 was primarily due to increases in salaries and
benefits expense.  Salaries and benefits expense for the three months
ended March 31, 2008 was $6.5 million, up $740,000 compared with $5.7 million
for the same period in 2007. The increase was primarily due to increases in
bonus accrual, salary expense due to increased personnel in California, employee
health care benefits, severance expenses, and stock-based compensation
expense.





Occupancy
and equipment expense of $2.0 million and other noninterest expense of $2.5
million for the three months ended March 31, 2008 were approximately the
same compared with the first quarter of 2007.





The
Company’s efficiency ratio for the three months ended March 31, 2008 was 67.99%,
an increase from 66.82% for the same quarter in 2007, and was primarily due to
increased salaries and benefits expense as noted above.





15





Income Taxes. Income tax
expense for the three months ended March 31, 2008 was $1.3 million,
compared with $1.9 million for the same period in 2007. The Company’s
effective tax rate was 37.5% and 37.4% for the three months ended March 31, 2008
and 2007, respectively.





Financial
Condition





Loan Portfolio. Total loans
at March 31, 2008 were $1.24 billion, an increase of $40.4 million or 3.4%
compared with $1.20 billion at December 31, 2007. Compared to the loan
level at December 31, 2007, real estate loans increased $29.0 million
or 3.9% during the three months ended March 31, 2008. At March 31,
2008 and December 31, 2007, the ratio of total loans to total deposits was
103.79%, and 100.91%, respectively. Total loans represented 82.3% of total
assets at both March 31, 2008 and December 31, 2007.





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





As
      of March 31, 2008
            
            
            As
      of December 31, 2007Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent(Dollars
      in thousands)Commercial
      and industrial
            
            $
            469,902
            
            
            
            37.73
            %
            
            $
            458,117
            
            
            
            38.01
            %Real
      estate mortgageResidential
            
            
            10,236
            
            
            
            0.83
            
            
            
            5,306
            
            
            
            0.44Commercial
            
            
            605,370
            
            
            
            48.60
            
            
            
            596,618
            
            
            
            49.50615,606
            
            
            
            49.43
            
            
            
            601,924
            
            
            
            49.94Real
      estate constructionResidential
            
            
            65,515
            
            
            
            5.26
            
            
            
            58,971
            
            
            
            4.89Commercial
            
            
            88,971
            
            
            
            7.14
            
            
            
            80,208
            
            
            
            6.65154,486
            
            
            
            12.40
            
            
            
            139,179
            
            
            
            11.54Consumer
      and other
            
            
            5,517
            
            
            
            0.44
            
            
            
            6,132
            
            
            
            0.51Gross
      loans
            
            
            1,245,511
            
            
            
            100.00
            %
            
            
            1,205,352
            
            
            
            100.00
            %Unearned
      discounts, interest and deferred fees
            
            
            (3,247
            )
            
            
            
            
            
            
            (3,441
            )Total
      loans
            
            
            1,242,264
            
            
            
            
            
            
            
            1,201,911Allowance
      for loan losses
            
            
            (14,588
            )
            
            
            
            
            
            
            (13,125
            )Loans,
      net
            
            $
            1,227,676
            
            
            
            
            
            
            $
            1,188,786





Nonperforming Assets. Total
nonperforming assets increased $1.6 million to $10.7 million at March 31, 2008
from $9.1 million at December 31, 2007. At March 31, 2008, total nonperforming
assets consisted of $9.3 million in nonaccrual loans, $131,000 in accruing loans
that were 90 days or more past due, and $1.3 million in other real
estate.  During the first quarter 2008, nonaccrual loans increased by
$2.9 million compared with December 31, 2007 primarily due to a $1.3 million
loan relationship in Texas and a $1.2 million loan relationship in California
being moved to nonaccrual status.  On a linked-quarter basis compared
with December 31, 2007, other real estate decreased $210,000 primarily due to
the sale of two properties in Texas.





Net
nonperforming assets at March 31, 2008 were $8.2 million compared to
$6.8 million at December 31, 2007, an increase of $1.4 million or
20.7%. The ratios for net nonperforming assets to total loans and other real
estate at March 31, 2008 and December 31, 2007 were 0.66% and 0.56%,
respectively. The ratios for net nonperforming assets to total assets were 0.54%
and 0.46% for the same periods, respectively. These ratios take into
consideration guarantees from the United States Department of Commerce’s Small
Business Administration (the “SBA”), the Export Import Bank of the United States
(the “Ex-Im Bank”), an independent agency of the United States Government, and
the Overseas Chinese Community Guaranty Fund (“OCCGF”), an agency sponsored by
the government of Taiwan, which totaled $2.5 million at March 31, 2008
compared to $2.3 million at December 31, 2007.





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
SBA program, the Company 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.





16





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




As
      of
              
              
              As
      ofMarch 31, 2008
              
              
              December 31, 2007(Dollars
      in thousands)Nonaccrual
      loans
              
              $
              9,264
              
              
              $
              6,336Accruing
      loans 90 days or more past due
              
              
              131
              
              
              
              1,284Other
      real estate (“ORE”)
              
              
              1,264
              
              
              
              1,474Total
      nonperforming assets
              
              
              10,659
              
              
              
              9,094Nonperforming
      loans guaranteed by the SBA, Ex-Im Bank and OCCGF
              
              
              (2,467
              )
              
              
              (2,309
              )Total
      net nonperforming assets
              
              $
              8,192
              
              
              $
              6,785Total
      nonperforming assets to total assets
              
              
              0.71
              %
              
              
              0.62
              %Total
      nonperforming assets to total loans and ORE
              
              
              0.86
              %
              
              
              0.76
              %Net
      nonperforming assets to total assets (1).
              
              
              0.54
              %
              
              
              0.46
              %Net
      nonperforming assets to total loans and ORE (1)
              
              
              0.66
              %
              
              
              0.56
              %





(1)
            Net
      nonperforming assets are net of the loan portions guaranteed by the SBA,
      Ex-Im Bank and OCCGF.





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
              March 31, 2008
            
            
            As
      of
              December 31, 2007(Dollars
      in thousands)Impaired
      loans with no SFAS No. 114 valuation reserve
            
            $
            5,333
            
            
            $
            3,721Impaired
      loans with a SFAS No. 114 valuation reserve
            
            
            3,931
            
            
            
            2,615Total
      recorded investment in impaired loans
            
            $
            9,264
            
            
            $
            6,336Valuation
      allowance related to impaired loans
            
            $
            1,813
            
            
            $
            1,131





The
average recorded investment in impaired loans during the three months ended
March 31, 2008 and the year ended December 31, 2007 was $8.2 million
and $6.7 million, respectively. No interest income on impaired loans was
recognized for cash payments received during the three months ended March 31,
2008.





Allowance for Loan Losses and
Reserve for Unfunded Lending Commitments. At March 31, 2008 and
2007, the allowance for loan losses was $14.6 million and
$11.9 million, respectively, or 1.17% and 1.18% of total loans,
respectively.  At December 31, 2007, the allowance for loan losses was
$13.1 million, or 1.09% of total loans. Net charge-offs for the three
months ended March 31, 2008 were $121,000 compared to net recoveries of
$327,000 for the same period in 2007.  The first quarter 2008 net
charge-offs were primarily the result of a $90,000 partial charge off related to
a real estate development loan in California.




The
allowance for loan losses provides for the risk of losses inherent in the
lending process. 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.





17





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,
(2) specific reserves on larger individual credits that are based on the
difference between the current loan balance and the loan’s observable market
price, (3) an unallocated component that reflects the inherent uncertainty of
estimates and unforeseen events that allow MetroBank and Metro United to fully
capture probable losses in the loan portfolio, and (4) a reserve for unfunded
lending commitments. 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
including changes in past due levels, criticized and non-performing loans, and
charge-offs.





In
setting the general reserve portion of the allowance for loan losses, the
factors the Company may consider include, but are not limited to, changes in the
quality of the loan portfolio as determined by loan quality grades assigned to
each loan, an assessment 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, value of the collateral securing loans,
payment history, cash flow analysis of borrowers and other historical
information. After the aforementioned assessment of the loan portfolio, the
general economic environment and other relevant factors, changes are implemented
in the allowance for loan losses.  While this methodology is
consistently followed, future changes in circumstances, economic conditions or
other factors could cause management to reevaluate the level of the allowance
for loan losses.





18





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




As
      of and for the
              Three
      Months Ended March 31,2008
            
            
            2007(Dollars
      in thousands)Average
      total loans outstanding for the period
            
            $
            1,215,736
            
            
            $
            933,829Total
      loans outstanding at end of period
            
            $
            1,242,264
            
            
            $
            1,006,278Allowance
      for loan losses at beginning of period
            
            $
            13,125
            
            
            $
            11,436Provision
      for loan losses
            
            
            1,584
            
            
            
            137Charge-offs:Commercial
      and industrial
            
            
            –
            
            
            
            –Real
      estate mortgage
            
            
            (136
            )
            
            
            (219
            )Real
      estate construction
            
            
            –
            
            
            
            –Consumer
      and other
            
            
            –
            
            
            
            (7
            )Total
      charge-offs
            
            
            (136
            )
            
            
            (226
            )Recoveries:Commercial
      and industrial
            
            
            5
            
            
            
            452Real
      estate mortgage
            
            
            8
            
            
            
            99Real
      estate construction
            
            
            –
            
            
            
            –Consumer
      and other
            
            
            2
            
            
            
            2Total
      recoveries
            
            
            15
            
            
            
            553Net (charge-offs) recoveries
            
            
            (121
            )
            
            
            327Allowance
      for loan losses at end of period
            
            
            14,588
            
            
            
            11,900Reserve
      for unfunded lending commitments at beginning of period
            
            
            816
            
            
            
            793Provision
      for unfunded lending commitments
            
            
            91
            
            
            
            126Reserve
      for unfunded lending commitments at end of period
            
            
            907
            
            
            
            919Allowance
      for credit losses
            
            $
            15,495
            
            
            $
            12,819Ratio
      of allowance for loan losses to end of period total loans
            
            
            1.17
            %
            
            
            1.18
            %Ratio
      of net (charge-offs) recoveries to average total loans
            
            
            (0.01
            )
      %
            
            
            0.03
            %Ratio
      of allowance for loan losses to end of period total nonperforming loans
      (1)
            
            
            155.27
            %
            
            
            155.90
            %Ratio
      of allowance for loan losses to end of period net nonperforming loans
      (2)
            
            
            210.57
            %
            
            
            236.25
            %





(1)
            Total
      nonperforming loans are nonaccrual loans plus loans over 90 days past
      due.


(2)
            Net
      nonperforming loans are nonaccrual loans plus loans over 90 days past due,
      net of the loan portions guaranteed by the SBA, Ex-Im Bank and
      OCCGF.





Securities. At March 31,
2008, the available for sale securities portfolio was $128.5 million, a decrease
of $9.2 million or 6.7% compared with $137.7 million at
December 31, 2007. The decrease was primarily due to principal payments,
calls and maturities on mortgage-backed securities, collateralized mortgage
obligations, and securities of U.S. government sponsored enterprises. The
securities portfolio is primarily comprised of mortgage-backed securities,
collateralized mortgage obligations and obligations of U.S. government sponsored
enterprises. 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 Federal Home Loan Bank (“FHLB”) stock and the investment in
subsidiary trust, were $8.1 million at March 31, 2008 and $6.9 million at
December 31, 2007.





19





Deposits. At March 31,
2008, total deposits were $1.20 billion, an increase of $5.9 million or
0.5% compared with $1.19 billion at December 31, 2007. Although total
deposits increased, noninterest-bearing demand deposits at March 31, 2008
decreased $4.0 million or 1.9% to $205.2 million from
$209.2 million at December 31, 2007. The Company’s ratio of
noninterest-bearing demand deposits to total deposits at March 31, 2008 and
December 31, 2007 was 17.1% and 17.6%, respectively. Interest-bearing
deposits at March 31, 2008 were $991.7 million, an increase of $9.9
million or 1.0% compared with $981.8 million at December 31,
2007.





Junior Subordinated
Debentures.Junior subordinated debentures at March 31,
2008 and December 31, 2007 were $36.1 million. The junior subordinated
debentures accrue interest at a fixed rate of 5.7625% until December 15, 2010,
at which time the debentures will accrue interest at a floating rate equal to
the 3-month LIBOR plus 1.55%. The debentures mature on December 15, 2035,
but are redeemable at the Company’s option at par plus accrued and unpaid
interest on or after December 15, 2010. The debentures issued to the
Company’s unconsolidated subsidiary trust MCBI Statutory Trust I, were used to
fund the Company’s acquisition of Metro United.





Other Borrowings. Other
borrowings at March 31, 2008 were $132.4 million, an increase of
approximately $32.6 million or 32.6% compared to other borrowings of $99.8
million at December 31, 2007. Other borrowings at March 31, 2008 primarily
include $57.0 million of advances from the FHLB of Dallas, $50.0 million of
advances from the FHLB of San Francisco and $25.0 million in security repurchase
agreements.  The advances from the FHLB of Dallas bear interest at an
average rate of 2.25% per annum and have maturities ranging from overnight to
six months.   The advances from the FHLB of San Francisco have
maturities ranging from overnight to 30 days, and bear an average rate of
2.42%.  Any maturities of any advances from the FHLBs since March 31,
2008 have been renewed with similar terms.   The security
repurchase agreements bear an average rate of 2.88% and mature on December 31,
2014. The securities collateralizing the repurchase agreements are transferred
to the applicable counterparty.  The counterparty, in certain
instances, is contractually entitled to sell or repledge securities accepted as
collateral.





The
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 Three
      Months Ended March 31,
      2008
            
            
            As
      of and for the Year
      Ended December 31,
      2007(Dollars
      in thousands)Federal
      Funds Purchased:at
      end of period
            
            $
            –
            
            
            $
            –average
      during the period
            
            
            2
            
            
            
            –maximum
      month-end balance during the period
            
            
            –
            
            
            
            –FHLB
      Notes:at
      end of period
            
            $
            107,000
            
            
            $
            74,000average
      during the period
            
            
            87,964
            
            
            
            25,516maximum
      month-end balance during the period
            
            
            109,000
            
            
            
            74,000Interest
      rate at end of period
            
            
            2.33
            %
            
            
            4.07
            %Interest
      rate during the period
            
            
            3.24
            
            
            
            4.89Security
      Repurchase Agreements:at
      end of period
            
            $
            25,000
            
            
            $
            25,000average
      during the period
            
            
            25,000
            
            
            
            68maximum
      month-end balance during the period
            
            
            25,000
            
            
            
            25,000Interest
      rate at end of period
            
            
            2.87
            %
            
            
            2.87
            %Interest
      rate during the period
            
            
            2.88
            
            
            
            2.94Federal
      Reserve TT&L:at
      end of period
            
            $
            367
            
            
            $
            796average
      during the period
            
            
            632
            
            
            
            819maximum
      month-end balance during the period
            
            
            618
            
            
            
            1,067





Liquidity. The Company’s loan
to deposit ratio at March 31, 2008 and 2007 was 103.8%
and  92.3%, respectively. As of March 31, 2008, the Company had
commitments to fund loans in the amount of $321.5 million. At this same date,
the Company had stand-by letters of credit of $11.5
million.  Available sources to fund these commitments and other cash
demands of the Company come from loan and investment securities repayments,
deposit inflows, and unsecured lines of credit from the FHLBs of Dallas and San
Francisco as well as the FRB discount window. With its current level of
collateral, the Company has the ability to borrow an additional $268.3 million
from the FHLBs, $9.7 million from the FRB discount window, and $20.5 million
from other correspondent banks.





20





Capital Resources.
Shareholders’ equity at March 31, 2008 was $120.2 million compared to
$117.4 million at December 31, 2007, an increase of approximately $2.8
million. This increase was primarily the combined result of $2.2 million in
net income, an increase in additional paid-in capital of $163,000 due to the
effect of dividend reinvestment and stock-based compensation, and a decrease in
accumulated other comprehensive loss of $545,000, partially offset by dividends
declared of approximately $433,000.





The
following table provides a comparison of the Company’s and each of the Banks’
leverage and risk-weighted capital ratios as of March 31, 2008 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 March 31,
      2008The
      CompanyLeverage
      ratio
            
            
            4.00
            %(1)
            
            
            N/A
            %
            
            
            8.98
            %Tier
      1 risk-based capital ratio
            
            
            4.00
            
            
            
            N/A
            
            
            
            9.13Risk-based
      capital ratio
            
            
            8.00
            
            
            
            N/A
            
            
            
            10.39MetroBankLeverage
      ratio
            
            
            4.00
            %(2)
            
            
            5.00
            %
            
            
            8.87
            %Tier
      1 risk-based capital ratio
            
            
            4.00
            
            
            
            6.00
            
            
            
            9.06Risk-based
      capital ratio
            
            
            8.00
            
            
            
            10.00
            
            
            
            10.11Metro
      UnitedLeverage
      ratio
            
            
            4.00
            %(3)
            
            
            5.0
            %
            
            
            9.53
            %Tier
      1 risk-based capital ratio
            
            
            4.00
            
            
            
            6.00
            
            
            
            9.60Risk-based
      capital ratio
            
            
            8.00
            
            
            
            10.00
            
            
            
            10.79





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


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


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





Critical
Accounting Estimates





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





The
Company believes the allowance for loan losses is a critical accounting estimate
that requires the most significant judgments and estimates used in the
preparation of its consolidated financial statements. The Company’s allowance
for possible loan loss methodology is based on guidance provided in SEC Staff
Accounting Bulletin No. 102, “Selected Loan Loss Allowance Methodology
and Documentation Issues” and includes allowance allocations calculated in
accordance with Statement of Financial Accounting Standards (SFAS) No. 114,
“Accounting by Creditors for Impairment of a Loan,” as amended by SFAS 118,
and allowance allocations determined in accordance with SFAS No. 5,
“Accounting for Contingencies.” 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”.





21





The
Company believes goodwill is a critical accounting estimate that requires
significant judgment and estimates used in the preparation of its consolidated
financial statements. Goodwill is recorded for the excess of the purchase price
over the fair value of identifiable net assets, including core deposit
intangibles, acquired through a merger transaction.  Goodwill is not
amortized, but instead will be tested for impairment at least annually using
both a discounted cash flow analysis and a review of the valuation of recent
bank acquisitions.  The discounted cash flow analysis utilizes a
risk-free interest rate, estimates of future cash flow and probabilities as to
the occurrence of the future cash flows. Other acquired intangible assets
determined to have finite lives, such as core deposit intangibles, are amortized
over their estimated useful lives in a manner that best reflects the economic
benefits of the intangible asset.  In addition, an impairment test is
performed periodically on these amortizing intangible assets.





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 SFAS
No. 123R. 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.





The
Company believes estimates of fair value is a critical accounting estimate that
requires significant judgment and estimates 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. The
extent to which fair value is used on a recurring basis was significantly
expanded upon the adoption of SFAS No. 159 and SFAS No. 157 during the
first quarter, effective on January 1, 2008. 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 in accordance with SFAS No. 107. 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. These valuation techniques and
assumptions are in accordance with SFAS No. 157.





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 SFAS No. 157 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
established by SFAS No. 157 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. As required under SFAS No. 157,
any use of significant, unobservable inputs would be described in Note 9, “Fair
Value,” to the Consolidated Financial Statements.





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





22




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, 2007. 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.





23





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
consultations with its legal counsel, such litigation is not expected to have a
material adverse effect of the Company’s consolidated financial position,
results of operations or cash flows.





Item 1A.
Risk
Factors.





There
have been no material changes in the Company’s risk factors from those disclosed
in the Company’s Annual Report on Form 10-K for the year ended December 31,
2007.




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





Not
applicable





Item 3.  
Defaults Upon Senior
Securities.





Not
applicable





Item 4.  
Submission of Matters to a
Vote of Security Holders.





Not
applicable





Item 5.  
Other
Information.





Not
applicable





Item 6.  
Exhibits.




ExhibitNumber
            
            Identification
      of Exhibit3.1
            
            Amended
      and Restated Articles of Incorporation of the Company (incorporated herein
      by reference to Exhibit 3.1 to the Company's Registration Statement on
      Form S-1 (Registration No. 333-62667) (the "Registration
      Statement")).3.2
            
            Articles
      of Amendment to Amended and Restated Articles of Incorporation of the
      Company (incorporated herein by reference to Exhibit 3.2 to the Company’s
      Quarterly Report on Form 10-Q for the quarter ended March 31,
      2007).3.3
            
            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
            
            Specimen
      form of certificate evidencing the Common Stock (incorporated herein by
      reference to Exhibit 4 to the Registration Statement).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.




24




31.2*
            
            Certification
      of the Chief Financial Officer pursuant to Rule 13a-14(a) of the
      Securities Exchange Act of 1934, as amended.32.1**
            
            Certification
      of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.32.2**
            
            Certification
      of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.





* Filed
herewith.


**
Furnished herewith.





25





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. LeeDate:
      May 9, 2008
            
            George
      M. LeeChief
      Executive Officer (principal executive officer)Date:
      May 9, 2008
            By:
            /s/
      David C. ChoiDavid
      C. ChoiChief
      Financial Officer (principal financial officer/ principal accounting
      officer)





26





EXHIBIT
INDEX




ExhibitNumber
            
            Identification
      of Exhibit3.1
            
            Amended
      and Restated Articles of Incorporation of the Company (incorporated herein
      by reference to Exhibit 3.1 to the Company's Registration Statement on
      Form S-1 (Registration No. 333-62667) (the "Registration
      Statement")).3.2
            
            Articles
      of Amendment to Amended and Restated Articles of Incorporation of the
      Company (incorporated herein by reference to Exhibit 3.2 to the Company’s
      Quarterly Report on Form 10-Q for the quarter ended March 31,
      2007).3.3
            
            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
            
            Specimen
      form of certificate evidencing the Common Stock (incorporated herein by
      reference to Exhibit 4 to the Registration Statement).11
            
            Computation
      of Earnings Per Common Share, included as Note (5) to the unaudited
      Condensed Consolidated Financial Statements of this
      Form 10-Q.31.1*
            
            Certification
      of the Chief Executive Officer pursuant to Rule 13a-14(a) of the
      Securities Exchange Act of 1934, as amended.31.2*
            
            Certification
      of the Chief Financial Officer pursuant to Rule 13a-14(a) of the
      Securities Exchange Act of 1934, as amended.32.1**
            
            Certification
      of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.32.2**
            
            Certification
      of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.


_________________________* Filed
herewith.


**
Furnished herewith.