UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 
 
 (Mark
One)
 
 þ
              QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
      QUARTERLY PERIOD ENDED JUNE 30,
2008
 
 
 o
              TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 Commission
file number 000-25141
 
 
 
 METROCORP
BANCSHARES, INC.
 (Exact
name of registrant as specified in its charter)
  Texas
              
              76-0579161(State
      or other jurisdiction of incorporation or organization)
              
              (I.R.S.
      Employer Identification No.)
 
 9600
Bellaire Boulevard, Suite 252
 Houston,
Texas 77036
 (Address
of principal executive offices including zip code)
 
 (713) 776-3876
 (Registrant’s
telephone number, including area code)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes R     No
£
 
 Indicate
by check mark whether the registrant 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 Act). Yes £    No
R
   As of
August 4, 2008, the number of outstanding shares of Common Stock, par value
$1.00 per share, was 10,860,034.
  
 
  PART I
 
 FINANCIAL
INFORMATION
 
 Item 1.Condensed Consolidated Financial
Statements.
 
 METROCORP
BANCSHARES, INC.
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (In
thousands, except share amounts)
 (Unaudited)
 
 June
      30,
              
              
              December
      31,2008
              
              
              2007ASSETSCash
      and due from banks
              
              $
              32,190
              
              
              $
              28,889Federal
      funds sold and other short-term investments
              
              
              37,473
              
              
              
              17,381Total
      cash and cash equivalents
              
              
              69,663
              
              
              
              46,270Securities
      available-for-sale, at fair value
              
              
              115,600
              
              
              
              137,749Other
      investments
              
              
              9,204
              
              
              
              6,886Loans,
      net of allowance for loan losses of  $15,520 and $13,125,
      respectively
              
              
              1,296,045
              
              
              
              1,188,786Accrued
      interest receivable
              
              
              6,054
              
              
              
              6,462Premises
      and equipment, net
              
              
              8,223
              
              
              
              8,795Goodwill
              
              
              21,827
              
              
              
              21,827Core
      deposit intangibles
              
              
              631
              
              
              
              756Customers'
      liability on acceptances
              
              
              11,813
              
              
              
              5,967Foreclosed
      assets, net
              
              
              2,230
              
              
              
              1,474Other
      assets
              
              
              37,188
              
              
              
              34,734Total
      assets
              
              $
              1,578,478
              
              
              $
              1,459,706LIABILITIES
      AND SHAREHOLDERS' EQUITYDeposits:Noninterest-bearing
              
              $
              224,935
              
              
              $
              209,223Interest-bearing
              
              
              1,017,766
              
              
              
              981,820Total
      deposits
              
              
              1,242,701
              
              
              
              1,191,043Junior
      subordinated debentures
              
              
              36,083
              
              
              
              36,083Other
      borrowings
              
              
              156,598
              
              
              
              99,796Accrued
      interest payable
              
              
              1,344
              
              
              
              1,727Acceptances
      outstanding
              
              
              11,813
              
              
              
              5,967Other
      liabilities
              
              
              8,195
              
              
              
              7,680Total
      liabilities
              
              
              1,456,734
              
              
              
              1,342,296Commitments
      and contingencies
              
              
              –
              
              
              
              –Shareholders'
      equity:Common
      stock, $1.00 par value, 50,000,000 shares authorized; 10,994,965 shares
      issued and 10,851,496 shares and 10,825,837 shares outstanding at June 30,
      2008 and December 31, 2007, respectively
              
              
              10,995
              
              
              
              10,995Additional
      paid-in-capital
              
              
              27,832
              
              
              
              27,386Retained
      earnings
              
              
              85,848
              
              
              
              82,211Accumulated
      other comprehensive loss
              
              
              (949
              )
              
              
              (786
              )Treasury
      stock, at cost, 143,469 and 169,128 shares at June 30, 2008 and December
      31, 2007, respectively
              
              
              (1,982
              )
              
              
              (2,396
              )Total
      shareholders' equity
              
              
              121,744
              
              
              
              117,410Total
      liabilities and shareholders' equity
              
              $
              1,578,478
              
              
              $
              1,459,706
 
 See
accompanying notes to condensed consolidated financial
statements
  2
  METROCORP
BANCSHARES, INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
 (In
thousands, except per share amounts)
 (Unaudited)
 
 For
      the Three Months
              
              
              For
      the Six MonthsEnded June 30,
              
              
              Ended June 30,2008
              
              
              2007
              
              
              2008
              
              
              2007Interest
      income:Loans
              
              $
              23,020
              
              
              $
              22,908
              
              
              $
              46,420
              
              
              $
              43,529Securities:Taxable
              
              
              1,276
              
              
              
              1,768
              
              
              
              2,648
              
              
              
              3,632Tax-exempt
              
              
              64
              
              
              
              76
              
              
              
              137
              
              
              
              161Other
      investments
              
              
              95
              
              
              
              70
              
              
              
              182
              
              
              
              138Federal
      funds sold and other short-term investments
              
              
              146
              
              
              
              850
              
              
              
              283
              
              
              
              1,818Total
      interest income
              
              
              24,601
              
              
              
              25,672
              
              
              
              49,670
              
              
              
              49,278Interest
      expense:Time
      deposits
              
              
              6,830
              
              
              
              8,162
              
              
              
              14,431
              
              
              
              15,763Demand
      and savings deposits
              
              
              1,902
              
              
              
              2,503
              
              
              
              3,967
              
              
              
              4,028Junior
      subordinated debentures
              
              
              520
              
              
              
              525
              
              
              
              1,040
              
              
              
              1,045Subordinated
      debentures and other borrowings
              
              
              880
              
              
              
              265
              
              
              
              1,768
              
              
              
              589Total
      interest expense
              
              
              10,132
              
              
              
              11,455
              
              
              
              21,206
              
              
              
              21,425Net
      interest income
              
              
              14,469
              
              
              
              14,217
              
              
              
              28,464
              
              
              
              27,853Provision
      for loan losses
              
              
              1,465
              
              
              
              468
              
              
              
              3,049
              
              
              
              605Net
      interest income after provision for loan losses
              
              
              13,004
              
              
              
              13,749
              
              
              
              25,415
              
              
              
              27,248Noninterest
      income:Service
      fees
              
              
              1,206
              
              
              
              1,262
              
              
              
              2,449
              
              
              
              2,478Loan-related
      fees
              
              
              183
              
              
              
              151
              
              
              
              364
              
              
              
              328Letters
      of credit commissions and fees
              
              
              295
              
              
              
              203
              
              
              
              562
              
              
              
              407Gain
      on securities transactions, net
              
              
              124
              
              
              
              –
              
              
              
              148
              
              
              
              –Gain
      on sale of loans
              
              
              194
              
              
              
              251
              
              
              
              245
              
              
              
              251Other
      noninterest income
              
              
              376
              
              
              
              132
              
              
              
              739
              
              
              
              201Total
      noninterest income
              
              
              2,378
              
              
              
              1,999
              
              
              
              4,507
              
              
              
              3,665Noninterest
      expenses:Salaries
      and employee benefits
              
              
              5,931
              
              
              
              6,251
              
              
              
              12,417
              
              
              
              11,997Occupancy
      and equipment
              
              
              1,982
              
              
              
              2,042
              
              
              
              3,941
              
              
              
              4,012Foreclosed
      assets, net
              
              
              (389
              )
              
              
              (132
              )
              
              
              (332
              )
              
              
              (90
              )Impairment
      write-down on securities
              
              
              1,540
              
              
              
              –
              
              
              
              1,540
              
              
              
              –Other
      noninterest expense
              
              
              2,734
              
              
              
              2,725
              
              
              
              5,195
              
              
              
              5,192Total
      noninterest expenses
              
              
              11,798
              
              
              
              10,886
              
              
              
              22,761
              
              
              
              21,111Income
      before provision for income taxes
              
              
              3,584
              
              
              
              4,862
              
              
              
              7,161
              
              
              
              9,802Provision
      for income taxes
              
              
              1,316
              
              
              
              1,789
              
              
              
              2,658
              
              
              
              3,639Net
      income
              
              $
              2,268
              
              
              $
              3,073
              
              
              $
              4,503
              
              
              $
              6,163Earnings
      per common share:Basic
              
              $
              0.21
              
              
              $
              0.28
              
              
              $
              0.42
              
              
              $
              0.56Diluted
              
              $
              0.21
              
              
              $
              0.28
              
              
              $
              0.41
              
              
              $
              0.55Weighted
      average shares outstanding:Basic
              
              
              10,819
              
              
              
              10,962
              
              
              
              10,815
              
              
              
              10,957Diluted
              
              
              10,899
              
              
              
              11,171
              
              
              
              10,900
              
              
              
              11,167Dividends
      per common share
              
              $
              0.04
              
              
              $
              0.04
              
              
              $
              0.08
              
              
              $
              0.08
 
 See
accompanying notes to condensed consolidated financial statements
  3
  METROCORP
BANCSHARES, INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 (In
thousands)
 (Unaudited)
 
 For
      the Three Months
              
              
              For
      the Six MonthsEnded June 30,
              
              
              Ended June 30,2008
              
              
              2007
              
              
              2008
              
              
              2007Net
      income
              
              $
              2,268
              
              
              $
              3,073
              
              
              $
              4,503
              
              
              $
              6,163Other
      comprehensive loss, net of tax:Unrealized
      loss on investment securities, net:Unrealized
      holding  loss arising during the period
              
              
              (629
              )
              
              
              (603
              )
              
              
              (68
              )
              
              
              (236
              )Less:
      reclassification adjustment for gain included in net
income
              
              
              79
              
              
              
              –
              
              
              
              95
              
              
              
              –Other
      comprehensive loss
              
              
              (708
              )
              
              
              (603
              )
              
              
              (163
              )
              
              
              (236
              )Total
      comprehensive income
              
              $
              1,560
              
              
              $
              2,470
              
              
              $
              4,340
              
              
              $
              5,927
 
 
 
 METROCORP
BANCSHARES, INC.
 CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
 For
the Six Months Ended June 30, 2008
 (In
thousands)
 (Unaudited)
 
 Additional
              
              
              
              
              
              Accumulated
      Other
              
              
              TreasuryCommon Stock
              
              
              Paid-In
              
              
              Retained
              
              
              Comprehensive
              
              
              StockShares
              
              
              At Par
              
              
              Capital
              
              
              Earnings
              
              
              Income (Loss)
              
              
              At Cost
              
              
              TotalBalance
      at December 31, 2007
              
              
              10,826
              
              
              $
              10,995
              
              
              $
              27,386
              
              
              $
              82,211
              
              
              $
              (786
              )
              
              $
              (2,396
              )
              
              $
              117,410Re-issuance
      of treasury stock
              
              
              26
              
              
              
              –
              
              
              
              (107
              )
              
              
              –
              
              
              
              –
              
              
              
              414
              
              
              
              307Stock-based
      compensation expense recognized in earnings
              
              
              –
              
              
              
              –
              
              
              
              553
              
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              553Net
      income
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              4,503
              
              
              
              –
              
              
              
              –
              
              
              
              4,503Other
      comprehensive income (loss)
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              (163
              )
              
              
              –
              
              
              
              (163
              )Cash
      dividends ($0.08 per share)
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              (866
              )
              
              
              –
              
              
              
              –
              
              
              
              (866
              )Balance
      at June 30, 2008
              
              
              10,852
              
              
              $
              10,995
              
              
              $
              27,832
              
              
              $
              85,848
              
              
              $
              (949
              )
              
              $
              (1,982
              )
              
              $
              121,744
 
 
 See
accompanying notes to condensed consolidated financial
statements
  4
  METROCORP
BANCSHARES, INC
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In
thousands)
 (Unaudited)
 
 For the Six Months Ended
                June 30,2008
              
              
              2007Cash
      flows from operating activities:Net
      income
              
              $
              4,503
              
              
              $
              6,163Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
              
              
              1,062
              
              
              
              895Provision
      for loan losses
              
              
              3,049
              
              
              
              605Impairment
      write-down on securities
              
              
              1,540
              
              
              
              –Gain
      on sale or call of securities, net
              
              
              (148
              )
              
              
              –Gain
      on foreclosed assets
              
              
              (447
              )
              
              
              (268
              )Loss
      on sale and disposal of premises and equipment
              
              
              9
              
              
              
              –Gain
      on sale of loans
              
              
              (245
              )
              
              
              (251
              )Amortization
      of premiums and discounts on securities
              
              
              29
              
              
              
              35Amortization
      of deferred loan fees and discounts
              
              
              (1,269
              )
              
              
              (1,345
              )Amortization
      of core deposit intangibles
              
              
              125
              
              
              
              173Stock-based
      compensation
              
              
              553
              
              
              
              458Changes
      in:Accrued
      interest receivable
              
              
              408
              
              
              
              (485
              )Other
      assets
              
              
              (2,364
              )
              
              
              (1,664
              )Accrued
      interest payable
              
              
              (383
              )
              
              
              132Other
      liabilities
              
              
              514
              
              
              
              1,507Net
      cash provided by operating activities
              
              
              6,936
              
              
              
              5,955Cash
      flows from investing activities:Purchases
      of securities available-for-sale
              
              
              (17,968
              )
              
              
              (378
              )Purchase
      of bank owned life insurance
              
              
              –
              
              
              
              (25,000
              )Proceeds
      from sales of securities available-for-sale
              
              
              4,849
              
              
              
              –Proceeds
      from maturities, principal paydowns and calls of securities
      available-for-sale
              
              
              31,276
              
              
              
              17,242Net
      change in loans
              
              
              (111,024
              )
              
              
              (191,503
              )Proceeds
      from sale of foreclosed assets
              
              
              1,921
              
              
              
              551Proceeds
      from sale of premises and equipment
              
              
              7
              
              
              
              –Purchases
      of premises and equipment
              
              
              (506
              )
              
              
              (1,811
              )Net
      cash used in investing activities
              
              
              (91,445
              )
              
              
              (200,899
              )Cash
      flows from financing activities:Net
      change in:Deposits
              
              
              51,658
              
              
              
              123,006Other
      borrowings
              
              
              56,802
              
              
              
              (15,577
              )Proceeds
      from stock option exercises
              
              
              –
              
              
              
              108Re-issuance
      of treasury stock
              
              
              307
              
              
              
              273Dividends
      paid
              
              
              (865
              )
              
              
              (875
              )Net
      cash provided by financing activities
              
              
              107,902
              
              
              
              106,935Net
      increase (decrease) in cash and cash equivalents
              
              
              23,393
              
              
              
              (88,009
              )Cash
      and cash equivalents at beginning of period
              
              
              46,270
              
              
              
              151,358Cash
      and cash equivalents at end of period
              
              $
              69,663
              
              
              $
              63,349
 
 See
accompanying notes to condensed consolidated financial
statements
  5
  METROCORP
BANCSHARES, INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 1.
BASIS OF PRESENTATION
 
 The
unaudited condensed consolidated financial statements include the accounts of
MetroCorp Bancshares, Inc. (the “Company”) and wholly-owned subsidiaries,
MetroBank, National Association (“MetroBank”) and Metro United Bank (“Metro
United”), in Texas and California, respectively (collectively, the
“Banks”).  MetroBank is engaged in commercial banking activities
through its thirteen branches in the greater Houston and Dallas, Texas
metropolitan areas, and Metro United is engaged in commercial banking activities
through its six branches in the San Diego, Los Angeles and San Francisco,
California metropolitan areas. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain principles which
significantly affect the determination of financial position, results of
operations and cash flows are summarized below.
 
 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 of America.  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 June 30, 2008, results of operations for the three and six months
ended June 30, 2008 and 2007, and cash flows for the six months ended June 30,
2008 and 2007. Interim period results are not necessarily indicative of results
for a full-year or any other period.  The year-end condensed
consolidated 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.
  6
  METROCORP
BANCSHARES, INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
 2.
SECURITIES
 
 The
amortized cost and approximate fair value of securities is as
follows:
 
 As of June 30, 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(In
      thousands)Securities
      available for saleUS
      Government agencies
              
              $
              23
              
              
              $
              1
              
              
              $
              (1
              )
              
              $
              23
              
              
              $
              24
              
              
              $
              2
              
              
              $
              (1
              )
              
              $
              25US
      Government sponsored enterprises
              
              
              16,397
              
              
              
              1
              
              
              
              (539
              )
              
              
              15,859
              
              
              
              20,473
              
              
              
              10
              
              
              
              (10
              )
              
              
              20,473Obligations
      of state and political subdivisions
              
              
              3,852
              
              
              
              35
              
              
              ─
              
              
              
              3,887
              
              
              
              5,936
              
              
              
              162
              
              
              
              (7
              )
              
              
              6,091Mortgage-backed
      securities and collateralized mortgage obligations
              
              
              78,405
              
              
              
              269
              
              
              
              (1,234
              )
              
              
              77,440
              
              
              
              92,673
              
              
              
              173
              
              
              
              (1,123
              )
              
              
              91,723Other
      debt securities
              
              
              6
              
              
              
              1
              
              
              
              (1
              )
              
              
              6
              
              
              
              33
              
              
              ─
              
              
              ─
              
              
              
              33Investment
      in ARM and CRA funds
              
              
              18,419
              
              
              ─
              
              
              
              (34
              )
              
              
              18,385
              
              
              
              19,858
              
              
              
              39
              
              
              
              (493
              )
              
              
              19,404Total
      available for sale securities
              
              $
              117,102
              
              
              $
              307
              
              
              $
              (1,809
              )
              
              $
              115,600
              
              
              $
              138,997
              
              
              $
              386
              
              
              $
              (1,634
              )
              
              $
              137,749Other
      investmentsFHLB/Federal
      Reserve Bank stock
              
              $
              8,121
              
              
              $
              ─
              
              
              $
              ─
              
              
              $
              8,121
              
              
              $
              5,803
              
              
              $
              ─
              
              
              $
              ─
              
              
              
              5,803Investment
      in subsidiary trust
              
              
              1,083
              
              
              
              ─
              
              
              
              ─
              
              
              
              1,083
              
              
              
              1,083
              
              
              
              ─
              
              
              
              ─
              
              
              
              1,083Total
      other investments
              
              $
              9,204
              
              
              $
              ─
              
              
              $
              ─
              
              
              $
              9,204
              
              
              $
              6,886
              
              
              $
              ─
              
              
              $
              ─
              
              
              $
              6,886
 
 The
following table displays the gross unrealized losses and fair value of
investments as of June 30, 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 LossesSecurities
      available for sale
              
              (In
      thousands)US
      Government agencies
              
              $
              10
              
              
              $
              (1
              )
              
              $
              ─
              
              
              $
              ─
              
              
              $
              10
              
              
              $
              (1
              )U S
      Government sponsored enterprises
              
              
              14,358
              
              
              
              (539
              )
              
              ─
              
              
              ─
              
              
              
              14,358
              
              
              
              (539
              )Mortgage-backed
      securities and collateralized mortgage obligations
              
              
              25,605
              
              
              
              (449
              )
              
              
              19,500
              
              
              
              (785
              )
              
              
              45,105
              
              
              
              (1,234
              )Other
      debt securities
              
              
              6
              
              
              
              (1
              )
              
              ─
              
              
              ─
              
              
              
              6
              
              
              
              (1
              )Investment
      in ARM and CRA funds
              
              
              4,747
              
              
              
              (34
              )
              
              ─
              
              
              ─
              
              
              
              4,747
              
              
              
              (34
              )Total
      securities
              
              $
              44,726
              
              
              $
              (1,024
              )
              
              $
              19,500
              
              
              $
              (785
              )
              
              $
              64,226
              
              
              $
              (1,809
              )
 
 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
the securities as of June 30, 2008 should be considered
other-than-temporary.
 
 The
Company recognized an other-than-temporary impairment charge of approximately
$1.5 million pre-tax, or $953,000 net of tax, on its $14.2 million investment in
the AMF Ultra Short Mortgage Fund (the “Fund”) as of June 30,
2008.   The Fund is a mutual fund investing primarily in
adjustable rate agency and private label mortgage-backed
securities.  The Company reclassified the unrealized
mark-to-market loss on these investment grade securities to an
other-than-temporary impairment charge because of the significant decline in the
net asset value of the Fund, and because the Fund manager activated the
redemption-in-kind provision on May 6, 2008 to protect shareholders against
forced liquidation of Fund holdings to satisy cash redemptions. The decline is
not attributable to credit losses of the underlying securities of the Fund, but
is instead a reflection of downgrades of the securities in the Fund's portfolio
by one or more of the three major rating agencies, and general market conditions
for private label mortgage-backed securities.
  7
  METROCORP
BANCSHARES, INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  In July
2008, the Company redeemed its shares in the Fund for approximately $2.2 million
in cash, with the remaining value of approximately $10.5 million, net of a
$57,000 loss, distributed in the form of securities held by the Fund that
approximates the Company's respective interest in each of the underlying
securities.
  The
redemption of securities from the Fund will result in the Company receiving all
of the principal payments, including prepayments, made each month on the
securities and will eliminate the 45 basis point fund management fee currently
assessed on the securities held in the Fund. The redemption also eliminated the
non-maturity characteristic associated with investments in a mutual fund since
each individual security has a final maturity date.
   The
Company also reviewed the impairment related to two other mutual funds with a
total book value of approximately $5.7 million as of June 30, 2008 and
determined that the impairment on one fund was other-than-temporary.
Accordingly, the Company recorded a non-cash impairment charge of $74,000
pre-tax, or $48,000 net of tax. The unrealized loss on the remaining fund was
approximately $34,000 at June 30, 2008 and such impairment was determined to not
be other-than-temporary.
  
 3.  ALLOWANCE
FOR LOAN LOSSES
 
 Changes
in the allowance for loan losses are as follows:
 
 As
      of and for the Three Months
              
              
              As
      of and for the Six MonthsEnded June 30,
              
              
              Ended June 30,2008
              
              
              2007
              
              
              2008
              
              
              2007(In
      thousands)Allowance
      for loan losses at beginning of period
              
              $
              14,588
              
              
              $
              11,900
              
              
              $
              13,125
              
              
              $
              11,436Provision
      for loan losses
              
              
              1,465
              
              
              
              468
              
              
              
              3,049
              
              
              
              605Charge-offs
              
              
              (623
              )
              
              
              (301
              )
              
              
              (759
              )
              
              
              (527
              )Recoveries
              
              
              90
              
              
              
              594
              
              
              
              105
              
              
              
              1,147Allowance
      for loan losses at end of period
              
              $
              15,520
              
              
              $
              12,661
              
              
              $
              15,520
              
              
              $
              12,661
 
 
 4.
              INCOME
      TAXES
 
  The
Company had no unrecognized income taxes as of June 30, 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
income taxes within the next 12 months. As of June 30, 2008, the Company has not
accrued any interest and penalties related to unrecognized income
taxes.
  The
Company is subject to taxation in the United States as well as 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.
  8
  METROCORP
BANCSHARES, INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 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
and restricted common shares can be dilutive common shares and are therefore
considered in the earnings per share calculation, if dilutive.  Stock
options and restricted common shares 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.  Restricted common shares are antidilutive when the
value at grant date is greater than the current market price of the Company’s
common stock.  As of June 30, 2008 and 2007, there were 285,342 and
48,865 antidilutive common shares, respectively.  The number of
potentially dilutive common shares is determined using the treasury stock
method.
 
 As
      of and for the Three Months
              
              
              As
      of and for the Six MonthsEnded June 30,
              
              
              Ended June 30,2008
              
              
              2007
              
              
              2008
              
              
              2007(In
      thousands, except per share amounts)Net
      income available to common shareholders
              
              $
              2,268
              
              
              $
              3,073
              
              
              $
              4,503
              
              
              $
              6,163Weighted
      average common shares in basic EPS
              
              
              10,819
              
              
              
              10,962
              
              
              
              10,815
              
              
              
              10,957Effect
      of dilutive securities
              
              
              80
              
              
              
              209
              
              
              
              85
              
              
              
              210Weighted
      average common and potentially dilutivecommon shares used
      in diluted EPS
              
              
              10,899
              
              
              
              11,171
              
              
              
              10,900
              
              
              
              11,167Earnings
      per common share:Basic
              
              $
              0.21
              
              
              $
              0.28
              
              
              $
              0.42
              
              
              $
              0.56Diluted
              
              $
              0.21
              
              
              $
              0.28
              
              
              $
              0.41
              
              
              $
              0.55
 
 
 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 it does for on-balance sheet
instruments. Off-balance sheet financial instruments include commitments to
extend credit and guarantees under standby and other letters of
credit.
  9
  METROCORP
BANCSHARES, INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 The
contractual amount of the Company’s financial instruments with off-balance sheet
risk as of June 30, 2008 and December 31, 2007 is presented below:
 
 As of
                June 30, 2008
              
              
              As of
                December 31, 2007(In
      thousands)Unfunded
      loan commitments including unfunded lines of credit
              
              $
              319,075
              
              
              $
              315,370Standby
      letters of credit
              
              
              11,884
              
              
              
              9,290Commercial
      letters of credit
              
              
              11,621
              
              
              
              12,853Operating
      leases
              
              
              8,894
              
              
              
              9,754Total
      financial instruments with off-balance sheet risk
              
              $
              351,474
              
              
              $
              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.
 
 The
following is a summary of selected operating segment information as of and for
the three and six months ended June 30, 2008 and 2007:
 
 For the three months ended June 30,
      2008
              
              
              For the three months ended June 30,
      2007MetroBank
              
              
              Metro United
              
              
              Other
              
              
              Consolidated Company
              
              
              MetroBank
              
              
              Metro United
              
              
              Other
              
              
              Consolidated Company(In
      thousands)Total
      interest income
              
              $
              18,187
              
              
              $
              6,398
              
              
              $
              16
              
              
              $
              24,601
              
              
              $
              19,551
              
              
              $
              6,105
              
              
              $
              16
              
              
              $
              25,672Total
      interest expense
              
              
              6,644
              
              
              
              2,966
              
              
              
              522
              
              
              
              10,132
              
              
              
              7,773
              
              
              
              3,157
              
              
              
              525
              
              
              
              11,455Net
      interest income
              
              
              11,543
              
              
              
              3,432
              
              
              
              (506
              )
              
              
              14,469
              
              
              
              11,778
              
              
              
              2,948
              
              
              
              (509
              )
              
              
              14,217Provision
      for loan losses
              
              
              914
              
              
              
              551
              
              
              ─
              
              
              
              1,465
              
              
              
              19
              
              
              
              449
              
              
              ─
              
              
              
              468Net
      interest income after provision for loan losses
              
              
              10,629
              
              
              
              2,881
              
              
              
              (506
              )
              
              
              13,004
              
              
              
              11,759
              
              
              
              2,499
              
              
              
              (509
              )
              
              
              13,749Noninterest
      income
              
              
              2,567
              
              
              
              149
              
              
              
              (338
              )
              
              
              2,378
              
              
              
              2,060
              
              
              
              134
              
              
              
              (195
              )
              
              
              1,999Noninterest
      expenses
              
              
              9,070
              
              
              
              2,431
              
              
              
              297
              
              
              
              11,798
              
              
              
              8,218
              
              
              
              2,410
              
              
              
              258
              
              
              
              10,886Income
      before income tax provision
              
              
              4,126
              
              
              
              599
              
              
              
              (1,141
              )
              
              
              3,584
              
              
              
              5,601
              
              
              
              223
              
              
              
              (962
              )
              
              
              4,862Provision
      for income taxes
              
              
              1,469
              
              
              
              199
              
              
              
              (352
              )
              
              
              1,316
              
              
              
              1,926
              
              
              
              120
              
              
              
              (257
              )
              
              
              1,789Net
      income
              
              $
              2,657
              
              
              $
              400
              
              
              $
              (789
              )
              
              $
              2,268
              
              
              $
              3,675
              
              
              $
              103
              
              
              $
              (705
              )
              
              $
              3,073
  10
  METROCORP
BANCSHARES, INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
 For the six months ended June 30,
      2008
              
              
              For the six months ended June 30,
      2007MetroBank
              
              
              Metro United
              
              
              Other
              
              
              Consolidated Company
              
              
              MetroBank
              
              
              Metro United
              
              
              Other
              
              
              Consolidated Company(In
      thousands)Total
      interest income
              
              $
              36,743
              
              
              $
              12,894
              
              
              $
              33
              
              
              $
              49,670
              
              
              $
              38,140
              
              
              $
              11,104
              
              
              $
              34
              
              
              $
              49,278Total
      interest expense
              
              
              13,886
              
              
              
              6,278
              
              
              
              1,042
              
              
              
              21,206
              
              
              
              14,652
              
              
              
              5,727
              
              
              
              1,046
              
              
              
              21,425Net
      interest income
              
              
              22,857
              
              
              
              6,616
              
              
              
              (1,009
              )
              
              
              28,464
              
              
              
              23,488
              
              
              
              5,377
              
              
              
              (1,012
              )
              
              
              27,853Provision
      for loan losses
              
              
              1,604
              
              
              
              1,445
              
              
              ─
              
              
              
              3,049
              
              
              
              19
              
              
              
              586
              
              
              ─
              
              
              
              605Net
      interest income after provision for loan losses
              
              
              21,253
              
              
              
              5,171
              
              
              
              (1,009
              )
              
              
              25,415
              
              
              
              23,469
              
              
              
              4,791
              
              
              
              (1,012
              )
              
              
              27,248Noninterest
      income
              
              
              4,929
              
              
              
              254
              
              
              
              (676
              )
              
              
              4,507
              
              
              
              3,683
              
              
              
              210
              
              
              
              (228
              )
              
              
              3,665Noninterest
      expenses
              
              
              17,068
              
              
              
              5,158
              
              
              
              535
              
              
              
              22,761
              
              
              
              16,074
              
              
              
              4,502
              
              
              
              535
              
              
              
              21,111Income
      before income tax provision
              
              
              9,114
              
              
              
              267
              
              
              
              (2,220
              )
              
              
              7,161
              
              
              
              11,078
              
              
              
              499
              
              
              
              (1,775
              )
              
              
              9,802Provision
      for income taxes
              
              
              3,169
              
              
              
              138
              
              
              
              (649
              )
              
              
              2,658
              
              
              
              3,898
              
              
              
              245
              
              
              
              (504
              )
              
              
              3,639Net
      income
              
              $
              5,945
              
              
              $
              129
              
              
              $
              (1,571
              )
              
              $
              4,503
              
              
              $
              7,180
              
              
              $
              254
              
              
              $
              (1,271
              )
              
              $
              6,163As of June 30, 2008
              
              
              As of June 30, 2007MetroBank
              
              
              Metro United
              
              
              Other
              
              
              Consolidated Company
              
              
              MetroBank
              
              
              Metro United
              
              
              Other
              
              
              Consolidated Company(In
      thousands)Net
      loans
              
              $
              932,030
              
              
              $
              364,015
              
              
              $
              –
              
              
              $
              1,296,045
              
              
              $
              779,941
              
              
              $
              287,673
              
              
              $
              –
              
              
              $
              1,067,614Total
      assets
              
              
              1,145,890
              
              
              
              433,386
              
              
              
              (798
              )
              
              
              1,578,478
              
              
              
              1,047,647
              
              
              
              335,561
              
              
              
              1,320
              
              
              
              1,384,528Deposits
              
              
              922,798
              
              
              
              323,519
              
              
              
              (3,616
              )
              
              
              1,242,701
              
              
              
              939,625
              
              
              
              272,071
              
              
              
              (7,026
              )
              
              
              1,204,670
 
 
 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.
  11
  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
bond 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 highly liquid government
bonds, and collateralized mortgage and debt obligations.
 
 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
June 30, 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 June 30, 2008,
      Using(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 June 30,
      2008Securities
      available-for-sale
              
              $
              18,385
              
              
              $
              97,215
              
              
              $
              –
              
              
              $
              115,600
 
 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 June 30, 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.  RELATED
PARTY TRANSACTIONS
 
 In June
2008, the Company issued an aggregate of $4.0 million of its 2008 Subordinated
Debentures through a private placement, with $2.0 million sold to the Company’s
Chairman of the Board and $2.0 million sold to an affiliate of a Company
Director.  The debentures accrue interest at a fixed rate of 5%
payable quarterly commencing on September 30, 2008, and mature in December
2008.    The proceeds from issuance of the 2008 Subordinated
Debentures were used to contribute capital to the Banks.
 
 
 11.  NEW ACCOUNTING
PRONOUNCEMENTS
 
 In May
2008, the FASB issued Statement No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”.  Statement No. 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy).  Statement No. 162 iseffective 60 days following the SEC’s approval of the Public Company Accounting
Oversight Board amendments to AU Section 411,The
Meaning ofPresent
Fairly in Conformity With Generally Accepted Accounting Principles.The adoption of Statement No. 162 is not expected to have a material
impact on the financial condition, results of operations, or cash flows of the
Company.
  12
  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.
  13
  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.
  14
  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 $2.3 million for the three months ended June
30, 2008, down approximately $805,000 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 June 30, 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. Net income for the six months ended June 30, 2008 was $4.5
million, a decrease of approximately $1.7 million compared with $6.2 million for
the same period in 2007. The Company’s diluted EPS for the six months ended June
30, 2008 was $0.41, a decrease of $0.14 compared with $0.55 for the same period
in 2007.  Details of the changes in the various components of net
income are further discussed below.
 
 Total
assets were $1.58 billion at June 30, 2008, up approximately
$118.8 million or 8.1% compared with $1.46 billion at December 31,
2007. Investment securities at June 30, 2008 were $115.6 million, down
approximately $22.1 million or 16.1% compared with $137.7 million at
December 31, 2007.  Net loans at June 30, 2008 were
$1.30 billion, up approximately $107.3 million or 9.0% compared with
$1.19 billion at December 31, 2007. Total deposits at June 30, 2008
were $1.24 billion, up approximately $51.7 million or 4.3% compared with
$1.19 billion at December 31, 2007. The Company’s return on average
assets (“ROAA”) for the three months ended June 30, 2008 and 2007 was 0.59% and
0.91%, respectively.  The Company’s ROAA for the six months ended June
30, 2008 and 2007 was 0.60% and 0.95%, respectively.
 
 Shareholders’
equity at June 30, 2008 was $121.7 million compared with $117.4 million at
December 31, 2007, an increase of approximately $4.3 million or
3.7%.  The Company’s return on average equity (“ROAE”) for the three
months ended June 30, 2008 and 2007 was 7.46% and 11.04%,
respectively.  The Company’s ROAE for the six months ended June 30,
2008 and 2007 was 7.49% and 11.31%, respectively.
 
 The
Company recognized an other-than-temporary impairment charge of $1.5 million
pre-tax, or $953,000 net of tax, on its $14.2 million investment in the AMF
Ultra Short Mortgage Fund (the “Fund”) as of June 30, 2008.   The
Fund is a mutual fund investing primarily in adjustable rate agency and private
label mortgage backed securities.  The Company reclassified the
unrealized mark-to-market loss on these investment grade securities to an
other-than-temporary impairment charge because of the significant decline in the
net asset value of the Fund and because the Fund manager activated the
redemption-in-kind provision on May 6, 2008 to protect shareholders against
forced liquidation of Fund holdings to satisfy cash redemptions. In July 2008,
the Company redeemed its shares in the Fund for approximately $2.2 million in
cash, with the remaining value of approximately $10.5 million, net of a $57,000
loss distributed in the form of securities held by the Fund that approximates
the Company's respective interest in each of the underlying
securities.
 
 In June
2008, the Company issued an aggregate of $4.0 million in subordinated debentures
through a private placement to the Company’s Chairman of the Board and an
affiliate of a Company Director.  The proceeds from issuance of the
subordinated debentures were used to contribute capital to the
Banks.
 
 During
the second quarter of 2008, the Company opened a new branch in Garland, Texas as
a part of the strategy to expand its presence in the greater Dallas metropolitan
area.
 
 
 Results
of Operations
 
 Net Interest Income and Net Interest
Margin. For the three months ended June 30, 2008, net interest income,
before the provision for loan losses, was $14.5 million, up approximately
$252,000 or 1.8% compared with $14.2 million for the same quarter in 2007.
The increase was due primarily to increased loan volume partially offset by
lower yields on average earning assets due to interest rate cuts by the Federal
Reserve.  The increase in net interest income reflects a $1.1 million
decrease in interest income that was offset by a $1.3 million decrease in
interest expense. Average interest-earning assets for the three months ended
June 30, 2008 were $1.46 billion, up approximately $178.8 million or 14.0%
compared with $1.28 billion for the same quarter in 2007. The weighted
average yield on interest-earning assets for the three months ended June 30,
2008 was 6.80%, down 127 basis points compared with 8.07% for the same quarter
in 2007. Average interest-bearing liabilities for the three months ended June
30, 2008 were $1.19 billion, up approximately $169.4 million or 16.6%
compared with $1.02 billion for the same quarter in 2007. The weighted average
rate paid on interest-bearing liabilities for the three months ended June 30,
2008 was 3.43%, down 108 basis points compared with 4.51% for the same quarter
in 2007.  Interest rate cuts by the Federal Reserve resulted in a
decrease in all yields and costs for the three and six months ended June 30,
2008, compared with the same period in 2007.
 
 For the
six months ended June 30, 2008, net interest income, before the provision for
loan losses, was $28.5 million, up approximately $611,000 or 2.2% compared
with $27.9 million for the same period in 2007. The increase was due
primarily to increased loan volume partially offset by lower yields on average
earning assets.  The increase reflects a $392,000 increase in interest
income and a $219,000 decrease in interest expense.  Average
interest-earning assets for the six months ended June 30, 2008 were
$1.42 billion, up approximately $179.1 million or 14.5% compared with
$1.24 billion for the same period in 2007. The weighted average yield on
interest-earning assets for the six months ended June 30, 2008 was 7.06%, down
98 basis points compared with 8.04% for the same period in
2007.  Average interest-bearing liabilities for the six months ended
June 30, 2008 were $1.16 billion, up approximately $182.4 million or 18.7%
compared with $977.0 million for the same period in 2007. The weighted
average rate paid on interest-bearing liabilities for the six months ended June
30, 2008 was 3.68%, down 74 basis points compared with 4.42% for the same period
in 2007.
  15
  The net
interest margin for the three months ended June 30, 2008 was 4.00%, down 47
basis points compared with 4.47% for the same quarter in 2007.  The
yield on average earning assets decreased 127 basis points, which was partially
offset by a decrease in the cost of average earning assets of 80 basis
points.
 
 The net
interest margin for the six months ended June 30, 2008 was 4.04%, down 50 basis
points compared with 4.54% for the same period in 2007.  For the six
months ended June 30, 2008, the yield on average earning assets decreased 98
basis points, which was partially offset by a decrease in the cost of average
earning assets of 48 basis points.
 
 Total Interest Income. Total
interest income for the three months ended June 30, 2008 was $24.6 million, down
approximately $1.1 million or 4.2% compared with $25.7 million for the same
period in 2007. Although total interest earning assets increased, the impact of
interest rate cuts during the second quarter 2008 offset the effect of volume
increases.  Total interest income for the six months ended June 30,
2008 was $49.7 million, up approximately $392,000 or 0.8% compared with
$49.3 million for the same period in 2007, primarily due to loan growth but
partially offset by decreases in average yield.
 
 Interest Income from Loans.
Interest income from loans for the three months ended June 30, 2008 was
$23.0 million, up approximately $112,000 or 0.5% compared with
$22.9 million for the same quarter in 2007. The increase was the result of
a higher volume of loans, partially offset by decreases in average
yield.   Average total loans for the three months ended June 30,
2008 were $1.29 billion compared with average total loans for the same
quarter in 2007 of $1.03 billion, an increase of approximately
$259.6 million or 25.2%. For the three months ended June 30, 2008, the
yield on average total loans was 7.17%, down 173 basis points compared with
8.90% for the same quarter in 2007.
 
 Interest
income from loans for the six months ended June 30, 2008 was $46.4 million,
up approximately $2.9 million or 6.6% compared with $43.5 million for
the same period in 2007. The increase was the result of a higher volume of
loans, partially offset by a lower yield on loans.   Average
total loans for the six months ended June 30, 2008 were $1.25 billion
compared with average total loans for the same period in 2007 of
$983.1 million, an increase of approximately $270.5 million or 27.5%.
For the six months ended June 30, 2008, the yield on average total loans was
7.45%, down 148 basis points compared with 8.93% for the same period in
2007.
 
 Approximately
$926.7 million or 70.5% of the total loan portfolio at June 30, 2008 were
variable rate loans that periodically reprice and are sensitive to changes in
market interest rates.  For the three months ended June 30, 2008, the
yield on average total loans was approximately 209 basis points above the
average prime rate over the period.  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 June 30,
2008, approximately $647.7 million in loans or 49.3% of the total loan portfolio
were variable rate loans with interest rate floors that carried a weighted
average interest rate of 6.92%.  At June 30, 2007, variable rate loans
with interest rate floors carried a weighted average interest rate of 8.93% and
comprised 47.2% of the total loan portfolio.
 
 Interest Income from
Investments. Interest income from investments (which includes investment
securities, Federal Funds sold, and other investments) for the three months
ended June 30, 2008 was $1.6 million, a decrease of approximately $1.2
million or 42.8% compared with $2.8 million for the same quarter in
2007.  Average total investments for the three months ended June 30,
2008 were $163.7 million compared with average total investments for the
same quarter in 2007 of $244.5 million, a decrease of approximately $80.8
million or 33.0%. The decreases in interest income from investments and in
average total investments were primarily the result of declining interest rates,
and maturities, sales and paydowns on the investment portfolio.  For
the three months ended June 30, 2008, the average yield on investments was 3.88%
compared with 4.53% for the same quarter in 2007, a decrease of 65 basis
points.
 
 Interest
income from investments for the six months ended June 30, 2008 was $3.3 million,
down approximately $2.4 million or 43.5% compared with $5.7 million for the
same period in 2007.  Average total investments for the six months
ended June 30, 2008 were $161.9 million compared with average total
investments for the same quarter in 2007 of $253.3 million, a decrease of
approximately $91.4 million or 36.1%. The decreases in interest income from
investments and in average total investments were primarily the result of
declining interest rates, and maturities, sales and paydowns on the investment
portfolio.   For the six months ended June 30, 2008, the average
yield on investments was 4.04% compared with 4.58% for the same quarter in 2008,
a decrease of 54 basis points.
 
 Total Interest Expense. Total
interest expense for the three months ended June 30, 2008 was
$10.1 million, down approximately $1.4 million or 11.5% compared with
$11.5 million for the same quarter in 2007. Total interest expense for the
six months ended June 30, 2008 was $21.2 million, down approximately
$219,000 or 1.0% compared with $21.4 million for the same period in 2007.
Interest expense decreased for both the three and six months ended June 30, 2008
primarily due to decreases in interest rates paid on deposits, partially offset
by growth in other borrowings and deposits.
 
 Interest Expense on Deposits.
Interest expense on interest-bearing deposits for the three months ended June
30, 2008 was $8.7 million, down approximately $2.0 million or 18.1% compared
with $10.7 million for the same period in 2007. The decrease was primarily
due to lower interest rates incurred for interest-bearing deposits partially
offset by growth in savings and money market deposits.  Average
interest-bearing deposits for the three months ended June 30, 2008 were $1.0
billion compared with average interest-bearing deposits for the same quarter in
2007 of $960.9 million, an increase of $41.0 million or 4.3%. The average
interest rate incurred on interest-bearing deposits for the three months ended
June 30, 2008 was 3.51% compared with 4.45% for the same quarter in 2007, a
decrease of 94 basis points. The decrease in interest rates primarily reflected
the impact of market rate decreases.
  16
  Interest
expense on interest-bearing deposits for the six months ended June 30, 2008 was
$18.4 million, down approximately $1.4 million or 7.0% compared with
$19.8 million for the same period in 2007.  The decrease was
primarily due to lower interest rates incurred for interest-bearing deposits
partially offset by growth in savings and money market
deposits.  Average interest-bearing deposits for the six months ended
June 30, 2008 were $991.4 million compared with average interest-bearing
deposits for the same period in 2007 of $916.7 million, an increase of
$74.7 million or 8.2%. The average interest rate incurred on
interest-bearing deposits for the six months ended June 30, 2008 was 3.73%
compared with 4.35% for the same period in 2007, a decrease of 62 basis
points.  The decrease in interest rates primarily reflected the impact
of market rate decreases.
 
 Interest Expense on Junior
Subordinated Debentures.  Interest expense on junior
subordinated debentures for the three months ended June 30, 2008 and 2007 was
$520,000, and $525,000, respectively. Interest expense on junior subordinated
debentures for the six months ended June 30, 2008 and 2007 was $1.0 million.
Average junior subordinated debentures for the three and six months ended June
30, 2008 and 2007 were $36.1 million. The average interest rate incurred on
junior subordinated debentures for the three and six months ended June 30, 2008
and 2007 was 5.76%. 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%.
 
 Interest Expense on Other
Borrowings. Interest expense on other borrowed funds for the three months
ended June 30, 2008 was $880,000, up approximately $615,000 compared with
$265,000 for the same period in 2007.   Interest expense on other
borrowed funds for the six months ended June 30, 2008 was $1.8 million, up
approximately $1.2 million compared with $589,000 for the same period in
2007.   The increase in interest expense for both the three and
six months ended June 30, 2008 was due to increases in Federal Home Loan Bank
(“FHLB”) advances and security repurchases agreements, which were partially
offset by lower interest rates paid. As part of its strategy to control
interest expense, the Company took advantage of lower cost wholesale funding in
lieu of higher cost deposits.  Average other borrowed funds for the
three months ended June 30, 2008 were $150.1 million compared with average
other borrowed funds for the same quarter in 2007 of $21.7 million, an
increase of $128.4 million.  The average interest rate incurred
on borrowed funds for the three months ended June 30, 2008 was 2.36%, compared
with 4.89% for the same quarter in 2007, a decrease of 253 basis
points.  Average other borrowed funds for the six months ended June
30, 2008 were $131.9 million compared with average other borrowed funds for
the same period in 2007 of $24.2 million, an increase of
$107.7 million.  The average interest rate incurred on borrowed
funds for the six months ended June 30, 2008 was 2.70%, compared with 4.91% for
the same period in 2007, a decrease of 221 basis points.
  17
  The
following tables present for the periods indicated 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 tables as loans having a zero yield
with income, if any, recognized at the end of the loan term.
 
 For The Three Months Ended June
      30,2008
              
              
              2007Average
              
              
              Interest
              
              
              Average
              
              
              Average
              
              
              Interest
              
              
              AverageOutstanding
              
              
              Earned/
              
              
              Yield/
              
              
              Outstanding
              
              
              Earned/
              
              
              Yield/Balance
              
              
              Paid
              
              
              Rate(1)
              
              
              Balance
              
              
              Paid
              
              
              Rate(1)(Dollars
      in thousands)AssetsInterest-earning
      assets:Total
      loans
              
              $
              1,291,494
              
              
              $
              23,020
              
              
              
              7.17
              %
              
              $
              1,031,921
              
              
              $
              22,908
              
              
              
              8.90
              %Taxable
      securities
              
              
              119,572
              
              
              
              1,276
              
              
              
              4.29
              
              
              
              167,679
              
              
              
              1,768
              
              
              
              4.23Tax-exempt
      securities
              
              
              5,202
              
              
              
              64
              
              
              
              4.95
              
              
              
              6,205
              
              
              
              76
              
              
              
              4.91Other
      investments (2)
              
              
              8,801
              
              
              
              95
              
              
              
              4.34
              
              
              
              4,856
              
              
              
              70
              
              
              
              5.78Federal
      funds sold and other short-term investments
              
              
              30,155
              
              
              
              146
              
              
              
              1.95
              
              
              
              65,774
              
              
              
              850
              
              
              
              5.18Total
      interest-earning assets
              
              
              1,455,224
              
              
              
              24,601
              
              
              
              6.80
              
              
              
              1,276,435
              
              
              
              25,672
              
              
              
              8.07Allowance
      for loan losses
              
              
              (15,065
              )
              
              
              
              
              
              
              
              
              
              
              (12,490
              )Total
      interest-earning assets, net of allowance for loan losses
              
              
              1,440,159
              
              
              
              
              
              
              
              
              
              
              
              1,263,945Noninterest-earning
      assets
              
              
              109,378
              
              
              
              
              
              
              
              
              
              
              
              86,565Total
      assets
              
              $
              1,549,537
              
              
              
              
              
              
              
              
              
              
              $
              1,350,510Liabilities and
      shareholders' equityInterest-bearing
      liabilities:Interest-bearing
      demand deposits
              
              $
              58,892
              
              
              
              114
              
              
              
              0.78
              %
              
              $
              64,065
              
              
              
              187
              
              
              
              1.17
              %Savings
      and money market accounts
              
              
              281,310
              
              
              
              1,788
              
              
              
              2.56
              
              
              
              237,231
              
              
              
              2,316
              
              
              
              3.92Time
      deposits
              
              
              661,655
              
              
              
              6,830
              
              
              
              4.15
              
              
              
              659,576
              
              
              
              8,162
              
              
              
              4.96Junior
      subordinated debentures
              
              
              36,083
              
              
              
              520
              
              
              
              5.76
              
              
              
              36,083
              
              
              
              525
              
              
              
              5.76Other
      borrowings
              
              
              150,136
              
              
              
              880
              
              
              
              2.36
              
              
              
              21,748
              
              
              
              265
              
              
              
              4.89Total
      interest-bearing liabilities
              
              
              1,188,076
              
              
              
              10,132
              
              
              
              3.43
              
              
              
              1,018,703
              
              
              
              11,455
              
              
              
              4.51Noninterest-bearing
      liabilities:Noninterest-bearing
      demand deposits
              
              
              219,318
              
              
              
              
              
              
              
              
              
              
              
              203,075Other
      liabilities
              
              
              19,935
              
              
              
              
              
              
              
              
              
              
              
              17,057Total
      liabilities
              
              
              1,427,329
              
              
              
              
              
              
              
              
              
              
              
              1,238,835Shareholders'
      equity
              
              
              122,208
              
              
              
              
              
              
              
              
              
              
              
              111,675Total
      liabilities and shareholders' equity
              
              $
              1,549,537
              
              
              
              
              
              
              
              
              
              
              $
              1,350,510Net
      interest income
              
              
              
              
              
              $
              14,469
              
              
              
              
              
              
              
              
              
              
              $
              14,217Net
      interest spread
              
              
              
              
              
              
              
              
              
              
              3.37
              %
              
              
              
              
              
              
              
              
              
              
              3.56
              %Net
      interest margin
              
              
              
              
              
              
              
              
              
              
              4.00
              %
              
              
              
              
              
              
              
              
              
              
              4.47
              %
  (1)
              Annualized.
 (2)
              Other
      investments include Federal Reserve Bank stock, Federal Home Loan Bank
      stock and investment in subsidiary
trust.
  18
 
 For The Six Months Ended June
      30,2008
              
              
              2007Average
              
              
              Interest
              
              
              Average
              
              
              Average
              
              
              Interest
              
              
              AverageOutstanding
              
              
              Earned/
              
              
              Yield/
              
              
              Outstanding
              
              
              Earned/
              
              
              Yield/Balance
              
              
              Paid
              
              
              Rate(1)
              
              
              Balance
              
              
              Paid
              
              
              Rate(1)(Dollars
      in thousands)AssetsInterest-earning
      assets:Total
      loans
              
              $
              1,253,615
              
              
              $
              46,420
              
              
              
              7.45
              %
              
              $
              983,146
              
              
              $
              43,529
              
              
              
              8.93
              %Taxable
      securities
              
              
              124,048
              
              
              
              2,648
              
              
              
              4.29
              
              
              
              171,236
              
              
              
              3,632
              
              
              
              4.28Tax-exempt
      securities
              
              
              5,569
              
              
              
              137
              
              
              
              4.95
              
              
              
              6,548
              
              
              
              161
              
              
              
              4.96Other
      investments (2)
              
              
              8,181
              
              
              
              182
              
              
              
              4.47
              
              
              
              4,897
              
              
              
              138
              
              
              
              5.68Federal
      funds sold and other short-term investments
              
              
              24,090
              
              
              
              283
              
              
              
              2.36
              
              
              
              70,598
              
              
              
              1,818
              
              
              
              5.19Total
      interest-earning assets
              
              
              1,415,503
              
              
              
              49,670
              
              
              
              7.06
              
              
              
              1,236,425
              
              
              
              49,278
              
              
              
              8.04Allowance
      for loan losses
              
              
              (14,499
              )
              
              
              
              
              
              
              
              
              
              
              (12,068
              )Total
      interest-earning assets, net of allowance for loan losses
              
              
              1,401,004
              
              
              
              
              
              
              
              
              
              
              
              1,224,357Noninterest-earning
      assets
              
              
              108,996
              
              
              
              
              
              
              
              
              
              
              
              81,917Total
      assets
              
              $
              1,510,000
              
              
              
              
              
              
              
              
              
              
              $
              1,306,274Liabilities and
      shareholders' equityInterest-bearing
      liabilities:Interest-bearing
      demand deposits
              
              $
              58,943
              
              
              
              257
              
              
              
              0.88
              %
              
              $
              66,191
              
              
              
              392
              
              
              
              1.19
              %Savings
      and money market accounts
              
              
              276,898
              
              
              
              3,710
              
              
              
              2.69
              
              
              
              204,557
              
              
              
              3,636
              
              
              
              3.58Time
      deposits
              
              
              655,553
              
              
              
              14,431
              
              
              
              4.43
              
              
              
              645,923
              
              
              
              15,763
              
              
              
              4.92Junior
      subordinated debentures
              
              
              36,083
              
              
              
              1,040
              
              
              
              5.76
              
              
              
              36,083
              
              
              
              1,045
              
              
              
              5.76Other
      borrowings
              
              
              131,867
              
              
              
              1,768
              
              
              
              2.70
              
              
              
              24,208
              
              
              
              589
              
              
              
              4.91Total
      interest-bearing liabilities
              
              $
              1,159,344
              
              
              
              21,206
              
              
              
              3.68
              
              
              $
              976,962
              
              
              
              21,425
              
              
              
              4.42Noninterest-bearing
      liabilities:Noninterest-bearing
      demand deposits
              
              
              209,567
              
              
              
              
              
              
              
              
              
              
              
              202,668Other
      liabilities
              
              
              20,155
              
              
              
              
              
              
              
              
              
              
              
              16,725Total
      liabilities
              
              
              1,389,066
              
              
              
              
              
              
              
              
              
              
              
              1,196,355Shareholders'
      equity
              
              
              120,934
              
              
              
              
              
              
              
              
              
              
              
              109,919Total
      liabilities and shareholders' equity
              
              $
              1,510,000
              
              
              
              
              
              
              
              
              
              
              $
              1,306,274Net
      interest income
              
              
              
              
              
              $
              28,464
              
              
              
              
              
              
              
              
              
              
              $
              27,853Net
      interest spread
              
              
              
              
              
              
              
              
              
              
              3.38
              %
              
              
              
              
              
              
              
              
              
              
              3.61
              %Net
      interest margin
              
              
              
              
              
              
              
              
              
              
              4.04
              %
              
              
              
              
              
              
              
              
              
              
              4.54
              %
 
 (1)
              Annualized.
 (2)
              Other
      investments include Federal Reserve Bank stock, Federal Home Loan Bank
      stock and investment in subsidiary
trust.
  19
  The
following table presents the dollar amount of changes in interest income and
interest expense for the major components of interest-earning assets and
interest-bearing liabilities and distinguishes between changes in outstanding
balances and changes in interest rates for the three and six months ended June
30, 2008 compared with the three and six months ended June 30, 2007. For
purposes of this table, changes attributable to both rate and volume have been
allocated to each accordingly.
 
 Three Months Ended June 30,
              
              
              Six Months Ended June 30,2008 vs 2007
              
              
              2008 vs 2007Increase
      (Decrease)
              
              
              
              
              
              Increase
      (Decrease)Due to
              
              
              
              
              
              Due toVolume
              
              
              Rate
              
              
              Total
              
              
              Volume
              
              
              Rate
              
              
              Total(Dollars
      in thousands)Interest-earning
      assets:Loans
              
              $
              5,699
              
              
              $
              (5,587
              )
              
              $
              112
              
              
              $
              12,104
              
              
              $
              (9,213
              )
              
              $
              2,891Taxable
      securities
              
              
              (511
              )
              
              
              19
              
              
              
              (492
              )
              
              
              (994
              )
              
              
              10
              
              
              
              (984
              )Tax-exempt
      securities
              
              
              (12
              )
              
              
              –
              
              
              
              (12
              )
              
              
              (24
              )
              
              
              –
              
              
              
              (24
              )Other
      investments
              
              
              57
              
              
              
              (32
              )
              
              
              25
              
              
              
              93
              
              
              
              (49
              )
              
              
              44Federal
      funds sold and other short-term investments
              
              
              (461
              )
              
              
              (243
              )
              
              
              (704
              )
              
              
              (1,197
              )
              
              
              (338
              )
              
              
              (1,535
              )Total
      increase (decrease) in interest income
              
              
              4,772
              
              
              
              (5,843
              )
              
              
              (1,071
              )
              
              
              9,982
              
              
              
              (9,590
              )
              
              
              392Interest-bearing
      liabilities:Interest-bearing
      demand deposits
              
              
              (15
              )
              
              
              (58
              )
              
              
              (73
              )
              
              
              (42
              )
              
              
              (93
              )
              
              
              (135
              )Savings
      and money market accounts
              
              
              425
              
              
              
              (953
              )
              
              
              (528
              )
              
              
              1,296
              
              
              
              (1,222
              )
              
              
              74Time
      deposits
              
              
              7
              
              
              
              (1,339
              )
              
              
              (1,332
              )
              
              
              275
              
              
              
              (1,607
              )
              
              
              (1,332
              )Junior
      subordinated debentures
              
              
              (5
              )
              
              
              –
              
              
              
              (5
              )
              
              
              (5
              )
              
              
              –
              
              
              
              (5
              )Other
      borrowings
              
              
              1,562
              
              
              
              (947
              )
              
              
              615
              
              
              
              2,624
              
              
              
              (1,445
              )
              
              
              1,179Total
      increase (decrease) in interest expense
              
              
              1,974
              
              
              
              (3,297
              )
              
              
              (1,323
              )
              
              
              4,148
              
              
              
              (4,367
              )
              
              
              (219
              )Increase
      (decrease) in net interest income
              
              $
              2,798
              
              
              $
              (2,546
              )
              
              $
              252
              
              
              $
              5,834
              
              
              $
              (5,223
              )
              
              $
              611
 
 Provision for Loan Losses.
Provisions for loan losses are charged to income to bring the Company’s
allowance for loan losses to a level which management considers adequate to
absorb probable losses inherent in the loan portfolio. The provision for loan
losses for the three months ended June 30, 2008 was $1.5 million, up
approximately $997,000, compared with $468,000 for the same period in
2007.  The provision for loan losses for the six months ended June 30,
2008 was $3.0 million, up approximately $2.4 million, compared with $605,000 for
the same period in 2007. The increase for the three months ended June 30, 2008
was primarily due to loan growth and to increase the allowance for loan losses
due to charge-offs.  The increase for the six months ended June 30,
2008 was primarily due to loan growth and to increase the allowance for loan
losses due to charge-offs and because of concerns about the general economic
conditions in California.  The allowance for loan losses as a percent
of total loans (net of unearned discounts, interest, and deferred fees) at June
30, 2008 and 2007 was 1.18% and 1.17%, respectively. The allowance for loan
losses as a percent of total loans at December 31, 2007 was 1.09%.
 
 Noninterest Income.
Noninterest income for the three months ended June 30, 2008 was $2.4 million, up
approximately $379,000 or 19.0% compared with the same three months in 2007.
  Noninterest income for the six months ended June 30, 2008 was $4.5
million, up approximately $842,000 or 23.0% compared with the same period in
2007. The increase in noninterest income for the three and six months ended June
30, 2008 was primarily due to an increase in the cash value of bank owned life
insurance, the net gain on sale of securities, and an increase in letter of
credit commissions and fees.
 
 Noninterest Expenses.
Noninterest expenses for the three months ended June 30, 2008 were $11.8
million, up approximately $912,000 or 8.4% compared with $10.9 million for the
same period in 2007.  Noninterest expenses for the six months ended
June 30, 2008 were $22.8 million, up $1.7 million or 7.8% compared with $21.1
million for the same period in 2007.  Changes in the components of
noninterest expenses are discussed below.
 
 Salaries
and benefits expense for the three months ended June 30, 2008 was $5.9 million,
a decrease of $320,000 compared with $6.3 million for the same period in
2007.  The decrease was primarily due to decreases in employee health
care benefits, bonus accrual, and salary expense due to a reduction in headcount
in both Texas and California, which were partially offset by an increase in
stock-based compensation expense.
 
 Salaries
and benefits expense for the six months ended June 30, 2008 was $12.4 million,
an increase of $420,000 compared with $12.0 million for the same period in 2007
primarily due to increases in bonus accrual, stock-based compensation expense,
and severance expenses.
  20
  Occupancy
and equipment expense for the three months ended June 30, 2008 and 2007 was $2.0
million.  Occupancy and equipment expense for the six months ended
June 30, 2008 was $3.9 million, down $71,000 or 1.8% compared with $4.0 million
for the same period in 2007.
 
 Other
noninterest expense, excluding the $1.5 million impairment write-down for
securities, for the three months ended June 30, 2008 and 2007 was $2.7 million.
Other noninterest expense, excluding the impairment write-down for securities,
for the six months ended June 30, 2008 and 2007 was $5.2
million.
 
 The
Company’s efficiency ratio is calculated by dividing total noninterest expense,
excluding credit loss provisions and impairment write-down on available for sale
securities, by net interest income plus non-inerest income.  The
Company’s efficiency ratio for the three months ended June 30, 2008 was 60.89%
compared with 67.13% for the same quarter in 2007, and was primarily due to the
decrease in noninterest expense, excluding the impairment write-down, combined
with the increases in noninterest income and net interest income previously
discussed above.  The Company’s efficiency ratio for the six months
ended June 30, 2008 was 64.36%, compared with 66.98% for the same period in
2007.
 
 Income Taxes. Income tax
expense for the three months ended June 30, 2008 and 2007 was $1.3 million
and $1.8 million, respectively. The Company’s effective tax rate was 36.72% and
36.80% for the three months ended June 30, 2008 and 2007,
respectively.  Income tax expense for the six months ended June 30,
2008 and 2007 was $2.7 million and $3.6 million, respectively. The
Company’s effective tax rate was 37.12% and 37.13% for the six months ended June
30, 2008 and 2007, respectively.
 
 
 Financial
Condition
 
 Loan Portfolio. Total loans
at June 30, 2008 were $1.31 billion, up $109.7 million or 9.1% compared with
$1.20 billion at December 31, 2007. Compared with the loan level at
December 31, 2007, commercial and industrial loans increased $9.0 million
and real estate loans increased $101.8 million during the six months ended
June 30, 2008.  At June 30, 2008 and December 31, 2007, the ratio
of total loans to total deposits was 105.54% and 100.91% respectively. At the
same dates, total loans represented 83.1% and 82.3% of total assets,
respectively.
 
 The
following table summarizes the loan portfolio of the Company by type of
loan:
 
 As ofJune
      30, 2008
              
              
              As ofDecember 31, 2007Amount
              
              
              Percent
              
              
              Amount
              
              
              Percent(Dollars
      in thousands)Commercial
      and industrial
              
              $
              467,096
              
              
              
              35.52
              %
              
              $
              458,117
              
              
              
              38.01
              %Real
      estate mortgageResidential
              
              
              11,527
              
              
              
              0.88
              
              
              
              5,306
              
              
              
              0.44Commercial
              
              
              664,217
              
              
              
              50.51
              
              
              
              596,618
              
              
              
              49.50675,744
              
              
              
              51.39
              
              
              
              601,924
              
              
              
              49.94Real
      estate constructionResidential
              
              
              53,115
              
              
              
              4.04
              
              
              
              58,971
              
              
              
              4.89Commercial
              
              
              114,021
              
              
              
              8.67
              
              
              
              80,208
              
              
              
              6.65167,136
              
              
              
              12.71
              
              
              
              139,179
              
              
              
              11.54Consumer
      and other
              
              
              4,988
              
              
              
              0.38
              
              
              
              6,132
              
              
              
              0.51Gross
      loans
              
              
              1,314,964
              
              
              
              100.00
              %
              
              
              1,205,352
              
              
              
              100.00
              %Unearned
      discounts, interest and deferred fees
              
              
              (3,399
              )
              
              
              
              
              
              
              (3,441
              )Total
      loans
              
              
              1,311,565
              
              
              
              
              
              
              
              1,201,911Allowance
      for loan losses
              
              
              (15,520
              )
              
              
              
              
              
              
              (13,125
              )Loans,
      net
              
              $
              1,296,045
              
              
              
              
              
              
              $
              1,188,786
  Nonperforming Assets. Total
nonperforming assets, which includes nonaccrual loans, loans 90 days or more
past due and still accruing interest and other real estate, at June 30, 2008
were $10.7 million, an increase of $1.6 million or 18.0% compared with $9.1
million at December 31, 2007.  The increase was primarily due to a
commercial real estate loan and a commercial loan in California, and three
commercial real estate loan relationships in Texas, which were partially offset
by the sale of two other real estate properties in Texas.   At
June 30, 2008, nonperforming assets primarily consisted of $7.7 million in
nonaccrual loans, $801,000 in accruing loans that were 90 days or more past due,
and $2.2 million in other real estate. Approximately $4.2 million of the
nonaccrual loans are collateralized by real estate, which represented 54.1% of
total nonaccrual loans at June 30, 2008.  Other real estate increased
$756,000 to $2.2 million at June 30, 2008 compared with $1.5 million at December
31, 2007.  The increase was due to the addition of one commercial real
estate property in Texas in the amount of $1.2 million and one commercial real
estate property in California in the amount of $1.0 million, partially offset by
the sale of two commercial real estate properties in Texas totaling $1.5
million.  Net nonperforming assets at June 30, 2008 were
$8.5 million compared with $6.8 million at December 31, 2007, an
increase of $1.7 million or 24.9%.
  21
  The
ratios for net nonperforming assets to total loans and other real estate at June
30, 2008 and December 31, 2007 were 0.64% 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 were $2.3 million at June 30, 2008 and 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. The Company’s nonperforming loans may increase during the period
of time in which any 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.
 
 The
following table presents information regarding nonperforming assets as of the
dates indicated:
 
 As
      ofJune
      30, 2008
              
              
              As
      ofDecember
      31, 2007(Dollars
      in thousands)Nonaccrual
      loans
              
              $
              7,696
              
              
              $
              6,336Accruing
      loans 90 days or more past due
              
              
              801
              
              
              
              1,284Other
      real estate (“ORE”)
              
              
              2,230
              
              
              
              1,474Total
      nonperforming assets
              
              
              10,727
              
              
              
              9,094Nonperforming
      loans guaranteed by the SBA, Ex-Im Bank and OCCGF
              
              
              (2,255
              )
              
              
              (2,309
              )Net
      nonperforming assets
              
              $
              8,472
              
              
              $
              6,785Total
      nonperforming assets to total assets
              
              
              0.68
              %
              
              
              0.62
              %Total
      nonperforming assets to total loans and ORE
              
              
              0.82
              %
              
              
              0.76
              %Net
      nonperforming assets to total assets (1)
              
              
              0.54
              %
              
              
              0.46
              %Net
      nonperforming assets to total loans and ORE (1)
              
              
              0.64
              %
              
              
              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
                June 30, 2008
              
              
              As of
                December 31, 2007(Dollars
      in thousands)Impaired
      loans with no SFAS No 114 valuation reserve
              
              $
              6,855
              
              
              $
              3,721Impaired
      loans with a SFAS No 114 valuation reserve
              
              
              841
              
              
              
              2,615Total
      recorded investment in impaired loans
              
              $
              7,696
              
              
              $
              6,336Valuation
      allowance related to impaired loans
              
              $
              1,049
              
              
              $
              1,131
 
 The
average recorded investment in impaired loans during the six months ended June
30, 2008 and the year ended December 31, 2007 was $8.4 million and $6.7
million, respectively.  No interest income on impaired loans was
recognized for cash payments received during the three and six months ended June
30, 2008.
  22
  Allowance for Loan Losses and
Reserve for Unfunded Lending Commitments.At June 30, 2008 and 2007, the
allowance for loan losses was $15.5 million and $12.7 million,
respectively, or 1.18% and 1.17% 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 June
30, 2008 were $533,000 compared with net recoveries of $293,000 for the same
period in 2007, with the charge-offs during the second quarter of 2008 primarily
the result of a $292,000 charge-off of a commercial loan in California and a
$210,000 charge-off on a commercial real estate loan in Texas.  Net
charge-offs for the six months ended June 30, 2008 were $654,000 compared with
net recoveries of $620,000 for the same period in 2007.
 
 The
Company maintains a reserve for unfunded commitments to provide for the risk of
loss inherent in its unfunded lending related commitments. The process used in
determining the reserve is consistent with the process used for the allowance
for loan losses discussed below.
 
 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.
 
 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 component
for individual loan impairment recognized and measured pursuant to FASB
Statement No. 114, (2) one or more components of collective loan impairment
recognized pursuant to FASB Statement No. 5 – Accounting for Contingencies, (3)
a component that assesses the impact of current conditions and determines how
estimated future credit losses might be expected to deviate from historical
trends, 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 nonperforming 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.
  23
  The
following tables present, for the periods indicated, an analysis of the
allowance for credit losses and other related data for the periods
indicated:
 
 As of and for the
                Three Months Ended June 30,2008
              
              
              2007(Dollars
      in thousands)Average
      total loans outstanding for the period
              
              $
              1,291,494
              
              
              $
              1,031,921Total
      loans outstanding at end of period
              
              $
              1,311,565
              
              
              $
              1,080,275Allowance
      for loan losses at beginning of period
              
              $
              14,588
              
              
              $
              11,900Provision
      for loan losses
              
              
              1,465
              
              
              
              468Charge-offs:Commercial
      and industrial
              
              
              (370
              )
              
              
              (301
              )Real
      estate mortgage
              
              
              (1
              )
              
              
              –Real
      estate construction
              
              
              (210
              )
              
              
              –Consumer
      and other
              
              
              (42
              )
              
              
              –Total
      charge-offs
              
              
              (623
              )
              
              
              (301
              )Recoveries:Commercial
      and industrial
              
              
              88
              
              
              
              592Real
      estate mortgage
              
              
              –
              
              
              
              –Real
      estate construction
              
              
              –
              
              
              
              –Consumer
      and other
              
              
              2
              
              
              
              2Total
      recoveries
              
              
              90
              
              
              
              594Net
      (charge-offs)/recoveries
              
              
              (533
              )
              
              
              293Allowance
      for loan losses at end of period
              
              
              15,520
              
              
              
              12,661Reserve
      for unfunded lending commitments at beginning of period
              
              
              907
              
              
              
              919Provision
      for unfunded lending commitments
              
              
              10
              
              
              
              107Reserve
      for unfunded lending commitments at end of period
              
              
              917
              
              
              
              1,026Allowance
      for credit losses at end of period
              
              $
              16,437
              
              
              $
              13,687Ratio
      of net (charge-offs)/recoveries to end of period total
    loans
              
              
              (0.04
              )
      %
              
              
              0.03
              %
  24
 
 As of and for the
                Six Months Ended June
      30,2008
              
              
              2007(Dollars
      in thousands)Average
      total loans outstanding for the period
              
              $
              1,253,615
              
              
              $
              983,146Total
      loans outstanding at end of period
              
              $
              1,311,565
              
              
              $
              1,080,275Allowance
      for loan losses at beginning of period
              
              $
              13,125
              
              
              $
              11,436Provision
      for loan losses
              
              
              3,049
              
              
              
              605Charge-offs:Commercial
      and industrial
              
              
              (417
              )
              
              
              (520
              )Real
      estate mortgage
              
              
              (90
              )
              
              
              –Real
      estate construction
              
              
              (210
              )
              
              
              –Consumer
      and other
              
              
              (42
              )
              
              
              (7
              )Total
      charge-offs
              
              
              (759
              )
              
              
              (527
              )Recoveries:Commercial
      and industrial
              
              
              101
              
              
              
              1,044Real
      estate mortgage
              
              
              –
              
              
              
              99Real
      estate construction
              
              
              –
              
              
              
              –Consumer
      and other
              
              
              4
              
              
              
              4Total
      recoveries
              
              
              105
              
              
              
              1,147Net
      (charge-offs)/recoveries
              
              
              (654
              )
              
              
              620Allowance
      for loan losses at end of period
              
              
              15,520
              
              
              
              12,661Reserve
      for unfunded lending commitments at beginning of period
              
              
              816
              
              
              
              793Provision
      for unfunded lending commitments
              
              
              101
              
              
              
              233Reserve
      for unfunded lending commitments at end of period
              
              
              917
              
              
              
              1,026Allowance
      for credit losses at end of period
              
              $
              16,437
              
              
              $
              13,687Ratio
      of allowance for loan losses to end of period total loans
              
              
              1.18
              %
              
              
              1.17
              %Ratio
      of net (charge-offs)/recoveries to end of period total
    loans
              
              
              (0.05
              )
      %
              
              
              0.06
              %Ratio
      of allowance for loan losses to end of period total nonperforming loans
      (1)
              
              
              182.65
              %
              
              
              215.14
              %Ratio
      of allowance for loan losses to end of period net nonperforming loans
      (2)
              
              
              248.64
              %
              
              
              403.35
              %
  (1)
              Total
      nonperforming loans are nonaccrual loans plus loans 90 days or more
      past due.
 
 (2)
              Net
      nonperforming loans are nonaccrual loans plus loans 90 days or more
      past due, less loan portions guaranteed by the SBA, Ex-Im Bank and
      OCCGF.
 
 Securities. At June 30, 2008,
the available-for-sale securities portfolio was $115.6 million, a decrease of
$22.1 million or 16.1% compared with $137.7 million at December 31,
2007. The decrease was primarily due to principal payments, sales and maturities
on mortgage-backed securities and collateralized mortgage obligations (“CMOs”),
U.S. Government sponsored enterprises and tax-free municipal bonds
(“municipals”).  The securities portfolio is primarily comprised of
mortgage-backed securities, collateralized mortgage obligations, obligations of
U.S. government sponsored enterprises, and tax-free municipal bonds. Other
investments, which include Federal Reserve Bank (“FRB”) and Federal Home Loan
Bank (“FHLB”) stock and the investment in subsidiary trust, were $9.2 million at
June 30, 2008 and $6.9 million at December 31, 2007.  A non-cash
impairment charge of $1.5 million pre-tax was recognized as a result of an
other-than-temporary impairment in the value of the $14.2 million investment in
the AMF Ultra Short Mortgage Fund, and a $74,000 pre-tax non-cash impairment
charge was recognized on another mutual fund.
 
 Deposits. At June 30, 2008,
total deposits were $1.24 billion, up $51.7 million or 4.3% compared with
$1.19 billion at December 31, 2007, primarily due to growth in money
market  and savings accounts. Noninterest-bearing demand deposits at
June 30, 2008 increased $15.7 million or 7.5% to $224.9 million compared
with $209.2 million at December 31, 2007. Interest-bearing deposits at
June 30, 2008 increased $35.9 million or 3.7% to $1.02 billion compared with
$981.8 million at December 31, 2007. The Company’s ratios of noninterest-bearing
demand deposits to total deposits at June 30, 2008 and December 31, 2007
were 18.1% and 17.6%, respectively.
  25
  Junior Subordinated
Debentures.Junior subordinated debentures were
$36.1 million at June 30, 2008 and December 31, 2007. 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 net proceeds
to the Company from the sale of the debentures to the Company’s subsidiary
trust, MCBI Statutory Trust I, were used to fund the Company’s acquisition
of Metro United.
 
 Other Borrowings. Other
borrowings are comprised of FHLB notes, security repurchase agreements, the 2008
Subordinated Debentures, and Federal Reserve TT&L.   Other
borrowings at June 30, 2008 were $156.6 million, an increase of $56.8
million compared with $99.8 million at December 31, 2007.  The
increase in other borrowings is due to $37.5 million of additional short-term
borrowings from the FHLB of Dallas, $15.0 of additional short-term borrowings
from FHLB of San Francisco, and the issuance of $4.0 million in 2008
Subordinated Debentures.
 
 In June
2008, the Company issued an aggregate of $4.0 million in its 2008 Subordinated
Debentures to related parties.  The debentures accrue interest at a
fixed rate of 5.0%, payable quarterly commencing on September 30, 2008 and
mature in December 2008.  The proceeds from issuance of the 2008
Subordinated Debentures were used to contribute capital to the
Banks.
 
 The notes
from the FHLB of Dallas bear interest at an average rate of 2.27% and have
maturities ranging from one week to three months. The notes from the FHLB of San
Francisco bear interest at 2.43% and are callable daily at the discretion of the
FHLB, and can be repaid at any time with a one-day notice. Maturities of any
advances from the FHLBs since June 30, 2008 have been renewed with similar
terms.  The security repurchase agreements bear interest at an average
rate of 2.90% 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, for the periods indicated, an analysis of the
Company’s other borrowings:
 
 As
      of and for theSix
      Months EndedJune
      30, 2008
              
              
              As
      of and for theYear
      EndedDecember
      31, 2007(Dollars
      in thousands)FHLB
      Notes:at
      end of period
              
              $
              126,500
              
              
              $
              74,000average
      during the period
              
              
              106,100
              
              
              
              25,516maximum
      month-end balance during the period
              
              
              133,000
              
              
              
              74,000Interest
      rate at end of period
              
              
              2.34
              %
              
              
              4.07
              %Interest
      rate during the period
              
              
              2.66
              
              
              
              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
              
              
              2.87
              
              
              
              2.87Subordinated
      Debentures:at
      end of period
              
              $
              4,000
              
              
              $
              –average
      during the period
              
              
              99
              
              
              
              –maximum
      month-end balance during the period
              
              
              4,000
              
              
              
              –Interest
      rate at end of period
              
              
              5.00
              %
              
              
              –Interest
      rate during the period
              
              
              5.00
              
              
              
              –Federal
      Reserve TT&L:at
      end of period
              
              $
              1,098
              
              
              $
              796average
      during the period
              
              
              667
              
              
              
              819maximum
      month-end balance during the period
              
              
              1,098
              
              
              
              1,067
  26
  Liquidity. The Company’s loan
to deposit ratio at June 30, 2008 was 105.54%. As of this same date, the Company
had commitments to fund loans in the amount of $319.1 million. At June 30,
2008, the Company had stand-by letters of credit of $11.9 million for which
the Company has recorded a liability of $33,000 at June 30, 2008, representing
the fair value of the Company’s probable obligations.  Available
sources to fund these commitments and other cash demands of the Company come
from loan and investment securities repayments, deposit inflows, and lines of
credit from the FHLB of Dallas and San Francisco (“FHLBs”) as well as the
Federal Reserve Bank (“FRB”) discount window. With its current level of
collateral, the Company has the ability to borrow an additional $249.4 million
from the FHLBs, $9.3 million from the FRB discount window, and $20.5 million
from other correspondent banks.
  Capital Resources.
Shareholders’ equity at June 30, 2008 was $121.7 million compared with
$117.4 million at December 31, 2007, an increase of approximately $4.3
million. This increase was primarily the combined result of $4.5 million in
net income, and a net increase in additional paid-in capital of $446,000 due to
the effect of stock-based compensation expense net of the issuance of restricted
stock and dividend reinvestment, partially offset by dividend payments of
approximately $866,000, and an increase in accumulated other comprehensive loss
of $163,000.
 
 The
following table provides a comparison of the Company’s and the Banks’ leverage
and risk-based capital ratios as of June 30, 2007 to the minimum and
well-capitalized regulatory standards:
 
 Minimum Required For Capital Adequacy
      Purposes
              
              
              To Be Categorized as Well Capitalized Under Prompt
      Corrective Action Provisions
              
              
              Actual Ratio At June 30,
    2008The
      CompanyLeverage
      ratio
              
              
              4.00
              %(1)
              
              
              N/A
              %
              
              
              8.75
              %Tier
      1 risk-based capital ratio
              
              
              4.00
              
              
              
              N/A
              
              
              
              8.87Risk-based
      capital ratio
              
              
              8.00
              
              
              
              N/A
              
              
              
              10.07MetroBankLeverage
      ratio
              
              
              4.00
              %(2)
              
              
              5.00
              %
              
              
              8.95
              %Tier
      1 risk-based capital ratio
              
              
              4.00
              
              
              
              6.00
              
              
              
              9.21Risk-based
      capital ratio
              
              
              8.00
              
              
              
              10.00
              
              
              
              10.29Metro
      United BankLeverage
      ratio
              
              
              4.00
              %(3)
              
              
              5.00
              %
              
              
              9.19
              %Tier
      1 risk-based capital ratio
              
              
              4.00
              
              
              
              6.00
              
              
              
              9.02Risk-based
      capital ratio
              
              
              8.00
              
              
              
              10.00
              
              
              
              10.15
 
 (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”.
  27
  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 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 Condensed Consolidated Financial Statements.
 
 In
estimating the fair values for investment securities the Company believes that
independent, third-party market prices are the best evidence of exit price and
where available, estimates are based on such prices. If such third-party market
prices are not available on the exact securities owned, fair values are based on
the market prices of similar instruments, independent pricing service estimates
or are estimated using industry-standard or proprietary models whose inputs may
be unobservable. When market observable data is not available, the valuation of
financial instruments becomes more subjective and involves substantial judgment.
The need to use unobservable inputs generally results from the lack of market
liquidity for certain types of loans and securities, which results in diminished
observability of both actual trades and assumptions that would otherwise be
available to value these instruments.
  28
  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,  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.
  29
  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
   The Company’s 2008 Annual Meeting of Shareholders was
held on May 9, 2008. At the meeting, the shareholders considered and acted upon
the proposals listed below:
 
 1. Helen
Chen, Shirley Clayton, George M. Lee, and David Tai were each elected as a Class
I director and Robert W. Hsueh was elected as a Class II
director.  The four Class I directors were elected to serve until the
Company’s 2011 annual meeting of shareholders, and the one Class II director was
elected to serve until the Company’s 2009 annual meeting of shareholders, and
each until their successors are duly elected and qualify.  The shares
voted for or withheld with respect to each director were as
follows:
 
 
 Director
              
              For
              
              
              WithheldClass
      IHelen
      Chen
              
              7,753,128
              
              
              971,405Shirley
      Clayton
              
              8,509,716
              
              
              214,817George
      M. Lee
              
              8,374,818
              
              
              349,715David
      Tai
              
              8,375,349
              
              
              349,184Class
      IIRobert
      W. Hsueh
              
              8,506,494
              
              
              218,039
 
 The
following Class II and Class III directors continued in office after the 2008
Annual Meeting of Shareholders:  May P. Chu, John Lee, Edward A.
Monto, Don Wang, Krishnan Balasubramanian, Charles Roff and Joe
Ting.
 
 2. The
shareholders ratified the appointment of PricewaterhouseCoopers LLP as the
independent registered public accounting firm of the Company for the year ending
December 31, 2008. A total of 8,707,461 shares were voted in favor of the
proposal, 14,021 shares were voted against the proposal and 3,051 shares
abstained from voting on the proposal.
 
 
 Item 5.
              Other
      Information
  Not
applicable
   30
  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.
      (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.
  31
 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:
      August 8, 2008
              
              George
      M. LeeVice
      Chairman and Chief Executive Officer (principal executive
      officer)Date:
      August 8, 2008
              By:
              /s/ David C. ChoiDavid
      C. ChoiChief
      Financial Officer (principal financial officer/ principal accounting
      officer)
  32
  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.
      (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.






33