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PART I

Item 1.

Financial Statements.

 

METROCORP BANCSHARES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

		September 30,				December 31,
		2007				2006
ASSETS
Cash and due from banks		$	23,463			$	25,709
Federal funds sold and other short-term investments			23,520				125,649
Total cash and cash equivalents			46,983				151,358
Securities available-for-sale, at fair value			158,475				181,544
Other investments			5,558				4,931
Loans, net of allowance for loan losses of $12,865 and $11,436, respectively			1,120,722				875,120
Accrued interest receivable			6,616				5,841
Premises and equipment, net			9,115				7,585
Goodwill			21,827				21,827
Core deposit intangibles, net			843				1,103
Customers' liability on acceptances			6,211				7,693
Foreclosed assets, net			2,266				2,747
Cash value of bank owned life insurance (BOLI)			25,407				–
Other assets			9,744				8,685
Total assets		$	1,413,767			$	1,268,434
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing		$	196,581			$	208,750
Interest-bearing			1,012,987				872,914
Total deposits			1,209,568				1,081,664
Junior subordinated debentures			36,083				36,083
Other borrowings			36,029				26,316
Accrued interest payable			1,876				1,822
Acceptances outstanding			6,211				7,693
Other liabilities			8,549				8,908
Total liabilities			1,298,316				1,162,486
Commitments and contingencies			–				–
Shareholders' equity:
Common stock, $1.00 par value, 50,000,000 shares authorized; 10,994,965 shares issued and 10,950,156 shares and 10,946,135 shares outstanding at September 30, 2007 and December 31, 2006, respectively			10,995				10,995
Additional paid-in capital			27,063				25,974
Retained earnings			79,839				71,783
Accumulated other comprehensive loss			(1,773	)			(2,421	)
Treasury stock, at cost			(673	)			(383	)
Total shareholders' equity			115,451				105,948
Total liabilities and shareholders' equity		$	1,413,767			$	1,268,434

See accompanying notes to condensed consolidated financial statements

 

2

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METROCORP BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2007				2006				2007				2006
Interest income:
Loans		$	24,583			$	19,112			$	68,112			$	53,382
Securities:
Taxable			1,708				2,047				5,340				6,386
Tax-exempt			73				179				234				572
Other investments			70				66				208				187
Federal funds sold and other short-term investments			252				1,171				2,070				2,830
Total interest income			26,686				22,575				75,964				63,357
Interest expense:
Time deposits			8,335				6,665				24,098				17,493
Demand and savings deposits			3,054				1,442				7,082				3,750
Junior subordinated debentures			474				532				1,519				1,577
Other borrowings			164				318				753				957
Total interest expense			12,027				8,957				33,452				23,777
Net interest income			14,659				13,618				42,512				39,580
Provision for loan losses			1,168				114				1,773				560
Net interest income after provision for loan losses			13,491				13,504				40,739				39,020
Noninterest income:
Service fees			1,379				1,397				3,857				4,303
Loan-related fees			183				187				511				622
Letters of credit commissions and fees			230				219				637				597
Gain on sale of loans			21				–				272				–
Increase in cash value of bank owned life insurance			330				–				407				–
Other noninterest income			55				91				179				237
Total noninterest income			2,198				1,894				5,863				5,759
Noninterest expenses:
Salaries and employee benefits			6,594				5,455				18,591				16,077
Occupancy and equipment			2,090				1,907				6,102				5,109
Foreclosed assets, net			39				52				(51	)			213
Other noninterest expense			2,007				2,406				7,199				7,586
Total noninterest expenses			10,730				9,820				31,841				28,985
Income before provision for income taxes			4,959				5,578				14,761				15,794
Provision for income taxes			1,751				2,032				5,390				5,625
Net income		$	3,208			$	3,546			$	9,371			$	10,169
Earnings per common share:
Basic		$	0.29			$	0.32			$	0.86			$	0.93
Diluted		$	0.29			$	0.32			$	0.84			$	0.92
Weighted average shares outstanding:
Basic			10,962				10,924				10,959				10,895
Diluted			11,132				11,153				11,161				11,097
Dividends per common share		$	0.04			$	0.04			$	0.12			$	0.12

 

See accompanying notes to condensed consolidated financial statements

 

3

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METROCORP BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2007				2006				2007				2006
Net income		$	3,208			$	3,546			$	9,371			$	10,169
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on investment securities, net:
Unrealized holding gain (loss) arising during the period			884				1,567				648				(236	)
Less: reclassification adjustment for gain included in net income			–				6				–				8
Other comprehensive income (loss)			884				1,561				648				(244	)
Total comprehensive income		$	4,092			$	5,107			$	10,019			$	9,925

 

METROCORP BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Nine Months Ended September 30, 2007

(In thousands)

(Unaudited)

										Additional								Accumulated Other				Treasury
		Common Stock								Paid-In				Retained				Comprehensive				Stock
		Shares				At Par				Capital				Earnings				Loss				At Cost				Total
Balance at December 31, 2006			10,946			$	10,995			$	25,974			$	71,783			$	(2,421	)		$	(383	)		$	105,948
Re-issuance of treasury stock			40				–				412				–				–				312				724
Repurchase of common stock			(36	)			–				–				–				–				(602	)			(602	)
Stock-based compensation expense			–				–				677				–				–				–				677
Net income			–				–				–				9,371				–				–				9,371
Other comprehensive income			–				–				–				–				648				–				648
Cash dividends ($0.12 per share)			–				–				–				(1,315	)			–				–				(1,315	)
Balance at September 30, 2007			10,950			$	10,995			$	27,063			$	79,839			$	(1,773	)		$	(673	)		$	115,451

 

See accompanying notes to condensed consolidated financial statements

4

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METROCORP BANCSHARES, INC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

		For the Nine Months Ended
		September 30,
		2007				2006
Cash flows from operating activities:
Net income		$	9,371			$	10,169
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation			1,418				1,044
Provision for loan losses			1,773				560
Gain on sale or call of securities, net			–				(11	)
(Gain) loss on foreclosed assets			(268	)			98
Gain on sale of loans			(272	)			–
Amortization of premiums and discounts on securities			47				64
Amortization of deferred loan fees and discounts			(1,999	)			(1,880	)
Amortization of core deposit intangibles			261				360
Stock-based compensation expense			677				257
Excess tax benefits from stock-based compensation expense			–				(12	)
Changes in:
Accrued interest receivable			(775	)			(165	)
Other assets			(1,836	)			2,143
Accrued interest payable			54				203
Other liabilities			(360	)			2,566
Net cash provided by operating activities			8,091				15,396
Cash flows from investing activities:
Purchases of securities available-for-sale			(2,079	)			(1,183	)
Purchase of bank owned life insurance			(25,000	)			–
Proceeds from maturities and principal paydowns of securities available-for-sale			25,492				42,664
Net change in loans			(245,104	)			(71,065	)
Proceeds from sale of foreclosed assets			749				–
Purchases of premises and equipment			(2,949	)			(1,911	)
Cash obtained from acquisition, net of cash paid			–				17,065
Net cash used in investing activities			(248,891	)			(14,430	)
Cash flows from financing activities:
Net change in:
Deposits			127,904				64,945
Other borrowings			9,713				(22	)
Proceeds from stock option exercises			108				698
Re-issuance of treasury stock			616				273
Repurchase of common stock			(602	)			–
Dividends paid			(1,314	)			(1,307	)
Excess tax benefits from stock-based compensation			–				12
Net cash provided by financing activities			136,425				64,599
Net (decrease) increase in cash and cash equivalents			(104,375	)			65,565
Cash and cash equivalents at beginning of period			151,358				81,812
Cash and cash equivalents at end of period		$	46,983			$	147,377

See accompanying notes to condensed consolidated financial statements

 

5

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METROCORP BANCSHARES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements include the accounts of MetroCorp Bancshares, Inc. (the “Company”) and wholly-owned subsidiaries, MetroBank, National Association (“MetroBank”) and Metro United Bank (“Metro United”), in Texas and California, respectively (collectively, the “Banks”).  MetroBank is engaged in commercial banking activities through its twelve branches in the greater Houston and Dallas, Texas metropolitan areas, and Metro United is engaged in commercial banking activities through its six branches in the greater 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 September 30, 2007, results of operations for the three and nine months ended September 30, 2007 and 2006, and cash flows for the three and nine months ended September 30, 2007 and 2006. Interim period results are not necessarily indicative of results for a full-year period.  The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

Certain amounts applicable to the prior periods have been reclassified to conform to the classifications currently used. Such reclassifications had no effect on net income, shareholders’ equity, or cash flows.

These financial statements and the notes thereto should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

6

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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 September 30, 2007																As of December 31, 2006
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value				Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(In thousands)
Securities available for sale
U.S. Government agencies		$	25			$	2			$	(1	)		$	26			$	28			$	1			$	─			$	29
U.S. Government sponsored enterprises			36,933			─					(248	)			36,685				36,906			─					(510	)			36,396
Obligations of state and political subdivisions			5,935				123			─					6,058				7,425				157			─					7,582
Mortgage-backed securities and collateralized mortgage obligations			98,520				66				(2,180	)			96,406				121,196				62				(3,060	)			118,198
Other debt securities			49			─				─					49				143				1				(1	)			143
Investment in ARM and CRA funds			19,807			─					(556	)			19,251				19,658			─					(462	)			19,196
Total available for sale securities		$	161,269			$	191			$	(2,985	)		$	158,475			$	185,356			$	221			$	(4,033	)		$	181,544
Other investments
FHLB/Federal Reserve Bank stock		$	4,475			$	─			$	─			$	4,475			$	3,848			$	─			$	─			$	3,848
Investment in subsidiary trust			1,083			─				─					1,083				1,083			─				─					1,083
Total other investments		$	5,558			$	─			$	─			$	5,558			$	4,931			$	─			$	─			$	4,931

 

The following table displays the gross unrealized losses and fair value of investments as of September 30, 2007 that were in a continuous unrealized loss position for the periods indicated:

		Less Than 12 Months								Greater Than 12 Months								Total
		Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses
		(In thousands)
U.S. Government agencies		$	11			$	(1	)		$	─			$	─			$	11			$	(1	)
U. S. Government sponsored enterprises			1,487				(13	)			35,198				(235	)			36,685				(248	)
Mortgage-backed securities and collateralized mortgage obligations			8,760				(79	)			79,410				(2,101	)			88,170				(2,180	)
Investment in ARM and CRA funds			4,593				(36	)			14,658				(520	)			19,251				(556	)
Total securities		$	14,851			$	(129	)		$	129,266			$	(2,856	)		$	144,117			$	(2,985	)

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

7

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METROCORP BANCSHARES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3. ALLOWANCE FOR LOAN LOSSES

The following table presents an analysis of the allowance for loan losses as of and for the periods indicated:

		As of and for the Three Months								As of and for the Nine Months
		Ended September 30,								Ended September 30,
		2007				2006				2007				2006
		(In thousands)
Allowance for loan losses at beginning of period		$	12,661			$	12,905			$	11,436			$	13,169
Provision for loan losses			1,168				114				1,773				560
Charge-offs			(1,046	)			(1,251	)			(1,573	)			(3,488	)
Recoveries			82				84				1,229				1,611
Allowance for loan losses at end of period		$	12,865			$	11,852			$	12,865			$	11,852

 

 

4. INCOME TAXES

 

The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes--an Interpretation of FASB Statement 109” ("FIN 48") on January 1, 2007. This Interpretation provides that the tax effects from an uncertain tax position can be recognized in the financial statements, only if the position is more likely than not of being sustained on examination by taxing authorities, based on the technical merits of the position.  Adoption of this standard on January 1, 2007 did not have a material effect on the Company's consolidated results of operations or financial condition.  Additionally, the Company had no unrecognized tax benefits as of September 30, 2007, and as a result there is no impact on the Company's effective tax rate.

To the extent penalties and interest would be assessed on any underpayment of income tax, such amounts have been accrued and classified as a component of income tax expense in the financial statements.  This is an accounting policy election made by the Company that is a continuation of the Company's historical policy and will continue to be consistently applied in the future.  As of September 30, 2007, the Company has not accrued any interest and penalties related to unrecognized tax benefits.

The Company does not anticipate a significant change in the balance of unrecognized tax benefits within the next 12 months.

The Company is subject to taxation in the United States and Texas and California.  State income tax returns are generally subject to examination for a period of three to five years after filing.  The state impact of any changes made to the federal return remains subject to examination by various states for a period up to one year after formal notification to the state.  The Company is open to federal tax authority examinations for the tax years ended December 31, 2003 through December 31, 2006.

The Company’s effective tax rate was 36.52% for the nine months ended September 30, 2007 compared to 35.61% for the nine months ended September 30, 2006.  The increase in the effective tax rate for the nine months ended September 30, 2007 was primarily the result of the effect of the Texas margin tax, which replaced the Texas franchise tax, and an increase in Metro United’s provision for loan losses, which is non-deductible for California state income taxes. The increase was partially offset by the non-taxable increase in the cash value of bank owned life insurance.

5. EARNINGS PER COMMON SHARE

Basic earnings per share (“EPS”) is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income available to common shareholders by the weighted-average number of common shares and potentially dilutive common shares outstanding during the period. Stock options can be dilutive common shares and are therefore considered in the earnings per share calculation, if dilutive.  Stock options that are antidilutive are excluded from earnings per share calculation.  Stock options are antidilutive when the exercise price is higher than the market price of the Company’s common stock.  For the nine months ended September 30, 2007 and 2006, there were 34,930 and 42,392 antidilutive stock options, respectively.  The number of potentially dilutive common shares is determined using the treasury stock method.

8

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METROCORP BANCSHARES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

		As of and for the Three Months								As of and for the Nine Months
		Ended September 30,								Ended September 30,
		2007				2006				2007				2006
		(In thousands, except per share amounts)
Net income available to common shareholders		$	3,208			$	3,546			$	9,371			$	10,169
Weighted average common shares outstanding:
Basic			10,962				10,924				10,959				10,895
Potentially dilutive shares issuable under stock option and purchase plans			170				229				202				202
Diluted			11,132				11,153				11,161				11,097
Earnings per common share:
Basic		$	0.29			$	0.32			$	0.86			$	0.93
Diluted		$	0.29			$	0.32			$	0.84			$	0.92

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.

The contractual amount of the Company’s financial instruments with off-balance sheet risk as of September 30, 2007 and December 31, 2006 is presented below:

		As of September 30, 2007				As of December 31, 2006
		(In thousands)
Unfunded loan commitments including unfunded lines of credit		$	311,467			$	234,501
Standby letters of credit			9,831				7,597
Commercial letters of credit			16,240				9,596
Operating leases			9,588				9,718
Total financial instruments with off-balance sheet risk		$	347,126			$	261,412

 

9

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METROCORP BANCSHARES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 nine months ended September 30, 2007 and 2006:

		For the three months ended September 30, 2007																For the three months ended September 30, 2006
		MetroBank				Metro United				Other				Consolidated Company				MetroBank				Metro United				Other				Consolidated Company
		(In thousands)
Total interest income		$	19,976			$	6,695			$	15			$	26,686			$	18,438			$	4,119			$	18			$	22,575
Total interest expense			8,100				3,454				473				12,027				6,442				1,983				532				8,957
Net interest income			11,876				3,241				(458	)			14,659				11,996				2,136				(514	)			13,618
Provision for loan losses			760				408			─					1,168				105				9			─					114
Net interest income after provision for loan losses			11,116				2,833				(458	)			13,491				11,891				2,127				(514	)			13,504
Noninterest income			2,658				128				(588	)			2,198				1,809				85			─					1,894
Noninterest expense			7,993				2,583				154				10,730				8,387				1,715				(282	)			9,820
Income before income tax provision			5,781				378				(1,200	)			4,959				5,313				497				(232	)			5,578
Provision for income taxes			1,980				174				(403	)			1,751				1,881				227				(76	)			2,032
Net income		$	3,801			$	204			$	(797	)		$	3,208			$	3,432			$	270			$	(156	)		$	3,546

 

10

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METROCORP BANCSHARES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

		For the nine months ended September 30, 2007																For the nine months ended September 30, 2006
		MetroBank				Metro United				Other				Consolidated Company				MetroBank				Metro United				Other				Consolidated Company
		(In thousands)
Total interest income		$	58,116			$	17,799			$	49			$	75,964			$	52,153			$	11,153			$	51			$	63,357
Total interest expense			22,752				9,181				1,519				33,452				17,107				5,093				1,577				23,777
Net interest income			35,364				8,618				(1,470	)			42,512				35,046				6,060				(1,526	)			39,580
Provision for loan losses			779				994			─					1,773				441				119			─					560
Net interest income after provision for loan losses			34,585				7,624				(1,470	)			40,739				34,605				5,941				(1,526	)			39,020
Noninterest income			6,341				338				(816	)			5,863				5,528				231			─					5,759
Noninterest expense			24,067				7,085				689				31,841				24,456				4,102				427				28,985
Income before income tax provision			16,859				877				(2,975	)			14,761				15,677				2,070				(1,953	)			15,794
Provision for income taxes			5,878				419				(907	)			5,390				5,475				806				(656	)			5,625
Net income		$	10,981			$	458			$	(2,068	)		$	9,371			$	10,202			$	1,264			$	(1,297	)		$	10,169
		As of September 30, 2007																As of September 30, 2006
		MetroBank				Metro United				Other				Consolidated Company				MetroBank				Metro United				Other				Consolidated Company
		(In thousands)
Net loans		$	816,003			$	304,719			$	–			$	1,120,722			$	671,467			$	156,953			$	–			$	828,420
Total assets			1,064,043				348,951				773				1,413,767				975,177				249,727				1,197				1,226,101
Deposits			921,317				295,056				(6,805	)			1,209,568				840,229				206,505				(2,503	)			1,044,231

 

9.  NEW ACCOUNTING PRONOUNCEMENTS

 

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115,” which establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. This standard requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the company’s choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. This new guidance does not eliminate disclosure requirements included in other accounting standards, including fair value measurement disclosures required by Statement No. 157, “Fair Value Measurements” and Statement  No. 107,  “Disclosures about Fair Value of Financial Instruments.” Statement No. 159 is effective for the Company beginning January 1, 2008. The Company is in the process of determining the impact of adoption of this statement.

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements.”  Statement No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  Statement No. 157 is effective for the Company beginning January 1, 2008.  The Company is in the process of determining the impact of adoption of this statement.

 

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Special Cautionary Notice Regarding Forward-looking Statements

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

·	changes in 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 credit losses;

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

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

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

·	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 the Company’s present and future banking and other subsidiaries, including changes in tax requirements and tax rates.

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

 

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

Overview

The Company recorded net income of $3.2 million for the three months ended September 30, 2007, down approximately $338,000 compared with net income of $3.5 million for the same quarter in 2006. The Company’s diluted earnings per share (“EPS”) for the three months ended September 30, 2007 was $0.29, a decrease of $0.03 per diluted share compared with diluted EPS of $0.32 for the same quarter in 2006. Net income for the nine months ended September 30, 2007 was $9.4 million, a decrease of approximately $798,000 compared with $10.2 million for the same period in 2006. The Company’s diluted EPS for the nine months ended September 30, 2007 was $0.84, a decrease of $0.08 compared with $0.92 for the same period in 2006

Total assets were $1.41 billion at September 30, 2007, up approximately $145.3 million or 11.5% compared with $1.27 billion at December 31, 2006. Investment securities at September 30, 2007 were $158.5 million, down approximately $23.0 million or 12.7% compared with $181.5 million at December 31, 2006.  Net loans at September 30, 2007 were $1.12 billion, up approximately $245.6 million or 28.1% compared with $875.1 million at December 31, 2006. Total deposits at September 30, 2007 were $1.21 billion, up approximately $127.9 million or 11.8% compared with $1.08 billion at December 31, 2006. The Company’s return on average assets (“ROAA”) for the three months ended September 30, 2007 and 2006 was 0.91% and 1.17%, respectively.  The Company’s ROAA for the nine months ended September 30, 2007 and 2006 was 0.94% and 1.16%, respectively.

Shareholders’ equity at September 30, 2007 was $115.5 million compared with $105.9 million at December 31, 2006, an increase of approximately $9.6 million or 9.0%.  The Company’s return on average equity (“ROAE”) for the three months ended September 30, 2007 and 2006 was 11.11% and 14.05%, respectively.  The Company’s ROAE for the nine months ended September 30, 2007 and 2006 was 11.24% and 13.99%, respectively.

On August 24, 2007, the Company’s board of directors authorized a stock repurchase program which calls for the repurchase of up to 500,000 shares of the Company's common stock. Transactions may occur from time to time, either on the open market or in privately negotiated transactions. The stock repurchase is subject to market conditions, corporate and regulatory requirements. During the three months ended September 30, 2007, the Company repurchased 36,061 shares of its common stock.

In September 2007, MetroBank closed its Clear Lake branch in Houston, Texas in an effort to realign its branch network to improve efficiency.

Details of the changes in the various components of net income are further discussed below.

          

Results of Operations

Net Interest Income and Net Interest Margin. For the three months ended September 30, 2007, net interest income, before the provision for loan losses, was $14.7 million, up approximately $1.1 million or 7.6% compared with $13.6 million for the same quarter in 2006. The increase was due primarily to loan growth and increases in average yield on earning assets.  The increase reflects a $4.1 million increase in interest income that was partially offset by a $3.0 million increase in interest expense. Average interest-earning assets for the three months ended September 30, 2007 were $1.30 billion, up approximately $167.4 million or 14.8% compared with $1.13 billion for the same quarter in 2006. The weighted average yield on interest-earning assets for the three months ended September 30, 2007 was 8.15%, up 24 basis points compared with 7.91% for the same quarter in 2006. The increase in yield was the result of an increase in loans, which had higher yields, and a decline in other interest-earning assets, which had lower yields. Average interest-bearing liabilities for the three months ended September 30, 2007 were $1.06 billion, up approximately $162.3 million or 18.1% compared with $895.5 million for the same quarter in 2006. The weighted average rate paid on interest-bearing liabilities for the three months ended September 30, 2007 was 4.51%, up 54 basis points compared with 3.97% for the same quarter in 2006.

For the nine months ended September 30, 2007, net interest income, before the provision for loan losses, was $42.5 million, up approximately $2.9 million or 7.4% compared with $39.6 million for the same period in 2006. The increase was due primarily to loan growth and increases in average yield.  The increase reflects a $12.6 million increase in interest income that was partially offset by a $9.7 million increase in interest expense.  Average interest-earning assets for the nine months ended September 30, 2007 were $1.26 billion, up approximately $154.2 million or 14.0% compared with $1.10 billion for the same period in 2006. The weighted average yield on interest-earning assets for the nine months ended September 30, 2007 was 8.09%, up 40 basis points compared with 7.69% for the same period in 2006.  The increase in yield was the result of an increase in loans, which had higher yields, and a decline in other interest-earning assets, which had lower yields.  Average interest-bearing liabilities for the nine months ended September 30, 2007 were $1.00 billion, up approximately $133.8 million or 15.4% compared with $870.4 million for the same period in 2006. The weighted average rate paid on interest-bearing liabilities for the nine months ended September 30, 2007 was 4.45%, up 80 basis points compared with 3.65% for the same period in 2006.

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The net interest margin for the three months ended September 30, 2007 was 4.48%, down 29 basis points compared with 4.77% for the same quarter in 2006.  The decrease was primarily the result of higher interest rates incurred on interest-bearing deposits, which increased 62 basis points from the same period in 2006. The yield on average earning assets increased 24 basis points, which was offset by an increase in the cost of average earning assets of 53 basis points.

The net interest margin for the nine months ended September 30, 2007 was 4.53%, down 28 basis points compared with 4.81% for the same period in 2006. The decrease was primarily the result of higher interest rates incurred on interest-bearing deposits, which increased 89 basis points from the same period in 2006. For the nine months ended September 30, 2007, the yield on average earning assets increased 40 basis points, which was offset by an increase in the cost of average earning assets of 68 basis points.

Total Interest Income. Total interest income for the three months ended September 30, 2007 was $26.7 million, up approximately $4.1 million or 18.2% compared with $22.6 million for the same period in 2006. Total interest income for the nine months ended September 30, 2007 was $76.0 million, up approximately $12.6 million or 19.9% compared with $63.4 million for the same period in 2006.  The higher interest income for both the three and nine months ended September 30, 2007, compared with the same periods in 2006, was primarily due to loan growth and increases in average yield.

Interest Income from Loans. Interest income from loans for the three months ended September 30, 2007 was $24.6 million, up approximately $5.5 million or 28.6% compared with $19.1 million for the same quarter in 2006. The increase was the result of a higher volume of loans.   Average total loans for the three months ended September 30, 2007 were $1.11 billion compared with average total loans for the same quarter in 2006 of $833.9 million, an increase of approximately $279.6 million or 33.5%. For the three months ended September 30, 2007, the yield on average total loans was 8.76%, down 33 basis points compared with 9.09% for the same quarter in 2006.

Interest income from loans for the nine months ended September 30, 2007 was $68.1 million, up approximately $14.7 million or 27.6% compared with $53.4 million for the same period in 2006. The increase was the result of a higher volume of loans.   Average total loans for the nine months ended September 30, 2007 were $1.03 billion compared with average total loans for the same period in 2006 of $803.6 million, an increase of approximately $223.5 million or 27.8%. For the nine months ended September 30, 2007, the yield on average total loans was 8.87%, down 1 basis point compared with 8.88% for the same period in 2006.

Approximately $779.3 million or 68.5% of the total loan portfolio are variable rate loans that periodically reprice and are sensitive to changes in market interest rates.  At September 30, 2007, the yield on average total loans was approximately 57 basis points above the prime rate.  To lessen interest rate sensitivity in the event of a falling interest rate environment, the Company originates variable rate loans with interest rate floors.  At September 30, 2007, approximately $519.9 million in loans or 45.7% of the total loan portfolio were variable rate loans with interest rate floors.  These loans carried a weighted average interest rate of 8.51%.  At September 30, 2006, variable rate loans with interest rate floors carried a weighted average interest rate of 9.16% and comprised 56.1% of the total loan portfolio.

Interest Income from Investments. Interest income from investments (which includes investment securities, Federal Funds sold, and other investments) for the three months ended September 30, 2007 was $2.1 million, a decrease of approximately $1.4 million or 39.3% compared with $3.5 million for the same quarter in 2006.  Average total investments for the three months ended September 30, 2007 were $185.9 million compared with average total investments for the same quarter in 2006 of $298.0 million, a decrease of approximately $112.1 million or 37.6%. The decrease in interest income from investments and average total investments was primarily the result of maturities and paydowns on the investment portfolio, which was reinvested in loan growth.  For the three months ended September 30, 2007, the average yield on investments was 4.49% compared with 4.61% for the same quarter in 2006, a decrease of 12 basis points.

Interest income from investments for the nine months ended September 30, 2007 was $7.9 million, down approximately $2.1 million or 21.3% compared with $10.0 million for the same period in 2006.  Average total investments for the nine months ended September 30, 2007 were $228.2 million compared with average total investments for the same quarter in 2006 of $297.5 million, a decrease of approximately $69.3 million or 23.3%. The decrease in interest income from investments and average total investments was primarily the result of maturities and paydowns on the investment portfolio, which was reinvested in loan growth.   For the nine months ended September 30, 2007, the average yield on investments was 4.60% compared with 4.48% for the same period in 2006, an increase of 12 basis points.

Total Interest Expense. Total interest expense for the three months ended September 30, 2007 was $12.0 million, up approximately $3.0 million or 34.3% compared with $9.0 million for the same quarter in 2006. Total interest expense for the nine months ended September 30, 2007 was $33.5 million, up approximately $9.7 million or 40.7% compared with $23.8 million for the same period in 2006. Interest expense increased for both the three and nine months ended September 30, 2007 primarily due to increases in interest rates paid on deposits and growth in money market and time deposits.

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        Interest Expense on Deposits. Interest paid on interest-bearing deposits for the three months ended September 30, 2007 was $11.4 million, up approximately $3.3 million or 40.5% compared with $8.1 million for the same period in 2006. The increase was primarily due to higher interest rates paid for interest-bearing deposits and growth in money market and time deposits. Average interest-bearing deposits for the three months ended September 30, 2007 were $1.01 billion compared with average interest-bearing deposits for the same quarter in 2006 of $833.8 million, an increase of $174.4 million or 20.9%. The average interest rate paid on interest-bearing deposits for the three months ended September 30, 2007 was 4.48% compared with 3.86% for the same quarter in 2006, an increase of 62 basis points. The increase in interest rates primarily reflected the impact of market rate increases.

 

Interest paid on interest-bearing deposits for the nine months ended September 30, 2007 was $31.2 million, up approximately $10.0 million or 46.8% compared with $21.2 million for the same period in 2006.  The increase was primarily due to higher interest rates paid for interest-bearing deposits and growth in money market and time deposits.  Average interest-bearing deposits for the nine months ended September 30, 2007 were $947.5 million compared with average interest-bearing deposits for the same period in 2006 of $808.3 million, an increase of $139.2 million or 17.2%. The average interest rate paid on interest-bearing deposits for the nine months ended September 30, 2007 was 4.40% compared with 3.51% for the same period in 2006, an increase of 89 basis points.  The increase in interest rates primarily reflected the impact of market rate increases.

Interest Expense on Junior Subordinated Debentures.  Interest paid on junior subordinated debentures for the three months ended September 30, 2007 and 2006 was $474,000 and $532,000, respectively. Interest paid on junior subordinated debentures for the nine months ended September 30, 2007 and 2006 was $1.5 million and $1.6 million, respectively. Average junior subordinated debentures for the three and nine months ended September 30, 2007 and 2006 were $36.1 million. The average interest rate paid on junior subordinated debentures for the three months ended September 30, 2007 and 2006 was 5.14% and 5.77%, respectively, and for the nine months ended September 30, 2007 was 5.55% and 5.76%, respectively. The junior subordinated debentures accrue interest at a fixed rate of 5.76% based on a 360 day year, 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 paid on other borrowed funds for the three months ended September 30, 2007 was $164,000, down approximately $154,000 compared with $318,000 for the same period in 2006.   Interest paid on other borrowed funds for the nine months ended September 30, 2007 was $753,000, down approximately $204,000 compared with $957,000 for the same period in 2006.   The decrease in interest expense for both the three and nine months ended September 30, 2007 was primarily due to the payoff of Federal Home Loan Bank  (“FHLB”) advances that were called on June 15, 2007. Average other borrowed funds for the three months ended September 30, 2007 were $13.5 million compared with average other borrowed funds for the same quarter in 2006 of $25.7 million, a decrease of $12.2 million.The average interest rate paid on borrowed funds for the three months ended September 30, 2007 was 4.82%, compared with 4.91% for the same quarter in 2006, a decrease of 9 basis points.  Average other borrowed funds for the nine months ended September 30, 2007 were $20.6 million compared with average other borrowed funds for the same period in 2006 of $26.0 million, a decrease of $5.4 million.The average interest rate paid on borrowed funds for the nine months ended September 30, 2007 was 4.89%, compared with 4.92% for the same period in 2006, a decrease of 3 basis points.

 

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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 September 30,
		2007												2006
		Average				Interest				Average				Average				Interest				Average
		Outstanding				Earned/				Yield/				Outstanding				Earned/				Yield/
		Balance				Paid				Rate(1)				Balance				Paid				Rate(1)
		(Dollars in thousands)
Assets
Interest-earning assets:
Total loans		$	1,113,551			$	24,583				8.76	%		$	833,943			$	19,112				9.09	%
Taxable securities			155,541				1,708				4.36				188,429				2,047				4.31
Tax-exempt securities			5,934				73				4.88				14,657				179				4.85
Other investments			4,600				70				6.04				4,865				66				5.38
Federal funds sold and other short-term investments			19,799				252				5.05				90,096				1,171				5.16
Total interest-earning assets			1,299,425				26,686				8.15				1,131,990				22,575				7.91
Allowance for loan losses			(12,949	)											(12,603	)
Total interest-earning assets, net of allowance for loan losses			1,286,476												1,119,387
Noninterest-earning assets			110,980												86,913
Total assets		$	1,397,456											$	1,206,300
Liabilities and shareholders' equity
Interest-bearing liabilities:
Interest-bearing demand deposits		$	63,529			$	191				1.19	%		$	71,404			$	217				1.21	%
Savings and money market accounts			283,115				2,863				4.01				166,926				1,225				2.91
Time deposits			661,591				8,335				5.00				595,467				6,665				4.44
Junior subordinated debentures			36,083				474				5.14				36,083				532				5.77
Other borrowings			13,505				164				4.82				25,669				318				4.91
Total interest-bearing liabilities			1,057,823				12,027				4.51				895,549				8,957				3.97
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits			205,816												191,196
Other liabilities			19,245												19,422
Total liabilities			1,282,884												1,106,167
Shareholders' equity			114,572												100,133
Total liabilities and shareholders' equity		$	1,397,456											$	1,206,300
Net interest income						$	14,659											$	13,618
Net interest spread											3.64	%											3.94	%
Net interest margin											4.48	%											4.77	%

 

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(1)

Annualized.

 

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		For The Nine Months Ended September 30,
		2007												2006
		Average				Interest				Average				Average				Interest				Average
		Outstanding				Earned/				Yield/				Outstanding				Earned/				Yield/
		Balance				Paid				Rate(1)				Balance				Paid				Rate(1)
		(Dollars in thousands)
Assets
Interest-earning assets:
Total loans		$	1,027,092			$	68,112				8.87	%		$	803,553			$	53,382				8.88	%
Taxable securities			163,562				5,340				4.37				199,145				6,386				4.29
Tax-exempt securities			6,341				234				4.93				15,538				572				4.92
Other investments			4,797				208				5.80				4,458				187				5.61
Federal funds sold and other short-term investments			53,479				2,070				5.18				78,329				2,830				4.83
Total interest-earning assets			1,225,271				75,964				8.09				1,101,023				63,357				7.69
Allowance for loan losses			(12,365	)											(13,437	)
Total interest-earning assets, net of allowance for loan losses			1,242,906												1,087,586
Noninterest-earning assets			94,096												85,400
Total assets		$	1,337,002											$	1,172,986
Liabilities and shareholders' equity
Interest-bearing liabilities:
Interest-bearing demand deposits		$	65,294			$	583				1.19	%		$	75,500			$	608				1.08	%
Savings and money market accounts			231,031				6,499				3.76				159,975				3,142				2.63
Time deposits			651,203				24,098				4.95				572,854				17,493				4.08
Junior subordinated debentures			36,083				1,519				5.55				36,083				1,577				5.76
Other borrowings			20,601				753				4.89				26,021				957				4.92
Total interest-bearing liabilities			1,004,212				33,452				4.45				870,433				23,777				3.65
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits			203,729												189,545
Other liabilities			17,574												15,806
Total liabilities			1,225,515												1,075,784
Shareholders' equity			111,487												97,202
Total liabilities and shareholders' equity		$	1,337,002											$	1,172,986
Net interest income						$	42,512											$	39,580
Net interest spread											3.64	%											4.04	%
Net interest margin											4.53	%											4.81	%

 

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(1)

Annualized.

 

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The following table presents the dollar amount of changes in interest income and interest expense for the major components of interest-earning assets and interest-bearing liabilities and distinguishes between changes in outstanding balances and changes in interest rates for the three and nine months ended September 30, 2007 compared with the three and nine months ended September 30, 2006. For purposes of this table, changes attributable to both rate and volume have been allocated to each accordingly.

		Three Months Ended September 30,												Nine Months Ended September 30,
		2007 vs 2006												2007 vs 2006
		Increase (Decrease)												Increase (Decrease)
		Due to												Due to
		Volume				Rate				Total				Volume				Rate				Total
		(Dollars in thousands)
Interest-earning assets:
Loans		$	6,408			$	(937	)		$	5,471			$	14,850			$	(120	)		$	14,730
Taxable securities			(357	)			18				(339	)			(1,141	)			95				(1,046	)
Tax-exempt securities			(107	)			1				(106	)			(339	)			1				(338	)
Other investments			(4	)			8				4				14				7				21
Federal funds sold and other short-term investments			(914	)			(5	)			(919	)			(898	)			138				(760	)
Total increase (decrease) in interest income			5,026				(915	)			4,111				12,486				121				12,607
Interest-bearing liabilities:
Interest-bearing demand deposits			(24	)			(2	)			(26	)			(82	)			57				(25	)
Savings and money market accounts			853				785				1,638				1,396				1,961				3,357
Time deposits			740				930				1,670				2,393				4,212				6,605
Junior subordinated debentures			–				(58	)			(58	)			–				(58	)			(58	)
Other borrowings			(151	)			(3	)			(154	)			(199	)			(5	)			(204	)
Total increase in interest expense			1,418				1,652				3,070				3,508				6,167				9,675
Increase (decrease) in net interest income		$	3,608			$	(2,567	)		$	1,041			$	8,978			$	(6,046	)		$	2,932

Provision for Loan Losses. Provisions for loan losses are charged to income to bring the Company’s allowance for loan losses to a level which management considers adequate to absorb probable losses inherent in the loan portfolio. The provision for loan losses for the three months ended September 30, 2007 was $1.2 million, up approximately $1.1 million, compared with $114,000 for the same period in 2006.  The provision for loan losses for the nine months ended September 30, 2007 was $1.8 million, up approximately $1.2 million, compared with $560,000 for the same period in 2006. Although asset quality improved with a $6.6 million or 41.3% reduction in total nonperforming assets since September 30, 2006, the provision for loan losses increased as a result of the $293.3 million or 34.9% growth in total loans since September 30, 2006. The allowance for loan losses as a percent of total loans (net of unearned discounts, interest, and deferred fees) at September 30, 2007 and 2006 was 1.13% and 1.41%, respectively. The allowance for loan losses as a percent of total loans at December 31, 2006 was 1.29%.

 

Noninterest Income. Noninterest income for the three months ended September 30, 2007 was $2.2 million, up $304,000 compared with the same period in 2006. The increase in noninterest income for the three months ended September 30, 2007 was primarily due to increases in the cash value of bank owned life insurance (up $330,000), which was purchased in the second quarter of 2007.  Noninterest income for the nine months ended September 30, 2007 was $5.9 million, up $104,000 or 1.8% compared with the same period in 2006. The increase in noninterest income for the nine months ended September 30, 2007 was primarily due to increases in the cash value of bank owned life insurance (up $407,000) and the gain on sale of SBA loans ($272,000), that was partially offset by decreases in service fees (down $446,000) and other loan-related fees (down $111,000).

Noninterest Expense. Noninterest expense for the three months ended September 30, 2007 was $10.7 million, up approximately $910,000 or 9.3% compared with $9.8 million for the same period in 2006.  Noninterest expense for the nine months ended September 30, 2007 was $31.8 million, up approximately $2.8 million or 9.9% compared with $29.0 million for the same period in 2006.  The increase for both the three and nine months ended September 30, 2007 was primarily due to increases in salaries and benefits expense and occupancy and equipment expense. Changes in the components of noninterest expenses are discussed below.

Salaries and benefits expense for the three months ended September 30, 2007 was $6.6 million, up $1.1 million compared with $5.5 million for the same period in 2006. Salaries and benefits expense for the nine months ended September 30, 2007 was $18.6 million, up $2.5 million compared with $16.1 million for the same period in 2006.  The increase for both the three and nine months ended September 30, 2007 was primarily due to an increase in staffing at Metro United for new branches and supporting personnel.

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Occupancy and equipment expense for the three months ended September 30, 2007 was $2.1 million, up $183,000 or 9.6% compared with $1.9 million for the same period in 2006. Occupancy and equipment expense for the nine months ended September 30, 2007 was $6.1 million, up $993,000 or 19.4% compared with $5.1 million for the same period in 2006.   The increase for both the three and nine months ended September 30, 2007 was primarily due to the new branches in California opened in the first six months of 2007.

Other noninterest expense for the three months ended September 30, 2007 was $2.0 million, a decrease of $399,000 or 16.6% compared with $2.4 million for the same period in 2006. The decrease for the three months ended September 30, 2007 was primarily the result of an elimination of the remaining tax liability related to the Texas franchise tax, which is now included in the tax provision. The Texas franchise tax has been replaced by the Texas margin tax. Other noninterest expense for the nine months ended September 30, 2007 was $7.2 million, down $387,000 from $7.6 million at September 30, 2006. The decrease for the nine months ended September 30, 2007 was primarily the result of decreases in professional fees ($606,000), consultant fees ($345,000), franchise taxes ($312,000), and intangible asset amortization ($99,000), which were partially offset by increases in telecommunications expense ($234,000), online banking expense ($175,000), other outside services ($130,000), the provision for unfunded loan commitments ($123,000), and other miscellaneous expenses ($313,000).

The Company’s efficiency ratio for the three months ended September 30, 2007 was 63.65% compared with 63.31% for the same quarter in 2006, with the increase being primarily due to an increase in noninterest expenses discussed above.  The Company’s efficiency ratio for the nine months ended September 30, 2007 was 65.82% compared with 63.93% for the same period in 2006.

Income Taxes. Income tax expense for the three months ended September 30, 2007 and 2006 was $1.8 million and $2.0 million, respectively. The Company’s effective tax rate was 35.31% and 36.43% for the three months ended September 30, 2007 and 2006, respectively. The decrease in the effective tax rate for the three months ended September 30, 2007 was attributed primarily to the non-taxable increase in the cash value of bank owned life insurance.  Income tax expense for the nine months ended September 30, 2007 and 2006 was $5.4 million and $5.6 million, respectively. The Company’s effective tax rate was 36.52% and 35.61% for the nine months ended September 30, 2007 and 2006, respectively.   The increase in the effective tax rate for the nine months ended September 30, 2007 was primarily the result of the effect of the Texas margin tax, which replaced the Texas franchise tax, and an increase in Metro United’s provision for loan losses, which is non-deductible for California state income taxes. The increase was partially offset by the non-taxable increase in the cash value of bank owned life insurance.

Financial Condition

Loan Portfolio. Total loans at September 30, 2007 were $1.13 billion, up $247.0 million or 27.9% compared with $886.6 million at December 31, 2006. Compared with the loan level at December 31, 2006, commercial and industrial loans increased $51.7 million and real estate loans increased $191.9 million during the nine months ended September 30, 2007.  At September 30, 2007 and December 31, 2006, the ratio of total loans to total deposits was 93.72% and 81.96%, respectively. At the same dates, total loans represented 80.18% and 69.89% of total assets, respectively.

 

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The following table summarizes the loan portfolio of the Company by type of loan:

		As of September 30, 2007								As of December 31, 2006
		Amount				Percent				Amount				Percent
		(Dollars in thousands)
Commercial and industrial		$	418,729				36.82	%		$	367,072				41.25	%
Real estate mortgage
Residential			6,093				0.54				4,847				0.55
Commercial			583,891				51.35				424,431				47.70
			589,984				51.89				429,278				48.25
Real estate construction
Residential			40,567				3.57				27,781				3.13
Commercial			76,747				6.75				58,311				6.55
			117,314				10.32				86,092				9.68
Consumer and other			11,081				0.97				7,332				0.82
Gross loans			1,137,108				100.00	%			889,774				100.00	%
Unearned discounts, interest and deferred fees			(3,521	)							(3,218	)
Total loans			1,133,587								886,556
Allowance for loan losses			(12,865	)							(11,436	)
Loans, net		$	1,120,722							$	875,120

 

Nonperforming Assets. Total nonperforming assets at September 30, 2007 were $9.4 million, a decrease of $2.8 million or 23.0% compared with $12.2 million at December 31, 2006.  The decrease was primarily due ­­­­to the payoffs of two loans  in the amount of $3.9 million,  and a charge-off of an $894,000 loan, which was partially offset by a $1.9 million loan  transferred to nonperforming status.  At September 30, 2007, nonperforming assets primarily consisted of $6.1 million in nonaccrual loans, $1.0 million in accruing loans that were 90 days or more past due, and $2.3 million in other real estate. Approximately $3.6 million of the nonaccrual loans are collateralized by real estate, which represented 59.7% of total nonaccrual loans at September 30, 2007.  Net nonperforming assets at September 30, 2007 were $6.7 million compared with $9.3 million at December 31, 2006, a decrease of $2.6 million or 28.1%. Other real estate decreased $481,000 to $2.3 million at September 30, 2007 compared with $2.7 million at December 31, 2006 due to the sale of two commercial properties.

The ratio of net nonperforming assets to total loans and other real estate at September 30, 2007 and December 31, 2006 were 0.59% and 1.05%, respectively. The ratio of net nonperforming assets to total assets was reduced to 0.47% at September 30, 2007 compared with 0.74% at December 31, 2006. On October 5, 2007, an accruing loan that was 90 days or more past due was settled which reduced total nonperforming assets to $8.5 million.  Had this settlement occurred during the third quarter, the ratio of net nonperforming assets to total assets at September 30, 2007 would have been reduced to 0.41%    Net nonperforming assets are net of 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 $2.7 million at September 30, 2007 and $2.9 million at December 31, 2006.

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 is repurchased, until the time the nonperforming loan is either restored to an accrual status or the Company files a claim with the SBA for the guaranteed portion of the loan.

 

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

		As of				As of
		September 30, 2007				December 31, 2006
		(Dollars in thousands)
Nonaccrual loans		$	6,079			$	9,414
Accruing loans 90 days or more past due			1,036				29
Other real estate (“ORE”)			2,266				2,747
Total nonperforming assets			9,381				12,190
Nonperforming loans guaranteed by the SBA, Ex-Im Bank and OCCGF			(2,667	)			(2,857	)
Net nonperforming assets		$	6,714			$	9,333
Total nonperforming assets to total assets			0.66	%			0.96	%
Total nonperforming assets to total loans and ORE			0.83	%			1.37	%
Net nonperforming assets to total assets (1)			0.47	%			0.74	%
Net nonperforming assets to total loans and ORE (1)			0.59	%			1.05	%

 

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(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 September 30, 2007				As of December 31, 2006
		(In thousands)
Impaired loans with no SFAS No. 114 valuation reserve		$	3,391			$	6,715
Impaired loans with a SFAS No. 114 valuation reserve			2,688				2,699
Total recorded investment in impaired loans		$	6,079			$	9,414
Valuation allowance related to impaired loans		$	1,273			$	900

The average recorded investment in impaired loans during the nine months ended September 30, 2007 and the year ended December 31, 2006 was $6.1 million and $12.1 million, respectively.  Interest income on impaired loans of $37,000 and $118,000 was recognized for cash payments received during the three and nine months ended September 30, 2007, respectively.

 Allowance for Loan Losses and Reserve for Unfunded Lending Commitments. At September 30, 2007 and 2006, the allowance for loan losses was $12.9 million and $11.9 million, respectively, or 1.13% and 1.41% of total loans, respectively.  At December 31, 2006, the allowance for loan losses was $11.4 million, or 1.29% of total loans.  Net charge-offs for the three months ended September 30, 2007 were $964,000 compared with net charge-offs of $1.2 million for the same period in 2006, and primarily the result of one charge-off of approximately $894,000.  Net charge-offs for the nine months ended September 30, 2007 were $344,000 compared with net charge-offs of $1.9 million for the same period in 2006.

The Company maintains a reserve for unfunded lending 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.

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The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments and is maintained at levels that the Company believes are adequate to absorb probable losses inherent in the loan portfolio and unfunded lending commitments as of the date of the financial statements. The Company employs a systematic methodology for determining the allowance for credit losses that consists of four components: (1) a formula-based general reserve based on historical average losses by loan grade, (2) specific reserves on larger individual credits that are based on the difference between the current loan balance and the loan’s observable market price, (3) an unallocated component that reflects the inherent uncertainty of estimates and unforeseen events that allow MetroBank and Metro United to fully capture probable losses in the loan portfolio, and (4) a reserve for unfunded lending commitments. Policies and procedures have been developed to assess the adequacy of the allowance for loan losses and the reserve for unfunded lending commitments that include the monitoring of qualitative and quantitative trends including changes in past due levels, criticized and 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.

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

		As of and for the Three Months Ended September 30,
		2007				2006
		(Dollars in thousands)
Average total loans outstanding for the period		$	1,113,551			$	833,943
Total loans outstanding at end of period		$	1,133,587			$	840,272
Allowance for loan losses at beginning of period		$	12,661			$	12,905
Provision for loan losses			1,168				114
Charge-offs:
Commercial and industrial			(1,031	)			(1,192	)
Real estate mortgage			–				–
Real estate construction			–				–
Consumer and other			(15	)			(59	)
Total charge-offs			(1,046	)			(1,251	)
Recoveries:
Commercial and industrial			42				83
Real estate mortgage			–				–
Real estate construction			–				–
Consumer and other			40				1
Total recoveries			82				84
Net charge-offs			(964	)			(1,167	)
Allowance for loan losses at end of period			12,865				11,852
Reserve for unfunded lending commitments at beginning of period			1,026				552
Provision for unfunded lending commitments			(8	)			96
Reserve for unfunded lending commitments at end of period			1,018				648
Allowance for credit losses at end of period		$	13,883			$	12,500
Ratio of net charge-offs to end of period total loans			(0.09	)%			(0.14	)%

 

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		As of and for the Nine Months Ended September 30,
		2007				2006
		(Dollars in thousands)
Average total loans outstanding for the period		$	1,027,092			$	803,553
Total loans outstanding at end of period		$	1,133,587			$	840,272
Allowance for loan losses at beginning of period		$	11,436			$	13,169
Provision for loan losses			1,773				560
Charge-offs:
Commercial and industrial			(1,551	)			(3,296	)
Real estate mortgage			–				(21	)
Real estate construction			–				–
Consumer and other			(22	)			(171	)
Total charge-offs			(1,573	)			(3,488	)
Recoveries:
Commercial and industrial			1,086				678
Real estate mortgage			99				851
Real estate construction			–				–
Consumer and other			44				82
Total recoveries			1,229				1,611
Net charge-offs			(344	)			(1,877	)
Allowance for loan losses at end of period			12,865				11,852
Reserve for unfunded lending commitments at beginning of period			793				546
Provision for unfunded lending commitments			225				102
Reserve for unfunded lending commitments at end of period			1,018				648
Allowance for credit losses at end of period		$	13,883			$	12,500
Ratio of allowance for loan losses to end of period total loans			1.13	%			1.41	%
Ratio of net charge-offs to end of period total loans			(0.03	)%			(0.22	)%
Ratio of allowance for loan losses to end of period total nonperforming loans (1)			180.81	%			119.14	%
Ratio of allowance for loan losses to end of period net nonperforming loans (2)			289.23	%			157.02	%

 

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

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

Securities. At September 30, 2007, the securities portfolio was $158.5 million, a decrease of  $23.0 million or 12.7% compared with $181.5 million at December 31, 2006. The decrease was primarily due to principal payments and maturities on tax-free municipal bonds (“municipals”), mortgage-backed securities and collateralized mortgage obligations (“CMOs”).  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. The securities portfolio has been funded primarily by the liquidity created from deposit growth and loan prepayments in excess of loan funding requirements.   Other investments, which include Federal Reserve Bank (“FRB”) and Federal Home Loan Bank (“FHLB”) stock and the investment in subsidiary trust, were $5.6 million at September 30, 2007 and $4.9 million at December 31, 2006.

Bank Owned Life Insurance (“BOLI”).  During the second quarter of 2007, the Company purchased $25.0 million in BOLI.  As a result of an increase in the cash surrender value, the cash value of BOLI increased to $25.4 million at September 30, 2007.  The increase was recorded as other noninterest income in the condensed consolidated statements of income.

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Deposits. At September 30, 2007, total deposits were $1.21 billion, up $127.9 million or 11.8% compared with $1.08 billion at December 31, 2006.  The increase, primarily in money market accounts and time deposits, was mainly the result of a deposit campaign held during the second quarter of 2007. Noninterest-bearing demand deposits at September 30, 2007 decreased $12.2 million or 5.8% to $196.6 million compared with $208.8 million at December 31, 2006. Interest-bearing deposits at September 30, 2007 increased $140.1 million or 16.0% to $1.01 billion compared with $872.9 million at December 31, 2006. The Company’s ratios of noninterest-bearing demand deposits to total deposits at September 30, 2007 and December 31, 2006 were 16.3% and 19.3%, respectively.

Junior Subordinated Debentures.  Junior subordinated debentures were $36.1 million at September 30, 2007 and December 31, 2006. The junior subordinated debentures accrue interest at a fixed rate of 5.76% based on a 360 day year 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 at September 30, 2007 were $36.0 million compared with $26.3 million at December 31, 2006.  The change in other borrowings is due to the payoff of the two ten-year loans totaling $25.0 million from the FHLB of Dallas that were called on June 15, 2007.  The payoff was partially offset by the addition of three short-term loans totaling $35.0 million from the FHLB of Dallas. The loans bore interest at rates ranging from 4.62% to 4.95% with maturity dates ranging from October 5, 2007 to October 26, 2007, and were repaid on the stated maturity date. The advance from the FHLB of San Francisco that was outstanding at June 30, 2007 was paid during August 2007.

The following table provides, for the periods indicated, an analysis of the Company’s other borrowings:

 

		As of and for the Nine Months Ended September 30, 2007				As of and for the Year Ended December 31, 2006
		(Dollars in thousands)
FHLB notes:
at end of period		$	35,000			$	25,000
average during the period			19,773				25,247
maximum month-end balance during the period			35,000				25,000
Interest rate at end of period			4.75	%			4.99	%
Interest rate during the period			5.09	%			5.05	%
Federal Reserve TT&L:
at end of period		$	1,029			$	1,316
average during the period			828				702
maximum month-end balance during the period			1,067				1,316

Liquidity. The Company’s loan to deposit ratio at September 30, 2007 was 93.72%. As of this same date, the Company had commitments to fund loans in the amount of $311.5 million. At September 30, 2007, the Company had stand-by letters of credit of $9.8 million, for which the Company has recorded a liability of $22,000 at September 30, 2007, 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 FHLBs of Dallas and San Francisco as well as the FRB discount window. With its current level of collateral, the Company has the ability to borrow an additional $396.1 million from the FHLBs, $7.7 million from the FRB discount window, and $20.5 million from other correspondent banks.

 

Capital Resources. Shareholders’ equity at September 30, 2007 was $115.5 million compared with $105.9 million at December 31, 2006, an increase of $9.5 million. This increase was the combined result of $9.4 million in net income and an increase in additional paid-in capital of $1.1 million due to dividend reinvestment, stock-based compensation expense, and a decrease in accumulated other comprehensive loss of $648,000, partially offset by dividend payments of $1.3 million and the repurchase of $602,000 in Company stock .

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The following table provides a comparison of the Company’s and the Banks’ leverage and risk-based capital ratios as of September 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 September 30, 2007
The Company
Leverage ratio			4.00	%(1)		N/A					9.12	%
Tier 1 risk-based capital ratio			4.00			N/A					9.51
Risk-based capital ratio			8.00			N/A					10.84
MetroBank
Leverage ratio			4.00	%(2)			5.00	%			8.86	%
Tier 1 risk-based capital ratio			4.00				6.00				9.42
Risk-based capital ratio			8.00				10.00				10.45
Metro United Bank
Leverage ratio			4.00	%(3)			5.00	%			9.16	%
Tier 1 risk-based capital ratio			4.00				6.00				9.01
Risk-based capital ratio			8.00				10.00				10.13

 

(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 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.”

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 an acquisition 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 will be 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 in the 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.

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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.

 

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PART II

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, 2006.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company’s common stock during the three months ended September 30, 2007:

Period

Total Number of Shares Purchased

Average Price Paid per Share

Total Number of Shares Purchased as Part of Publicly Announced Plan (1)

Maximum Number of Shares That May Yet Be Purchased Under the Plan at the End of the Period

July 1, 2007 to July 31, 2007

–

$

–

–

–

August 1, 2007 to August 31, 2007

–

$

–

–

500,000

September 1, 2007 to September 30, 2007

36,061

$

16.69

36,061

463,939

 

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⁽¹⁾  The Company maintains a stock repurchase plan that was announced on August 30, 2007.  Under the plan, the Board of Directors authorized the Company to repurchase up to 500,000 of its common stock from time to time, with no expiration date, at various prices in the open market or through privately negotiated transactions.

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 SIGNATURES

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

	METROCORP BANCSHARES, INC.
	By:	/s/ George M. Lee
Date: November 8, 2007		George M. Lee
		Chief Executive Officer (principal executive officer)
Date: November 8, 2007	By:	/s/ David C. Choi
		David C. Choi
		Chief Financial Officer (principal financial officer/ principal accounting officer)

30

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EXHIBIT INDEX

Exhibit
Number		Identification of Exhibit
3.1		- Amended and Restated Articles of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-62667) (the "Registration Statement")).
3.2		- Articles of Amendment to Amended and Restated Articles of Incorporation (incorporated herein by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006).
3.3		- Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 to the Registration Statement).
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