Table of Contents

 

 

 

**UnitedStates**

**Securitiesand Exchange Commission**

**Washington, D. C. 20549**

 

**FORM 10-Q**

 
| **x** | ** ** | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|-------|------------|---------------------------------------------------------------------------------------------------|

 

**For thequarterly period ended September 30, 2010**

 
| o | ** ** | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT** |
|---|------------|--------------------------------------------------------------------------------|

 

**For the transition period from                      to                      **

 

**Commission File Number 333-140448**

 

**MANHATTANBANCORP**

(Exact name of registrant as specified in its charter)

 

| **California**                  | ** ** | **20-5344927**      |
|---------------------------------|------------|---------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer    |
| incorporation or organization)  |       | Identification No.) |

 

----

 

**2141 Rosecrans Avenue, Suite 1160**

**El Segundo, California  90245**

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number: **(310) 606-8000**

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes o  No x

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Website, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 or Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). o  Yes  o No

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act

 

| Large accelerated filer o                     |   | Accelerated filer o         |
|-----------------------------------------------|--------|-----------------------------|
|                                          |   |                        |
| Non-accelerated filer o                  |   | Smaller reporting company x |
| (Do not check if a smaller reporting company) |   |                        |

 

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

 

Asof November 1, 2010, there were 3,987,631 shares of the issuer’s commonstock outstanding.

 

 

 

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Table of Contents

 

**Manhattan Bancorp**

**QUARTERLY REPORT ON FORM 10-Q**

**FOR**

**THE QUARTER ENDED SEPTEMBER 30, 2010**

 

**TABLE OF CONTENTS**

 
| ** **                               | ** **                                                                                  | **PAGE**   |
|------------------------------------------|---------------------------------------------------------------------------------------------|------------|
|                                     |                                                                                        |       |
| PART I — FINANCIAL INFORMATION |                                                                                        |
|                                     |                                                                                        |       |
| Item  1.                                 | FINANCIAL STATEMENTS                                                                        |       |
| ** **                               | ** **                                                                                  | ** ** |
|                                     | CONSOLIDATED BALANCE SHEETS                                                                 | 3          |
|                                     |                                                                                        |       |
|                                     | CONSOLIDATED STATEMENTS OF OPERATIONS                                                       | 4          |
|                                     |                                                                                        |       |
|                                     | CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY                                         | 5          |
|                                     |                                                                                        |       |
|                                     | CONSOLIDATED STATEMENTS OF CASH FLOWS                                                       | 6          |
|                                     |                                                                                        |       |
|                                     | NOTES  TO FINANCIAL STATEMENTS                                                              | 7          |
|                                     |                                                                                        |       |
| Item 2.                                  | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 15         |
|                                     |                                                                                        |       |
| Item 3.                                  | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                 | 34         |
|                                     |                                                                                        |       |
| Item 4T.                                 | CONTROLS AND  PROCEDURES                                                                    | 35         |
|                                     |                                                                                        |       |
| PART II  - OTHER INFORMATION        |                                                                                        |
|                                     |                                                                                        |
| Item 1.                                  | LEGAL PROCEEDINGS                                                                           | 37         |
|                                     |                                                                                        |       |
| Item  1A.                                | RISK FACTORS                                                                                | 37         |
|                                     |                                                                                        |       |
| Item 2.                                  | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                | 37         |
|                                     |                                                                                        |       |
| Item 3.                                  | DEFAULTS UPON  SENIOR SECURITIES                                                            | 37         |
|                                     |                                                                                        |       |
| Item 4.                                  | (REMOVED AND RESERVED)                                                                      | 37         |
|                                     |                                                                                        |       |
| Item 5.                                  | OTHER INFORMATION                                                                           | 37         |
|                                     |                                                                                        |       |
| Item  6.                                 | EXHIBITS                                                                                    | 37         |
|                                     |                                                                                        |       |
| SIGNATURES                               | 38                                                                                          |

 

2

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Tableof Contents

 

***PART I —FINANCIAL INFORMATION***

 

***Item 1 —Financial Information***

*** ***

**Manhattan Bancorp and Subsidiaries**

**ConsolidatedBalance Sheets**

 
| ** **                                                                                                                                                            | ** ** | **(Unaudited)**                  | ** **  | **(Audited)**                   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|-------------|---------------------------------|------------|
| ** **                                                                                                                                                            | ** ** | **September 30, 2010** | ** **  | **December 31, 2009** | ** ** |
| **Assets**                                                                                                                                                            | ** ** | ** **                       | ** **  | ** **                      | ** ** |
| Cash and due from banks                                                                                                                                               |       | $                                | 1,703,097   |                            | $          | 1,213,837 |   |
| Federal funds sold                                                                                                                                                    |       | 24,482,701                       |        | 50,241,455                      |       |
| Total cash and cash equivalents                                                                                                                                       |       | 26,185,798                       |        | 51,455,292                      |       |
| Time deposits-other financial institutions                                                                                                                            |       | 3,212,000                        |        | 3,462,000                       |       |
| Securities-available for sale                                                                                                                                         |       | 18,023,656                       |        | 13,360,750                      |       |
| Securities-held to maturity                                                                                                                                           |       | 496,611                          |        | 493,942                         |       |
|                                                                                                                                                                  |       |                             |        |                            |       |
| Loans                                                                                                                                                                 |       | 83,340,679                       |        | 80,116,019                      |       |
| Allowance for loan losses                                                                                                                                             |       | (1,863,200                       | )           | (1,202,494                      | )          |
| Net loans                                                                                                                                                             |       | 81,477,479                       |        | 78,913,525                      |       |
|                                                                                                                                                                  |       |                             |        |                            |       |
| Property and equipment, net                                                                                                                                           |       | 1,149,794                        |        | 1,281,940                       |       |
| Stock in other financial institutions                                                                                                                                 |       | 1,610,050                        |        | 1,699,650                       |       |
| Accrued interest receivable and other assets                                                                                                                          |       | 2,452,163                        |        | 1,647,744                       |       |
|                                                                                                                                                                  |       |                             |        |                            |       |
| Total assets                                                                                                                                                          |       | $                                | 134,607,551 |                            | $          | 152,314,843 |   |
|                                                                                                                                                                  |       |                             |        |                            |       |
| **Liabilities and Stockholders’  Equity**                                                                                                                        |       |                             |        |                            |       |
| Deposits:                                                                                                                                                             |       |                             |        |                            |       |
| Non-interest-bearing demand                                                                                                                                           |       | $                                | 29,784,998  |                            | $          | 29,647,199 |   |
| Interest-bearing:                                                                                                                                                     |       |                             |        |                            |       |
| Demand                                                                                                                                                                |       | 2,816,128                        |        | 4,026,157                       |       |
| Savings and money market                                                                                                                                              |       | 31,371,819                       |        | 17,899,434                      |       |
| Certificates of deposit equal to or greater than  $100,000                                                                                                            |       | 34,772,320                       |        | 54,351,901                      |       |
| Certificates of deposit less than $100,000                                                                                                                            |       | 3,412,780                        |        | 4,995,301                       |       |
| Total deposits                                                                                                                                                        |       | 102,158,045                      |        | 110,919,992                     |       |
| FHLB advances                                                                                                                                                         |       | 4,500,000                        |        | 12,000,000                      |       |
| Accrued interest payable and other liabilities                                                                                                                        |       | 2,305,779                        |        | 992,648                         |       |
| Total liabilities                                                                                                                                                     |       | 108,963,824                      |        | 123,912,640                     |       |
|                                                                                                                                                                  |       |                             |        |                            |       |
| Commitments and contingencies                                                                                                                                         |       | —                           |        | —                          |       |
|                                                                                                                                                                  |       |                             |        |                            |       |
| Stockholders’ equity                                                                                                                                             |       |                             |        |                            |       |
| Manhattan Bancorp stockholders’ equity:                                                                                                                          |       |                             |        |                            |       |
| Serial preferred stock-no par value; 10,000,000  shares authorized:  issued and outstanding, none in 2010 and 2009                                                    |       | —                           |        | —                          |       |
| Common stock-no par value;                                                                                                                                            |       |                             |        |                            |       |
| 10,000,000 shares authorized at December 31,  2009

30,000,000 shares authorized at September 30,  2010

issued and outstanding, 3,987,631 in 2010 and 2009 |       | 38,977,282                       |        | 38,977,282                      |       |
| Additional paid in capital                                                                                                                                            |       | 2,004,796                        |        | 1,566,396                       |       |
| Unrealized gain on available-for-sale securities                                                                                                                      |       | 491,670                          |        | 305,152                         |       |
| Accumulated deficit                                                                                                                                                   |       | (16,141,678                      | )           | (12,737,537                     | )          |
|                                                                                                                                                                  |       |                             |        |                            |       |
| Total Manhattan Bancorp stockholders’ equity                                                                                                                     |       | 25,332,070                       |        | 28,111,293                      |       |
| Non-controlling interest                                                                                                                                              |       | 311,657                          |        | 290,910                         |       |
|                                                                                                                                                                  |       | 25,643,727                       |        | 28,402,203                      |       |
|                                                                                                                                                                  |       |                             |        |                            |       |
| Total liabilities and stockholders’ equity                                                                                                                       |       | $                                | 134,607,551 |                            | $          | 152,314,843 |   |

 

Theaccompanying notes are an integral part of this financial statement.

 

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Tableof Contents

 

**Manhattan Bancorp and Subsidiaries**

** Consolidated Statements of Operations**

**(Unaudited)**

 
| ** **                                                         | ** ** | **For the three months** | ** ** | **For the nine months** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------|------------|----------------------------------------|------------|
| ** **                                                         | ** ** | **ended September 30,**       | ** ** | **ended September 30,**      | ** ** |
| ** **                                                         | ** ** | **2010**                                | ** ** | **2009**                               | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Interest income**                                                |       |                                    |       |                                   |       |   |   |   |   |
| Interest and fees on loans                                         |       | $                                       | 1,346,256  |                                   | $          | 1,084,097 |   | $ | 3,901,772 |   | $ | 2,822,969 |   |
| Interest on investment securities                                  |       | 271,896                                 |       | 93,163                                 |       | 908,548 |   | 325,936 |   |
| Interest on federal funds sold                                     |       | 9,247                                   |       | 7,410                                  |       | 29,614 |   | 22,112 |   |
| Interest on time deposits-other financial  institutions            |       | 16,809                                  |       | 19,070                                 |       | 39,062 |   | 92,281 |   |
|                                                               |       |                                    |       |                                   |       |   |   |   |   |
| Total interest income                                              |       | 1,644,208                               |       | 1,203,740                              |       | 4,878,996 |   | 3,263,298 |   |
|                                                               |       |                                    |       |                                   |       |   |   |   |   |
| **Interest expense**                                               |       |                                    |       |                                   |       |   |   |   |   |
| NOW, money market and savings                                      |       | 57,597                                  |       | 42,810                                 |       | 173,937 |   | 113,676 |   |
| Time deposits                                                      |       | 134,342                                 |       | 106,423                                |       | 450,180 |   | 331,268 |   |
| FHLB advances                                                      |       | 50,371                                  |       | 50,389                                 |       | 149,503 |   | 149,555 |   |
|                                                               |       |                                    |       |                                   |       |   |   |   |   |
| Total interest expense                                             |       | 242,310                                 |       | 199,622                                |       | 773,620 |   | 594,499 |   |
|                                                               |       |                                    |       |                                   |       |   |   |   |   |
| Net interest income                                                |       | 1,401,898                               |       | 1,004,118                              |       | 4,105,376 |   | 2,668,799 |   |
|                                                               |       |                                    |       |                                   |       |   |   |   |   |
| Provision for loan losses                                          |       | 149,724                                 |       | 468,650                                |       | 727,230 |   | 1,096,281 |   |
|                                                               |       |                                    |       |                                   |       |   |   |   |   |
| Net interest income after provision for loan  losses               |       | 1,252,174                               |       | 535,468                                |       | 3,378,146 |   | 1,572,518 |   |
|                                                               |       |                                    |       |                                   |       |   |   |   |   |
| **Non-interest income**                                            |       |                                    |       |                                   |       |   |   |   |   |
| Bank-related fees                                                  |       | 68,907                                  |       | 47,321                                 |       | 186,354 |   | 98,301 |   |
| Non-bank related fees                                              |       | 2,411,533                               |       | —                                 |       | 5,684,633 |   | — |   |
| Total Non-interest income                                          |       | 2,480,440                               |       | 47,321                                 |       | 5,870,987 |   | 98,301 |   |
|                                                               |       |                                    |       |                                   |       |   |   |   |   |
| **Non-interest expense**                                           |       |                                    |       |                                   |       |   |   |   |   |
| Compensation and benefits                                          |       | 3,301,571                               |       | 1,118,738                              |       | 8,707,739 |   | 3,245,781 |   |
| Occupancy and equipment                                            |       | 279,486                                 |       | 175,774                                |       | 818,210 |   | 515,241 |   |
| Technology and communication                                       |       | 397,738                                 |       | 154,759                                |       | 1,016,126 |   | 428,458 |   |
| Professional fees                                                  |       | 254,918                                 |       | 220,846                                |       | 1,039,905 |   | 864,794 |   |
| Administrative expenses                                            |       | 140,585                                 |       | 52,498                                 |       | 492,457 |   | 212,396 |   |
| Other non-interest expenses                                        |       | 221,817                                 |       | 133,992                                |       | 551,918 |   | 363,818 |   |
|                                                               |       |                                    |       |                                   |       |   |   |   |   |
| Total non-interest expenses                                        |       | 4,596,115                               |       | 1,856,607                              |       | 12,626,355 |   | 5,630,488 |   |
|                                                               |       |                                    |       |                                   |       |   |   |   |   |
| Loss before income taxes                                           |       | (863,501                                | )          | (1,273,818                             | )          | (3,377,222 | ) | (3,959,669 | ) |
|                                                               |       |                                    |       |                                   |       |   |   |   |   |
| Provision for income taxes                                         |       | 2,972                                   |       | —                                 |       | 6,172 |   | 1,600 |   |
|                                                               |       |                                    |       |                                   |       |   |   |   |   |
| Net loss                                                           |       | $                                       | (866,473   | )                                      | $          | (1,273,818 | ) | $ | (3,383,394 | ) | $ | (3,961,269 | ) |
| Less: Net (loss) gain attributable to the  noncontrolling interest |       | 9,332                                   |       | —                                 |       | 20,747 |   | — |   |
| Net loss attributable to Manhattan Bancorp                         |       | $                                       | (875,805   | )                                      | $          | (1,273,818 | ) | $ | (3,404,141 | ) | $ | (3,961,269 | ) |
|                                                               |       |                                    |       |                                   |       |   |   |   |   |
| Weighted average number of shares outstanding  (basic and diluted) |       | 3,987,631                               |       | 3,987,631                              |       | 3,987,631 |   | 3,987,631 |   |
|                                                               |       |                                    |       |                                   |       |   |   |   |   |
| Basic and diluted loss per share                                   |       | $                                       | (0.22      | )                                      | $          | (0.32 | ) | $ | (0.85 | ) | $ | (0.99 | ) |

 

The accompanying notes are an integral part of this financialstatement.

 

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**Manhattan Bancorp and Subsidiaries**

**ConsolidatedStatement of Stockholders’ Equity (Unaudited)**

**September 30, 2010 and 2009**

 
| ** **                                 | ** ** | ** **    | ** ** | ** **            | ** ** | ** ** | ** ** | ** **   | ** ** | ** **        | ** ** | ** **             | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** **   | ** **  | ** **  | ** ** |
|--------------------------------------------|------------|---------------|------------|-----------------------|------------|------------|------------|--------------|------------|-------------------|------------|------------------------|------------|-------------------|------------|------------------------|------------|--------------|-------------|-------------|------------|
| ** **                                 | ** ** | ** **    | ** ** | ** **            | ** ** | ** ** | ** ** | **Common**   | ** ** | **Additional**    | ** ** | ** **             | ** ** | ** **        | ** ** | **Other**              | ** ** | ** **   | ** **  | ** **  | ** ** |
| ** **                                 | ** ** | **Preferred** | ** ** | **Common Stock** | ** ** | **Stock**  | ** ** | **Paid-in**  | ** ** | **Comprehensive** | ** ** | **Accumulated**        | ** ** | **Comprehensive** | ** ** | **Non-controlling**    | ** ** | ** **   | ** **  |
| ** **                                 | ** ** | **Stock**     | ** ** | **Shares**            | ** ** | **Amount** | ** ** | **Warrants** | ** ** | **Capital**       | ** ** | **Income (Loss)** | ** ** | **Deficit**       | ** ** | **Income (Loss)** | ** ** | **Interest** | ** **  | **Total**   | ** ** |
| **Balance at December 31, 2008**      |       | $             | 1,558,517  |                  | 3,987,631  |       | $          | 38,977,282   |       | $                 | 120,417    |                   | $          | 957,825           |       | $                      | —     |         | $           | (7,634,001  | )          | $ | 307,488 |   | $ | — |   | $ | 34,287,528 |   |
| Accretion of preferred stock discount      |       | 18,063        |       |                  |       |       |       | (18,063      | )          |              |       |                   |       |              |       |                   |       |         |        | —      |       |
| Repurchase of preferred stock              |       | (1,576,580    | )          |                  |       |       |       | (102,354     | )          | $                 | (21,066    | )                      |       |              |       |                   |       |         |        |        | (1,700,000 | ) |
| Dividend on preferred stock                |       |          |       |                  |       |       |       |         |       |              |       |                   |       | (66,347           | )          |                   |       |         |        | (66,347     | )          |
| Share-based compensation expense           |       |          |       |                  |       |       |       |         |       | 587,113           |       |                   |       |              |       |                   |       |         |        | 587,113     |       |
| Unrealized (loss) on investment securities |       |          |       |                  |       |       |       |         |       |              |       | (5,667                 | )          |              |       | (5,667                 | )          |         |        | (5,667      | )          |
| Net loss                                   |       |          |       |                  |       |       |       |         |       |              |       | (3,961,269             | )          | $                 | (3,961,269 | )                      |       |         |        |        | (3,961,269 | ) |
| Total comprehensive loss                   |       |          |       |                  |       |       |       |         |       |              |       | $                      | (3,966,936 | )                 |       |                   |       |         |        |        |       |   |
| **Balance at September 30,  2009**    |       | $             | —     |                  | 3,987,631  |       | $          | 38,977,282   |       | $                 | —     |                   | $          | 1,523,872         |       |                   |       | $            | (11,661,617 | )           | $          | 301,821 |   | $ | — |   | $ | 29,141,358 |   |
|                                       |       |          |       |                  |       |       |       |         |       |              |       |                   |       |              |       |                   |       |         |        |        |       |
| **Balance at December 31, 2009**      |       | $             | —     |                  | 3,987,631  |       | $          | 38,977,282   |       | $                 | —     |                   | $          | 1,566,396         |       | $                      | —     |         | $           | (12,737,537 | )          | $ | 305,152 |   | $ | 290,910 |   | $ | 28,402,203 |   |
| Share-based compensation expense           |       |          |       |                  |       |       |       |         |       | 438,400           |       |                   |       |              |       |                   |       |         |        | 438,400     |       |
| Unrealized gain on investment securities   |       |          |       |                  |       |       |       |         |       |              |       | 186,518                |       |              |       | 186,518                |       |         |        | 186,518     |       |
| Net (loss) gain                            |       |          |       |                  |       |       |       |         |       |              |       | (3,404,141             | )          | (3,404,141        | )          |                   |       | 20,747       |        | (3,383,394  | )          |
| Total comprehensive loss                   |       |          |       |                  |       |       |       |         |       |              |       | $                      | (3,217,623 | )                 |       |                   |       |         |        |        |       |   |
| **Balance at Septebmer 30, 2010**          |       | $             | —     |                  | 3,987,631  |       | $          | 38,977,282   |       | $                 | —     |                   | $          | 2,004,796         |       |                   |       | $            | (16,141,678 | )           | $          | 491,670 |   | $ | 311,657 |   | $ | 25,643,727 |   |

 

The accompanying notes are an integral part of this financialstatement.

 

5

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**ManhattanBancorp and Subsidiary**

**ConsolidatedStatements of Cash Flows**

**(Unaudited)**

 
| ** **                                                           | ** ** | **For the nine months** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                           | ** ** | **ended September 30**       | ** ** |
| ** **                                                           | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| **Cash flows from operating  activities**                            |       |                                   |       |   |   |
| Net loss                                                             |       | $                                      | (3,383,394 | ) | $ | (3,961,269 | ) |
| Net amortization of discounts and premiums on  securities            |       | (322,042                               | )          | (19,705 | ) |
| Depreciation and amortization                                        |       | 298,888                                |       | 230,610 |   |
| Provision for loan losses                                            |       | 727,230                                |       | 1,096,281 |   |
| Share-based compensation                                             |       | 438,400                                |       | 587,113 |   |
| (Increase) in accrued interest receivable and  other assets          |       | (804,419                               | )          | (105,603 | ) |
| Increase in accrued interest payable and other  liabilities          |       | 1,313,131                              |       | 614,251 |   |
|                                                                 |       |                                   |       |   |   |
| Net cash used in operating activities                                |       | (1,732,206                             | )          | (1,558,322 | ) |
|                                                                 |       |                                   |       |   |   |
| **Cash flows from investing  activities**                            |       |                                   |       |   |   |
| Net (increase) in loans                                              |       | (3,325,375                             | )          | (16,606,169 | ) |
| Allowance for loan and lease loss recoveries                         |       | 34,191                                 |       | 14,014 |   |
| (Increase) decrease in time deposits - other  financial institutions |       | 250,000                                |       | 1,182,000 |   |
| Proceeds from repayment and maturities from  investment securities   |       | 9,657,783                              |       | 1,201,090 |   |
| Purchase of investments                                              |       | (13,814,798                            | )          | — |   |
| (Purchase) Redemption of stock in other financial  institutions      |       | 89,600                                 |       | (231,450 | ) |
| Purchase of premises and equipment                                   |       | (166,742                               | )          | (27,957 | ) |
|                                                                 |       |                                   |       |   |   |
| Net cash used in investing activities                                |       | (7,275,341                             | )          | (14,468,472 | ) |
|                                                                 |       |                                   |       |   |   |
| **Cash flows from financing  activities**                            |       |                                   |       |   |   |
| Net increase (decrease) in:                                          |       |                                   |       |   |   |
| Demand deposits                                                      |       | 137,799                                |       | 5,528,286 |   |
| Interest-bearing demand deposits                                     |       | (1,210,029                             | )          | 819,865 |   |
| Savings and money market deposits                                    |       | 13,472,385                             |       | 8,616,582 |   |
| Certificates of deposit equal to or greater than  $100,000           |       | (19,579,581                            | )          | 5,710,978 |   |
| Certificates of deposit less than $100,000                           |       | (1,582,521                             | )          | 86,381 |   |
| Increase (decrease) from borrowings                                  |       | (7,500,000                             | )          | 2,000,000 |   |
| Repurchase of preferred stock                                        |       | —                                 |       | (1,700,000 | ) |
| Cash dividend paid on preferred stock                                |       | —                                 |       | (66,347 | ) |
|                                                                 |       |                                   |       |   |   |
| Net cash (used in)/provided by financing  activities                 |       | (16,261,947                            | )          | 20,995,745 |   |
|                                                                 |       |                                   |       |   |   |
| Net decrease in cash and cash equivalents                            |       | (25,269,494                            | )          | 4,968,951 |   |
|                                                                 |       |                                   |       |   |   |
| **Cash and cash equivalents at  beginning of period**                |       | 51,455,292                             |       | 19,710,235 |   |
|                                                                 |       |                                   |       |   |   |
| **Cash and cash equivalents at end  of period**                      |       | $                                      | 26,185,798 |   | $ | 24,679,186 |   |
|                                                                 |       |                                   |       |   |   |
| **Supplementary information**                                        |       |                                   |       |   |   |
|                                                                 |       |                                   |       |   |   |
| Interest paid                                                        |       | $                                      | 735,794    |   | $ | 548,409 |   |
|                                                                 |       |                                   |       |   |   |
| Income taxes paid                                                    |       | $                                      | 3,200      |   | $ | 1,600 |   |

 

The accompanying notes are an integral partof this financial statement.

 

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**MANHATTAN BANCORP**

**NOTES TOFINANCIAL STATEMENTS**

**SEPTEMBER 30, 2010**

 

**Note 1.     CONSOLIDATED FINANCIAL STATEMENTS**

 

The accompanying unaudited condensed consolidatedfinancial statements of Manhattan Bancorp (the “Bancorp”) and its wholly-ownedsubsidiaries, Bank of Manhattan, N.A. (the “Bank”) and MBFS Holdings, Inc.(“MBFS”), together referred to as the “Company”, have been prepared inaccordance with the instructions to Form 10-Q and Article 8 ofRegulation S-X.  On October 1, 2009,the Bancorp, through its wholly-owned subsidiary MBFS, acquired a 70% interestin Banc of Manhattan Capital, LLC, (“BOMC”).  On July 30, 2010, while maintaining its 70% interest in BOMC, MBFSacquired a 70% interest in a newly-formed LLC, Manhattan Capital Markets (“MCM”).  In the anticipated reorganization, thepresent 70% partnership interests of MBFS in BOMC will be transferred to MCM,which will then acquire 100% of the partnership interest in BOMC.  The reorganization is intended to becompleted before the end of 2010.

 

As this is a condensed interim presentation, certaininformation and notes required by accounting principles generally accepted inthe United States of America (“U.S. GAAP”) for annual financial statements arenot included herein.  In the opinion ofManagement, all adjustments considered necessary for a fair presentation ofresults for the interim periods presented have been included.  These interim condensed consolidatedfinancial statements should be read in conjunction with the financialstatements and related notes contained in the Company’s 2009 Annual Report onForm 10-K.

 

The preparation of condensed consolidated financialstatements in conformity with U.S. GAAP requires Management to make estimatesand assumptions.  These estimates andassumptions affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities at the date of the consolidatedfinancial statements, and the reported amounts of revenues and expenses duringthe reporting period.   Actual resultscould differ from these estimates. All material intercompany accounts andtransactions have been eliminated.

 

Certain amounts in prior presentations may have beenreclassified to conform to the current presentation.  These reclassifications, if any, had noeffect on stockholders’ equity, net loss or loss-per-share amounts.

 

**Note 2.      RECENTACCOUNTING PRONOUNCEMENTS**

 

GENERALLY ACCEPTED ACCOUNTINGPRINCIPLES:  In June 2009,accounting standards were revised to establish the FASB Accounting StandardsCodification (the “Codification”) as the source of authoritative accountingprinciples recognized by the Financial Accounting Standard Board (“FASB”) to beapplied by nongovernmental entities in the preparation of financial statementsin conformity with U.S. GAAP.  TheCodification does not change current U.S. GAAP but is intended to simplify useraccess to all authoritative U.S. GAAP by providing all the authoritative literaturerelated to a particular topic in one place. The Codification is effective for interim and annual periods endingafter September 15, 2009, and as of the effective date, all existingaccounting standard documents were superseded. The Company adopted the Codification for the year endedDecember 31, 2009 and all subsequent statements will reference theCodification as the sole source of authoritative literature.

 

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BUSINESS COMBINATIONS:  EffectiveJanuary 1, 2009, the Company adopted the new accounting guidance thatapplies to all transactions and other events in which one entity obtainscontrol over one or more other businesses. The guidance requires an acquirer, upon initially obtaining control ofanother entity, to recognize the assets, liabilities and any non-controllinginterest in the acquiree at fair value as of the acquisition date.  Contingent consideration is required to berecognized and measured at fair value on the date of acquisition rather than ata later date when the amount of that consideration may be determinable beyond areasonable doubt.  This fair-valueapproach replaces the cost-allocation process required under old accountingliterature whereby the cost of an acquisition was allocated to the individualassets acquired and liabilities assumed based on their estimated fairvalue.  The new guidance requiresacquirers to expense acquisition-related costs as incurred rather thanallocating such costs to the assets acquired and liabilities assumed, as waspreviously the case.  Accounting forcosts associated with exit or disposal activities would have to be met in orderto accrue for a restructuring plan in purchase accounting.  Pre-acquisition contingencies are to berecognized at fair value, unless it is a non-contractual contingency that isnot likely to materialize, in which case, nothing should be recognized inpurchase accounting and, instead, that contingency would be subject to theprobable and estimable recognition criteria delineated in the Codificationrelated to accounting for contingencies. Subsequent accounting literature released during 2009 amends the newaccounting guidance to require that assets acquired and liabilities assumed ina business combination that arise from contingencies be recognized at fairvalue if fair value can be reasonably estimated, removes subsequent accountingguidance for assets and liabilities arising from contingencies, and requiresentities to develop a systematic and rational basis for subsequently measuringand accounting for assets and liabilities arising from contingencies.  It also eliminates the requirement todisclose an estimate of the range of outcomes of recognized contingencies atthe acquisition date. The adoption of these amendments did not have a materialimpact on the Company’s Consolidated Balance Sheets or Statements ofOperations.

 

SUBSEQUENTEVENTS:  In May 2009, accountingstandards were revised to require that management evaluate, as of the end ofeach reporting period, events or transactions that occur after the balancesheet date through the date that the financial statements are issued, or areavailable to be issued, and to disclose the date through which the evaluationhas been made.  The Company is requiredto evaluate whether events subsequent to the end of the reporting periodrequire disclosure or recognition through the date the financial statements areissued.  The adoption of these amendmentsdid not have a material impact on the Company’s Consolidated Balance Sheets orStatements of Operations.

 

InFebruary 2010, accounting standards were revised to remove the requirementfor an SEC registrant to disclose the date through which subsequent events wereevaluated as this requirement would have potentially conflicted with SECreporting requirements.  Removal of thedisclosure requirement is not expected to affect the nature or timing of subsequentevents evaluations performed by the Company. This change became effective immediately.

 

FAIRVALUE MEASUREMENTS:  InJanuary 2010, accounting standards were modified to add disclosurerequirements about significant transfers into and out of Levels 1 and 2,clarified existing fair value disclosure requirements about the appropriatelevel of disaggregation, and clarified that a description of the valuationtechniques and inputs used to measure fair value was required for recurring andnonrecurring Level 2 and 3 fair value measurements.  The Company initially adopted theseprovisions in preparing the condensed Consolidated Financial Statements for theperiod ended March 31, 2010.  Theadoption of these provisions which were subsequently codified into AccountingStandards Codification Topic 820, “Fair Value Measurements and Disclosures,”only affected the disclosure requirements for fair value measurements and as aresult had no impact on the Company’s statements of income and condition.

 

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Thenew accounting disclosure also requires that Level 3 activity about purchases,sales, issuances, and settlements be presented on a gross basis rather than asa net number as currently permitted and was effective for the Company’sreporting period ending March 31, 2011. As this provision amends only thedisclosure requirements for fair value measurements, the adoption will have noimpact on the Company’s statements of income and condition.

 

**Note 3.   INTEREST-EARNING ASSETS WITH OTHER FINANCIAL INSTITUTIONS**

 

At September 30, 2010, the Company hadinterest-earning deposits with other financial institutions of $3.2 million,with a weighted average yield of 1.44%, and an average weighted remaining lifeof approximately 7.2 months. At December 31, 2009, the Company hadinterest-earning deposits with other financial institutions of $3.5 million,with a weighted average yield of 1.81%, and an average weighted remaining lifeof approximately 3.4 months.

 

**Note 4.    INVESTMENTSECURITIES**

 

Investment securities have been classified in thebalance sheet according to Management’s intent. The following table sets forththe investment securities at their amortized cost and estimated fair value withgross unrealized gains and losses as of September 30, 2010, andDecember 31, 2009.

 
| ** **                                        | ** ** | ** **              | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | **Estimated** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|----------------|------------|----------------|------------|---------------|------------|
| ** **                                        | ** ** | **Amortized**           | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**      | ** ** |
| ** **                                        | ** ** | **Cost**                | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Value**     | ** ** |
| ** **                                        | ** ** | **(in thousands)** | ** ** |
| **September 30, 2010 **(unaudited) | ** ** | ** **              | ** ** | ** **     | ** ** | ** **     | ** ** | ** **    | ** ** |
| **Available-for-sale securities:**                |       |                    |       |           |       |           |       |          |       |
| U.S.  government and agency securities            |       | $                       | 2,645      |           | $          | 7              |       | $             | —     |   | $ | 2,652 |   |
| Mortgage-backed  securities                       |       | 4,845                   |       | 304            |       | 3              |       | 5,146         |       |
| Asset-backed  securities                          |       | 10,042                  |       | 262            |       | 78             |       | 10,226        |       |
| **Total available-for-sale securities**           |       | $                       | 17,532     |           | $          | 573            |       | $             | 81         |   | $ | 18,024 |   |
|                                              |       |                    |       |           |       |           |       |          |       |
| **Held-to-maturity securities:**                  |       |                    |       |           |       |           |       |          |       |
| State  and municipal securities                   |       | $                       | 496        |           | $          | 10             |       | $             | —     |   | $ | 506 |   |

 
| ** **                              | ** ** | ** **              | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | **Estimated** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|----------------|------------|----------------|------------|---------------|------------|
| ** **                              | ** ** | **Amortized**           | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**      | ** ** |
| ** **                              | ** ** | **Cost**                | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Value**     | ** ** |
| ** **                              | ** ** | **(in thousands)** | ** ** |
| **December 31, 2009**(audited)     |       |                    |       |           |       |           |       |          |       |
| **Available-for-sale securities:**      |       |                    |       |           |       |           |       |          |       |
| U.S.  government and agency securities  |       | $                       | 2,647      |           | $          | —         |       | $             | 21         |   | $ | 2,626 |   |
| Mortgage-backed  securities             |       | 7,009                   |       | 320            |       | 1              |       | 7,328         |       |
| Asset-backed  securities                |       | 3,399                   |       | 62             |       | 54             |       | 3,407         |       |
| **Total available-for-sale securities** |       | $                       | 13,055     |           | $          | 382            |       | $             | 76         |   | $ | 13,361 |   |
|                                    |       |                    |       |           |       |           |       |          |       |
| **Held-to-maturity securities:**        |       |                    |       |           |       |           |       |          |       |
| State  and municipal securities         |       | $                       | 494        |           | $          | 4              |       | $             | —     |   | $ | 498 |   |

 

Thefair value of these securities is based upon quoted market prices unlessotherwise indicated in Note 7, “*Fair Value Measurements.”*

 

Therewere realized gains during the nine-month period ended September 30, 2010of approximately $20,000. The net unrealized gain on available-for-salesecurities included in accumulated other comprehensive income was approximately$187,000 for the nine-month period ended September 30, 2010.Available-for-sale securities with an amortized cost of approximately $5.0million (fair value of approximately $5.2 million) were pledged as collateralfor Federal Home Loan Bank advances as of September 30, 2010.

 

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Managementdoes not believe that any of the Company’s investment securities are impaireddue to reasons of credit quality. Declines in the fair value of available-for-sale securities below theircost, that are deemed to be other-than-temporary, are reflected in earnings asrealized losses.  In estimating other-than-temporarylosses, Management considers among other things: (i) the length of timeand the extent to which the fair value has been less than cost, (ii) thefinancial condition and near-term prospects of the issuer, and (iii) the intentand ability of the Company to retain its investment in the issuer for a periodof time sufficient to allow for any anticipated recovery in fair value.

 

AtSeptember 30, 2010, the Company had no securities with unrealized lossesthat were in a continual loss position for over a twelve-month period.  The following table reflects unrealizedlosses for securities that were in a continual loss position for less than atwelve-month period as of September 30, 2010.

 
| **(unaudited)**                        | ** ** | **Less than 12 Months** | ** ** |
|----------------------------------------|------------|----------------------------------------|------------|
| **(In thousands)**                | ** ** | **Estimated Fair Value**     | ** ** | **Unrealized Losses** | ** ** |
| *Securities available for sale:*       |       |                                   |       |   |   |
| U.S.  Government and agency securities |       | $                                      | —     |   | $ | — |   |
| Mortgage-backed  securities            |       | 243                                    |       | 3 |   |
| Asset-backed  securities               |       | 5,821                                  |       | 78 |   |
| *Securities held to maturity*          |       |                                   |       |   |   |
| State  and municipal securities        |       | —                                 |       | — |   |
| Total  imparied securities             |       | $                                      | 6,064      |   | $ | 81 |   |

 

Anyintra-period decline in market values was attributable to changes in marketrates of interest rather than credit quality.  Because the Company has the ability and intent to hold all of its investmentsuntil a recovery of fair value, which may be at maturity, the Company considersnone of its investments to be other-than-temporarily impaired atSeptember 30, 2010.

 

Theamortized cost, estimated fair value and average yield of debt securities at September 30,2010 are shown below.  In the case ofavailable-for-sale securities, the average yields are based on effective ratesof book balances at year end.  Yields arederived by dividing interest income, adjusted for amortization of premiums andaccretion of discounts, by total amortized cost.  Mortgage-backed, asset-backed and othermortgage-type obligation securities are classified in accordance with estimatedlives.  Expected maturities may differfrom contractual maturities because borrowers have the right to prepayobligations.

 
| ** **                        | ** ** | **Available-for-Sale Securities** | ** ** | **Held-to Maturity Securities** | ** ** |
|-----------------------------------|------------|----------------------------------------|------------|-------------------------------------------|------------|
| ** **                        | ** ** | ** **                             | ** ** | **Estimated**                             | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Estimated** | ** ** | **Weighted** | ** ** |
| ** **                        | ** ** | **Amortized**                          | ** ** | **Fair**                                  | ** ** | **Average** | ** ** | **Amortized** | ** ** | **Fair** | ** ** | **Average** | ** ** |
| **(unaudited)**                   | ** ** | **Cost**                               | ** ** | **Value**                                 | ** ** | **Yield** | ** ** | **Cost** | ** ** | **Value** | ** ** | **Yield** | ** ** |
| ** **                        | ** ** | **(dollars in thousands)**   | ** ** |
| Due  in One Year or Less          |       | $                                      | 5,922      |                                      | $          | 5,998 |   | 3.22 | % | $ | — |   | $ | — |   |   |   |
| Due  from One Year to Five Years  |       | 6,078                                  |       | 6,259                                     |       | 2.02 | % | 496 |   | 506 |   | 4.55 | % |
| Due  from Five Years to Ten Years |       | 3,652                                  |       | 3,782                                     |       | 5.76 | % |   |   |   |   |   |   |
| Due  after Ten Years              |       | 1,880                                  |       | 1,985                                     |       | 4.14 | % |   |   |   |   |   |   |
|                              |       | $                                      | 17,532     |                                      | $          | 18,024 |   | 3.43 | % | $ | 496 |   | $ | 506 |   | 4.55 | % |

 

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**Note 5.     LOANS ANDALLOWANCE FOR LOAN LOSSES**

 

Loans are summarized as follows:

 
| ** **                             | ** ** | **September 30, 2010 (unaudited)** | ** ** | **December 31, 2009 (audited)** | ** ** |
|----------------------------------------|------------|---------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                             | ** ** | **Amount**                                        | ** ** | **Percentage of**                         | ** ** | **Amount** | ** ** | **Percentage of** | ** ** |
| **(dollars in thousands)**   | ** ** | **Outstanding**                                   | ** ** | **Total**                                      | ** ** | **Outstanding** | ** ** | **Total** | ** ** |
| Commercial  loans                      |       | $                                                 | 25,847     |                                           | 31.0       | % | $ | 26,531 |   | 33.1 | % |
| Real  estate loans                     |       | 49,895                                            |       | 59.9                                           | %          | 46,055 |   | 57.5 | % |
| Other  loans                           |       | 7,599                                             |       | 9.1                                            | %          | 7,530 |   | 9.4 | % |
| Total  loans, including net loan costs |       | 83,341                                            |       | 100.0                                          | %          | 80,116 |   | 100.0 | % |
| Less  : allowance for loan losses      |       | (1,863                                            | )          |                                           |       | (1,202 | ) |   |   |
| Net  loans                             |       | $                                                 | 81,478     |                                           |       |   | $ | 78,914 |   |   |   |

 

TheCompany has had no impaired or non-accrual loans, and there were no loanspast-due 90 days or more in either interest or principal as ofSeptember 30, 2010 and December 31, 2009.

 

The following table presentsan analysis of changes in the allowance for loan losses during the periodsindicated:

 
| ** **                                     | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                     | ** ** | **September 30,**                             | ** ** | **September 30,**                            | ** ** |
| **(Unaudited)**                                | ** ** | **2010**                                           | ** ** | **2009**                                          | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                     | ** ** | **(in thousands)**                            | ** ** | **(in thousands)**                           | ** ** | **(in thousands)** | ** ** | **(in thousands)** | ** ** |
| Balance  at beginning of period                |       | $                                                  | 1,693      |                                              | $          | 1,090 |   | $ | 1,202 |   | $ | 975 |   |
| Additions  to the allowance charged to expense |       | 150                                                |       | 469                                               |       | 728 |   | 1,096 |   |
| Recoveries                                     |       | 20                                                 |       | 14                                                |       | 34 |   | 14 |   |
|                                           |       | 1,863                                              |       | 1,573                                             |       | 1,964 |   | 2,085 |   |
| Less  loans charged-off                        |       | —                                             |       | 478                                               |       | 101 |   | 990 |   |
|                                           |       |                                               |       |                                              |       |   |   |   |   |
| Balance  at end of period                      |       | $                                                  | 1,863      |                                              | $          | 1,095 |   | $ | 1,863 |   | $ | 1,095 |   |

 

**Note 6.     SHARE-BASEDCOMPENSATION**

 

Asof September 30, 2010, the Company had two share-based employeecompensation plans. These plans include the 2007 Stock Option Plan (“2007 Plan”)and the 2010 Equity Incentive Plan (“2010 Plan”).  The 2007 Plan is more fully described in Note9 of the consolidated financial statements in the Company’s Annual Report filedon Form 10-K for the year ended December 31, 2009.  The 2010 Plan is more fully described in aCurrent Report filed on Form 8-K on March 15, 2010.  Upon approval of the 2010 Plan, the Company’s2007 Plan was terminated with respect to the grant of new options.

 

Share-basedcompensation expense for all share-based compensation awards is based on thegrant date fair value. The grant date fair value has been the higher of thefair market value per share or the book value per share as of the last date ofthe month prior to the date of grant.  The grant date fair value isestimated using the Black-Scholes option pricing model.  The Company recognizes these compensationcosts only for those shares expected to vest on a straight-line basis over therequisite service period of the award, for which the Company use the relatedvesting term.

 

Theshare-based compensation expense recognized in the consolidated statements ofincome for the three- and nine-month periods noted below is based on awardsultimately expected to vest.

 

Thefollowing tables provide a summary of the expenses, as well the unrecordedcompensation expense related to non-vested stock option grants and the periodin which the expense is expected to be recognized.

 

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| ** **                                     | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                     | ** ** | **September 30,**                             | ** ** | **September 30,**                            | ** ** |
| **(unaudited)**                                | ** ** | **2010**                                           | ** ** | **2009**                                          | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                     | ** ** | **(in thousands)**                            | ** ** | **(in thousands)**                           | ** ** | **(in thousands)** | ** ** | **(in thousands)** | ** ** |
| Share-based  compensation expense              |       | $                                                  | 154        |                                              | $          | 196 |   | $ | 438 |   | $ | 587 |   |
|                                           |       |                                               |       |                                              |       |   |   |   |   |
| ** **                                     | ** ** | ** **                                         | ** ** | ** **                                        | ** ** | **As of** | ** ** |
| ** **                                     | ** ** | ** **                                         | ** ** | ** **                                        | ** ** | **September 30,** | ** ** |
| ** **                                     | ** ** | ** **                                         | ** ** | ** **                                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                     | ** ** | ** **                                         | ** ** | ** **                                        | ** ** | **(in thousands)** | ** ** | **(in thousands)** | ** ** |
| Unrecognized  share-based compensation expense |       |                                               |       |                                              |       |   |
| Remainder  of 2009                             |       |                                               |       |                                              |       | $ | — |   | $ | 196 |   |
| Remainder  of 2010                             |       |                                               |       |                                              |       | 155 |   | 557 |   |
| 2011                                           |       |                                               |       |                                              |       | 235 |   | 208 |   |
| 2012                                           |       |                                               |       |                                              |       | 140 |   | 5 |   |
| 2013                                           |       |                                               |       |                                              |       | 53 |   | — |   |
| Total                                          |       |                                               |       |                                              |       | $ | 583 |   | $ | 966 |   |
|                                                |            |                                                    |            |                                                   |            |  |  |  |  |  |  |  |  |

 

TheCompany uses the Black-Scholes option valuation model to determine the fairvalue of options.  The Company utilizesassumptions on expected life, risk-free rate, expected volatility, and dividendyield to determine such values.  Asgrants occur, the Company estimates the life of the options by calculating theaverage of the vesting period and the contractual life.   The risk-free rate would be based upontreasury instruments in effect at the time of the grant whose terms areconsistent with the expected life of the Company’s stock options.  Expected volatility would be based onhistorical volatility of other financial institutions within the Company’s operatingarea as the Company has limited market history.

 

Thefollowing table summarizes the weighted average assumptions utilized for stockoptions granted for the nine-month periods presented:

 
| ** **            | ** ** | **Period Ended**  | ** ** |
|-----------------------|------------|------------------------|------------|
| ** **            | ** ** | **September 30,** | ** ** |
| **(unaudited)**       | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Risk-free  rate       |       | 2.34%                  |       | 2.24% |   |
| Expected  term        |       | 6  years               |       | 6  years |   |
| Expected  volatility  |       | 28.08%                 |       | 26.16% |   |
| Dividend  yield       |       | 0.00%                  |       | 0.00% |   |
| Fair  value per share |       | $1.25                  |       | $0.74 |   |

 

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The following table summarizes the stock option activity under the planfor the periods indicated:

 
| ** **                                | ** ** | ** ** | ** ** | ** **           | ** ** | **Weighted Average** | ** ** | **Aggregate** | ** ** |
|-------------------------------------------|------------|------------|------------|----------------------|------------|----------------------|------------|---------------|------------|
| ** **                                | ** ** | ** ** | ** ** | **Weighted Average** | ** ** | **Remaining**        | ** ** | **Intrinsic** | ** ** |
| **(unaudited)**                           | ** ** | **Shares** | ** ** | **Exercise Price**   | ** ** | **Contractual Life** | ** ** | **Value**     | ** ** |
| **2009**                                  |       |       |       |                 |       |                 |       |          |       |
| Outstanding at December 31, 2008          |       | 657,480    |       | $                    | 9.99       |                 |       |          |       |   |
| Granted                                   |       | 42,250     |       | $                    | 8.25       |                 |       |          |       |   |
| Exercised                                 |       | —     |       | —               |       |                 |       |          |       |
| Expired                                   |       | —     |       | —               |       |                 |       |          |       |
| Forfeited                                 |       | 12,755     |       | $                    | 9.96       |                 |       |          |       |   |
| Outstanding at September 30, 2009         |       | 686,975    |       | $                    | 9.42       |                 | 8.31       |          | $          | — |   |
| Options exercisable at September 30, 2009 |       | 314,889    |       | $                    | 9.91       |                 | 7.93       |          | $          | — |   |
| Options unvested at September 30, 2009    |       | 372,086    |       | $                    | 9.00       |                 | 8.60       |          | $          | — |   |
|                                      |       |       |       |                 |       |                 |       |          |       |
| **2010**                                  |       |       |       |                 |       |                 |       |          |       |
| Outstanding at December 31, 2009          |       | 686,942    |       | $                    | 9.42       |                 |       |          |       |   |
| Granted                                   |       | 284,531    |       | $                    | 6.63       |                 |       |          |       |   |
| Exercised                                 |       | —     |       | —               |       |                 |       |          |       |
| Expired                                   |       | —     |       | —               |       |                 |       |          |       |
| Forfeited                                 |       | 226,603    |       | $                    | 9.38       |                 |       |          |       |   |
| Outstanding at September 30, 2010         |       | 744,870    |       | $                    | 8.37       |                 | 8.17       |          | $          | — |   |
| Options exercisable at September 30, 2010 |       | 316,902    |       | $                    | 9.60       |                 | 7.14       |          | $          | — |   |
| Options unvested at September 30, 2010    |       | 427,968    |       | $                    | 7.45       |                 | 8.94       |          | $          | — |   |

 

**Note 7.     FAIR VALUEMEASUREMENTS**

 

Currentaccounting literature defines fair value as the exchange price that would bereceived for an asset or paid to transfer a liability (an exit price) in theprincipal or most advantageous market for the asset or liability in an orderlytransaction between market participants on the measurement date. It alsoestablishes a fair value hierarchy, which requires an entity to maximize theuse of observable inputs and minimize the use of unobservable inputs whenmeasuring fair value. The literature describes three levels of inputs that maybe used to measure fair value:

 

Level1: Quoted prices (unadjusted) for identical assets or liabilities in activemarkets that the entity has the ability to access as of the measurement date.

 

Level2: Significant other observable inputs other than Level 1 prices such as quotedprices for similar assets or liabilities; quoted prices in markets that are notactive; or other inputs that are observable or can be corroborated byobservable market data.

 

Level3: Significant unobservable inputs that reflect a Company’s own assumptionsabout the assumptions that market participants would use in pricing an asset orliability.

 

The following table summarizes the Company’s assetsand liabilities, if any, which were measured at fair value on a recurring basisduring the period, with dollars reported in thousands:

 
| ** **                           | ** ** | ** **        | ** ** | **Quoted Price in** | ** ** | **Significant** | ** ** | ** **       | ** ** |
|--------------------------------------|------------|-------------------|------------|---------------------|------------|-----------------|------------|------------------|------------|
| ** **                           | ** ** | ** **        | ** ** | **Active Markets**  | ** ** | **Other**       | ** ** | **Significant**  | ** ** |
| ** **                           | ** ** | ** **        | ** ** | **for Identical**   | ** ** | **Observable**  | ** ** | **Unobservable** | ** ** |
| **(unaudited)**                      | ** ** | **September 30,** | ** ** | **Assets**          | ** ** | **Inputs**      | ** ** | **Inputs**       | ** ** |
| **Description of Assets/Liabiltity** | ** ** | **2010**          | ** ** | **(Level 1)**       | ** ** | **(Level 2)**   | ** ** | **(Level 3)**    | ** ** |
| Available-for-sale securities        |       | $                 | 18,024     |                | $          | —          |       | $                | 18,024     |   | $ | — |   |
|                                      |            |                   |            |                     |            |                 |            |                  |            |  |  |  |  |

 

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Available-for-sale securities are valued based uponinputs derived principally from observable market data.  Changes in fair market value are recorded inother comprehensive income as the securities are available for sale.

 

**Note 8.     OTHERBORROWINGS**

 

At September 30, 2010, the Company had acollateralized line of credit with the Federal Home Loan Bank (“FHLB”) totaling$17.5 million against which it had outstanding $4.5 million consisting of aFHLB five-year fixed rate advance at 4.38% maturing on June 27, 2013.

 

**Note 9.     EARNINGS(LOSS) PER SHARE**

 

Basicearnings (loss) per share represents income available (loss reported) to commonstock divided by the weighted average number of common shares outstandingduring the period reported on the Statement of Operations. Diluted earnings(loss) per share reflect additional common shares that would have been outstandingif dilutive potential common shares had been issued, as well as any adjustmentto income that would result from the assumed conversion. There were no dilutivepotential common shares outstanding for any periods reported on the Statementof Operations.  The weighted averagenumber of shares for the three-month and nine-month periods ended September 30,2010 and September 30, 2009 was 3,987,631.

 

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***Item 2 — Management’s Discussion andAnalysis of Financial Condition and Results of Operations***

 

***Forward-Looking Statements***

 

**The statements contained in this Quarterly Report on Form 10-Q,that are not historical facts, are forward-looking statements within themeaning of the Private Securities Litigation Reform Act of 1995, and are basedupon management’s current expectations and beliefs concerning furtherdevelopments and their potential effects on Manhattan Bancorp and itssubsidiaries.  The Company’sforward-looking statements involve risks and uncertainties, including the risksand uncertainties described herein and those enumerated in “Item 1A RiskFactors” in the Company’s Annual Report on Form 10-K for the year ended December31, 2009.  There can be no assurance thatfuture developments affecting Manhattan Bancorp will be the same as thoseanticipated by management, and actual results may differ from those projectedin the forward-looking statements. Statements regarding policies and procedures are not intended, andshould not be interpreted to mean, that such policies and procedures will notbe amended, modified, or repealed at any time in the future.**

 

***The Company***

 

Manhattan Bancorp (“Bancorp”) is a bank holdingcompany which was incorporated in August 2006, in order to acquire Bank ofManhattan, N.A. (the “Bank”), a de novo bank which it acquired on August 14,2007.  The Bank is a nationally-charteredbanking association organized under the laws of the United States, whichcommenced its banking operations on August 15, 2007.  Bancorp operates primarily through the Bank,and the investment in the Bank is its principal asset.  The Bank is located in El Segundo, Californiaand at September 30, 2010, had $132 million in assets, $81 million in net loansreceivable and $105 million in deposits. On October 1, 2009, Bancorp, through its wholly owned subsidiary, MBFSHoldings, Inc. (“MBFS”), acquired a 70% interest in Banc of Manhattan Capital,LLC, (“BOMC”) a full-service mortgage-centric broker/dealer.  The gross investment in MBFS was $1.6 millionas of September 30, 2010. Unless thecontext requires otherwise, references in this Form 10-Q to the “Company,” “we”or “us” refers to Bancorp and its consolidated subsidiaries, the Bank and MBFSand its subsidiaries.

 

Management’s discussion and analysis of financialcondition and results of operation is intended to provide a betterunderstanding of the significant changes in trends relating to the Company’sfinancial condition, results of operation, liquidity and interest ratesensitivity.  The following discussionand analysis should be read in conjunction with the unaudited financialstatements contained within this report including the notes thereto.

 

***Earnings and Financial Condition Overview***

 

The Company recorded a net loss of $866,000 or $0.22basic and fully-diluted loss per share of common stock for the three-monthperiod ended September 30, 2010, including a gain from the minority interest of$9,000, as compared with a net loss of $1,274,000 or $0.32 basic andfully-diluted loss per share of common stock for the three-month period ended September30, 2009.  The per-share values are basedupon the loss attributable to the shareholders of the Bancorp and the relatedshares outstanding.  Comparing theCompany’s 2009 third quarter with the current operating quarter, reflects anapproximate 31.3% decrease in the reported comparable quarterly losses.

 

Similarly, the nine-month recorded loss for theperiod ended September 30, 2010 was $3,383,000 or $0.85 per basic andfully-diluted share of common stock, (including a gain from the minorityinterest of $21,000), and reflects a 14.6% decrease in the reported comparable2009 nine-month period loss of $3,961,000 or $0.99 per share.

 

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The continuation of Company losses reported duringthe nine-month periods ended September 30, 2010 and September 30, 2009 is theresult of two primary reasons:

 

·                  The decline in the Bank’s operating loss of $1.7 million fromapproximately $2.9 million for the nine-month period ended September 30, 2009to approximately $1.2 million for the nine-month period ended September 30,2010 were mostly offset by the increase in the operating loss of the Bancorp by$1.2 million.  The Bancorp operatingexpenses are primarily associated with the costs of exploring potentialbusiness opportunities for the Bancorp and its subsidiaries.

 

·                  The fee income generated by the Company’s non-bank subsidiary, whilesufficient to cover its operation costs, as reflected in the significantincrease in the combined non-interest expenses, has yet to contributesignificantly to a reduction in the overall Company’s operating loss.

 

The Company’s management has invested a substantialamount of time and resources during the nine-month period of 2010 in theevaluation and exploration of additional financial products and services deemedessential to meeting the needs of its customer base and to enhance itsfranchise value.

 

Due to the current condition in the general economy,the Company continues to be cautious in granting new credit extensions, anddemand for credit, in general, has been limited with gross loans outstandingincreasing approximately $3.2 million for the nine-month period ended September30, 2010.   Despite the fact that as ofboth September 30, 2010 and December 31, 2009 the Bank had no past due loans orloans on non-accrual, the Bank’s management elected to increase the allowancefor loan loss to 2.24% of outstanding loans as of September 30, 2010, comparedto 1.50% of outstanding loans as of December 31, 2009.  The Company charged off approximately$101,000 in loans during the nine-month period ended September 30, 2010, alloccurring in the first quarter of 2010. Management continuously reviews the portfolio for indication of specificweaknesses and adjusts the provision accordingly.  The provision for the three-month periodended September 30, 2010 was $150,000 compared to $469,000 for the three-monthperiod ended September 30, 2009.  Theprovision for the nine-month period ended September 30, 2010 was $727,000compared to $1,096,000 for the nine-month period ended September 30, 2009.

 

Net interest income after provision for loan lossesfor the three-month period ended September 30, 2010 was approximately$1,252,000, an increase of approximately $717,000 over the three-month periodended September 30, 2009.  This was a134% improvement in net interest income after provision for loan losses and waspossible because of an increase in interest income, up approximately $440,000(37%) for the comparable three-month period ended September 30, 2010 over thesame period in 2009.  Interest expensealso increased but by a smaller percentage (21%) for the comparable three-monthperiod ended September 30, 2010 over September 30, 2009, with the actual dollaramount only increasing approximately $43,000.

 

Net interest income after provision for loan lossesfor the nine-month period ended September 30, 2010 was approximately$3,378,000, an increase of approximately $1,806,000 over the prior year’snine-month period ended September 30, 2009. This was a 115% improvement in net interest income after provision forloan losses and was possible because of an increase in interest income, upapproximately $1,616,000 (50%) for the comparable nine-month period ended September30, 2010 over the same period in 2009.  Interest expense also increased but by a smaller percentage (30%) forthe nine-month period ended September 30, 2010 over September 30, 2009 with theactual dollar amount only increasing approximately $179,000. A detailedanalysis of the components of net interest expense is found under *Net Interest Income*on page 17.

 

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Non-interest income for the three-month andnine-month periods ended September 30, 2010 compared to September 30, 2009increased dramatically primarily as a result of the acquisition of the feebased BOMC business in the fourth quarter of 2009.  A detailed analysis of the components ofnon-interest income is found under *Non-Interest Income*onpage 25.

 

Non-interest expense for the three-month periodsended September 30, 2010 compared to September 30, 2009 increased byapproximately $2.7 million.  Non-interestexpense for the nine-month periods ended September 30, 2010 compared to September30, 2009 increased by approximately $7.0 million.  A detailed analysis is found under *Non-Interest Expense*on page 26.

 

As of September 30, 2010, total assets of theCompany were approximately $134.6 million. This represents a decrease of approximately $17.7 million or 11.6% fromthe amount reported as of December 31, 2009. The significant decline in total assets can be attributed to highbalances in liquid assets as of December 31, 2009, which would have beennecessary for contemplated business activities during the first quarter of2010.  When the opportunity for thisbusiness transaction did not occur, the funding associated with this influx wasno longer required.   As the funding(estimated at approximately $33 million) was provisional in nature, most wasrepaid within weeks following December 31, 2009.

 

A more detailed analysis of the components of theCompany’s balance sheet is found under *Financial Condition*onpage 28.

 

The following table provides selected financial datathat highlights the Company’s financial performance for each of the last eightfull quarters.  Dollars are in thousands,except per share amounts.

 

| ** **                                             | ** ** | **For the three months ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                             | ** ** | **9/30/2010**                                      | ** ** | **6/30/2010** | ** ** | **3/31/2010** | ** ** | **12/31/2009** | ** ** | **9/30/2009** | ** ** | **6/30/2009** | ** ** | **3/31/2009** | ** ** | **12/31/2008** | ** ** |
| ** **                                             | ** ** | **(Unaudited)**                                    | ** ** | **(Unaudited)** | ** ** | **(Unaudited)** | ** ** | **(Audited)** | ** ** | **(Unaudited)** | ** ** | **(Unaudited)** | ** ** | **(Unaudited)** | ** ** | **(Audited)** | ** ** |
| **Statements of Operations:**                          |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  income                                       |       | $                                                  | 1,644      |   | $ | 1,659 |   | $ | 1,576 |   | $ | 1,338 |   | $ | 1,204 |   | $ | 1,109 |   | $ | 951 |   | $ | 909 |   |
| Interest  expense                                      |       | 242                                                |       | 243 |   | 289 |   | 251 |   | 200 |   | 179 |   | 216 |   | 248 |   |
|                                                   |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  interest income                                   |       | 1,402                                              |       | 1,416 |   | 1,287 |   | 1,087 |   | 1,004 |   | 930 |   | 735 |   | 661 |   |
| Provision  for loan losses                             |       | 150                                                |       | 207 |   | 370 |   | 84 |   | 468 |   | 454 |   | 174 |   | 275 |   |
|                                                   |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  interest income after provision                   |       | 1,252                                              |       | 1,209 |   | 917 |   | 1,003 |   | 536 |   | 476 |   | 561 |   | 386 |   |
|                                                   |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest  income                                   |       | 2,480                                              |       | 1,646 |   | 1,744 |   | 921 |   | 47 |   | 34 |   | 17 |   | 11 |   |
| Non-interest  expense                                  |       | 4,596                                              |       | 4,129 |   | 3,902 |   | 3,009 |   | 1,857 |   | 1,964 |   | 1,811 |   | 1,498 |   |
|                                                   |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  loss from operations excluding minority interest  |       | $                                                  | (864       | ) | $ | (1,274 | ) | $ | (1,318 | ) | $ | (1,076 | ) | $ | (1,274 | ) | $ | (1,454 | ) | $ | (1,233 | ) | $ | (1,101 | ) |
|                                                   |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Per Share and Other Data:**                          |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic  and diluted loss per share                      |       | $                                                  | (0.22      | ) | $ | (0.32 | ) | $ | (0.33 | ) | $ | (0.27 | ) | $ | (0.32 | ) | $ | (0.36 | ) | $ | (0.31 | ) | $ | (0.42 | ) |
| Book  value per common share- period end               |       | $                                                  | 6.35       |   | $ | 6.49 |   | $ | 6.75 |   | $ | 7.05 |   | $ | 7.31 |   | $ | 7.61 |   | $ | 7.94 |   | $ | 8.21 |   |
| Weighted  average shares outstanding basic and diluted |       | 3,988                                              |       | 3,988 |   | 3,988 |   | 3,988 |   | 3,988 |   | 3,988 |   | 3,988 |   | 2,646 |   |
|                                                   |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Balance Sheet Data:**                                |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investments  and fed funds sold                        |       | $                                                  | 46,215     |   | $ | 27,735 |   | $ | 43,288 |   | $ | 67,558 |   | $ | 33,770 |   | $ | 27,114 |   | $ | 17,085 |   | $ | 12,603 |   |
| Loans,  net                                            |       | $                                                  | 81,478     |   | $ | 84,574 |   | $ | 83,870 |   | $ | 78,914 |   | $ | 71,963 |   | $ | 71,154 |   | $ | 60,810 |   | $ | 56,467 |   |
| Assets                                                 |       | $                                                  | 134,608    |   | $ | 119,161 |   | $ | 134,360 |   | $ | 152,315 |   | $ | 110,270 |   | $ | 103,835 |   | $ | 97,221 |   | $ | 92,040 |   |
| Deposits                                               |       | $                                                  | 102,158    |   | $ | 86,706 |   | $ | 101,021 |   | $ | 110,920 |   | $ | 68,753 |   | $ | 59,650 |   | $ | 51,891 |   | $ | 47,991 |   |
| Shareholders’  equity                             |       | $                                                  | 25,644     |   | $ | 25,876 |   | $ | 26,916 |   | $ | 28,111 |   | $ | 29,141 |   | $ | 31,899 |   | $ | 33,244 |   | $ | 34,288 |   |
|                                                   |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Selected Financial Ratios**                          |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  loss as a percentage of average assets            |       | -2.65                                              | %          | -3.74 | % | -3.90 | % | -3.57 | % | -5.15 | % | -6.53 | % | -5.71 | % | -5.98 | % |
| Net  loss as a percentage of average equity            |       | -13.45                                             | %          | -18.03 | % | -19.16 | % | -14.79 | % | -16.14 | % | -17.75 | % | -14.75 | % | -21.73 | % |
| Dividend  payout ratio                                 |       | —                                             |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Equity  to asset ratio                                 |       | 18.82                                              | %          | 21.71 | % | 20.03 | % | 18.46 | % | 26.43 | % | 30.72 | % | 34.19 | % | 37.25 | % |
| Net  interest margin                                   |       | 4.46                                               | %          | 4.84 | % | 3.99 | % | 3.79 | % | 4.26 | % | 4.42 | % | 3.60 | % | 3.82 | % |
|                                                   |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Credit Quality**                                     |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance  for loan losses                             |       | $                                                  | 1,863      |   | $ | 1,693 |   | $ | 1,484 |   | $ | 1,202 |   | $ | 1,095 |   | $ | 1,090 |   | $ | 1,149 |   | $ | 975 |   |
| Allowance  /total loans                                |       | 2.24                                               | %          | 1.96 | % | 1.74 | % | 1.50 | % | 1.50 | % | 1.51 | % | 1.85 | % | 1.70 | % |
| Non-performing  loans                                  |       | $                                                  | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Net  (recoveries) charge-offs                          |       | $                                                  | (20        | ) | $ | (1 | ) | $ | 88 |   | $ | (24 | ) | $ | 464 |   | $ | 513 |   | $ | — |   | $ | — |   |

 

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***RESULTS OF OPERATIONS***

 

***Net Interest Income***

 

At present, the Company’s earnings depend largelyupon our net interest income, which is the difference between the income theCompany earns on interest-bearing assets, such as loans, and the interest theCompany pays on deposits and borrowed funds. Net interest income is related to (i) the relative amounts ofinterest-earning assets and liabilities and (ii) the interest rates earned andpaid on these balances.  Total interestincome can fluctuate based upon the mix of earning assets amongst loans,investments and federal funds sold and the related rates associated with theirbalances.  Some of the funding sourcesfor these assets also have interest costs which can fluctuate based upon themix of interest-bearing liabilities and the related rates associated with theirbalances.

 

Theinterest rate spread represents the difference between the weighted averageyield on interest-earning assets and the weighted average rate paid oninterest-bearing liabilities.  Theinterest rate spread increased from 3.43% for the three-month period ended September30, 2009 to 3.93% for the three-month period ended September 30, 2010.Similarly, the interest rate spread increased from 3.09% for the nine-monthperiod ended September 30, 2009 to 3.84% for the comparable nine-month periodended September 30, 2010.  The increasesin both periods were attributable to the large decline in effective interestrates associated with interest-bearing liabilities coupled with increases ineffective interest rates associated with interest-bearing assets.  See the *Variance in Balances andRates*Tables on pages 20 and 21.

 

Netinterest margin is net interest income expressed as a percentage of averagetotal interest-earning assets, allowing for the sources and the relative sizeof funding to be used as factors in the calculation.   During the comparable three-month periodsended September 30, 2009 and 2010, while the interest rate spread increased by49 basis points, the net interest margin increased by only 20 basis points,from 4.26% to 4.46%, reflecting the fact that a higher percentage of thesources of the funding were from interest-bearing liabilities.  The percentage of interest-bearing funds tointerest-earning assets increased from 50.5% to 59.2% for the three-monthperiods ended September 30, 2009 and 2010, respectively.

 

Similarly,the interest rate spread for the comparable nine-month periods of 2010 and 2009reflects an increase of 75 basis points; the net interest margin increased byonly 32 basis points, from 4.09% to 4.41%. The noted increase in the net interest margin between the nine-monthperiods of 2009 and 2010 again reflects the fact that a higher percentage ofthe sources of funds originates from interest-bearing liabilities. Thepercentage of interest-bearing funds to interest-earning assets increased from47.7% to 59.2% for the nine-month periods ended September 30, 2009 and 2010,respectively.

 

Netinterest margin is affected by changes in the yields earned on assets and ratespaid on liabilities, referred to as rate changes, and changes in the relativeamounts of interest-earning assets and interest- bearing liabilities, referredto as volume changes.  Interest ratesearned and paid are affected principally by our competition, general economicconditions and other factors beyond the Company’s control, such as federaleconomic policies, the general supply of money in the economy, legislative taxpolicies, governmental budgetary matters and the actions of the Federal ReserveBoard.

 

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The following table sets forth interest income,interest expense, net interest income before provision for loan losses and netinterest margin for the periods presented:

 

| ** **                                            | ** ** | **Three Months Ended**     | ** ** | **Nine Months Ended**      | ** ** |
|-------------------------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|
| ** **                                            | ** ** | **September 30,**               | ** ** | **Dollar**                           | ** ** | **Percent** | ** ** | **September 30,** | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                                            | ** ** | **2010**                             | ** ** | **2009**                             | ** ** | **Change** | ** ** | **Change** | ** ** | **2010** | ** ** | **2009** | ** ** | **Change** | ** ** | **Change** | ** ** |
| ** **                                            | ** ** | **(Unaudited)**                      | ** ** | **(Unaudited)**                      | ** ** |
| ** **                                            | ** ** | **(Dollars in thousands)** | ** ** | **(Dollars in thousands)** | ** ** |
| Interest income                                       |       | $                                    | 1,644      |                                 | $          | 1,204 |   | $ | 440 |   | 36.59 | % | $ | 4,879 |   | $ | 3,263 |   | $ | 1,616 |   | 49.52 | % |
| Interest expense                                      |       | 242                                  |       | 200                                  |       | 42 |   | 21.38 | % | 774 |   | 594 |   | 180 |   | 30.30 | % |
| Net interest income before provision for loan  losses |       | $                                    | 1,402      |                                 | $          | 1,004 |   | $ | 398 |   | 39.61 | % | $ | 4,105 |   | $ | 2,669 |   | $ | 1,436 |   | 53.80 | % |
| Net interest margin                                   |       | 4.46                                 | %          | 4.26                                 | %          |   |   | 4.58 | % | 4.41 | % | 4.09 | % |   |   | 7.75 | % |

 

The following table presents the weighted averageyield on each specified category of interest-earning assets, the weightedaverage rate paid on each specified category of interest-bearing liabilities,the resulting interest rate spread, and the net interest margin for the periodsindicated:

 

**ANALYSISOF NET INTEREST INCOME**

 

| ** **                                              | ** ** | **(Unaudited)**                                          | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                              | ** ** | **Three months ended September 30,** | ** ** |
| ** **                                              | ** ** | **2010**                                                 | ** ** | **2009** | ** ** |
| ** **                                              | ** ** | ** **                                               | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                              | ** ** | ** **                                               | ** ** | **Interest** | ** ** | **Average** | ** ** | ** ** | ** ** | **Interest** | ** ** | **Average** | ** ** |
| ** **                                              | ** ** | **Average**                                              | ** ** | **Income/** | ** ** | **Rate** | ** ** | **Average** | ** ** | **Income/** | ** ** | **Rate** | ** ** |
| ** **                                              | ** ** | **Balance**                                              | ** ** | **Expense** | ** ** | **Earned/Paid** | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Earned/Paid** | ** ** |
| ** **                                              | ** ** | **(Dollars in thousands)**                     | ** ** |
| **Interest-earning assets:**                            |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Federal funds sold                                      |       | $                                                        | 15,712     |   | $ | 9 |   | 0.23 | % | $ | 11,873 |   | $ | 8 |   | 0.27 | % |
| Deposits with other financial institutions              |       | 3,742                                                    |       | 17 |   | 1.80 | % | 3,433 |   | 19 |   | 2.20 | % |
| Investments                                             |       | 19,822                                                   |       | 272 |   | 5.44 | % | 7,366 |   | 93 |   | 5.01 | % |
| Loans(1)                                                |       | 85,550                                                   |       | 1,346 |   | 6.24 | % | 70,830 |   | 1,084 |   | 6.07 | % |
| Total interest-earning assets                           |       | 124,826                                                  |       | 1,644 |   | 5.23 | % | 93,502 |   | 1,204 |   | 5.11 | % |
| Non-interest-earning assets                             |       | 6,294                                                    |       |   |   |   |   | 4,725 |   |   |   |   |   |
| Total assets                                            |       | $                                                        | 131,120    |   |   |   |   |   | $ | 98,227 |   |   |   |   |   |
|                                                    |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities:**                       |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Demand                                                  |       | $                                                        | 3,631      |   | 1 |   | 0.10 | % | $ | 2,287 |   | 1 |   | 0.10 | % |
| Savings and money market                                |       | 26,699                                                   |       | 57 |   | 0.85 | % | 14,790 |   | 42 |   | 1.13 | % |
| Certificates of deposit                                 |       | 39,001                                                   |       | 134 |   | 1.37 | % | 25,593 |   | 106 |   | 1.64 | % |
| FHLB advances                                           |       | 4,500                                                    |       | 50 |   | 4.38 | % | 4,576 |   | 51 |   | 4.36 | % |
| Total interest-bearing liabilities                      |       | 73,831                                                   |       | 242 |   | 1.30 | % | 47,246 |   | 200 |   | 1.68 | % |
| Non-interest-bearing demand deposits                    |       | 29,785                                                   |       |   |   |   |   | 14,246 |   |   |   |   |   |
| Total funding sources                                   |       | 103,616                                                  |       |   |   | 0.93 | % | 61,492 |   |   |   | 1.29 | % |
| Non-interest-bearing liabilities                        |       | 1,669                                                    |       |   |   |   |   | 5,425 |   |   |   |   |   |
| Shareholders’ equity                               |       | 25,835                                                   |       |   |   |   |   | 31,310 |   |   |   |   |   |
| Total liabilities and shareholders’ equity         |       | $                                                        | 131,120    |   |   |   |   |   | $ | 98,227 |   |   |   |   |   |
|                                                    |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Excess of interest-earning assets over funding  sources |       | $                                                        | 21,210     |   |   |   |   |   | $ | 32,010 |   |   |   |   |   |
| Net interest income                                     |       |                                                     |       | $ | 1,402 |   |   |   |   |   | $ | 1,004 |   |   |   |
| Net interest rate spread                                |       |                                                     |       |   |   | 3.93 | % |   |   |   |   | 3.43 | % |
| Net interest margin                                     |       |                                                     |       |   |   | 4.46 | % |   |   |   |   | 4.26 | % |

 

----

(1)          The average balance of loans is calculated net of deferred loanfees/cost, but would include non-accrual loans, if any, with a zero yield.   Loan fees net of amortized costs included intotal net income were approximately $13,000 for the three-month period ended September30, 2010.   Loan fees net of amortizedcosts included in total net income were approximately $21,000 for thethree-month period ended September 30, 2009.

 

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The table below sets forth changes for thecomparable three-month periods ended September 30, 2010 and September 30, 2009for average interest-earning assets, average interest-bearing liabilities, andtheir respective rates:

 

| ** **                                 | ** ** | **VARIANCE IN BALANCES AND RATES** | ** ** | ** **   | ** ** | ** **             | ** ** | ** **                                         | ** ** |
|--------------------------------------------|------------|--------------------------------------------------------|------------|--------------|------------|------------------------|------------|----------------------------------------------------|------------|
| ** **                                 | ** ** | **Average Balance**                               | ** ** | ** **   | ** ** | ** **             | ** ** | **Average Yield/Rate**                        | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **for the three months ended**     | ** ** | ** **   | ** ** | ** **             | ** ** | **for the three months ended** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **September 30,**                                 | ** ** | **Variance** | ** ** | **September 30,** | ** ** | ** **                                         | ** ** |
| **(dollars in thousands)**       | ** ** | **2010**                                               | ** ** | **2009**     | ** ** | **dollar**             | ** ** | **percent**                                        | ** ** | **2010** | ** ** | **2009** | ** ** | **Variance** | ** ** |
| ** **                                 | ** ** | **(Unaudited)**                                        | ** ** |
| **Interest-earning assets:**               |       |                                                   |       |         |       |                   |       |                                               |       |   |   |   |   |   |   |
| Federal funds sold/Interest-bearing demand |       | $                                                      | 15,712     |         | $          | 11,873                 |       | $                                                  | 3,839      |   | 32.33 | % | 0.23 | % | 0.27 | % | -0.04 | % |
| Deposits with other financial institutions |       | 3,742                                                  |       | 3,433        |       | 309                    |       | 9.00                                               | %          | 1.80 | % | 2.20 | % | -0.40 | % |
| Investments                                |       | 19,822                                                 |       | 7,366        |       | 12,456                 |       | 169.10                                             | %          | 5.44 | % | 5.01 | % | 0.43 | % |
| Loans                                      |       | 85,550                                                 |       | 70,830       |       | 14,720                 |       | 20.78                                              | %          | 6.24 | % | 6.07 | % | 0.17 | % |
| Total interest-earning assets              |       | $                                                      | 124,826    |         | $          | 93,502                 |       | $                                                  | 31,324     |   | 33.50 | % | 5.23 | % | 5.11 | % | 0.12 | % |
|                                       |       |                                                   |       |         |       |                   |       |                                               |       |   |   |   |   |   |   |
| **Interest-bearing liabilities:**          |       |                                                   |       |         |       |                   |       |                                               |       |   |   |   |   |   |   |
| Interest-bearing demand                    |       | $                                                      | 3,631      |         | $          | 2,287                  |       | $                                                  | 1,344      |   | 58.77 | % | 0.10 | % | 0.10 | % | 0.00 | % |
| Savings and money market                   |       | 26,699                                                 |       | 14,790       |       | 11,909                 |       | 80.52                                              | %          | 0.85 | % | 1.13 | % | -0.28 | % |
| Certificates of deposit                    |       | 39,001                                                 |       | 25,593       |       | 13,408                 |       | 52.39                                              | %          | 1.37 | % | 1.64 | % | -0.27 | % |
| FHLB advances                              |       | 4,500                                                  |       | 4,576        |       | (76                    | )          | -1.66                                              | %          | 4.38 | % | 4.36 | % | 0.02 | % |
| Total interest-bearing liabilities         |       | $                                                      | 73,831     |         | $          | 47,246                 |       | $                                                  | 26,585     |   | 56.27 | % | 1.30 | % | 1.68 | % | -0.38 | % |

 

The following table presents the weighted averageyield on each specified category of interest-earning assets, the weightedaverage rate paid on each specified category of interest-bearing liabilities,the resulting interest rate spread, and the net interest margin for thecomparable nine-month periods indicated:

 

**ANALYSIS OF NET INTEREST INCOME**

 

| ** **                                              | ** ** | **(Unaudited)**                                         | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                              | ** ** | **Nine months ended September 30,** | ** ** |
| ** **                                              | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
| ** **                                              | ** ** | ** **                                              | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                              | ** ** | ** **                                              | ** ** | **Interest** | ** ** | **Average** | ** ** | ** ** | ** ** | **Interest** | ** ** | **Average** | ** ** |
| ** **                                              | ** ** | **Average**                                             | ** ** | **Income/** | ** ** | **Rate** | ** ** | **Average** | ** ** | **Income/** | ** ** | **Rate** | ** ** |
| ** **                                              | ** ** | **Balance**                                             | ** ** | **Expense** | ** ** | **Earned/Paid** | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Earned/Paid** | ** ** |
| ** **                                              | ** ** | **(Dollars in thousands)**                    | ** ** |
| **Interest-earning assets:**                            |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Federal funds sold                                      |       | $                                                       | 16,956     |   | $ | 30 |   | 0.23 | % | $ | 9,859 |   | $ | 22 |   | 0.30 | % |
| Deposits with other financial institutions              |       | 3,323                                                   |       | 39 |   | 1.57 | % | 5,798 |   | 92 |   | 2.12 | % |
| Investments                                             |       | 20,938                                                  |       | 908 |   | 5.80 | % | 7,811 |   | 326 |   | 5.58 | % |
| Loans(1)                                                |       | 83,117                                                  |       | 3,902 |   | 6.28 | % | 63,732 |   | 2,823 |   | 5.92 | % |
| Total interest-earning assets                           |       | 124,334                                                 |       | 4,879 |   | 5.25 | % | 87,200 |   | 3,263 |   | 5.00 | % |
| Non-interest-earning assets                             |       | 8,320                                                   |       |   |   |   |   | 4,566 |   |   |   |   |   |
| Total assets                                            |       | $                                                       | 132,654    |   |   |   |   |   | $ | 91,766 |   |   |   |   |   |
|                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities:**                       |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Demand                                                  |       | $                                                       | 3,059      |   | 3 |   | 0.11 | % | $ | 1,950 |   | 1 |   | 0.10 | % |
| Savings and money market                                |       | 24,743                                                  |       | 171 |   | 0.92 | % | 12,564 |   | 112 |   | 1.19 | % |
| Certificates of deposit                                 |       | 41,192                                                  |       | 450 |   | 1.46 | % | 22,475 |   | 331 |   | 1.97 | % |
| FHLB advances                                           |       | 4,584                                                   |       | 150 |   | 4.30 | % | 4,595 |   | 150 |   | 4.30 | % |
| Total interest-bearing liabilities                      |       | 73,578                                                  |       | 774 |   | 1.41 | % | 41,584 |   | 594 |   | 1.91 | % |
| Non-interest-bearing demand deposits                    |       | 28,790                                                  |       |   |   |   |   | 16,825 |   |   |   |   |   |
| Total funding sources                                   |       | 102,368                                                 |       |   |   | 1.01 | % | 58,409 |   |   |   | 1.36 | % |
| Non-interest-bearing liabilities                        |       | 3,406                                                   |       |   |   |   |   | 650 |   |   |   |   |   |
| Shareholders’ equity                               |       | 26,880                                                  |       |   |   |   |   | 32,707 |   |   |   |   |   |
| Total liabilities and shareholders’ equity         |       | $                                                       | 132,654    |   |   |   |   |   | $ | 91,766 |   |   |   |   |   |
|                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Excess of interest-earning assets over funding  sources |       | $                                                       | 21,966     |   |   |   |   |   | $ | 28,791 |   |   |   |   |   |
| Net interest income                                     |       |                                                    |       | $ | 4,105 |   |   |   |   |   | $ | 2,669 |   |   |   |
| Net interest rate spread                                |       |                                                    |       |   |   | 3.84 | % |   |   |   |   | 3.09 | % |
| Net interest margin                                     |       |                                                    |       |   |   | 4.41 | % |   |   |   |   | 4.09 | % |

 

----

(1)          The average balance of loans is calculated net of deferred loanfees/cost, but would include non-accrual loans, if any, with a zero yield.   Loan fees net of amortized costs wereapproximately $64,000 for the nine-month period ended September 30, 2010.   Loan fees net of amortized costs included intotal net income were approximately $30,000 for the nine-month period ended September30, 2009.

 

20

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The table below sets forth changes for thecomparable nine-month periods ended September 30, 2010 and September 30,2009 for average earning assets, average interest-bearing liabilities, andtheir respective rates:

 

| ** **                                 | ** ** | **VARIANCE IN BALANCES AND RATES** | ** ** | ** **   | ** ** | ** **             | ** ** | ** **                                        | ** ** |
|--------------------------------------------|------------|--------------------------------------------------------|------------|--------------|------------|------------------------|------------|---------------------------------------------------|------------|
| ** **                                 | ** ** | **Average Balance**                               | ** ** | ** **   | ** ** | ** **             | ** ** | **Average Yield/Rate**                       | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **for the nine months ended**      | ** ** | ** **   | ** ** | ** **             | ** ** | **for the nine months ended** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **September 30,**                                 | ** ** | **Variance** | ** ** | **September 30,** | ** ** | ** **                                        | ** ** |
| **(dollars in thousands)**       | ** ** | **2010**                                               | ** ** | **2009**     | ** ** | **dollar**             | ** ** | **percent**                                       | ** ** | **2010** | ** ** | **2009** | ** ** | **Variance** | ** ** |
| ** **                                 | ** ** | **(Unaudited)**                                        | ** ** |
| **Interest-earning assets:**               |       |                                                   |       |         |       |                   |       |                                              |       |   |   |   |   |   |   |
| Federal funds sold                         |       | $                                                      | 16,956     |         | $          | 9,859                  |       | $                                                 | 7,097      |   | 71.98 | % | 0.23 | % | 0.30 | % | -0.07 | % |
| Deposits with other financial institutions |       | 3,323                                                  |       | 5,798        |       | (2,475                 | )          | -42.69                                            | %          | 1.57 | % | 2.12 | % | -0.55 | % |
| Investments                                |       | 20,938                                                 |       | 7,811        |       | 13,127                 |       | 168.06                                            | %          | 5.80 | % | 5.58 | % | 0.22 | % |
| Loans                                      |       | 83,117                                                 |       | 63,732       |       | 19,385                 |       | 30.42                                             | %          | 6.28 | % | 5.92 | % | 0.36 | % |
| Total interest-earning assets              |       | $                                                      | 124,334    |         | $          | 87,200                 |       | $                                                 | 37,134     |   | 42.58 | % | 5.25 | % | 5.00 | % | 0.25 | % |
|                                       |       |                                                   |       |         |       |                   |       |                                              |       |   |   |   |   |   |   |
| **Interest-bearing liabilities:**          |       |                                                   |       |         |       |                   |       |                                              |       |   |   |   |   |   |   |
| Interest-bearing demand                    |       | $                                                      | 3,059      |         | $          | 1,950                  |       | $                                                 | 1,109      |   | 56.87 | % | 0.11 | % | 0.10 | % | 0.01 | % |
| Savings and money market                   |       | 24,743                                                 |       | 12,564       |       | 12,179                 |       | 96.94                                             | %          | 0.92 | % | 1.19 | % | -0.27 | % |
| Certificates of deposit                    |       | 41,192                                                 |       | 22,475       |       | 18,717                 |       | 83.28                                             | %          | 1.46 | % | 1.97 | % | -0.51 | % |
| FHLB advances                              |       | 4,584                                                  |       | 4,595        |       | (11                    | )          | -0.24                                             | %          | 4.30 | % | 4.30 | % | 0.00 | % |
| Total interest-bearing liabilities         |       | $                                                      | 73,578     |         | $          | 41,584                 |       | $                                                 | 31,994     |   | 76.94 | % | 1.41 | % | 1.91 | % | -0.50 | % |

 

A volume and rate variance table is provided belowwhich sets forth the dollar differences in interest earned and paid for eachmajor category of interest-earning assets and interest-bearing liabilities forthe comparable periods indicated:

 

| ** **                                 | ** ** | **For the three months ended**   | ** ** | **For the nine months ended**    | ** ** |
|--------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                 | ** ** | **September 30, 2010 over 2009** | ** ** | **September 30, 2010 over 2009** | ** ** |
| **(in thousands)**                    | ** ** | **Volume**                                           | ** ** | **Rate**                                             | ** ** | **Total** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Total** | ** ** |
| ** **                                 | ** ** | **(Unaudited)**                                      | ** ** | **(Unaudited)**                                      | ** ** |
| **Interest income:**                       |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Federal funds sold                         |       | $                                                    | 3          |                                                 | $          | (2 | ) | $ | 1 |   | $ | 16 |   | $ | (9 | ) | $ | 7 |   |
| Deposits with other financial institutions |       | 2                                                    |       | (5                                                   | )          | (3 | ) | (39 | ) | (14 | ) | (53 | ) |
| Investments                                |       | 157                                                  |       | 22                                                   |       | 179 |   | 548 |   | 35 |   | 583 |   |
| Loans                                      |       | 225                                                  |       | 37                                                   |       | 262 |   | 859 |   | 220 |   | 1,079 |   |
| Net increase (decrease)                    |       | 387                                                  |       | 52                                                   |       | 439 |   | 1,384 |   | 232 |   | 1,616 |   |
|                                       |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| **Interest expense:**                      |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Interest-bearing demand                    |       | 0                                                    |       | (0                                                   | )          | 0 |   | 1 |   | (0 | ) | 1 |   |
| Savings and money market                   |       | 34                                                   |       | (19                                                  | )          | 15 |   | 109 |   | (49 | ) | 59 |   |
| Certificates of deposit                    |       | 56                                                   |       | (27                                                  | )          | 29 |   | 275 |   | (156 | ) | 119 |   |
| FHLB advances                              |       | (1                                                   | )          | 0                                                    |       | (1 | ) | 0 |   | (0 | ) | 0 |   |
| Net increase (decrease)                    |       | 89                                                   |       | (46                                                  | )          | 43 |   | 385 |   | (205 | ) | 180 |   |
| Total net increase (decrease)              |       | $                                                    | 298        |                                                 | $          | 98 |   | $ | 396 |   | $ | 999 |   | $ | 437 |   | $ | 1,436 |   |

 

A review of the above tables shows that the overallincrease in net interest income of approximately $396,000 between the twocomparative quarters ended at September 30, 2010 and September 30,2009 is the result of several factors.

 

Among the most significant factors in the increasein net interest income is the overall growth in average quarterly earningassets, up approximately $31.3 million or 33.5% between September 30, 2009and September 30, 2010.  Thisincrease was primarily a result of loan growth (approximately $14.7 million)accounting for 47.0% of the total increase.  However, the percentage of average loan dollars outstanding, as apercentage of interest-earning assets, declined from 75.8% as of September 30,2009 to 68.5% as of September 30, 2010. The higher outstanding volume of loans between the third-quarter periodswould have resulted in an increase of approximately $225,000 in interestincome, but the actual amount of interest income earned was also augmented byapproximately $37,000 due to the improvement in the overall effective yield onthe loan portfolio.  The overall yield onoutstanding loans increased from 6.07% for the three-month period ended September 30,2009 to 6.24% for the three-month period ended September 30, 2010.

 

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A review of the above tables also shows that theoverall increase in net interest income of approximately $1,436,000 between thetwo comparative nine-month periods ended at September 30, 2010 and September 30,2009.

 

The Bank continues to have eight significant depositrelationships, some of which are with related parties, which total, as of September 30,2010, approximately $34.1 million or 32.4% of the Bank’s deposits.  Included in these deposits are funds subjectto unscheduled withdrawals, mandating the Bank to hold funds in cash or cash equivalentsat a higher level to provide necessary liquidity. The amount of Fed funds soldas a percentage of all Company interest-earning assets has been consistent from12.7% to 12.6% for the comparable three-month periods ended September 30,2009 and September 30, 2010, with the average balance in Fed funds soldincreasing by approximately $3.8 million. The levels, as noted above, weresufficient to provide adequate liquidity for the Company.

 

The Company, in order to improve the overall yieldon interest-earning assets, has placed additional funds into itsavailable-for-sale investment category. The higher average outstanding volume of funds invested of approximately$12.5 million between the two third-quarter periods would have resulted in anincrease of approximately $157,000 in interest income. This positive effect wasaugmented slightly by an increase in the effective yields within the investmentcategory based upon acceptable duration and risks, improving the amount ofinterest on investments by approximately $22,000, bringing the overall total to$179,000.  The effective yield oninvestments increased by 43 basis points from 5.01% for the three-month periodended September 30, 2009 to 5.44% for the comparable period ended September 30,2010.

 

The change in the mix of interest-yielding assetscoupled with the overall growth resulted in the increase of interest income ofapproximately $439,000, with approximately $387,000 due to volume increases,which more than fully offset the result of the general market interest ratedecline in many of the interest-earning assets categories. While generalinterest rates have remained at historical lows since prior to the secondquarter of 2009, the average effective yield on the Company’s earning assetshave shown a improvement by approximately 12 basis points as a result primarilyof changes in loan pricing.

 

Interest expense increased by only $43,000, withincreases in balances outstanding on interest-bearing liabilities beingpartially offset by the savings available on the repricing associated with theoverall declining market rates.

 

The increase in interest expense due to the changein outstanding average interest-bearing liabilities was $89,000 with averageoutstanding interest-bearing balances up approximately 76.9% from the balancesat September 30, 2009 of approximately $41.6 million to $73.6 million at September 30,2010.

 

The increase in interest expense due to the changein overall effective interest rates resulted in a savings of approximately$46,000 with the average rates declining by 38 basis points from 1.68% for thethree-month period ended September 30, 2009 to approximately 1.30% for thethree-month period ended September 30, 2010.

 

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The rate/volume table reflects that two of theinterest-bearing categories, *Interest-bearing Demand*and*Federal Home Loan Bank Advances,* hadlimited effect on the increase in the interest expense between the comparableperiods.

 

For the comparable three-month periods ended September 30,2010 and September 30, 2009, the average balance in *Certificateof Deposits* increased by approximately $13.4 million. The higheroutstanding volume in certificates of deposits would have resulted in anincrease of expense of approximately $56,000. However the decline in the effective yield on this category by 27 basispoints from an effective yield of 1.64% for the three-month period ended September 30,2009 to 1.37% for the three-month period ended September 30, 2010, offsetmuch of the additional expense by reducing the potential interest cost byapproximately $27,000.

 

A similar result occurred in the *Savings and Money Market* category. For the comparablethree-month periods ended September 30, 2010 and September 30, 2009,the average balance in*Savings and Money Market*depositsincreased by approximately $11.9 million. The higher outstanding volume in thiscategory would have resulted in an increase of expense of approximately$34,000.  However the decline in theeffective yield on this category by 28 basis points from 1.13% for thethree-month period ended September 30, 2009 to 0.85% for the three-monthperiod ended September 30, 2010, offset about one-half of the additionalexpense and reduced the potential interest cost by approximately $19,000.

 

Further analysis is provided for the comparablenine-month periods ending September 30, 2009 and September 30, 2010.

 

Among the most significant factors in the increasein net interest income is the overall growth in the year-to-date averageinterest-earning assets between 2009 and 2010, up approximately $37.1 millionor 42.6% between September 30, 2009 and September 30, 2010.  This increase was also centered in loangrowth ($19.4 million) reflecting 52.2% of the total increase.  The percentage of average loan dollarsoutstanding, as a percentage of interest-earning assets, declined fromapproximately 73.1% as of September 30, 2009 to approximately 66.9% as of September 30,2010.  The higher outstanding volume ofloans between the  nine-month periodswould have resulted in an increase of approximately $859,000 in interestincome, but the actual amount of interest income earned was further augmentedby approximately $220,000 due to the improvement in the overall effective yieldon the loan portfolio.  The overall yieldon outstanding loans increased from 5.92% for the nine-month period ended September 30,2009 to 6.28% for the nine-month period ended September 30, 2010.

 

In addition, the Company, in order to improve theoverall yield on interest-earning assets, has placed additional funds into itsavailable-for-sale investment category. The higher average outstanding volume of funds invested of approximately$13.1 million between the two nine-month periods would have resulted in anincrease of approximately $548,000 in interest income. This positive effect wasaugmented slightly by a small increase in the effective yields within theinvestment category of approximately $35,000 bringing the overall total to$583,000.  The effective yield oninvestments increased by 22 basis points from 5.58% for the nine-month periodended September 30, 2009 to 5.80% for the comparable nine-month periodended September 30, 2010.

 

The change in the mix of interest-yielding assetscoupled with the overall growth resulted in the increase of interest income ofapproximately $1,616,000, with approximately $1,384,000 due to volumeincreases, which more than fully offset the result of the general marketinterest rate decline in many of the interest-earning assets categories. Whilegeneral interest rates have remained at historical lows since prior to thesecond quarter of 2009, the average effective yield on the Company’s earningassets have shown an improvement by approximately 25 basis points as a resultprimarily of changes in loan pricing.

 

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Interest expense increased by only $180,000, withincreases in balances outstanding on interest-bearing liabilities beingpartially offset by the savings available on the repricing associated with theoverall declining market rates.

 

The increase in interest expense due to the changein outstanding average interest-bearing liabilities was $385,000 with averageoutstanding interest-bearing balances up approximately 76.9% from the balancesat September 30, 2009 of approximately $41.6 million to $73.6 million at September 30,2010.

 

The increase in interest expense due to the changein overall effective interest rates resulted in a savings of approximately$205,000 with the average rates declining by 50 basis points from 1.91% for thenine-month period ended September 30, 2009 to approximately 1.41% for thenine-month period ended September 30, 2010.

 

The rate/volume table reflects that two of theinterest-bearing categories, *Interest-bearing Demand*and*Federal Home Loan Bank Advances,* had noeffect on the increase in the interest expense between the comparable periods.

 

For the comparable nine-month periods ended September 30,2010 and September 30, 2009, the average balance in *Certificateof Deposits* increased by approximately $18.7 million. The higheroutstanding volume in certificates of deposits would have resulted in anincrease of expense of approximately $275,000. However the significant decline in the effective yield on this categoryby 51 basis points from an effective yield of 1.97% for the nine-month periodended September 30, 2009 to 1.46% for the nine-month period ended September 30,2010, offset much of the additional expense by reducing the potential interestcost by approximately $156,000.

 

A similar result occurred in the *Savings and Money Market* category. For the comparablenine-month periods ended September 30, 2010 and September 30, 2009,the average balance in*Savings and Money Market*depositsincreased by approximately $12.2 million. The higher outstanding volume in thiscategory would have resulted in an increase of expense of approximately$109,000.  However the decline in theeffective yield on this category by 27 basis points from 1.19% for thenine-month period ended September 30, 2009 to 0.92% for the nine-monthperiod ended September 30, 2010, offset about 45% of the additionalexpense and reduced the potential interest cost by approximately $49,000.

 

***Provision for Loan Losses***

 

The Company made provisions for loan losses of$150,000 for the three-month period ended September 30, 2010, compared to$469,000 for the three-month period ended September 30, 2009.  For the comparable nine-month periods ended September 30,2010 and September 30, 2009, the Company made provisions of $728,000 and$1,096,000 respectively.  Theseprovisions were determined based upon the periodic credit review of the loanportfolio, consideration of past loan loss experience, current and predictedeconomic conditions, and other pertinent factors.  As a part of that ongoing monthly analysis,the Bank recognized recent changes in the ultimate collectability of some ofits loans, even among those that still were performing as agreed.  Among those loans, the Bank charged offcertain loans totaling approximately $101,000 as of September 30, 2010 allwithin the first quarter of 2010. Forfurther analysis of the adequacy of the loan loss reserve, see *Asset Quality and Allowance for Loan Losses.*

 

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***Non-Interest Income***

 

The following tables set forth changes in the twocomparable three-month periods and the two comparable nine-month periods ended September 30,2010 and September 30, 2009:

 

| ** **                           | ** ** | **For the three months ended** | ** ** | ** **   | ** ** |
|--------------------------------------|------------|----------------------------------------------------|------------|--------------|------------|
| **(unaudited)**                      | ** ** | **September 30,**                             | ** ** | **Variance** | ** ** |
| **(dollars in thousands)** | ** ** | **2010**                                           | ** ** | **2009**     | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| Service charges on deposit accounts  |       | $                                                  | 44         |         | $          | 21 |   | $ | 23 |   | 109.52 | % |
| Other commission and bank fees       |       | 23                                                 |       | 26           |       | (3 | ) | -9.82 | % |
| Riskless trading income              |       | 1,622                                              |       | —       |       | 1,622 |   | 0.00 | % |
| Whole loan sales                     |       | 692                                                |       | —       |       | 692 |   | 0.00 | % |
| Advisory income                      |       | 99                                                 |       | —       |       | 99 |   | 0.00 | % |
| Total non-interest income            |       | $                                                  | 2,480      |         | $          | 47 |   | $ | 2,433 |   | 5176.16 | % |

 

| ** **                           | ** ** | **For the nine months ended** | ** ** | ** **   | ** ** | ** **  | ** ** |
|--------------------------------------|------------|---------------------------------------------------|------------|--------------|------------|-------------|------------|
| **(unaudited)**                      | ** ** | **September 30,**                            | ** ** | **Variance** | ** ** |
| **(dollars in thousands)** | ** ** | **2010**                                          | ** ** | **2009**     | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| Service charges on deposit accounts  |       | $                                                 | 106        |         | $          | 49          |       | $ | 57 |   | 117.24 | % |
| Other commission and bank fees       |       | 80                                                |       | 49           |       | 31          |       | 62.17 | % |
| Riskless trading income              |       | 4,010                                             |       | —       |       | 4,010       |       | 0.00 | % |
| Whole loan sales                     |       | 1,016                                             |       | —       |       | 1,016       |       | 0.00 | % |
| Advisory income                      |       | 658                                               |       | —       |       | 658         |       | 0.00 | % |
| Total non-interest income            |       | $                                                 | 5,870      |         | $          | 98          |       | $ | 5,772 |   | 5871.68 | % |

 

Non-interest income for the three-month andnine-month periods ended September 30, 2010 consists of fees for twosources, the Bank and BOMC.  Bank-relatedfee income increased by 44% from approximately $48,000 for the three-monthperiod ended September 30, 2009 to approximately $67,000 for thethree-month period ended September 30, 2010.   For the nine-month periods ended September 30,2010, the reported amount of approximately $186,000 represents a 90% increaseover the approximately $98,000 reported for the nine-month period ended September 30,2009.

 

Non-bank related income totaled approximately $2.4million and was generated by BOMC for the second quarter of 2010.  Approximately $5.7 million was generated forthe nine-month period ended September 30, 2010.  There are no comparable numbers for the priorperiods, as BOMC was not affiliated with the Company until October 1,2009.

 

The revenue from BOMC came from three primarysources.  The largest of the sources isfrom riskless-principal institutional trading in mortgage-backed and relatedsecurities.  BOMC also generated incomefrom facilitating trades in whole loans between institutional clients. A thirdsource of revenue came from consulting and advisory services regardingevaluation and packaging of other institutions’ loan and bond portfolios.

 

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***Non-Interest Expense***

 

The following tables set forth changes for the twocomparable three-month and nine-month periods ending September 30, 2010and September 30, 2009, allowing comparisons between these operatingperiods:

 
| ** **                   | ** ** | **For the three months ended** | ** ** | ** **   | ** ** | ** **  | ** ** |
|------------------------------|------------|----------------------------------------------------|------------|--------------|------------|-------------|------------|
| ** **                   | ** ** | **September 30,**                             | ** ** | **Variance** | ** ** |
| ** **                   | ** ** | **2010**                                           | ** ** | **2009**     | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| ** **                   | ** ** | **(dollars in thousands)**               | ** ** | ** **   | ** ** |
| ** **                   | ** ** | **(Unaudited)**                                    | ** ** | ** **   | ** ** | ** **  | ** ** |
| Compensation and benefits    |       | $                                                  | 3,301      |         | $          | 1,119       |       | $ | 2,182 |   | 195.0 | % |
| Occupancy and equipment      |       | 279                                                |       | 176          |       | 102         |       | 58.5 | % |
| Technology and communication |       | 398                                                |       | 155          |       | 243         |       | 156.8 | % |
| Professional Fees            |       | 255                                                |       | 221          |       | 34          |       | 15.3 | % |
| Administrative Expenses      |       | 141                                                |       | 52           |       | 90          |       | 171.2 | % |
| Other non-interest expenses  |       | 222                                                |       | 134          |       | 88          |       | 65.7 | % |
| Total non-interest expenses  |       | $                                                  | 4,596      |         | $          | 1,857       |       | $ | 2,738 |   | 147.5 | % |

 

The differences in expense between the thirdquarters of 2010 and 2009 can be primarily attributed to the following:

 

·                  Compensation and benefits increases associated with an average of twenty(20) employees for BOMC not present in the third quarter of 2009 as the Companyhad, as yet, no interest in BOMC, which totaled approximately $1,872,000 and anaverage of seven (7) employees in the Bancorp also not present in thethird quarter of 2009, which totaled approximately $316,000.

 

·                  Costs associated with increase in the occupancy, furniture and equipmentcosts for both BOMC and Bancorp not present in the third quarter of 2009.  Of the overall net increase of approximately$103,000, 62% is connected with BOMC and 19% originated in Bancorp, with theremaining cost of 19% associated with the Bank.

 

·                  Technology and communication costs associated with the operatingrequirements of BOMC accounted for 92% of the noted increase in technology andcommunication expenses.

 

·                  Included with the increased expense noted in the other category areincreased FDIC insurance assessments, the payment of fees to Company directorsand other costs associated with the activation of activities at the holdingcompany level and entrance into businesses by BOMC.

 
| ** **                   | ** ** | **For the nine months ended** | ** ** | ** **   | ** ** | ** **  | ** ** |
|------------------------------|------------|---------------------------------------------------|------------|--------------|------------|-------------|------------|
| ** **                   | ** ** | **September 30,**                            | ** ** | **Variance** | ** ** |
| ** **                   | ** ** | **2010**                                          | ** ** | **2009**     | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| ** **                   | ** ** | **(dollars in thousands)**              | ** ** | ** **   | ** ** |
| ** **                   | ** ** | **(Unaudited)**                                   | ** ** | ** **   | ** ** | ** **  | ** ** |
| Compensation and benefits    |       | $                                                 | 8,708      |         | $          | 3,246       |       | $ | 5,462 |   | 168.3 | % |
| Occupancy and equipment      |       | 818                                               |       | 515          |       | 303         |       | 58.8 | % |
| Technology and communication |       | 1,016                                             |       | 428          |       | 588         |       | 137.4 | % |
| Professional fees            |       | 1,040                                             |       | 865          |       | 175         |       | 20.2 | % |
| Administrative expenses      |       | 492                                               |       | 212          |       | 280         |       | 131.6 | % |
| Other non-interest expenses  |       | 552                                               |       | 364          |       | 188         |       | 51.6 | % |
| Total non-interest expenses  |       | $                                                 | 12,626     |         | $          | 5,630       |       | $ | 6,996 |   | 124.2 | % |

 

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The differences in expense between the nine-monthperiods ended September 30, 2010 and September 30, 2009 can beprimarily attributed to the following:

 

·                  Compensation and benefits increases associated with approximately twenty(20) employees for BOMC not present in during the 2009 period that the Companyheld its interest, which totaled approximately $4,286,000 and an average ofseven (7) employees in the Bancorp also not present in the firstnine-months of 2009, which totaled approximately $1,234,000.  There were some slight cost savings at theBank level between the two nine-month periods.

 

·                  Costs associated with increase in the occupancy, furniture and equipmentcosts for both BOMC and Bancorp not present in the first nine-months of2009.  Of the increase of approximately$303,000, 67% is connected with BOMC and 21% originated from Bancorpactivities.

 

·                  Costs associated with legal, consulting and accounting services includedin professional fees required by BOMC accounted for approximately$390,000.  There were no direct expensesassociated with BOMC during the 2009 period because the Company has not yetpurchased an interest in BOMC. Similarity, cost required for legal and recruiting expenses required bythe Bank during the nine-month period in 2010 accounted for approximately$264,000 more than the prior nine-month period in 2009.  The expenses incurred during 2009 by theBancorp related to the exploration and establishment of other businessopportunities declined significantly during the nine-month period of 2010 ascompared to the same period during 2009. The reduction was approximately $441,000.

 

·                  Data processing costs associated with the operating requirements of BOMCaccounted for 100% of the noted increase in technology and communicationexpenses.

 

·                  Included with the increased expense noted in the other category areincreased FDIC insurance assessments, the payment of fees to Company directors forthe first time beginning in 2010 and other costs associated with the activationof activities at the holding company level and entrance into business by BOMC.

 

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***FINANCIAL CONDITION***

 

The Company’s decrease in total assets to $134.6million as of September 30, 2010 represents an 11.6% decline, orapproximately $17.7 million, from total assets of $152.3 million as of December 31,2009.  The decline is centered inovernight Federal funds sold, which were temporarily augmented by both brokeredand non-brokered non-locally generated deposits and secured overnight FHLBadvances.   Asset balances as of December 31,2009 had been augmented to facilitate potential business opportunities andincrease certain borrowing capacity levels presently tied to quarter-end assettotals.

 

***Investments***

 

Total investments increased by approximately $4.6million from $13.9 million as of December 31, 2009 to $18.5 million as of September 30,2010.  The following schedule provides anoverview of the types of investments on the Company’s books at the date notedand at their carrying value in thousands of dollars:

 

| ** **                                            | ** ** | **September 30, 2010 (unaudited)** | ** ** | **December 31, 2009 (audited)** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                            | ** ** | **Amount**                                        | ** ** | **Percentage of**                         | ** ** | **Amount** | ** ** | **Percentage of** | ** ** |
| **(dollars in thousands)**                  | ** ** | **Outstanding**                                   | ** ** | **Total**                                      | ** ** | **Outstanding** | ** ** | **Total** | ** ** |
| Municipal obligations                                 |       | $                                                 | 496        |                                           | 2.7        | % | $ | 494 |   | 3.6 | % |
| Non-mortgage-backed US Government Agency  obligations |       | 2,652                                             |       | 14.3                                           | %          | 2,626 |   | 18.9 | % |
| Mortgage-backed securities                            |       | 5,146                                             |       | 27.8                                           | %          | 7,328 |   | 52.9 | % |
| Asset-backed securities                               |       | 10,226                                            |       | 55.2                                           | %          | 3,407 |   | 24.6 | % |
| Total investments                                     |       | $                                                 | 18,520     |                                           | 100.0      | % | $ | 13,855 |   | 100.0 | % |

 

The expected weighted life of the Company’sinvestment portfolio is approximately four years. Additional informationregarding the composition, maturities, and yields of the security portfolio asof September 30, 2010 is found in Note 4 of the Company’s financialstatements included within this document.

 

***Loans***

 

Total gross loans as of September 30, 2010 were$83.3 million, an increase of approximately $3.2 million from $80.1 million at December 31,2009. Outstanding loan balances increased in all but commercial loans, with themost monetary growth occurring in non-construction real estate loans, where thetotal grew by approximately $2.6 million or 6.5%.

 

The table below sets forth the changes from December 31,2009 to September 30, 2010 in the composition of the loan portfolio:

 

| ** **                       | ** ** | **September 30, 2010 (unaudited)** | ** ** | **December 31, 2009 (audited)** | ** ** |
|----------------------------------|------------|---------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                       | ** ** | **Amount**                                        | ** ** | **Percentage of**                         | ** ** | **Amount** | ** ** | **Percentage of** | ** ** |
| **(unaudited)**                  | ** ** | **Outstanding**                                   | ** ** | **Total**                                      | ** ** | **Outstanding** | ** ** | **Total** | ** ** |
| ** **                       | ** ** | **(Dollars in Thousands)**              | ** ** | **(Dollars in Thousands)**           | ** ** |
| Commercial loans                 |       | $                                                 | 25,812     |                                           | 30.9       | % | $ | 26,520 |   | 33.0 | % |
| Real estate loans                |       | 43,202                                            |       | 51.8                                           | %          | 40,566 |   | 50.5 | % |
| Real estate - construction       |       | 6,838                                             |       | 8.2                                            | %          | 5,656 |   | 7.1 | % |
| Other loans                      |       | 7,582                                             |       | 9.1                                            | %          | 7,516 |   | 9.4 | % |
| Total Loans (excluding fees)     |       | 83,434                                            |       | 100.0                                          | %          | 80,258 |   | 100.0 | % |
|                             |       |                                              |       |                                           |       |   |   |   |   |
| Add: Purchase Premium            |       | 22                                                |       |                                           |       | 30 |   |   |   |
| Add: Unamortized Costs           |       | 89                                                |       |                                           |       | 81 |   |   |   |
| Less: Deferred Fees              |       | (205                                              | )          |                                           |       | (253 | ) |   |   |
| Less - Allowance for loan losses |       | (1,863                                            | )          |                                           |       | (1,202 | ) |   |   |
| Net loans                        |       | $                                                 | 81,477     |                                           |       |   | $ | 78,914 |   |   |   |

 

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Of the Bank’s total loans outstanding as of September30, 2010, 29.5% were due in one year or less, 27.3% were due in one to fiveyears, and 43.2% were due after five years. As is customary in the banking industry, loans can be renewed by mutualagreement between the borrower and the Bank. The following table is based on contractual maturities, reflecting grossoutstanding loans without consideration of purchase premium, deferred fees ordeferred costs.

 

**Loan Maturity Schedule as of September 30, 2010**

 
| ** **                               | ** ** | ** **                 | ** ** | **Maturing**    | ** ** | ** **     | ** ** | ** ** | ** ** |
|------------------------------------------|------------|----------------------------|------------|-----------------|------------|----------------|------------|------------|------------|
| ** **                               | ** ** | **Within One**             | ** ** | **One to Five** | ** ** | **After Five** | ** ** | ** ** | ** ** |
| **(unaudited)**                          | ** ** | **Year**                   | ** ** | **Years**       | ** ** | **Years**      | ** ** | **Total**  | ** ** |
| ** **                               | ** ** | **(Dollars in thousands)** | ** ** |
| Commercial                               |       | $                          | 16,915     |            | $          | 6,726          |       | $          | 2,171      |   | $ | 25,812 |   |
| Real Estate                              |       | —                     |       | 14,655          |       | 28,547         |       | 43,202     |       |
| Real Estate-Construction                 |       | 6,838                      |       | —          |       | —         |       | 6,838      |       |
| Other Loans                              |       | 853                        |       | 1,441           |       | 5,288          |       | 7,582      |       |
| Total                                    |       | $                          | 24,606     |            | $          | 22,822         |       | $          | 36,006     |   | $ | 83,434 |   |
|                                     |       |                       |       |            |       |           |       |       |       |
| Loans with pre-determined interest rates |       | $                          | 1,937      |            | $          | 8,937          |       | $          | 7,515      |   | $ | 18,389 |   |
| Loans with floating or adjustable rates  |       | 22,669                     |       | 13,885          |       | 28,491         |       | 65,045     |       |
| Total                                    |       | $                          | 24,606     |            | $          | 22,822         |       | $          | 36,006     |   | $ | 83,434 |   |

 

Of the gross loan dollars outstanding as of September30, 2010, approximately 78.0% had adjustable rates.  Approximately 61.2% of the loan dollars ofthese adjustable rate loans have interest rates tied to the prime rate and aresubject to changes in the rate index immediately when the prime rate ischanged.

 

The balance of the adjustable rate loans are tied toother indices subject to periodic adjustment prior to the contract maturity.

 

*Commercial Loans*

 

TheBank offers a variety of commercial loans, including secured and unsecured termand revolving lines of credit, equipment loans and accounts receivable loans.  As of September 30, 2010, approximately 79.3%of the commercial loans had adjustable rates. The Bank underwrites secured term loans and revolving lines of creditprimarily on the basis of a borrower’s cash flow and the ability to service thedebt, although the Bank may rely on the liquidation of the underlyingcollateral as a secondary payment source, where applicable.  Should the borrower default and the Bankforecloses on the assets, the Bank may not be able to recover the full amountof the loan.

 

*Real Estate/ Construction Loans*

 

TheBank’s real estate loans are secured primarily by commercial property,including a significant percentage in multi-family complexes.  Approximately 74.6% of the real estate loansare adjustable during the term of the loan. Approximately 57.1% of the real estate loans have a remaining maturitybetween five and ten years.  As of September30, 2010, the weighted average ratio of the current loan extension to theunderlying value of the property was approximately 47%.  No individual loan to value ratio exceeded79%.

 

*Other Loans*

 

TheBank offers other types of loans, including home equity lines of credit.  Home equity lines of credit have adjustablerates and provide the borrower with a line of credit in an amount which doesnot exceed 79% of the appraised value of the borrower’s property at the time oforigination.

 

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***Off-Balance Sheet Credit Commitments and ContingentObligations***

 

Weenter into and may issue financial instruments with off-balance sheet creditrisk in the normal course of business to meet the financial needs of ourcustomers.  Since inception through September30, 2010, these had been limited to undisbursed commitments to extend credit toboth businesses and individuals. Beginning with the second quarter of 2008, the Bank issued severalletters of credit for the first time. The outstanding balance was approximately $88,000 as of September 30,2010. All commitments noted above were associated with loans and were thereforesubject to the same credit underwriting policies and practices as those usedfor the loans reflected in the financial statements.  When deemed advisable, the Bank obtainscollateral to support such commitments.

 

Commitmentsto extend credit are agreements to lend up to a specific amount to a customeras long as there is no violation of any condition in the contract.  Commitments generally have fixed expirationdates or other termination clauses, which may require payment of a fee.  Since we expect some commitments to expirewithout being drawn upon, the total commitment amounts do not necessarilyrepresent future loans. There wasapproximately $27.3 million in undisbursed loan commitments as of September 30,2010, an increase of approximately $1.5 million or 5.7% from the December 31,2009 amount of approximately $25.8 million.

 

***Non-Performing Assets***

 

Non-performingassets consist of non-performing loans and other real estate owned (“OREO”).  Non-performing loans are (i) loans which havebeen placed on non-accrual status; (ii) loans which are contractually past due90 days or more with respect to principal or interest, have not beenrestructured or placed on non-accrual status, and are accruing interest; and (iii)troubled debt restructures ( “TDRs”). OREO is comprised of real estate acquired in satisfaction of the loaneither through foreclosure or deed in lieu of foreclosure.

 

TheBank had no non-performing assets as of September 30, 2010 and December 31,2009.

 

***Deposits and Borrowed Funds***

 

Depositsare the Company’s primary source of funds. The following table sets forth the amount of deposits outstanding bycategory at September 30, 2010 and December 31, 2009, and the net changesbetween the two periods.

 
| ** **                                | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | **Variance** | ** ** |
|-------------------------------------------|------------|-------------------|------------|------------------|------------|--------------|------------|
| **(dollars  in thousands)**               | ** ** | **2010**          | ** ** | **2009**         | ** ** | **Dollars**  | ** ** | **Percent** | ** ** |
| ** **                                | ** ** | **(unaudited)**   | ** ** | **(audited)**    | ** ** | ** **   | ** ** | ** ** | ** ** |
| **Deposit Classifications:**              |       |              |       |             |       |         |       |   |   |
| Noninterest-bearing deposits              |       | $                 | 29,785     |             | $          | 29,647       |       | $ | 138 |   | 0.47 | % |
| Interest-bearing demand                   |       | 2,816             |       | 4,026            |       | (1,210       | )          | -30.05 | % |
| Savings and money market                  |       | 31,372            |       | 17,900           |       | 13,472       |       | 75.26 | % |
| Certificate of deposit $100,000 and over  |       | 34,772            |       | 54,352           |       | (19,580      | )          | -36.02 | % |
| Certificate of deposit less than $100,000 |       | 3,413             |       | 4,995            |       | (1,582       | )          | -31.68 | % |
| Total deposits                            |       | $                 | 102,158    |             | $          | 110,920      |       | $ | (8,762 | ) | -7.90 | % |

 

Asof September 30, 2010, 29.2% of the Company’s deposits werenon-interest-bearing demand deposits, an increase from December 31, 2009 at26.7%.  At September 30, 2010, the Bankheld no funds in ‘reciprocal brokered funds’ or one-way buy under the CDARSprogram. Most funds have been placed with the Bank by local depositors atcompetitive rates within the Bank’s marketing area.  While the goal of the Bank is to fund creditcommitments using local funding sources, it is anticipated that some of thefuture funding sources may include additional funds both brokered and fromnon-local sources.

 

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Theoutflow of deposits in the *Certificate of Deposits of$100,000 and over*by approximately $19.6 million resulted from thenon-renewal of non-local non-brokered deposits, which resulted in a decline inthe category from approximately $21.1 million as of December 31, 2009 toapproximately $14.8 million as of September 30, 2010.  This was coupled with the return of $16.5million of ‘one-way-buy’ funds from the CDARS program, which were returnedduring January 2010.

 

Thegrowth in *Savings and Money-Markets*deposits stemsprimarily from significant deposits from a few customers whose balancesfluctuate with business needs.

 

The*Analysis of Net Interest Income,*foundwithin this document, summarizes the distribution of the average depositbalances and the average rates paid on deposits during the Bank’s twocomparative quarters ended September 30, 2010 and 2009 and for the twocomparative nine-month periods ended September 30, 2010 and 2009.

 

Thefollowing table shows the maturity of all of the Bank’s time deposits as of September30, 2010:

 
| **Maturities**                       | ** ** | **Amounts**        | ** ** |
|--------------------------------------|------------|--------------------|------------|
| **(unaudited)**                      | ** ** | **(in thousands)** | ** ** |
| Three months or less                 |       | $                  | 10,284     |   |
| Over three and through twelve months |       | 21,802             |       |
| Over twelve months                   |       | 6,100              |       |
| Total                                |       | $                  | 38,186     |   |

 

TheBank has established borrowing lines with the Federal Home Loan Bank (“FHLB”).  At December 31, 2009, the Bank had borrowed$12.0 million from the FHLB collateralized by both loans and securities, mostof which was borrowed for a short duration. The average rate that was paid on FHLB borrowings was 4.36% for thequarter ended December 31, 2009.  At September30, 2010, the Bank had borrowed $4.5 million from the FHLB collateralized bysecurities.  The average rate that waspaid on FHLB borrowings was 4.38% for the quarter ended September 30, 2010.

 

***Asset Quality and Allowance for Loan Losses***

 

The Bank maintains an allowance for loan losses (“ALLL”)to provide for potential losses in its loan portfolio.  Additions to the allowance are made bycharges to operating expense in the form of a provision for loan losses.  All loans that are judged to be uncollectiblewill be charged against the allowance, while recoveries would be credited tothe allowance.  The Bank has institutedloan policies designed primarily for internal use, to adequately evaluate andassess the analysis of the risk factors associated with the Bank’s loanportfolio, to enable us to assess such risk factors prior to granting new loansand to assess the sufficiency of the allowance. The Bank conducts an evaluation on the loan portfolio monthly.

 

The calculation of the adequacy of the ALLLnecessarily includes estimates by management applied to known loan portfolioelements.  The Bank employs a 10-pointloan grading system in an effort to more accurately track the inherent qualityof the loan portfolio.  The 10-pointsystem assigns a value of “1” or “2” to loans that are substantially riskfree.  Modest, average and acceptablerisk loans are assigned point values of “3”, “4”, and “5”, respectively.  Loans on the watch list, which are consideredpass credits, are assigned a point value of “6.”  Point values of “7,” “8,” “9” and “10” areassigned, respectively, to loans classified as special mention, substandard, doubtfuland loss. Using these risk factors, management continues the analysis of thegeneral reserves applying quantitative factors based upon different riskscenarios.

 

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In addition, management considers other trends thatare qualitative relative to our marketplace, demographic trends, the riskrating of the loan portfolios as discussed above, amounts and trends innon-performing assets and concentration factors.

 

***Regulatory Capital***

 

The Bank is subject to various regulatory capitalrequirements administered by the federal banking agencies.  Failure to meet minimum capital requirementscan trigger mandatory and possibly additional discretionary actions by theregulators that, if undertaken, could have a material effect on the Bank’sfinancial statements and operations. Under capital adequacy guidelines and regulatory framework for promptcorrective action, the Bank must meet specific capital guidelines that involvequantitative measures of the Bank’s assets, liabilities, and certainoff-balance sheet items as calculated under regulatory accepted accountingpractices.  The Bank’s capital amountsand classifications are also subject to qualitative judgments by the regulatorssuch as components, risk-weightings, and other factors.

 

Quantitative measures established by regulation toensure capital adequacy require both the Company and the Bank to maintain thefollowing minimum amounts and ratios (set forth in the table below) of totaland Tier 1 Capital to risk-weighted assets and Tier 1 Capital to averageassets. As of September 30, 2010, the Company and the Bank exceeded allapplicable capital adequacy requirements.

 

Under the Federal Reserve Board’s guidelines,Bancorp is a “small bank holding company,” and thus qualifies for an exemptionfrom the consolidated risk-based and leverage capital adequacy guidelinesapplicable to bank holding companies with assets of $500 million or more.  However, while not required to do so underthe Federal Reserve Board’s capital adequacy guidelines, the Company stillmaintained levels of capital on a consolidated basis required to be considered “wellcapitalized” under generally applicable regulatory guidelines as of September 30,2010.

 

The following table sets forth the Company’s and theBank’s regulatory capital ratios as of September 30, 2010:

 
| ** **                            | ** ** | ** **         | ** ** | **To Be Adequately** | ** ** | **To Be Well**  | ** ** |
|---------------------------------------|------------|--------------------|------------|----------------------|------------|-----------------|------------|
| ** **                            | ** ** | **Actual**         | ** ** | **Capitalized**      | ** ** | **Capitalized** | ** ** |
| **(unaudited)**                       | ** ** | **Amount**         | ** ** | **Ratio**            | ** ** | **Amount**      | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| ** **                            | ** ** | **(in thousands)** | ** ** |
| **Company**                           |       |               |       |                 |       |            |       |   |   |   |   |   |   |
| Total Capital (risk-weighted assets)  |       | $                  | 26,346     |                 | 27.7       | %               | $          | 7,600 |   | 8 | % | $ | 9,501 |   | 10 | % |
| Tier 1 Capital (risk-weighted assets) |       | $                  | 25,152     |                 | 26.5       | %               | $          | 3,800 |   | 4 | % | $ | 5,700 |   | 6 | % |
| Tier 1 Capital (average assets)       |       | $                  | 25,152     |                 | 19.2       | %               | $          | 5,245 |   | 4 | % | $ | 6,556 |   | 5 | % |
|                                  |       |               |       |                 |       |            |       |   |   |   |   |   |   |
| **Bank**                              |       |               |       |                 |       |            |       |   |   |   |   |   |   |
| Total Capital (risk-weighted assets)  |       | $                  | 22,481     |                 | 24.3       | %               | $          | 7,412 |   | 8 | % | $ | 9,265 |   | 10 | % |
| Tier 1 Capital (risk-weighted assets) |       | $                  | 21,314     |                 | 23.0       | %               | $          | 3,706 |   | 4 | % | $ | 5,559 |   | 6 | % |
| Tier 1 Capital (average assets)       |       | $                  | 21,314     |                 | 16.5       | %               | $          | 5,173 |   | 4 | % | $ | 6,467 |   | 5 | % |

 

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***Liquidity and Liquidity Management***

 

Liquiditymanagement for banks requires that funds always be available to pay anticipateddeposit withdrawals, fund loan commitments, and meet other commitments on atimely and cost-effective basis.  Theacquisition of deposits is our primary source of funds.  This relatively stable and low-cost source offunds has, along with the balances in stockholder’s equity, providedsubstantially all of the funding since the Bank’s inception.

 

TheBank also has had liquidity as a net seller of overnight federal funds at alevel that would cushion in part any unexpected increase in demand for loans ordecrease in funds deposited.  During thethree-month period ended September 30, 2010, the Company had an average balanceof $15.7 million in overnight federal funds sold representing approximately 12%of our average assets.  This ratio isabove the minimum guideline of 3% established in the Bank’s liquidity policy.

 

Tomeet liquidity needs, the Company maintains a portion of its funds in cashdeposits in other banks, federal funds and investment securities.  As of December 31, 2009, liquid assets(including cash, federal funds sold, interest-bearing deposits in otherfinancial institutions and available-for-sale investment securities that havenot been pledged as collateral), as a percentage of the Company’s deposits,were 57%.  As of September 30, 2010,liquid assets as a percentage of the Company’s deposits, although declining,remained acceptable at 41% due primarily to the reduction in the Federal fundssold, associated with the reduction of the CDARS deposits, FLHB advances, andnon-local deposits.

 

Whileliquidity has not been a major concern in either 2010 or 2009, management hasestablished and is seeking to establish secondary sources of liquidity.  The Bank maintains a line of credit totaling$3 million with a correspondent bank for the purchase of overnight federalfunds.  The line is subject toavailability of funds and has restrictions as to the number of days used duringdefined periods of time.  Another methodthat the Bank currently has available for acquiring additional deposits isthrough the acceptance of “brokered deposits” (defined to include not onlydeposits acquired with deposit brokers, but also deposits bearing effectiveyield more than 75 basis points above the prevailing market rates), typicallyattracting large certificates of deposits at high interest rates.  The Bank had a no “brokered deposits” as of September30, 2010 but held $16.5 million as of December 31, 2009, all of which wasreturned by the end of January 2010. The Bank has established a credit linewith the Federal Home Loan Bank of San Francisco and has outstanding as of September30, 2010 a five-year fixed rate advance of $4.5 million at 4.38%, which wasestablished to stabilize the funding source of certain longer-term assets.

 

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***Item 3 — Quantitative and QualitativeDisclosures about Market Risk***

 

The Company’s market risk results primarily from twosources, credit risk and interest rate risk. Risk management is an important part of our operations and a key elementof our overall financial results. Banking regulators, in recent years, have emphasized appropriate riskmanagement, prompting banks to have adequate systems to identify, monitor andmanage risks.  The Bank has both boardand management committees who meet on a regular basis to oversee riskfunctions.  The Company’s Audit Committeeis responsible for overseeing internal auditing functions and for interfacingwith the Company’s external auditors. The Bank’s Loan Committee establishes loan policy, reviews loans made bymanagement and approves loans in excess of management’s lending authority.  This committee is also responsible for thereview of any problem credits and assessing the adequacy of our allowance forloan losses.  The Asset/Liability Committeereviews investments made by management and monitors compliance with investment,interest rate risk and liquidity policies.

 

***Credit Risk***

 

Creditrisk generally arises as a result of the Bank’s lending activities, but mayalso be present in the Bank’s investment functions.  To manage the credit risk inherent in ourlending activities, the Bank relies on the adherence to underwriting standardsand loan policies as well as our allowance for loan losses.  The Bank employs frequent monitoringprocedures and takes prompt corrective action when necessary.  Additionally, the Bank’s loan portfolio andthe ALLL methodology are expected to be examined on a regular basis by bothregulatory agencies and independent loan review professionals.

 

***Interest Rate Risk***

 

Interest rate risk is the exposure of a bank’sfinancial condition and the results of operations to adverse movements ininterest rates.  Movements in interestrates affect both the generation of earnings as well as the market value ofassets and liabilities.  Interest raterisk results from more than just the differences in the maturity or repricingopportunities of interest-earning assets and interest-bearing liabilities.Other factors that affect the interest rate risk include changes in the slopeof the yield curves over time, imperfect correlation in the adjustment of ratesearned and paid on different instruments with similar characteristics,interest-rate-related embedded options such as loan floors, ceilings, andprepayments, as well as callable investment securities and early withdrawal oftime deposits.

 

The potential impact of interest rate risk issignificant because of the liquidity and capital adequacy consequences thatreduced earnings or losses may imply. While the Company recognizes and accepts that interest rate risk is aroutine part of banking operations, the objective of interest rate riskmanagement is to measure, monitor and control exposure of net interest incometo excessive risks associated with interest rate movements.

 

Understanding the inherent weakness in traditionalgap analysis to properly measure interest rate risk, the Bank employs modelingtechniques which measure the affect of interest rate shocks on the net interestincome and the market value of equity on the Bank’s existing mix of assets andliabilities.

 

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The results of the model’s simulations on thepotential loss of net interest income as of September 30, 2010 reflect thefollowing:

 

**Earningsat Risk**

 
| **(unaudited)**       | ** ** | ** **    | ** ** | ** **          | ** ** |
|-----------------------|------------|---------------|------------|---------------------|------------|
| **Rate**              | ** ** | **Maximum**   | ** ** | **% (Loss) Gain**   | ** ** |
| **Shock**             | ** ** | **Policy**    | ** ** | **in Net Interest** | ** ** |
| **(in basis points)** | ** ** | **Guideline** | ** ** | **Income**          | ** ** |
| -400                  |       | -20%          |       | -0.5%               |       |
| -300                  |       | -15%          |       | -0.3%               |       |
| -200                  |       | -10%          |       | -0.1%               |       |
| -100                  |       | -5%           |       | -0.1%               |       |
| +100                  |       | -5%           |       | 4.5%                |       |
| +200                  |       | -10%          |       | 8.1%                |       |
| +300                  |       | -15%          |       | 11.3%               |       |
| +400                  |       | -20%          |       | 14.3%               |       |

 

The method employed in rate shocking the earnings atrisk was “ramping” (i.e., changing the indicated rate movement gradually over a12 month horizon).  Based upon the modelsimulation as of September 30, 2010, the Bank’s interest rate risk exposure asmeasured by rate movement on net interest income is within policy guidelines.

 

The results of the model’s simulations on thepotential loss of the Company’s equity as of September 30, 2010 reflect thefollowing:

 

**Market Value of Equity**

 
| **(unaudited)**       | ** ** | ** **    | ** ** | ** **          | ** ** |
|-----------------------|------------|---------------|------------|---------------------|------------|
| **Rate**              | ** ** | **Maximum**   | ** ** | **% (Loss) Gain**   | ** ** |
| **Shock**             | ** ** | **Policy**    | ** ** | **in Market**       | ** ** |
| **(in basis points)** | ** ** | **Guideline** | ** ** | **Value of Equity** | ** ** |
| -400                  |       | -40%          |       | 21.2%               |       |
| -300                  |       | -30%          |       | 19.0%               |       |
| -200                  |       | -20%          |       | 9.8%                |       |
| -100                  |       | -10%          |       | 3.2%                |       |
| +100                  |       | -10%          |       | -2.9%               |       |
| +200                  |       | -20%          |       | -5.8%               |       |
| +300                  |       | -30%          |       | -6.3%               |       |
| +400                  |       | -40%          |       | -6.7%               |       |

 

The method employed in rate shocking the marketvalue of equity is referred to as “regulatory shock”, i.e., changing theindicated rates instantaneously.

 

Based upon the model simulation as of September 30,2010, the Bank interest rate exposure as measured by rate movement on themarket value of the Bank’s equity is within policy guidelines.

 

***Item 4T — Controls and Procedures***

 

The Company maintains disclosure controls andprocedures (as defined in the Exchange Act Rule 13a-15(e) under the SecuritiesExchange Act of 1934, as amended (the Exchange Act”)) that are designed toensure that information required to be disclosed in our reports filed orsubmitted under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms, and that such information is accumulated andcommunicated to management, including the Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosures.

 

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In designing and evaluating the disclosure controlsand procedures, management recognizes that any controls and procedures, nomatter how well-designed and operated, can provide reasonable assurance only ofachieving the desired control objectives, and management necessarily isrequired to apply its judgment in weighing the costs and benefits of possiblenew or different controls and procedures. Limitations are inherent in all control systems, so no evaluation ofcontrols can provide absolute assurance that all control issues and any fraudwithin the Company have been detected.

 

Asrequired by Exchange Act Rule 13a-15(b), as of the end of the period covered bythis report the Company, under the supervision and with participation of theChief Executive Officer and Chief Financial Officer, evaluated theeffectiveness of our disclosure controls and procedures.  Based upon this evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures were effective as of that date.

 

During the quarter ended September 30, 2010, therewere no significant changes in our internal control over financial reporting(as defined in Exchange Act Rule 13a-15(f)) that have materially affected, orare reasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

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**PART II – OTHER INFORMATION**

 

***Item 1. – Legal Proceedings***

 

The Company is not a party to any material legal proceedings.

 

***Item 1A. – Risk Factors***

 

As a smaller reporting company, the Company is notrequired to provide the information required by this item as a part of the Form10-Q.

 

***Item 2 – Unregistered Sale of EquitySecurities and Use of Proceeds***

 

None.

 

***Item 3 – Defaults upon Senior Securities***

 

Not Applicable.

 

***Item 4 – (Removed and Reserved)***

 

***Item 5 – Other Information***

 

***Item 6 – Exhibits***

 
| **Exhibit  Number** | ** ** | **Index to Exhibits**                                                                                                                                                         |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1                |       | Certification of the Interim Chief Executive  Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange  Act of 1934, as amended                             |
| 31.2                |       | Certification of the Chief Financial Officer  pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of  1934, as amended                                     |
| 32.1                |       | Certification of the Interim President and Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as amended pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2                |       | Certification of the Chief Financial Officer  pursuant to 18 U.S.C. Section 1350, as amended pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                       |

 

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**SIGNATURES**

 

Pursuantto the requirement of the Securities and Exchange Act of 1934, the registranthas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

 
|   |               | **MANHATTAN BANCORP**          |
|--------|--------------------|--------------------------------|
|   |               | ** **                     |
|   |               |                           |
| Date:  | November  12, 2010 | /s/  Harry W. Chenoweth        |
|   |               | Harry  W. Chenoweth            |
|   |               | Interim  President and         |
|   |               | Chief  Executive Officer       |
|   |               | (Principal  Executive Officer) |
|   |               |                           |
|   |               |                           |
| Date:  | November  12, 2010 | /s/  Dean Fletcher             |
|   |               | Dean  Fletcher                 |
|   |               | Executive  Vice President and  |
|   |               | Chief  Financial Officer       |
|   |               | (Principal  Financial and      |
|   |               | Accounting  Officer)           |

 

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