UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

	☑		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED ~~JUNE~~SEPTEMBER 30, 2013
	☐		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-25141

MetroCorp Bancshares, Inc.

(Exact name of registrant as specified in its charter)

Texas

(State or other jurisdiction of

incorporation or organization)

76-0579161

(I.R.S. Employer

Identification No.)

9600 Bellaire Boulevard, Suite 252

Houston, Texas 77036

(Address of principal executive offices including zip code)

(713) 776-3876

(Registrant’s telephone number, including area code)

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

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

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

Large Accelerated Filer ☐	Accelerated Filer ☑

Non-accelerated Filer ☐ (Do not check if a smaller reporting company)	Smaller Reporting Company ☐

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

As of ~~August~~November 1, 2013, the number of outstanding shares of Common Stock was 18,~~700~~699,~~028.~~121

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

METROCORP BANCSHARES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

	June 30, 2013			December 31, 2012
	September 30, 2013			December 31, 2012
ASSETS
Cash and due from banks	$	2129,~~237~~963		$	31,203
Federal funds sold and other short-term investments		~~105~~137,~~331~~527			128,246
Total cash and cash equivalents		~~126~~167,~~568~~490			159,449
Interest-bearing time deposits in banks		15,~~501~~616			15,321
Securities available-for-sale, at fair value		~~146~~145,~~459~~344			119,422
Securities available-for-sale pledged with creditors’ right to repledge, at fair value		3738,~~105~~313			44,626
Total securities available-for-sale		183,~~564~~657			164,048
Securities held-to-maturity (fair value $4,445 and $4,757 at June 30, 2013 and December 31, 2012, respectively)		4,047			4,046
Securities held-to-maturity (fair value $8,108 and $4,757 at September 30, 2013 and December 31, 2012, respectively)		7,788			4,046
Other investments		65,~~001~~702			5,592
Loans, net of allowance for loan losses of $21,832 and $24,592 at June 30, 2013 and December 31, 2012, respectively		1,156,456			1,075,745
Loans, net of allowance for loan losses of $20,800 and $24,592 at September 30, 2013 and December 31, 2012, respectively		1,163,864			1,075,745
Accrued interest receivable		4,316			4,120
Loans held-for-sale		160			—
Premises and equipment, net		3,878			4,046
Accrued interest receivable		3,753			4,120
Premises and equipment, net		3,788			4,046
Goodwill		14,327			14,327
Deferred tax asset, net		15,~~089~~327			13,110
Customers' liability on acceptances		75,~~797~~828			7,045
Foreclosed assets, net		109,~~960~~373			12,555
Cash value of bank owned life insurance		33,~~431~~721			32,794
Prepaid FDIC assessment		—			3,439
Other assets		34,~~851~~055			4,175
Total assets	$	1,~~585~~634,~~786~~449		$	1,519,812
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing	$	~~322~~330,~~504~~067		$	309,696
Interest-bearing		~~983~~1,~~659~~022,401			957,334
Total deposits		1,~~306~~352,~~163~~468			1,267,030
Junior subordinated debentures		36,083			36,083
Other borrowings		46,000			25,000
Accrued interest payable		~~283~~280			233
Acceptances outstanding		75,~~797~~828			7,045
Other liabilities		1113,~~740~~672			7,390
Total liabilities		1,~~408~~454,~~066~~331			1,342,781
Commitments and contingencies		—			—
Shareholders' equity:
Common stock, $1.00 par value, 50,000,000 shares authorized; 18,776,765 and 18,766,765 shares issued and 18,713,530 and 18,746,385 shares outstanding at June 30, 2013 and December 31, 2012, respectively		18,777			18,767
Common stock, $1.00 par value, 50,000,000 shares authorized; 18,776,765 and 18,766,765 shares issued and 18,699,638 and 18,746,385 shares outstanding at September 30, 2013 and December 31, 2012, respectively		18,777			18,767
Additional paid-in-capital		75,~~140~~164			74,998
Retained earnings		8891,~~330~~403			82,881
Accumulated other comprehensive (loss) income		(34,~~915~~466	)		567
Treasury stock, at cost, 63,235 and 20,380 shares at June 30, 2013 and December 31, 2012, respectively		(612	)		(182	)
Treasury stock, at cost, 77,127 and 20,380 shares at September 30, 2013 and December 31, 2012, respectively		(760	)		(182	)
Total shareholders' equity		~~177~~180,~~720~~118			177,031
Total liabilities and shareholders' equity	$	1,~~585~~634,~~786~~449		$	1,519,812

See accompanying notes to condensed consolidated financial statements.

METROCORP BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF ~~OPERATIONS~~INCOME

(In thousands, except per share amounts)

(Unaudited)

For the Three Months Ended June 30, For the Six Months Ended June 30, 2013 2012 2013 2012 Interest income: Loans $ 14,006 $ 14,754 $ 27,835 $ 29,753 Securities: Taxable 847 1,004 1,638 2,031 Tax-exempt 166 145 313 262 Other investments 64 44 114 87 Federal funds sold and other short-term investments (1) 192 234 392 446 Total interest income 15,275 16,181 30,292 32,579 Interest expense: Time deposits 1,316 1,370 2,535 2,906 Demand and savings deposits 389 586 816 1,221 Junior subordinated debentures 329 333 645 669 Other borrowings 260 247 493 494 Total interest expense 2,294 2,536 4,489 5,290 Net interest income 12,981 13,645 25,803 27,289 (Reduction in) provision for loan losses (25 ) 200 (475 ) 600 Net interest income after provision for loan losses 13,006 13,445 26,278 26,689 Noninterest income: Service fees 1,002 1,131 1,911 2,248 Loan-related fees 169 117 299 187 Letters of credit commissions and fees 175 190 374 387 Gain on securities, net 23 72 37 84 Total other-than-temporary impairments (“OTTI”) on securities (53 ) (48 ) (93 ) (87 ) Less: Noncredit portion of OTTI (14 ) (10 ) (27 ) (10 ) Net impairments on securities (39 ) (38 ) (66 ) (77 ) Gain on sale of loans 71 – 71 – Other noninterest income 543 288 968 734 Total noninterest income 1,944 1,760 3,594 3,563 Noninterest expense: Salaries and employee benefits 5,933 5,997 12,225 11,918 Occupancy and equipment 1,678 1,743 3,328 3,432 Foreclosed assets, net 82 362 (759 ) 1,363 FDIC assessment 517 485 977 882 Other noninterest expense 2,498 2,725 5,239 4,650 Total noninterest expense 10,708 11,312 21,010 22,245 Income before provision for income taxes 4,242 3,893 8,862 8,007 Provision for income taxes 1,446 1,267 3,039 2,613 Net income $ 2,796 $ 2,626 $ 5,823 $ 5,394 Dividends and discount – preferred stock – (811 ) – (1,409 ) One-time adjustment from repurchase of preferred stock – 706 – 706 Net income available to common shareholders $ 2,796 $ 2,521 $ 5,823 $ 4,691 Earnings per common share: Basic $ 0.15 $ 0.16 $ 0.32 $ 0.33 Diluted $ 0.15 $ 0.16 $ 0.31 $ 0.32 Weighted average shares outstanding: Basic 18,366 15,493 18,349 14,331 Diluted 18,713 15,753 18,713 14,497 Dividends per common share $ 0.02 – $ 0.02 –

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2013			2012			2013			2012
Interest income:
Loans	$	14,695		$	14,593		$	42,530		$	44,346
Securities:
Taxable		892			1,020			2,530			3,051
Tax-exempt		186			145			499			407
Other investments		70			42			184			129
Federal funds sold and other short-term investments (1)		218			229			610			675
Total interest income		16,061			16,029			46,353			48,608

Interest expense:
Time deposits		1,361			1,288			3,896			4,194
Demand and savings deposits		376			508			1,192			1,729
Junior subordinated debentures		328			338			973			1,007
Other borrowings		305			247			798			741
Total interest expense		2,370			2,381			6,859			7,671

Net interest income		13,691			13,648			39,494			40,937
(Reduction in) provision for loan losses		(655	)		(300	)		(1,130	)		300
Net interest income after provision for loan losses		14,346			13,948			40,624			40,637

Noninterest income:
Service fees		1,002			1,099			2,913			3,347
Loan-related fees		125			139			424			326
Letters of credit commissions and fees		166			197			540			584
(Loss) gain on securities, net		(4	)		24			33			108
Total other-than-temporary impairments (“OTTI”) on securities		(36	)		(14	)		(129	)		(101	)
Less: Noncredit portion of OTTI		(27	)		(7	)		(54	)		(17	)

Net impairment on securities		(9	)		(7	)		(75	)		(84	)
Gain on sale of loans		487		–				558		–
Other noninterest income		322			420			1,290			1,154
Total noninterest income		2,089			1,872			5,683			5,435

Noninterest expense:
Salaries and employee benefits		6,017			6,016			18,242			17,934
Occupancy and equipment		1,649			1,792			4,977			5,224
Foreclosed assets, net		309			552			(450	)		1,915
FDIC assessment		486			480			1,463			1,362
Other noninterest expense		3,017			2,689			8,256			7,339
Total noninterest expense		11,478			11,529			32,488			33,774

Income before provision for income taxes		4,957			4,291			13,819			12,298
Provision for income taxes		1,509			1,410			4,548			4,023
Net income	$	3,448		$	2,881		$	9,271		$	8,275

Dividends and discount – preferred stock	–				(20	)	–				(1,429	)
One-time adjustment from repurchase of preferred stock	–				(149	)	–				557
Net income available to common shareholders	$	3,448		$	2,712		$	9,271		$	7,403

Earnings per common share:
Basic	$	0.19		$	0.15		$	0.50		$	0.47
Diluted	$	0.18		$	0.15		$	0.49		$	0.47
Weighted average shares outstanding:
Basic		18,417			18,307			18,372			15,666
Diluted		18,814			18,648			18,757			15,876

Dividends per common share	$	0.02		$	–		$	0.04		$	–

__________________

(1)

Includes interest-bearing time deposits in banks

See accompanying notes to condensed consolidated financial statements.

METROCORP BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE ~~(LOSS)~~ INCOME

(In thousands)

(Unaudited)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2013			2012			2013			2012
Net income	$	23,~~796~~448		$	2,~~626~~881		$	59,~~823~~271		$	58,~~394~~275
Other comprehensive income, net of taxes:
Change in accumulated gain (loss) on effective cash flow hedging derivatives		~~135~~56			(98	)		~~231~~287			3442
Unrealized loss on investment securities, net:
Securities with OTTI charges during the period		(3423	)		(319	)		(5982	)		(5665	)
Less: OTTI charges recognized in net income		(247	)		(254	)		(4148	)		(5054	)
Net unrealized losses on investment securities with OTTI		(1016	)		(65	)		(1834	)		(611	)
Unrealized holding (loss) gain arising during the period		(4,246	)		482			(4,671	)		503
Unrealized holding (loss) gain on investment securities arising during the period		(594	)		623			(5,265	)		1,126
Less: reclassification adjustment for gain included in net income		15			46			24			54
Less: reclassification adjustment for (loss) gain included in net income		(3	)		15			21			69
Net unrealized (losses) gains on investment securities		(~~4,261~~591	)		~~436~~608			(45,~~695~~286	)		~~449~~1,057
Other comprehensive (loss) income, net of taxes		(~~4,136~~551	)		~~421~~611			(45,~~482~~033	)		~~477~~1,088
Total comprehensive (loss) income	$	(1,340	)	$	3,047		$	1,341		$	5,871
Total comprehensive income	$	2,897		$	3,492		$	4,238		$	9,363

See accompanying notes to condensed consolidated financial statements.

METROCORP BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the ~~Six~~Nine Months Ended ~~June~~September 30, 2013

(In thousands)

(Unaudited)

	Common Stock				Additional paid-in		Retained			Accumulated other comprehensive income			Treasury Stock at
	Shares		At par		capital		earnings			(loss)			cost			Total
Balance at December 31, 2012		18,767	$	18,767	$	74,998	$	82,881		$	567		$	(182	)	$	177,031
Issuance of common stock		10		10		94	–			–			–				104
Repurchase of common stock	–		–		–		–			–				(~~430~~578	)		(~~430~~578	)
Stock-based compensation expense related to stock options recognized in earnings	–		–			4872	–			–			–				4872
Net income	–		–		–			59,~~823~~271		–			–				59,~~823~~271
Other comprehensive loss	–		–		–		–				(45,~~482~~033	)	–				(45,~~482~~033	)
Dividends – common stock ($0.02 per share)	–		–		–			(374	)	–			–				(374	)
Dividends – common stock ($0.04 per share)		–		–		–		(749	)		–			–			(749	)
Balance at June 30, 2013		18,777	$	18,777	$	75,140	$	88,330		$	(3,915	)	$	(612	)	$	177,720
Balance at September 30, 2013		18,777	$	18,777	$	75,164	$	91,403		$	(4,466	)	$	(760	)	$	180,118

See accompanying notes to condensed consolidated financial statements.

METROCORP BANCSHARES, INC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	For the Six Months Ended June 30,
	For the Nine Months Ended September 30,
	2013			2012
Cash flows from operating activities:
Net income	$	59,~~823~~271		$	58,~~394~~275
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		~~463~~687			~~543~~792
(Reduction in) provision for loan losses		(~~475~~1,130	)		~~600~~300
Impairment on securities		6675			7784
Gain on securities transactions, net		(3733	)		(84108	)
(Gain) loss on writedown and sale of foreclosed assets		(~~1,047~~912	)		~~525~~944
Gain on sale of premises and equipment		(1	)		—
Loss on sale of premises and equipment		6			—
Gain on sale of loans		(71558	)		—
Amortization of premiums and discounts on securities, net		~~377~~535			~~276~~330
Amortization of deferred loan fees and discounts		(~~579~~889	)		(~~545~~858	)
Amortization of core deposit intangibles		1928			2842
Stock-based compensation		4872			3860
Changes in:
Accrued interest receivable		~~(196~~367	)		~~(84~~389	)
Other assets		3,~~481~~499			(21,~~172~~781	)
Accrued interest payable		5047			(4952	)
Preferred stock repurchase payable		—			42,941
Other liabilities		6,194			8,214
Other liabilities		4,206			673
Net cash provided by operating activities		17,259			16,631
Net cash provided by operating activities		12,127			48,161
Cash flows from investing activities:
Net change in interest-bearing deposits in banks		(~~180~~295	)		—
Purchases of securities available-for-sale		(4253,~~650~~026	)		(47105,~~072~~708	)
Purchases of other investments		(649	)		(1	)
Purchases of securities held-to-maturity		(3,746	)		—
Proceeds from maturities, calls, and principal paydowns of securities available-for-sale		15,516			51,206
Purchases of other investments		(649	)		(2	)
Proceeds from sales and maturities of other investments		60			604
Proceeds from maturities, calls, and principal paydowns of securities available-for-sale		24,695			101,146
Net change in loans		(86,265	)		(56,481	)
Proceeds from sales and maturities of other investments		360			711
Proceeds from sale of foreclosed assets		9,321			9,878
Net change in loans		(92,640	)		(60,259	)
Purchases of premises and equipment		(294	)		(188	)
Proceeds from sale of foreclosed assets		11,032			15,958
Net cash used in investing activities		(105,141	)		(42,054	)
Purchases of premises and equipment		(435	)		(290	)
Net cash used in investing activities		(114,704	)		(48,444	)
Cash flows from financing activities:
Net change in:
Deposits		3985,~~133~~438			713,~~895~~482
Other borrowings		21,000			(315	)
Proceeds from issuance of common stock		—			45,~~247~~969
Repurchase of common stock		—(578	)		(~~125~~145	)
Repurchase of preferred stock		—			(4344,~~034~~443	)
Cash dividends paid on preferred stock		—			(1,~~125~~433	)
Net cash provided by financing activities		60,133			8,543
Cash dividends paid on common stock		(374	)		—
Net (decrease) increase in cash and cash equivalents		(32,881	)		14,650
Net cash provided by financing activities		105,486			13,115
Net increase (decrease) in cash and cash equivalents		8,041			(18,698	)
Cash and cash equivalents at beginning of period		159,449			193,609
Cash and cash equivalents at end of period	$	~~126~~167,~~568~~490		$	~~208~~174,~~259~~911
Supplemental information:
Interest paid	$	46,~~440~~812		$	57,~~339~~723
Income taxes paid		~~900~~2,450			23,~~144~~482
Noncash investing and financing activities:
Issuance of common stock – restricted shares		104			23,~~302~~024
Foreclosed assets acquired		6,~~679~~938			5,799
Loans originated to finance foreclosed assets		6,120			46,~~071~~501

See accompanying notes to condensed consolidated financial statements.

METROCORP BANCSHARES, INC.~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

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

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

The accompanying unaudited condensed consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal and recurring adjustments, necessary for a fair statement of the Company’s financial position at ~~June~~September 30, 2013, results of operations for the three and ~~six~~nine months ended ~~June~~September 30, 2013 and 2012, and cash flows for the ~~six~~nine months ended ~~June~~September 30, 2013 and 2012. Interim period results are not necessarily indicative of results for a full year period. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. generally accepted accounting principles.

Certain items in prior financial statements have been reclassified to conform to the 2013 presentation, with no impact on the balance sheet, net income, shareholders’ equity or cash flows.

These unaudited financial statements and the notes thereto should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

2. SECURITIES

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

	As of June 30, 2013
	As of September 30, 2013
	Amortized		Unrealized								Fair
	Cost		Gains		Losses			OTTI			Value
	(Dollars in thousands)
Securities available-for-sale
Debt securities
U.S. Treasury and other U.S. government sponsored enterprises and agencies	$	9186,~~382~~395	$	18-	$	(34,~~773~~649	)	$	-		$	8781,~~627~~746
Obligations of state and political subdivisions		1817,~~661~~899		~~176~~156		(~~844~~912	)		-			17,~~993~~143
Corporate		6,~~068~~063		~~193~~216		-			-			6,~~261~~279
Mortgage-backed securities and collateralized mortgage obligations
Government issued or guaranteed		5763,~~101~~874		~~682~~782		(~~859~~929	)		-			5663,~~924~~727
Privately issued residential		~~639~~588		~~349~~379		(1-	)		(~~317~~299	)		~~670~~668
Asset backed securities		~~164~~152		~~145~~143		-			(~~162~~152	)		~~147~~143
Equity Securities
Community Reinvestment Act (“CRA”) funds		14,~~278~~352		-		(~~336~~401	)		-			13,~~942~~951
Total available-for-sale securities	$	~~188~~189,~~293~~323	$	1,~~563~~676	$	(56,~~813~~891	)	$	(~~479~~451	)	$	183,~~564~~657
Securities held-to-maturity
Obligations of state and political subdivisions	$	47,~~047~~788	$	~~398~~372	$	-(52	)	$	-		$	48,~~445~~108
Total held-to-maturity securities	$	47,~~047~~788	$	~~398~~372	$	-(52	)	$	-		$	48,~~445~~108
Other investments
Federal Home Loan Bank (“FHLB”)(1)/Federal Reserve Bank stock (2)	$	4,~~918~~619	$	-	$	-		$	-		$	4,~~918~~619
Investment in subsidiary trust (3)		1,083		-		-			-			1,083
Total other investments	$	65,~~001~~702	$	-	$	-		$	-		$	65,~~001~~702

	As of December 31, 2012
	Amortized		Unrealized								Fair
	Cost		Gains		Losses			OTTI			Value
Securities available-for-sale
Debt securities
U.S. Treasury and other U.S. government sponsored enterprises and agencies	$	70,892	$	362	$	(73	)	$	—		$	71,181
Obligations of state and political subdivisions		12,810		579		—			—			13,389
Corporate		6,080		270		—			—			6,350
Mortgage-backed securities and collateralized mortgage obligations:
Government issued or guaranteed		56,572		1,369		—			—			57,941
Privately issued residential		718		330		—			(365	)		683
Asset backed securities		187		129		—			(173	)		143
Equity securities
Investment in CRA funds		14,128		233		—			—			14,361

Total available-for-sale securities	$	161,387	$	3,272	$	(73	)	$	(538	)	$	164,048

Securities held-to-maturity
Obligations of state and political subdivisions	$	4,046	$	711	$	—		$	—		$	4,757

Total held-to-maturity securities	$	4,046	$	711	$	—		$	—		$	4,757

Other investments
FHLB (1)/Federal Reserve Bank (2) stock		4,509		—		—			—			4,509
Investment in subsidiary trust (3)		1,083		—		—			—			1,083

Total other investments	$	5,592	$	—	$	—		$	—		$	5,592

_____________________

(1)	FHLB stock held by the Banks is subject to certain restrictions under the membership requirements of the FHLB. Redemption of FHLB stock is dependent upon repayment of borrowings, if any, from the FHLB.
(2)	Federal Reserve Bank stock held by MetroBank is subject to certain restrictions under Federal Reserve Bank Policy.
(3)	The Company’s ownership of common securities of MCBI Trust I is carried at cost.

(1)	FHLB stock held by the Banks is subject to certain restrictions under a credit policy of the FHLB dated May 1, 1997. Redemption of FHLB stock is dependent upon repayment of borrowings, if any, from the FHLB.
(2)	Federal Reserve Bank stock held by MetroBank is subject to certain restrictions under Federal Reserve Bank Policy.
(3)	The Company’s ownership of common securities of MCBI Trust I is carried at cost.

The following table displays the fair value and gross unrealized losses on securities available-for-sale as of ~~June~~September 30, 2013 and December 31, 2012 for which other-than-temporary impairments (“OTTI”) has not been recognized, that were in a continuous unrealized loss position for the periods indicated. There were no securities held-to-maturity in a continuous unrealized loss position as of ~~June 30, 2013 or~~ December 31, 2012.

	As of June 30, 2013
	As of September 30, 2013
	Less Than 12 Months					Greater Than 12 Months				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in thousands)
Securities available-for-sale
U.S. Treasury and other U.S. government sponsored enterprises and agencies	$	8281,~~617~~747	$	(34,~~773~~649	)	$	—	$	—	$	8281,~~617~~747	$	(34,~~773~~649	)
Obligations of state and political subdivisions		14,~~289~~161		(~~844~~912	)		—		—		14,~~289~~161		(~~844~~912	)
Mortgage-backed securities and collateralized mortgage obligations
Government issued or guaranteed		3135,~~360~~108		(~~859~~929	)		—		—		3135,~~360~~108		(~~859~~929	)
Asset backed securities		64		(1	)						64		(1	)
Privately issued residential		17		—			—		—		17		—
CRA funds		13,~~941~~951		(~~336~~401	)						13,~~941~~951		(~~336~~401	)
Total securities	$	142,271	$	(5,813	)	$	—	$	—	$	142,271	$	(5,813	)
Total available-for-sale securities	$	144,984	$	(6,891	)	$	—	$	—	$	144,984	$	(6,891	)
Securities held-to-maturity
Obligations of state and political subdivisions	$	2,158	$	(52	)	$	—	$	—	$	2,158	$	(52	)
Total held-to-maturity securities	$	2,158	$	(52	)	$	—	$	—	$	2,158	$	(52	)

	As of December 31, 2012
	Less Than 12 Months					Greater Than 12 Months				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in thousands)
Securities available-for-sale
U.S. Treasury and other U.S. government sponsored enterprises and agencies	$	9,921	$	(73	)	$	—	$	—	$	9,921	$	(73	)
Mortgage-backed securities and collateralized mortgage obligations
Privately issued residential		—		—			72		—		72		—
Total securities	$	9,921	$	(73	)	$	72	$	—	$	9,993	$	(73	)

As of ~~June~~September 30, 2013, management did not have the intent to sell any of the securities classified as available-for-sale in unrealized loss positions and believes it is not more likely than not that the Company will have to sell any such securities before a recovery of the cost. However, if strategic opportunities arise, the Company may consider selling selected securities. Any unrealized losses on such selected securities would be charged to earnings.

The unrealized losses are largely due to increases in the market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such securities decline. Management does not believe any of the unrealized losses above are due to credit quality. Accordingly, management believes the $56.89 million of unrealized losses of available-for-sale securities and the $52,000 of unrealized losses of held-to-maturity securities as of ~~June~~September 30, 2013 is temporary and the remaining $451,000 of OTTI as of ~~June~~September 30, 2013 represents unrealized losses for which an impairment has been recognized in other comprehensive loss.

Other-Than-Temporary Impairments (OTTI)

The following table presents a rollforward for the three and ~~six~~nine months ended ~~June~~September 30, 2013, of the credit loss component of OTTI losses that have been recognized in earnings related to debt securities that the Company does not intend to sell.

	Impairment related to credit losses
	Three months ended June 30, 2013		Six months ended June 30, 2013
	Three months ended September 30, 2013		Nine months ended September 30, 2013
	(In thousands)
Credit losses at beginning of period	$	1,~~732~~748	$	1,716
Transfers from accumulated other comprehensive income (loss) to OTTI related to credit losses		16		32
Additions to OTTI that were not previously recognized		3		3
Credit losses at end of period	$	1,748	$	1,748
Additions to OTTI that was previously recognized when there is no intent to sell and no requirement to sell before recovery of the amortized cost basis		4		4
Transfers from accumulated other comprehensive income (loss) to OTTI related to credit losses		3		35
Credit losses at end of period	$	1,758	$	1,758

For the ~~six~~nine months ended ~~June~~September 30, 2013, credit-related losses of $2130,000 on ~~three~~five non-agency residential mortgage-backed securities and $11,000 on one asset-backed security were recognized. There were no credit-related impairments included in accumulated other comprehensive income (loss) for the three or ~~six~~nine months ended ~~June~~September 30, 2013.

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

Other Securities Information

There were no sales of available-for-sale securities or sales or transfers of held-to-maturity securities for the ~~six~~nine months ended ~~June~~September 30, 2013 or 2012.

At ~~June~~September 30, 2013, future contractual maturities of debt securities were as follows (in thousands):

Securities Available-for-sale

Securities Held-to-maturity

Amortized Cost

Fair Value

Amortized Cost

Fair Value

Within one year

~~701~~—

~~702~~—

—

Within two to five years

2220,~~556~~053

2220,~~460~~088

—

Within six to ten years

7573,~~677~~188

7268,~~283~~785

—

After ten years

17,~~341~~268

16,~~583~~438

47,~~047~~788

48,~~445~~108

Mortgage-backed securities and collateralized mortgage obligations

5764,~~740~~462

5764,~~594~~395

—

Total debt securities

174,~~015~~971

169,~~622~~706

47,~~047~~788

48,~~445~~108

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

3. LOANS

The loan portfolio is classified by major type as follows:

	As of June 30, 2013						As of December 31, 2012
	As of September 30, 2013						As of December 31, 2012
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
Commercial and industrial	$	~~438~~439,~~529~~420			37.1300	%	$	383,641			34.78	%
Real estate mortgage
Residential		3639,~~730~~998			3.1137			36,807			3.34
Commercial		~~695~~694,~~210~~980			58.8852			665,244			60.32
		731,940			61.99			702,051			63.66
		734,978			61.89			702,051			63.66
Real estate construction
Residential		24,~~016~~936			0.1742			2,420			0.22
Commercial		23,~~712~~747			0.2331			7,284			0.66
		4,728			0.40			9,704			0.88
		8,683			0.73			9,704			0.88
Consumer and other		54,~~623~~483			0.4838			7,531			0.68
Gross loans		1,~~180~~187,~~820~~564			100.00	%		1,102,927			100.00	%
Unearned discounts, interest and deferred fees		(2,~~532~~740	)					(2,590	)
Total loans		1,~~178~~184,~~288~~824						1,100,337
Allowance for loan losses		(2120,~~832~~800	)					(24,592	)
Loans, net	$	1,156,456					$	1,075,745
Loans, net (1)	$	1,164,024					$	1,075,745

(1)

Includes loans held-for-sale.

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

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

June 30, 2013

Gross Loan Balance

Deferred Loan Fees

Accrued Interest Receivable

Recorded Investment in Loans

September 30, 2013

Gross Loan Balance

Deferred Loan Fees

Accrued Interest Receivable

Recorded Investment in Loans

Commercial and industrial

~~438~~439,~~529~~420

(~~846~~956

)

1,~~155~~137

~~438~~439,~~838~~601

Real estate mortgage

~~731~~734,~~940~~978

(1,~~445~~549

)

21,~~060~~851

~~732~~735,~~555~~280

Real estate construction

48,~~728~~683

(81101

)

1825

48,~~665~~607

Consumer and other

54,~~623~~483

(~~160~~134

)

1613

54,~~479~~362

Total

1,~~180~~187,~~820~~564

(2,~~532~~740

)

3,~~249~~026

1,~~181~~187,~~537~~850

December 31, 2012	Gross Loan Balance		Deferred Loan Fees			Accrued Interest Receivable		Recorded Investment in Loans

Commercial and industrial	$	383,641	$	(814	)	$	1,078	$	383,905
Real estate mortgage		702,051		(1,595	)		2,024		702,480
Real estate construction		9,704		(30	)		18		9,692
Consumer and other		7,531		(151	)		21		7,401

Total	$	1,102,927	$	(2,590	)	$	3,141	$	1,103,478

Loan Origination/Risk Management

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

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

Inherent in all lending is the risk of nonpayment. The types of collateral required, the terms of the loans and the underwriting practices discussed under each loan category below are all designed to minimize the risk of nonpayment. In addition, as further risk protection, the Banks rarely make loans at their respective legal lending limit. MetroBank generally does not make loans larger than $13 million to one borrower and Metro United generally does not make loans larger than $8 million to one borrower. Loans greater than the Banks’ lending limits are subject to participation with other financial institutions, including with each other. Loans originated by MetroBank are approved by the Chief Lending Officer, Chief Credit Officer, the Loan Committee or the Director’s Loan Committee based on the size of the loan relationship and its risk rating. Loans originated by Metro United are approved by the Management Credit Committee or Director’s Credit Committee except for certain consumer loans, which are approved under individual authority. Control systems and procedures are in place to ensure all loans are approved in accordance with credit policies.

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

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

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

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

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

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

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

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

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

As of June 30, 2013

Commercial and industrial

Real estate mortgage

Real estate construction

Consumer and other

Total

As of September 30, 2013

Commercial and industrial

Real estate mortgage

Real estate construction

Consumer and other

Total

Grade:

1-6 - “Pass”

~~424~~425,~~013~~498

~~664~~673,~~222~~267

48,~~665~~607

54,~~479~~362

1,~~098~~111,~~379~~734

7 - “Special Mention”/ “Watch”

2,~~900~~851

2117,~~786~~714

—

2420,~~686~~565

8 - “Substandard”

11,~~925~~252

4644,~~547~~299

—

5855,~~472~~551

9 -“Doubtful"

—

Total

~~438~~439,~~838~~601

~~732~~735,~~555~~280

48,~~665~~607

54,~~479~~362

1,~~181~~187,~~537~~850

As of December 31, 2012	Commercial and industrial		Real estate mortgage		Real estate construction		Consumer and other		Total

Grade:
1-6 - “Pass”	$	366,571	$	611,159	$	5,163	$	7,401	$	990,294
7 - “Special Mention”/ “Watch”		4,393		14,593		—		—		18,986
8 - “Substandard”		12,941		76,728		4,529		—		94,198
9 -“Doubtful"		—		—		—		—		—

Total	$	383,905	$	702,480	$	9,692	$	7,401	$	1,103,478

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

Nonperforming Assets

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

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

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

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

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

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

As of June 30, 2013

30-59 Days Past Due

60-89 Days Past Due

Greater Than 90 Days

Total Past Due

Current

Total Recorded Investment in Loans

Recorded Investment 90 Days and Accruing

As of September 30, 2013

30-59 Days Past Due

60-89 Days Past Due

Greater Than 90 Days

Total Past Due

Current

Total Recorded Investment in Loans

Recorded Investment 90 Days and Accruing

Commercial and industrial

41,~~266~~974

~~4,442~~414

1,~~410~~178

103,~~118~~566

~~428~~436,~~720~~035

~~438~~439,~~838~~601

—

Real estate mortgage:

Residential

71482

—

~~133~~124

~~204~~606

3639,~~609~~468

3640,~~813~~074

—

Commercial

1916,~~687~~891

~~1,974~~—

8,~~994~~596

3025,~~655~~487

~~665~~669,~~087~~719

695,~~742~~206

—

Real estate construction:

Residential

—

24,~~007~~911

—

Commercial

—

23,~~658~~696

—

Consumer and other

128

9—

—

218

54,~~458~~354

54,~~479~~362

—

Total

2419,~~036~~355

~~6,425~~414

109,~~537~~898

4029,~~998~~667

1,~~140~~158,~~539~~183

1,~~181~~187,~~537~~850

—

As of December 31, 2012	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Recorded Investment in Loans		Recorded Investment 90 Days and Accruing

Commercial and industrial	$	2,233	$	817	$	1,308	$	4,358	$	379,547	$	383,905	$	—
Real estate mortgage:
Residential		—		—		239		239		36,667		36,906		—
Commercial		114		3,817		18,141		22,072		643,502		665,574		—
Real estate construction:
Residential		—		—		1,426		1,426		984		2,410		—
Commercial		150		—		3,103		3,253		4,029		7,282		—
Consumer and other		—		—		—		—		7,401		7,401		—

Total	$	2,497	$	4,634	$	24,217	$	31,348	$	1,072,130	$	1,103,478	$	—

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

Recorded investment in nonaccrual loans	~~June~~September 30, 2013		December 31, 2012
Commercial and industrial	$	1,~~680~~441	$	1,308
Real estate mortgage:
Residential		~~816~~606		239
Commercial		1312,~~668~~969		22,501
Real estate construction:
Residential		—		1,426
Commercial		—		3,103
Total	$	1615,~~164~~016	$	28,577

As of June 30, 2013	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment
Impaired loans with no allowance
Commercial and industrial	$	839	$	839	$	—	$	2,511
Real estate mortgage:
Residential		816		813		—		345
Commercial		13,378		13,391		—		16,594
Real estate construction:
Residential		—		—		—		1,299
Commercial		—		—		—		2,339
Impaired loans with an allowance
Commercial and industrial	$	841	$	841	$	464	$	221
Real estate mortgage:
Commercial		684		685		191		3,548
Total:
Commercial and industrial	$	1,680	$	1,680	$	464	$	2,732
Real estate mortgage		14,878		14,889		191		20,487
Real estate construction		—		—		—		3,638

Information on impaired loans, which includes nonaccrual loans and troubled debt restructurings, and the related specific allowance for loan losses on such loans at September 30, 2013 and December 31, 2012, is presented below (in thousands):

As of September 30, 2013	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment

Impaired loans with no allowance
Commercial and industrial	$	1,441	$	1,441	$	—	$	1,036
Real estate mortgage:
Residential		606		606		—		451
Commercial		12,700		12,713		—		14,204
Real estate construction:
Residential		—		—		—		713
Commercial		—		—		—		1,552

Impaired loans with an allowance
Commercial and industrial	$	—	$	—	$	—	$	216
Real estate mortgage:
Commercial		657		658		174		2,463

Total:
Commercial and industrial	$	1,441	$	1,441	$	—	$	1,252
Real estate mortgage		13,963		13,977		174		17,118
Real estate construction		—		—		—		2,265

As of December 31, 2012	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment

Impaired loans with no allowance
Commercial and industrial	$	1,287	$	1,289	$	—	$	5,162
Real estate mortgage:
Residential		239		239		—		213
Commercial		18,369		18,369		—		19,732
Real estate construction:
Residential		1,426		1,426		—		1,529
Commercial		3,103		3,103		—		3,171

Impaired loans with an allowance
Commercial and industrial	$	21	$	21	$	21	$	1,434
Real estate mortgage:
Commercial		4,533		4,535		503		6,836

Total:
Commercial and industrial	$	1,308	$	1,310	$	21	$	6,596
Real estate mortgage		23,141		23,143		503		26,781
Real estate construction		4,529		4,529		—		4,700

For the ~~six~~nine months ended ~~June~~September 30, 2013 and 2012, interest income of $1128,000 and $93139,000 was recognized on impaired loans, which consisted of nonaccrual loans that were paid in full and accruing troubled debt restructurings (“TDRs”).

Troubled Debt Restructurings

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

As of ~~June~~September 30, 2013, there were no commitments to lend additional funds on loans that were modified as TDRs. As of ~~June~~September 30, 2013, there were no defaults on any loans that were modified as TDRs during the preceding twelve months. There were no new TDRs for the three months ended September 30, 2013.

The following table presents the recorded investment in TDRs that occurred for the ~~three~~nine ~~and six~~ months ended ~~June~~September 30, 2013 (dollars in thousands):

Three Months Ended June 30, 2013

Nine Months Ended September 30, 2013

Troubled Debt Restructurings

Number of Contracts

Pre-Modification Outstanding Recorded Investment

Post-Modification Outstanding Recorded Investment

Commercial and industrial

229

~~211~~208

Real estate mortgage:

Residential

696

~~683~~482

Commercial

3,074

2,~~899~~636

	Six Months Ended June 30, 2013
Troubled Debt Restructurings	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial and industrial		1	$	229	$	211
Real estate mortgage:
Residential		2		696		683
Commercial		5		3,074		2,899

For the nine months ended September 30, 2013, TDR activity was as follows:

~~For~~Prior to restructure, one participation purchased by MetroBank and one participation purchased by Metro United secured by a mixed use property containing residential condominium, retail space and subterranean parking were classified as nonaccrual. A 72% principal reduction was received by each Metro Bank and Metro United and the ~~three~~participations were restructured into two loan participations for each Bank with more than sufficient collateral coverage based on the fair value of the collateral. Since the loans were classified and ~~six~~on ~~months~~nonaccrual ~~ended~~status ~~June~~both 30before and after restructuring, the modifications had an insignificant impact on the Company’s determination of the allowance for loan losses. In September 2013, ~~TDR~~payoffs ~~activity~~totaling ~~was~~$211,000 aswere ~~follows:~~received by the Banks for one of the restructured loan participations.

Prior to restructure, one participation purchased by MetroBank and one participation purchased by Metro United secured by a mixed use property containing residential condominium, retail space and subterranean parking were classified as nonaccrual. A 72% principal reduction was received by each Metro Bank and Metro United and the participations were restructured into two loans for each Bank with more than sufficient collateral coverage based on the fair value of the collateral. Since the loans were classified and on nonaccrual status both before and after restructuring, the modifications had an insignificant impact on the Company’s determination of the allowance for loan losses.

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

One commercial retail loan was restructured by extending with no principal reduction at below market terms. The loan was classified and on accrual status before the restructuring and reclassified to nonaccrual status after the restructuring. Prior to restructuring, the Company’s determination of the allowance for loan losses was based on FASB ~~codification~~Codification 450-20; after restructuring, the determination of the allowance for loan losses was based on FASB ~~codification~~Codification 310-10-35 and therefore insignificantly reduced the allowance for loan losses.

One sufficiently collateralized land loan was previously on nonaccrual status and reported as an impaired loan prior to restructuring. The loan was restructured with no principal reduction at below market terms. Since the loan was classified and on nonaccrual status both before and after restructuring, the modification did not impact the Company’s determination of the allowance for loan losses.

Allowance for Loan Losses and Reserve for Unfunded Lending Commitments

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

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

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

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

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

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

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

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

As of and for the three months ended June 30, 2013	Commercial and industrial			Real estate- mortgage			Real estate - construction			Consumer and other			Unallocated			Total
As of and for the three months ended September 30, 2013	Commercial and industrial			Real estate- mortgage			Real estate - construction			Consumer and other			Unallocated			Total
Allowance for loan losses at beginning of period	$	7,~~053~~523		$	13,~~217~~176		$	~~180~~75		$	7970		$	~~2,303~~988		$	2221,832
(Reduction in) provision for loan losses		~~394~~(31	)		~~1,027~~(918	)		~~(126~~72	)		(511	)		~~(1,315~~233	)		(25655	)
Charge-offs		(2450	)		(~~1,095~~41	)		(917	)		(79	)		—			(~~1,113~~517	)
Recoveries		78124			2714			30—			32			—			~~138~~140
Allowance for loan losses at end of period	$	7,~~523~~166		$	1312,~~176~~231		$	75130		$	7052		$	~~988~~1,221		$	2120,~~832~~800
Ending allowance for loan losses balance for loans individually evaluated for impairment	$	~~464~~—		$	~~190~~174		$	—		$	—					$	~~654~~174
Ending allowance for loan losses balance for loans collectively evaluated for impairment	$	7,~~059~~166		$	12,~~986~~057		$	75130		$	7052					$	2019,~~190~~405
Loans:
Recorded investment in loans	$	~~438~~439,~~838~~601		$	~~732~~735,~~555~~280		$	48,~~665~~607		$	54,~~479~~362					$	1,~~181~~187,~~537~~850
Recorded investment in loans individually evaluated for impairment	$	1,~~680~~441		$	1413,~~878~~963		$	—		$	—					$	1615,~~558~~404
Recorded investment in loans collectively evaluated for impairment	$	~~437~~438,~~158~~160		$	~~717~~721,~~677~~317		$	48,~~665~~607		$	54,~~479~~362					$	1,~~164~~172,~~979~~446

As of and for the three months ended June 30, 2012	Commercial and industrial			Real estate- mortgage			Real estate - construction			Consumer and other			Unallocated			Total
As of and for the three months ended September 30, 2012	Commercial and industrial			Real estate- mortgage			Real estate - construction			Consumer and other			Unallocated			Total
Allowance for loan losses at beginning of period	$	9,~~223~~146		$	16,~~598~~151		$	~~235~~185		$	~~100~~106		$	1,~~910~~723		$	2827,~~066~~311
(Reduction in) provision for loan losses		~~(314~~922	)		47(574	)		~~633~~(6	)		2050			(~~186~~692	)		~~200~~(300	)
Charge-offs		(101,464	)		(~~945~~130	)		~~(683~~—	)		(1931	)		—			(1,~~657~~625	)
Recoveries		~~247~~32			~~452~~118			—			36			—			~~702~~156
Allowance for loan losses at end of period	$	98,~~146~~636		$	1615,~~152~~565		$	~~185~~179		$	~~104~~131		$	1,~~724~~031		$	2725,~~311~~542
Ending allowance for loan losses balance for loans individually evaluated for impairment	$	2623		$	~~790~~953		$	—		$	—					$	~~816~~976
Ending allowance for loan losses balance for loans collectively evaluated for impairment	$	98,~~120~~613		$	1514,~~362~~612		$	~~185~~179		$	~~104~~131					$	2423,~~771~~535
Loans:
Recorded investment in loans	$	~~376~~377,~~173~~309		$	708,~~699~~121		$	7,~~711~~907		$	56,~~005~~723					$	1,~~097~~100,~~588~~060
Recorded investment in loans individually evaluated for impairment	$	87,~~386~~357		$	2027,~~182~~441		$	5,~~517~~492		$	1					$	3440,~~086~~291
Recorded investment in loans collectively evaluated for impairment	$	~~367~~369,~~787~~952		$	~~688~~680,~~517~~680		$	2,~~194~~415		$	56,~~004~~722					$	1,~~063~~059,~~502~~769

As of and for the six months ended June 30, 2013	Commercial and industrial			Real estate- mortgage			Real estate - construction			Consumer and other			Unallocated			Total
As of and for the nine months ended September 30, 2013	Commercial and industrial			Real estate- mortgage			Real estate - construction			Consumer and other			Unallocated			Total
Allowance for loan losses at beginning of period	$	8,255		$	14,748		$	216		$	143		$	1,230		$	24,592
(Reduction in) provision for loan losses		(1445	)		(4923	)		(~~167~~95	)		(4858	)		(~~242~~9	)		(~~475~~1,130	)
Charge-offs		(~~886~~1,336	)		(1,~~645~~685	)		(926	)		(3242	)		—			(23,~~572~~089	)
Recoveries		~~168~~292			7791			35			79			—			~~287~~427
Allowance for loan losses at end of period	$	7,~~523~~166		$	1312,~~176~~231		$	75130		$	7052		$	~~988~~1,221		$	2120,~~832~~800
Ending allowance for loan losses balance for loans individually evaluated for impairment	$	~~464~~—		$	~~190~~174		$	—		$	—					$	~~654~~174
Ending allowance for loan losses balance for loans collectively evaluated for impairment	$	7,~~059~~166		$	12,~~986~~057		$	75130		$	7052					$	2019,~~190~~405
Loans:
Recorded investment in loans	$	~~438~~439,~~838~~601		$	~~732~~735,~~555~~280		$	48,~~665~~607		$	54,~~479~~362					$	1,~~181~~187,~~537~~850
Recorded investment in loans individually evaluated for impairment	$	1,~~680~~441		$	1413,~~878~~963		$	—		$	—					$	1615,~~558~~404
Recorded investment in loans collectively evaluated for impairment	$	~~437~~438,~~158~~160		$	~~717~~721,~~677~~317		$	48,~~665~~607		$	54,~~479~~362					$	1,~~164~~172,~~979~~446

As of and for the six months ended June 30, 2012	Commercial and industrial			Real estate- mortgage			Real estate - construction			Consumer and other			Unallocated		Total
As of and for the nine months ended September 30, 2012	Commercial and industrial			Real estate- mortgage			Real estate - construction			Consumer and other			Unallocated		Total
Allowance for loan losses at beginning of period	$	7,966		$	19,213		$	320		$	137		$	685	$	28,321
(Reduction in) provision for loan losses		12,~~609~~531			(23,~~591~~166	)		~~529~~523			1466			~~1,039~~346		~~600~~300
Charge-offs		(~~794~~2,258	)		(1,~~285~~415	)		(683	)		(6192	)		—		(24,~~823~~448	)
Recoveries		~~365~~397			~~815~~933			19			1420			—		1,~~213~~369
Allowance for loan losses at end of period	$	98,~~146~~636		$	1615,~~152~~565		$	~~185~~179		$	~~104~~131		$	1,~~724~~031	$	2725,~~311~~542
Ending allowance for loan losses balance for loans individually evaluated for impairment	$	2623		$	~~790~~953		$	—		$	—				$	~~816~~976
Ending allowance for loan losses balance for loans collectively evaluated for impairment	$	98,~~120~~613		$	1514,~~362~~612		$	~~185~~179		$	~~104~~131				$	2423,~~771~~535
Loans:
Recorded investment in loans	$	~~376~~377,~~173~~309		$	708,~~699~~121		$	7,~~711~~907		$	56,~~005~~723				$	1,~~097~~100,~~588~~060
Recorded investment in loans individually evaluated for impairment	$	87,~~386~~357		$	2027,~~182~~441		$	5,~~517~~492		$	1				$	3440,~~086~~291
Recorded investment in loans collectively evaluated for impairment	$	~~367~~369,~~787~~952		$	~~688~~680,~~517~~680		$	2,~~194~~415		$	56,~~004~~722				$	1,~~063~~059,~~502~~769

4. GOODWILL

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

~~2012~~The ~~Annual~~Company ~~Evaluation~~utilized a third party consultant to perform its annual impairment test as of August 31, 2013 and determined there was no impairment of goodwill as of the test date. The review calculated the fair value of both Metro United and MetroBank on a controlling, marketable basis and reconciled the indicated equity value of the Company based on the concluded valuation of the two reporting units to its market capitalization. Various appraisal methods were considered and based on the specific facts and circumstances, the income approach and the market approach were used to derive the fair value of the reporting units.

The Company completed its 2012 annual impairment test based on information as of August 31, 2012. The impairment analysis utilized guideline company and guideline transaction information where available, discounted cash flow analysis, and the market capitalization of the Company to estimate the fair value of Metro United.

Due to the limited number of bank transaction multiples, management allocated more weight on the income approach for the step-one analysis. The Company also performed a reconciliation of the estimated fair value of the reporting unit to the stock price of the Company. This reconciliation is performed by first determining the fair value of the reporting unit from various valuation techniques (i.e., guideline transactions, discounted cash flows, and quoted market prices). The fair value is compared to the allocated value of the reporting unit based on the Company’s market value using the stock price as of the valuation date. The Company allocates the total market value to both of its segments, MetroBank and Metro United. For each Bank, the allocation is based upon the following internal ratios:

Balance Sheet Ratios

• Total Bank assets as a percentage of total assets;

• Total Bank loans as a percentage of total loans;

• Total Bank deposits as a percentage of total deposits; and

• Total Bank shareholder's equity as a percentage of total shareholders' equity.

Performance Ratios

• Total Bank nonperforming assets as a percentage of total assets;

• Last twelve months return on assets; and

• Last twelve months return on equity.

In allocating the market value between the two Banks, more weight was assigned to the Performance Ratios than the Balance Sheet Ratios in order to account for the differences in market valuation as a result of different financial performance. The allocated market value of Metro United is then reconciled to the weighted average fair value derived from each valuation technique (i.e., guideline transactions, discounted cash flows, and quoted market prices) by assigning an estimated control premium of 20% to the allocated market value.

Under the discounted cash flow method, the Company used an average asset growth rate of 9.8% for the next five-year period and discounted Metro United’s cash flow and terminal value using a 13.2% discount rate. The derived fair value of Metro United was lower than the carrying value of its equity; therefore Metro United failed the step-one impairment test.

The Company then performed the step-two analysis to derive the implied fair value of goodwill. The size of the implied goodwill under the step-two analysis was significantly affected by the estimated fair value of the loans pertaining to Metro United. The significant market risk adjustment, which is a consequence of the current market conditions such as the interest rate environment, risk premium requirement on performing and nonperforming loans, supply and demand of loans for sale, macroeconomic conditions and political and regulatory environment, were all substantial contributors to the valuation discounts associated with Metro United’s loan portfolio. The implied fair value of goodwill at the evaluation date exceeded the carrying value; therefore the Company determined there was no impairment of goodwill as of that date.

To the extent that market liquidity returns and the fair value of the individual assets or loans of Metro United increases at a faster rate than the fair value of Metro United as a whole, that may cause the implied goodwill to be lower than the carrying value of goodwill. Future potential changes in valuation assumptions may also impact the estimated fair value of Metro United, resulting in impairment of goodwill under the step-two analysis. The stock price performance of the Company and the fair value of Metro United's loans are factors that may impact the potential future goodwill impairment.

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

Balance as of January 1, 2013
Goodwill		21,827
Accumulated impairment losses		7,500
Net goodwill	$	14,327
Impairment losses for the six months ended June 30, 2013		—
Balance as of June 30, 2013
Goodwill		21,827
Accumulated impairment losses		7,500
Net goodwill	$	14,327

Balance as of January 1, 2013
Goodwill		21,827
Accumulated impairment losses		7,500
Net goodwill	$	14,327

Impairment losses for the nine months ended September 30, 2013		—

Balance as of September 30, 2013
Goodwill		21,827
Accumulated impairment losses		7,500
Net goodwill	$	14,327

5. EARNINGS PER COMMON SHARE

Basic earnings per common share (“EPS”) is computed by dividing net income (after deducting dividends on preferred stock) by the weighted-average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income available to common shareholders by the weighted-average number of common shares and potentially dilutive common shares outstanding during the period. Stock options, restricted common shares and warrants can be dilutive common shares and are therefore considered in the earnings per share calculation, if dilutive. Stock options, restricted common shares and warrants that are antidilutive are excluded from earnings per share calculation. Stock options, restricted common shares and warrants are antidilutive when the exercise price is higher than the current market price of the Company’s common stock. For the three months ended ~~June~~September 30, 2013 and 2012, there were ~~244~~130,~~801~~836 and ~~453~~302,~~090~~406 antidilutive stock options, respectively. For the ~~six~~nine months ended ~~June~~September 30, 2013 and 2012, there were ~~258~~212,~~954~~811 and ~~600~~520,~~491~~343 antidilutive stock options including restricted common shares, respectively. The number of potentially dilutive common shares is determined using the treasury stock method.

	As of and for the Three Months Ended June 30,				As of and for the Six Months Ended June 30,
	As of and for the Three Months Ended September 30,				As of and for the Nine Months Ended September 30,
	2013		2012		2013		2012
	(In thousands, except per share amounts)
Net income available to common shareholders	$	23,~~796~~448	$	2,~~521~~712	$	59,~~823~~271	$	47,~~691~~403
Weighted average common shares in basic EPS		18,~~366~~417		1518,~~493~~307		18,~~349~~372		1415,~~331~~666
Effect of dilutive securities		~~347~~397		~~260~~341		~~364~~385		~~166~~210
Weighted average common and potentially dilutive common shares used in diluted EPS		18,~~713~~814		1518,~~753~~648		18,~~713~~757		1415,~~497~~876
Earnings per common share:
Basic	$	0.1519	$	0.1615	$	0.3250	$	0.3347
Diluted	$	0.1518	$	0.1615	$	0.3149	$	0.3247

6. COMMITMENTS AND CONTINGENCIES

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

~~The contractual amount of the Company’s financial instruments with off-balance sheet risk as of June 30, 2013 and December 31, 2012 is presented below (in thousands):~~24

	As of June 30, 2013		As of December 31, 2012
Unfunded loan commitments including unfunded lines of credit	$	162,605	$	99,474
Standby letters of credit		6,035		10,387
Commercial letters of credit		7,742		1,595
Operating leases		6,512		7,337
Total financial instruments with off-balance sheet risk	$	182,894	$	118,793

The contractual amount of the Company’s financial instruments with off-balance sheet risk as of September 30, 2013 and December 31, 2012 is presented below (in thousands):

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.

	As of September 30, 2013		As of December 31, 2012
Unfunded loan commitments including unfunded lines of credit	$	154,827	$	99,474
Standby letters of credit		5,873		10,387
Commercial letters of credit		5,972		1,595
Operating leases		5,899		7,337
Total financial instruments with off-balance sheet risk	$	172,571	$	118,793

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, results of operations or cash flows.

7. REGULATORY MATTERS

The Banks are subject to regulations and, among others things, may be limited in their ability to pay dividends or otherwise transfer funds to the holding company. In addition, dividends paid by the Banks to the Parent would be prohibited if the effect thereof would cause the Banks’ capital to be reduced below applicable minimum capital requirements.

OnAs ~~August 10~~of September 30, ~~2009~~2013, ~~MetroBank~~the ~~entered~~most ~~into~~recent anotifications ~~written~~from ~~agreement (~~the ~~“Agreement”)~~OCC with ~~the~~respect ~~OCC.~~to ~~The~~MetroBank, ~~Agreement~~and ~~was~~the ~~based~~CDBO onwith ~~the~~respect ~~findings~~to ofMetro ~~the~~United ~~OCC~~categorized ~~during~~ the ~~annual~~Banks as ~~on-site~~“well ~~examination~~capitalized” ofunder ~~MetroBank performed in~~ the ~~first~~regulatory ~~quarter~~framework offor ~~2009~~prompt ~~and~~corrective ~~was primarily focused on matters related to MetroBank’s asset quality~~action. ~~The~~There ~~Board~~are ofno ~~Directors~~conditions ofor ~~MetroBank~~events ~~was~~since ~~officially informed on June 12, 2013 by~~ the ~~OCC~~notifications that ~~the~~management ~~Agreement~~believes ~~had~~have ~~been~~changed ~~terminated~~the ~~effective~~Banks’ aslevel of ~~June~~capital ~~12, 2013~~adequacy.

As of June 30, 2013, the most recent notifications from the OCC with respect to MetroBank, and the CDFI with respect to Metro United categorized the Banks as “well capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events since the notifications that management believes have changed the Banks’ level of capital adequacy.

The Company’s and the Banks’ actual capital amounts and ratios atas of the dates indicated are presented in the following table (dollars in thousands):

	~~Actual~~	Actual				~~Minimum Required For Capital Adequacy Purposes~~	Minimum Required For Capital Adequacy Purposes				~~To be Categorized as Well Capitalized under Prompt Corrective Action Provisions~~	To be Categorized as Well Capitalized under Prompt Corrective Action Provisions
	~~Amount~~	Amount	~~Ratio~~	Ratio		~~Amount~~	Amount	~~Ratio~~	Ratio		~~Amount~~	Amount	~~Ratio~~	Ratio
	~~(Dollars in thousands)~~						(Dollars in thousands)
As of June 30, 2013
As of September 30, 2013
Total risk-based capital ratio
MetroCorp Bancshares, Inc.	$	~~217~~221,~~914~~088		17.1022	%	$	~~101~~102,~~953~~719		8.00	%	$	N/A		N/A	%
MetroBank, N.A.		~~149~~152,~~083~~143		16.0740			74,199		8.00			92,749		10.00
Metro United Bank		5455,~~222~~536		15.7367			2728,~~582~~351		8.00			3435,~~477~~439		10.00
Tier 1 risk-based capital ratio
MetroCorp Bancshares, Inc.		~~201~~204,~~902~~969		15.8496			5051,~~977~~359		4.00		N/A		N/A
MetroBank, N.A.		~~137~~140,~~437~~511		1415.8215			37,~~100~~099		4.00			55,649		6.00
Metro United Bank		4951,~~882~~076		14.4741			1314,~~791~~176		4.00			2021,~~686~~263		6.00
Leverage ratio
MetroCorp Bancshares, Inc.		~~201~~204,~~902~~969		12.8785			6263,~~743~~801		4.00		N/A		N/A
MetroBank, N.A.		~~137~~140,~~437~~511		12.0933			45,~~479~~587		4.00			56,~~848~~984		5.00
Metro United Bank		4951,~~882~~076		11.5516			1718,~~273~~299		4.00			2122,~~591~~873		5.00
As of December 31, 2012
Total risk-based capital ratio
MetroCorp Bancshares, Inc.	$	212,083		17.95	%	$	94,509		8.00	%	$	N/A		N/A	%
MetroBank, N.A.		152,613		17.80			68,587		8.00			85,734		10.00
Metro United Bank		52,714		16.34			25,814		8.00			32,267		10.00
Tier 1 risk-based capital ratio
MetroCorp Bancshares, Inc.		197,077		16.68			47,255		4.00		N/A		N/A
MetroBank, N.A.		141,702		16.53			34,293		4.00			51,440		6.00
Metro United Bank		48,636		15.07			12,907		4.00			19,360		6.00
Leverage ratio
MetroCorp Bancshares, Inc.		197,077		13.18			59,812		4.00		N/A		N/A
MetroBank, N.A.		141,702		12.70			44,613		4.00			55,766		5.00
Metro United Bank		48,636		12.76			15,243		4.00			19,053		5.00

As of December 31, 2012
Total risk-based capital ratio
MetroCorp Bancshares, Inc.	$	212,083	17.95	%	$	94,509	8.00	%	$	N/A	N/A%
MetroBank, N.A.		152,613	17.80			68,587	8.00			85,734		10.00
Metro United Bank		52,714	16.34			25,814	8.00			32,267		10.00
Tier 1 risk-based capital ratio
MetroCorp Bancshares, Inc.		197,077	16.68			47,255	4.00		N/A		N/A
MetroBank, N.A.		141,702	16.53			34,293	4.00			51,440		6.00
Metro United Bank		48,636	15.07			12,907	4.00			19,360		6.00
Leverage ratio
MetroCorp Bancshares, Inc.		197,077	13.18			59,812	4.00		N/A		N/A
MetroBank, N.A.		141,702	12.70			44,613	4.00			55,766		5.00
Metro United Bank		48,636	12.76			15,243	4.00			19,053		5.00

~~The~~8. ACCUMULATED ~~tax~~OTHER ~~effects~~COMPREHENSIVE ~~allocated to each component of other comprehensive income~~ (~~loss~~LOSS) ~~were~~INCOME ~~as follows (in thousands):~~

	Three months ended June 30, 2013									Three months ended June 30, 2012
	Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount			Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount
Change in accumulated gain (loss) on effective cash flow derivatives	$	210		$	75		$	135		$	(15	)	$	(6	)	$	(9	)
Unrealized losses on investment securities with OTTI:
Securities with OTTI charges during the period		(53	)		(19	)		(34	)		(48	)		(17	)		(31	)
Less: OTTI charges recognized in net income		(39	)		(15	)		(24	)		(38	)		(13	)		(25	)
Net unrealized losses on investment securities with OTTI		(14	)		(4	)		(10	)		(10	)		(4	)		(6	)
Unrealized (losses) gain on investment securities:
Unrealized holding (loss) gain arising during the period		(6,664	)		(2,418	)		(4,246	)		756			274			482
Less: reclassification adjustment for gains included in net income		23			8			15			72			26			46
Net unrealized (losses) gains on investment securities		(6,687	)		(2,426	)		(4,261	)		684			248			436
Other comprehensive (loss) income	$	(6,491	)	$	(2,355	)	$	(4,136	)	$	659		$	238		$	421

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

	Six months ended June 30, 2013									Six months ended June 30, 2012
	Three months ended September 30, 2013									Three months ended September 30, 2012
	Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount			Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount
Change in accumulated gain on effective cash flow derivatives	$	361		$	130		$	231		$	53		$	19		$	34
Change in accumulated gain (loss) on effective cash flow hedging derivative	$	87		$	31		$	56		$	12		$	4		$	8
Unrealized losses on investment securities with OTTI:
Unrealized loss on investment securities with OTTI:
Securities with OTTI charges during the period		(9336	)		(3413	)		(5923	)		(8714	)		(315	)		(569	)
Less: OTTI charges recognized in net income		(669	)		(252	)		(417	)		(777	)		(273	)		(504	)
Net unrealized losses on investment securities with OTTI		(27	)		(911	)		(1816	)		(107	)		(42	)		(65	)
Unrealized (losses) gains on investment securities:
Unrealized (losses) gain on investment securities:
Unrealized holding (loss) gain arising during the period		(~~7,327~~914	)		(~~2,656~~320	)		(~~4,671~~594	)		~~787~~974			~~284~~351			~~503~~623
Less: reclassification adjustment for gains included in net income		37			13			24			84			30			54
Less: reclassification adjustment for (loss) gain included in net income		(4	)		(1	)		(3	)		24			9			15
Net unrealized (losses) gains on investment securities		(~~7,364~~910	)		(~~2,669~~319	)		(~~4,695~~591	)		~~703~~950			~~254~~342			~~449~~608
Other comprehensive (loss) income	$	(~~7,030~~850	)	$	(~~2,548~~299	)	$	(~~4,482~~551	)	$	~~746~~955		$	~~269~~344		$	~~477~~611

The balance of and changes in each component of accumulated other comprehensive income (loss) as of and for the six months ended June 30, 2013 are as follows (net of taxes) (in thousands):

	Nine months ended September 30, 2013									Nine months ended September 30, 2012
	Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount			Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount
Change in accumulated gain on effective cash flow hedging derivative	$	448		$	161		$	287		$	65		$	23		$	42

Unrealized loss on investment securities with OTTI:
Securities with OTTI charges during the period		(129	)		(47	)		(82	)		(101	)		(36	)		(65	)
Less: OTTI charges recognized in net income		(75	)		(27	)		(48	)		(84	)		(30	)		(54	)
Net unrealized losses on investment securities with OTTI		(54	)		(20	)		(34	)		(17	)		(6	)		(11	)

Unrealized (losses) gains on investment securities:
Unrealized holding (loss) gain arising during the period		(8,241	)		(2,976	)		(5,265	)		1,761			635			1,126
Less: reclassification adjustment for gains included in net income		33			12			21			108			39			69
Net unrealized (losses) gains on investment securities		(8,274	)		(2,988	)		(5,286	)		1,653			596			1,057

Other comprehensive (loss) income	$	(7,880	)	$	(2,847	)	$	(5,033	)	$	1,701		$	613		$	1,088

	Gains (Losses) on Effective Cash Hedging Derivatives			Net Unrealized Gains (Losses) on Investments with OTTI			Net Unrealized Investment Gains (Losses)			Total Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) December 31, 2012	$	(1,136	)	$	(1,017	)	$	2,720		$	567
Other comprehensive income (losses) before reclassifications		231			(18	)		(4,671	)		(4,458	)
Amounts reclassified from other comprehensive income (loss) (1)		—			—			(24	)		(24	)
Net current-period other comprehensive income (loss)		231			(18	)		(4,695	)		(4,482	)
Accumulated other comprehensive loss June 30, 2013	$	(905	)	$	(1,035	)	$	(1,975	)	$	(3,915	)

The balance of and changes in each component of accumulated other comprehensive loss as of and for the nine months ended September 30, 2013 are as follows (net of taxes) (in thousands):

______________________________

	Gains (Losses) on Effective Cash Hedging Derivatives			Net Unrealized Gains (Losses) on Investments with OTTI			Net Unrealized Investment Gains (Losses)			Total Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) December 31, 2012	$	(1,136	)	$	(1,017	)	$	2,720		$	567
Other comprehensive income (losses) before reclassifications		287			(34	)		(5,265	)		(5,012	)
Amounts reclassified from other comprehensive income (loss) (1)		—			—			(21	)		(21	)
Net current-period other comprehensive income (loss)		287			(34	)		(5,286	)		(5,033	)

Accumulated other comprehensive loss September 30, 2013	$	(849	)	$	(1,051	)	$	(2,566	)	$	(4,466	)

(1)	Amounts reclassified from other comprehensive income were transferred to gain (loss) on securities, net.

9. DERIVATIVE FINANCIAL INSTRUMENTS

The fair value of derivative positions outstanding is included in other liabilities in the accompanying condensed consolidated balance sheets and in the net change in this financial statement line item in the accompanying condensed consolidated statements of cash flows.

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

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

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

The Company ~~obtains~~applies ~~dealer~~hedge ~~quotations~~accounting to ~~value its~~ interest rate derivatives when qualified. To qualify for hedge accounting, a derivative ~~contract~~must be highly effective at reducing the risk associated with the exposure being hedged. In addition, for a derivative to be designated as a hedge, the risk management objective and strategy must be documented. Hedge documentation must identify the derivative hedging instrument, the asset or liability and type of ~~cash~~risk ~~flows~~to be hedged, and ~~its~~how ~~non~~the effectiveness of the derivative will be assessed prospectively and retrospectively. To assess effectiveness, the Company compares the dollar-~~hedging~~value ~~interest~~of ~~rate~~the change in the fair value of the derivative to the change in the fair value or cash flows of the hedged item. The ~~notional~~extent ~~amounts~~to which a derivative has been, and ~~estimated~~is expected to continue to be, effective at offsetting changes in the fair ~~values~~value or cash flows of ~~interest~~the ~~rate~~hedged ~~derivative~~item ~~contracts~~must ~~outstanding~~be assessed and documented at ~~June~~least ~~30,~~quarterly. ~~2013~~Any ~~and~~hedge ~~December~~ineffectiveness 31(i.e., ~~2012~~the ~~are~~amount ~~presented~~by inwhich the ~~following~~gain ~~table~~or ~~(in~~loss ~~thousands~~on the designated derivative instrument does not exactly offset the gain or loss on the hedged item attributable to the hedged risk): must be reported in current-period earnings. If it is determined that a derivative is not highly effective at hedging the designated exposure, hedge accounting is discontinued.

	June 30, 2013					December 31, 2012
	Notional Amount		Estimated Fair Value			Notional Amount		Estimated Fair Value
Interest rate derivative contract designated as a hedge of cash flows	$	17,500	$	(1,415	)	$	17,500	$	(1,775	)
Interest rate derivative contract not designated as a hedge of cash flows	$	15,000	$	83		$	15,000	$	41

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

The Company obtains dealer quotations to value its interest rate derivative contract designated as a hedge of cash flows and its non-hedging interest rate derivative. The notional amounts and estimated fair values of interest rate derivative contracts outstanding at September 30, 2013 and December 31, 2012 are presented in the following table (in thousands):

	September 30, 2013					December 31, 2012
	Notional Amount		Estimated Fair Value			Notional Amount		Estimated Fair Value
Interest rate derivative contract designated as a hedge of cash flows	$	17,500	$	(1,327	)	$	17,500	$	(1,775	)

Interest rate derivative contract not designated as a hedge of cash flows	$	15,000	$	63		$	15,000	$	41

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

Amounts included in the condensed consolidated statements of operations and in other comprehensive income (loss) for the period related to interest rate derivatives designated as hedges of cash flows were as follows:

	Gains/(losses) recorded in income and other comprehensive income (loss), net of tax (in thousands)
Three months ended June 30, 2013	Derivative effective portion reclassified from AOCI into income		Hedge ineffectiveness recorded directly in income		Total income statement impact		Derivative effective portion recorded in OCI			Total change in OCI for period
Interest rate derivative designated as a hedge of cash flows:
Interest rate swap	$	—	$	—	$	—	$	210		$	210
Three months ended June 30, 2012
Interest rate derivative designated as a hedge of cash flows:
Interest rate swap	$	—	$	—	$	—	$	(15	)	$	(15	)

	Gains/(losses) recorded in income and other comprehensive income (loss), net of tax (in thousands)
Six months ended June 30, 2013	Derivative effective portion reclassified from AOCI into income		Hedge ineffectiveness recorded directly in income		Total income statement impact		Derivative effective portion recorded in OCI		Total change in OCI for period
Interest rate derivative designated as a hedge of cash flows:
Interest rate swap	$	—	$	—	$	—	$	360	$	360
Six months ended June 30, 2012
Interest rate derivative designated as a hedge of cash flows:
Interest rate swap	$	—	$	—	$	—	$	53	$	53

Amounts included in the condensed consolidated statements of ~~operations~~income and in other comprehensive income (loss) for the period related to ~~non-hedging~~ interest rate derivatives ~~were~~designated as ~~follows~~hedges ~~(in~~of ~~thousands)~~cash flows were as follows:

	Three Months Ended June 30,					Six Months Ended June 30,
	Gains/(losses) recorded in income and other comprehensive income (loss), net of tax (in thousands)
	2013		2012			2013		2012
Three months ended September 30, 2013	Derivative effective portion reclassified from AOCI into income		Hedge ineffectiveness recorded directly in income			Total income statement impact		Derivative effective portion recorded in OCI			Total change in OCI for period
Non-hedging interest rate derivative:
Interest rate derivative designated as a hedge of cash flows:
Other non-interest income	$	34	$	(75	)	$	42	$	(108	)
Interest rate swap	$	—	$	—		$	—	$	87		$	87
Three months ended September 30, 2012
Interest rate derivative designated as a hedge of cash flows:
Interest rate swap	$	—	$	—		$	—	$	11		$	11

Counterparty Credit Risk. Derivative contracts involve the risk of dealing with institutional derivative counterparties and their ability to meet contractual terms. Derivative contracts are executed with a Credit Support Annex, or CSA, which is a bilateral ratings-sensitive agreement that requires collateral postings at established credit threshold levels. These agreements protect the interests of the Company and its counterparties, should either party suffer a credit rating deterioration. Institutional counterparties must have an investment grade credit rating. The Company’s credit exposure on interest rate swaps is limited to the net favorable value and interest payments of all swaps by each counterparty. Credit exposure may be reduced by the amount of collateral pledged by the counterparty. There are no credit-risk-related contingent features associated with any of the Company’s derivative contracts. The Company had no credit exposure relating to the interest rate swap at June 30, 2013. The amount of cash collateral posted by the Company related to derivative contracts was $2.3 million at both June 30, 2013 and December 31, 2012.

	Gains/(losses) recorded in income and other comprehensive income (loss), net of tax (in thousands)
Nine months ended September 30, 2013	Derivative effective portion reclassified from AOCI into income		Hedge ineffectiveness recorded directly in income		Total income statement impact		Derivative effective portion recorded in OCI		Total change in OCI for period
Interest rate derivative designated as a hedge of cash flows:
Interest rate swap	$	—	$	—	$	—	$	448	$	448

Nine months ended September 30, 2012
Interest rate derivative designated as a hedge of cash flows:
Interest rate swap	$	—	$	—	$	—	$	65	$	65

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013		2012
Non-hedging interest rate derivative:
Other non-interest income	$	(19	)	$	(31	)	$	22	$	(139	)

Counterparty Credit Risk. Derivative contracts involve the risk of dealing with institutional derivative counterparties and their ability to meet contractual terms. Derivative contracts are executed with a Credit Support Annex, or CSA, which is a bilateral ratings-sensitive agreement that requires collateral postings at established credit threshold levels. These agreements protect the interests of the Company and its counterparties, should either party suffer a credit rating deterioration. Institutional counterparties must have an investment grade credit rating. The Company’s credit exposure on interest rate swaps is limited to the net favorable value and interest payments of all swaps by each counterparty. Credit exposure may be reduced by the amount of collateral pledged by the counterparty. There are no credit-risk-related contingent features associated with any of the Company’s derivative contracts. The Company had no credit exposure relating to the interest rate swap at September 30, 2013. The amount of cash collateral posted by the Company related to derivative contracts was $1.6 million and $2.3 million at September 30, 2013 and December 31, 2012, respectively.

10. 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~~nine months ended ~~June~~September 30, 2013 and 2012:

For the Three Months Ended June 30, 2013

For the Three Months Ended June 30, 2012

For the Three Months Ended September 30, 2013

For the Three Months Ended September 30, 2012

MetroBank

Metro United

Other

Consolidated Company

MetroBank

Metro United

Other

Consolidated Company

(Dollars in thousands)

Total interest income

11,~~108~~404

4,~~163~~657

4─

1516,~~275~~061

1211,~~147~~926

4,~~027~~096

16,~~181~~029

Total interest expense

1,~~328~~353

~~640~~696

~~326~~321

2,~~294~~370

1,~~614~~483

~~576~~548

~~346~~350

2,~~536~~381

Net interest income

910,~~780~~051

3,~~523~~961

(~~322~~321

)

1213,~~981~~691

10,~~533~~443

3,~~451~~548

(~~339~~343

)

13,~~645~~648

(Reduction in) provision for loan losses

─

(800

)

~~(25~~145

)

─

(25655

)

~~200~~(300

)

─

~~200~~(300

)

Net interest income after provision for loan losses

910,~~780~~851

3,~~548~~816

(~~322~~321

)

1314,~~006~~346

10,~~333~~743

3,~~451~~548

(~~339~~343

)

13,~~445~~948

Noninterest income

2,~~097~~115

~~193~~321

(~~346~~347

)

12,~~944~~089

2,~~005~~126

9284

(~~337~~338

)

1,~~760~~872

Noninterest expenses

78,~~608~~336

2,~~645~~749

~~455~~393

1011,~~708~~478

8,~~349~~281

2,~~782~~870

~~181~~378

11,~~312~~529

Income (loss) before income tax provision

4,~~269~~630

1,~~096~~388

(1,~~123~~061

)

4,~~242~~957

34,~~989~~588

~~761~~762

(~~857~~1,059

)

34,~~893~~291

Provision (benefit) for income taxes

1,~~358~~517

~~461~~349

(~~373~~357

)

1,~~446~~509

1,~~312~~449

~~251~~321

(~~296~~360

)

1,~~267~~410

Net income (loss)

23,~~911~~113

~~635~~1,039

(~~750~~704

)

23,~~796~~448

23,~~677~~139

~~510~~441

(~~561~~699

)

2,~~626~~881

	For the nine months ended September 30, 2013											For the nine months ended September 30, 2012
	MetroBank			Metro United		Other			Consolidated Company			MetroBank		Metro United		Other			Consolidated Company
	(Dollars in thousands)
Total interest income	$	33,361		$	12,986	$	6		$	46,353		$	36,483	$	12,104	$	21		$	48,608
Total interest expense		3,990			1,910		959			6,859			4,834		1,793		1,044			7,671
Net interest income		29,371			11,076		(953	)		39,494			31,649		10,311		(1,023	)	$	40,937
(Reduction in) provision for loan losses		(1,250	)		120	─				(1,130	)		300	─		─				300
Net interest income after provision for loan losses		30,621			10,956		(953	)		40,624			31,349		10,311		(1,023	)		40,637
Noninterest income		6,117			620		(1,054	)		5,683			6,188		260		(1,013	)		5,435
Noninterest expenses		23,362			7,805		1,321			32,488			25,143		8,043		588			33,774
Income (loss) before income tax provision		13,376			3,771		(3,328	)		13,819			12,394		2,528		(2,624	)		12,298
Provision (benefit) for income taxes		4,310			1,358		(1,120	)		4,548			3,921		995		(893	)		4,023
Net income (loss)	$	9,066		$	2,413	$	(2,208	)	$	9,271		$	8,473	$	1,533	$	(1,731	)	$	8,275

	For the Six Months Ended June 30, 2013												For the Six Months Ended June 30, 2012
	MetroBank			Metro United			Other			Consolidated Company			MetroBank		Metro United		Other			Consolidated Company
	(Dollars in thousands)
Total interest income	$	21,957		$	8,329		$	6		$	30,292		$	24,557	$	8,008	$	14		$	32,579
Total interest expense		2,637			1,214			638			4,489			3,351		1,245		694			5,290
Net interest income		19,320			7,115			(632	)		25,803			21,206	$	6,763	$	(680	)	$	27,289
(Reduction in) provision for loan losses		(450	)		(25	)	─				(475	)		600	─		─				600
Net interest income after provision for loan losses		19,770			7,140			(632	)		26,278			20,606		6,763		(680	)		26,689
Noninterest income		4,002			299			(707	)		3,594			4,062		176		(675	)		3,563
Noninterest expenses		15,026			5,056			928			21,010			16,862		5,173		210			22,245
Income (loss) before income tax provision		8,746			2,383			(2,267	)		8,862			7,806		1,766		(1,565	)		8,007
Provision (benefit) for income taxes		2,793			1,009			(763	)		3,039			2,472		674		(533	)		2,613
Net income (loss)	$	5,953		$	1,374		$	(1,504	)	$	5,823		$	5,334	$	1,092	$	(1,032	)	$	5,394

	As of June 30, 2013									As of June 30, 2012
	As of September 30, 2013									As of September 30, 2012
	MetroBank		Metro United		Other			Consolidated Company		MetroBank		Metro United		Other			Consolidated Company
	(Dollars in thousands)
Net loans	$	807,081	$	349,375	$	—		$	1,156,456	$	760,874	$	306,048	$	—		$	1,066,922
Net loans (1)	$	802,569	$	361,455	$	—		$	1,164,024	$	759,904	$	311,409	$	—		$	1,071,313
Total assets		1,~~131~~146,~~360~~878		~~456~~488,~~822~~848		(21,~~396~~277	)		1,~~585~~634,~~786~~449		1,~~161~~128,~~189~~652		~~393~~396,~~163~~019		~~(418~~1,417	)		1,~~553~~526,~~934~~088
Deposits		~~943~~957,~~710~~061		~~381~~411,~~041~~749		(1816,~~588~~342	)		1,~~306~~352,~~163~~468		~~982~~946,~~195~~206		~~330~~325,~~553~~646		(536,~~278~~795	)		1,~~259~~265,~~470~~057

(1)

Includes loans held-for-sale.

11. FAIR VALUE

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

●

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

●

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

●

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

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

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

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

The following table presents the financial instruments carried at fair value on a recurring basis by caption on the consolidated balance sheets and by valuation hierarchy (as described above) at June 30, 2013 and December 31, 2012:

	Fair Value Measurements, using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Fair Value Measurements
Securities available-for-sale at June 30, 2013
U.S. Treasury and other U.S. government sponsored enterprises and agencies	$	—	$	87,627		$	—	$	87,627
Obligations of state and political subdivisions		—		17,993			—		17,993
Corporate		—		6,261			—		6,261
Mortgage-backed securities and collateralized mortgage obligations:							—
Government issued or guaranteed		—		56,924			—		56,924
Privately issued residential		—		670			—		670
Asset backed securities		—		147			—		147
Investment in CRA funds		13,942		—			—		13,942
Total available-for-sale securities		13,942		169,622			—		183,564
Derivative assets
Interest rate cap		—		83			—		83
Total assets measured at fair value on a recurring basis	$	13,942	$	169,705		$	—	$	183,647
Derivative liabilities at June 30, 2013
Interest rate swap	$	—	$	(1,415	)	$	—	$	(1,415	)

Securities available-for-sale at December 31, 2012
U.S. Treasury and other U.S. government sponsored enterprises and agencies	$	—	$	71,181		$	—	$	71,181
Obligations of state and political subdivisions		—		13,389			—		13,389
Corporate		—		6,350			—		6,350
Mortgage-backed securities and collateralized mortgage obligations:							—
Government issued or guaranteed		—		57,941			—		57,941
Privately issued residential		—		683			—		683
Asset backed securities		—		143			—		143
Investment in CRA funds		14,361		—			—		14,361
Total available-for-sale securities		14,361		149,687			—		164,048
Derivative assets
Interest rate cap		—		41			—		41
Total assets measured at fair value on a recurring basis	$	14,361	$	149,728		$	—	$	164,089
Derivative liabilities at December 31, 2012
Interest rate swap	$	—	$	(1,775	)	$	—	$	(1,775	)

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

	Fair Value Measurements, using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Fair Value Measurements

Securities available-for-sale at September 30, 2013
U.S. Treasury and other U.S. government sponsored enterprises and agencies	$	—	$	81,746		$	—	$	81,746
Obligations of state and political subdivisions		—		17,143			—		17,143
Corporate		—		6,279			—		6,279
Mortgage-backed securities and collateralized mortgage obligations:
Government issued or guaranteed		—		63,727			—		63,727
Privately issued residential		—		668			—		668
Asset backed securities		—		143			—		143
Investment in CRA funds		13,951		—			—		13,951

Total available-for-sale securities		13,951		169,706			—		183,657
Derivative asset
Interest rate cap		—		63			—		63
Total assets measured at fair value on a recurring basis	$	13,951	$	169,769		$	—	$	183,720

Derivative liability at September 30, 2013
Interest rate swap	$	—	$	(1,327	)	$	—	$	(1,327	)


Securities available-for-sale at December 31, 2012
U.S. Treasury and other U.S. government sponsored enterprises and agencies	$	—	$	71,181		$	—	$	71,181
Obligations of state and political subdivisions		—		13,389			—		13,389
Corporate		—		6,350			—		6,350
Mortgage-backed securities and collateralized mortgage obligations:
Government issued or guaranteed		—		57,941			—		57,941
Privately issued residential		—		683			—		683
Asset backed securities		—		143			—		143
Investment in CRA funds		14,361		—			—		14,361

Total available-for-sale securities		14,361		149,687			—		164,048
Derivative asset
Interest rate cap		—		41			—		41
Total assets measured at fair value on a recurring basis	$	14,361	$	149,728		$	—	$	164,089

Derivative liability at December 31, 2012
Interest rate swap	$	—	$	(1,775	)	$	—	$	(1,775	)

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

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

Non-financial and financial assets measured at fair value on a non-recurring basis include the following:

Foreclosed Assets. Foreclosed assets are carried at fair value less costs to sell. The fair value measurements of foreclosed assets can include Level 2 measurement inputs such as real estate appraisals and comparable real estate sales information, in conjunction with Level 3 measurement inputs such as cash flow projections, qualitative adjustments, sales cost estimates, etc. As a result, the categorization of foreclosed assets is Level 3 of the fair value hierarchy. In connection with the measurement and initial recognition of certain foreclosed assets, the Company may recognize charge-offs through the allowance for loan losses, and subsequent to initial recognition based on updated appraisals or other factors, may remeasure foreclosed assets to fair value through a write-down included in other non-interest expense.

Impaired Loans. Certain impaired loans with a valuation reserve are measured for impairment using the practical expedient, whereby fair value of the loan is based on the fair value of the loan’s collateral, provided the loan is collateral dependent. The fair value measurements of loan collateral can include real estate appraisals, comparable real estate sales information, cash flow projections, realization estimates, etc., all of which can include observable and unobservable inputs. As a result, the categorization of impaired loans can be either Level 2 or Level 3 of the fair value hierarchy, depending on the nature of the inputs used for measuring the related collateral’s fair value. As of ~~June~~September 30, 2013 and December 31, 2012, certain impaired loans were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for loan losses based upon the fair value of the underlying collateral.

The following presents assets carried at fair value on a nonrecurring basis by caption on the condensed consolidated balance sheets and by valuation hierarchy (as described above) at ~~June~~September 30, 2013 and December 31, 2012 (in thousands):

	As of June 30, 2013				As of December 31, 2012
	As of September 30, 2013				As of December 31, 2012
	Level 2		Level 3		Level 2		Level 3
Assets
Foreclosed assets	$	—	$	109,~~960~~373	$	—	$	12,555
Impaired loans (1)		~~870~~485		—		4,646		—

___________________________________

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

The following presents losses related to fair value adjustments that are included in the consolidated statements of ~~operations~~income for the three and six months ended ~~June~~September 30, 2013 and 2012 related to assets held at those dates (in thousands):

	Three Months ended June 30,				Six Months ended June 30,
	Three Months ended September 30,				Nine months ended September 30,
	2013		2012		2013		2012
Losses related to:
Foreclosed assets (1)	$	3914	$	~~845~~598	$	~~103~~117	$	~~922~~1,520
Impaired loans (2)		50—		~~451~~—		50		451

__________________________________

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

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

FASB ASC Topic 825 requires disclosure of the fair value of financial assets and liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis.34

33Fair Value of Financial Instruments

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

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

	As of June 30, 2013				As of December 31, 2012
	As of September 30, 2013				As of December 31, 2012
	Carrying or Contract Amount		Estimated Fair Value		Carrying or Contract Amount		Estimated Fair Value
	(In thousands)
Financial Assets
Level 2 inputs:
Cash and cash equivalents	$	~~126~~167,~~568~~490	$	~~126~~167,~~568~~490	$	159,449	$	159,449
Interest-bearing deposits in banks		15,~~501~~616		15,~~501~~616		15,321		15,321
Investment securities held-to-maturity		47,~~047~~788		48,~~445~~108		4,046		4,757
Other investments		65,~~001~~702		65,~~001~~702		5,592		5,592
Cash value of bank owned life insurance		33,~~431~~721		33,~~431~~721		32,794		32,794
Accrued interest receivable		43,~~316~~753		43,~~316~~753		4,120		4,120
Level 3 inputs:
Loans held-for-investment, net		1,156,456		1,142,858		1,075,745		1,062,432
Loans held-for-investment, net (1)		1,164,024		1,149,087		1,075,745		1,062,432
Financial Liabilities
Level 2 inputs:
Deposit transaction accounts		~~766~~798,~~222~~693		~~766~~798,~~222~~693		808,377		808,377
Junior subordinated debentures		36,083		36,083		36,083		36,083
Accrued interest payable		~~283~~280		~~283~~280		233		233
Level 3 inputs:
Time deposits		~~539~~553,~~941~~775		~~542~~556,~~549~~408		458,653		461,672
Other borrowings		46,000		4746,~~699~~737		25,000		25,008
Off-balance sheet financial instruments
Unfunded loan commitments, including unfunded lines of credit		—		~~247~~214		—		251
Standby letters of credit		—		3023		—		24

(1)

Includes loans held-for-sale.

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

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

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

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

Loans Held-for-Sale. The Company's loans held-for-sale are carried at the lower of cost or fair value utilizing Level 1 inputs based on contractual sales prices. These loans currently consist of SBA loans.

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

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

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

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

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

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

12. INCOME TAXES

The Company’s effective tax rate was 3430.14% for three months ended ~~June~~September 30, 2013 compared with 32.59% for the three months ended ~~June~~September 30, 2012. The ~~increase~~decrease in the effective income tax rate in 2013 as compared to 2012 was partially the result of adjustments related to state income taxes, bank owned life insurance investment income and foreign taxes. Additionally, the effective income tax rates for the three months ended ~~June~~September 30, 2013 and 2012 were impacted by the amount of other non-deductible expense and non-taxable income in each respective period, and also relative to the pre-tax income upon which the effective income tax rate was calculated. The Texas state tax is based on the Company’s gross margin with limited deductions. Because the Texas state tax allows only limited deductions the tax may not correlate, from year to year, with pre-tax income. The California state tax is based on the unitary income of the consolidated group which can vary disproportionately from pre-tax income depending on the apportionment of income among members of the unitary group. Income tax expense for the ~~six~~nine months ended ~~June~~September 30, 2013 was $34.05 million, compared with $24.60 million for the same period in 2012. The Company’s effective tax rate was 3432.39% for the ~~six~~nine months ended ~~June~~September 30, 2013 compared with 32.67% for the ~~six~~nine months ended ~~June~~September 30, 2012.

As of ~~June~~September 30, 2013, the Company had approximately $15.13 million in deferred tax assets. Deferred tax assets are subject to an evaluation of whether it is more likely than not that they will be realized. The Company has not provided a valuation allowance for the deferred tax assets at ~~June~~September 30, 2013 and December 31, 2012 due to its ability to offset reversals of net deductible temporary differences against income taxes paid in previous years and expected to be paid in future years. In making such judgments, significant weight is given to evidence that can be objectively verified. Because of historical losses that were recorded by the Company for the years ended December 31, 2010 and 2009, and if the Company is unable to generate sufficient taxable income in the future, then the Company may not be able to conclude it is more likely than not that the benefits of the deferred tax assets will be fully realized and may be required to recognize a valuation allowance and a corresponding income tax expense equal to the portion of the deferred tax assets that may not be realized.

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

13. NEW AUTHORITATIVE ACCOUNTING GUIDANCE

Accounting Standards Update (“ASU”) No.2013-11 – “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”. ASU No. 2013-11 eliminates the diversity in reporting an unrecognized tax benefit when a net operating loss carryforward or similar tax loss exists. ASU No. 2013-11 requires, in most circumstances, that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward or similar tax loss. The ASU will be effective prospectively for the Company for annual and interim periods beginning on January 1, 2014 and is not expected to have a material impact on the Company's financial condition, results of operations or cash flows.

ASU No. 2013-10 – “Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes”. ASU No. 2013-10 permits the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to Treasury obligations of the U.S. government (UST) and London Interbank Offered Rate (LIBOR). The amendments also remove the restriction on using different benchmark rates for similar hedges. The ASU was effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013 and did not have a material impact on the Company’s financial condition, results of operation or cash flows.

ASU No. 2013-02–“Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”. ASU No. 2013-02 does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts ASU No. 2013-02 was effective for the Company for annual and interim periods beginning on January 1, 2013 and did not have a material impact on the Company's financial condition, results of operations or cash flows.

ASU No. 2013-01 – “Balance Sheet (Topic 210) – Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities”. ASU No. 2013-01 addresses implementation issues about the scope of ASU No. 2011-11 “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities” and clarifies that ASU No. 2011-11 applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement . ASU No. 2013-01 was effective for the Company for annual and interim periods beginning on January 1, 2013 and did not have a material impact on the Company's financial condition, results of operations or cash flows.

ASU No. 2012-06 – “Business Combinations (Topic 805) - Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution”. ASU No. 2012-06 states that when a reporting entity recognizes an indemnification asset (in accordance with Subtopic 805-20) as a result of a government-assisted acquisition of a financial institution and subsequently a change in the cash flows expected to be collected on the indemnification asset occurs, the reporting entity should subsequently account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement (that is, the lesser of the term of the indemnification agreement and the remaining life of the indemnified assets). ASU No. 2012-06 was effective for the Company for annual and interim periods beginning on January 1, 2013 and did not have a material impact on the Company's financial condition, results of operations or cash flows.

ASU No. 2012-04 – “Technical Corrections and Improvements”. The amendments in ASU No. 2012-04 represent changes to clarify the FASB Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments are categorized as (1) source literature amendments (2) guidance clarification and reference corrections and (3) relocated guidance. Additionally, the amendments are intended to make the Codification easier to understand and the fair value measurement guidance easier to apply by eliminating inconsistencies and providing needed clarifications. The amendments in ASU No. 2012-04 that do not have transition guidance were effective October 1, 2012. The amendments that are subject to the transition guidance were effective for fiscal periods beginning on January 1, 2013. ASU No. 2012-04 did not have a material impact on the Company's financial condition, results of operations or cash flows.

ASU No. 2012-02 "Intangibles – Goodwill and Other (Topic 350) – Testing Indefinite-Lived Intangible Assets for Impairment". ASU No. 2012-02 gives entities the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events or circumstances, an entity determines it is more likely than not that an indefinite-lived intangible asset is impaired, then the entity must perform the quantitative impairment test. If, under the quantitative impairment test, the carrying amount of the intangible asset exceeds its fair value, an entity should recognize an impairment loss in the amount of that excess. Permitting an entity to assess qualitative factors when testing indefinite-lived intangible assets for impairment results in guidance that is similar to the goodwill impairment testing guidance in ASU No. 2011-08. ASU No. 2012-02 was effective for the Company beginning January 1, 2013 and did not have a significant impact on the Company's financial condition, results of operations or cash flows.

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

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

Special Cautionary Notice Regarding Forward-looking Statements

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

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

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

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

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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;

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

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

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the Company’s ability to raise additional capital;

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

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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;

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

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increases in the level of nonperforming assets;

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

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

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

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

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

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

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

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increases in FDIC deposit insurance assessments;

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government intervention in the U.S. financial system;

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

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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;

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the actual results of the pending merger with East West Bancorp, Inc. ("East West") could vary materially as a result of a number of factors, including the possibility that various closing conditions for the transaction may not be satisfied or waived and the merger agreement could be terminated under certain circumstances;

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

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adverse conditions in Asia;

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

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

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

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

Overview

The Company recorded net income of $23.84 million for the three months ended ~~June~~September 30, 2013, an increase of $~~170~~567,000 compared with the same quarter in 2012. The Company’s diluted earnings per common share for the three months ended ~~June~~September 30, 2013 were $0.~~15 (based on~~ 18~~.7 million diluted shares)~~, compared with $0.~~16 (based on~~ 15.8 ~~million diluted shares)~~ for the same quarter in 2012. Diluted earnings per share is computed by dividing net income (after deducting dividends on preferred stock) by the weighted-average number of common shares and potentially dilutive common shares outstanding at the end of the period. The Company recorded net income of $59.83 million for the ~~six~~nine months ended ~~June~~September 30, 2013, an increase of $~~429~~996,000 compared with $58.43 million for the same period in 2012. The Company’s diluted earnings per common share for the ~~six~~nine months ended ~~June~~September 30, 2013 were $0.3149 ~~(based on 18.7 million diluted shares),~~ compared with $0.3247 ~~(based on 14.5 million diluted shares)~~ for the same ~~quarter~~period in 2012. Details of the changes in the various components of net income are further discussed below.

Total assets were $1.5963 billion at ~~June~~September 30, 2013, an increase of $66114.06 million or 47.35% from $1.52 billion at December 31, 2012. Available-for-sale investment securities at ~~June~~September 30, 2013 were $183.67 million, an increase of $19.56 million or 1112.90% from $164.0 million at December 31, 2012. Net loans, including loans held-for-sale, at ~~June~~September 30, 2013 were $1.16 billion, an increase of $8088.73 million or 78.52% from $1.08 billion at December 31, 2012. Total deposits at ~~June~~September 30, 2013 were $1.3135 billion, an increase of $3985.14 million or 36.17% from $1.27 billion at December 31, 2012. Other borrowings at ~~June~~September 30, 2013 were $46.0 million, an increase of $21.0 million or 84.0% from $25.0 million at December 31, 2012. The Company’s return on average assets (“ROAA”) for the three months ended ~~June~~September 30, 2013 and 2012 was 0.7185% and 0.6976%, respectively. The Company’s return on average equity (“ROAE”) for the three months ended ~~June~~September 30, 2013 and 2012 was 67.2066% and 56.6261%, respectively. The Company’s ROAA for the ~~six~~nine months ended ~~June~~September 30, 2013 and 2012 was 0.7579% and 0.7273%, respectively. The Company’s ROAE for the ~~six~~nine months ended ~~June~~September 30, 2013 and 2012 was 6.5391% and 6.1128%, respectively. Shareholders’ equity at ~~June~~September 30, 2013 was $~~177~~180.71 million compared with $177.0 million at December 31, 2012, an increase of $~~689,000~~3.1 million or 01.47%. Details of the changes in the various balance sheet items are further discussed below.

Recent Developments

~~Formal~~Definitive Agreement for Merger – On September 18, 2013, East West and the Company announced that they have entered into a definitive agreement for the merger of the Company into East West. Under the terms of the definitive agreement, East West will acquire the outstanding shares of the Company for the lesser of $14.60 per share and 1.72 times the per share tangible equity, as adjusted, for an aggregate purchase price of approximately $273 million based on the 18,699,638 shares outstanding as of September 30, 3013. The shareholders of the Company will receive two-thirds of the merger consideration in shares of East West common stock and the remainder in cash. The ~~Board~~exchange ratio for determining the number of ~~Directors~~shares of ~~MetroBank~~East ~~was~~West ~~officially~~common ~~informed~~

Filing Compare · MetroCorp Bancshares, Inc.