Tableof Contents

 

 

 

**UnitedStates********Securities and Exchange Commission**

**Washington, D. C. 20549**

 

# **FORM 10-Q**

 

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

 

**For thequarterly period ended September 30, 2008**

 

o**TRANSITION REPORT UNDER SECTION 13 OR 15(d) OFTHE EXCHANGE ACT**

 

**For the transition period from                to                **

 

**Commission File Number 333-140448**

 

**MANHATTAN BANCORP**

(Exact name of smaller reporting company 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) |
|                                                |
| Issuer’s telephone number: **(310) 606-8000**  |

 

Indicateby a check mark whether the registrant (1) filed all reports required tobe filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.   Yes x  No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definition 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 (Do not  check if a smaller reporting company) | Smaller reporting company x |
|                           |                                                  |                             |  |

 

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

 

Asof November 5, 2008, there were 2,615,806 shares of the issuer’s commonstock outstanding.

 

 

 

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Table of Contents

 

**ManhattanBancorp**

**QUARTERLY REPORT ON FORM 10-Q**

**FOR**

**THE QUARTER ENDED SEPTEMBER 30, 2008**

 

**TABLE OF CONTENTS**

 
| ** **                         | **PAGE**                                                                                    |
|------------------------------------|---------------------------------------------------------------------------------------------|
| PART I- FINANCIAL INFORMATION | ** **                                                                                  |
|                               | ** **                                                                                  |
| Item 1.                            | FINANCIAL STATEMENTS (Unaudited, except for Balance Sheet as of  12/31/2007)                |   |
|                               |                                                                                        |   |
|                               |                                                                                        | CONSOLIDATED BALANCE SHEETS | 3 |
|                               |                                                                                        |   |   |
|                               |                                                                                        | CONSOLIDATED STATEMENTS OF OPERATIONS | 4 |
|                               |                                                                                        |   |   |
|                               |                                                                                        | CONSOLIDATED STATEMENTS 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 | 14 |
|                               |                                                                                        |   |
| Item 3.                            | QUANTITATIVE AND QUALITATIVE DISCLOSURES  ABOUT MARKET RISK                                 | 27 |
|                               |                                                                                        |   |
| Item 4.                            | CONTROLS AND PROCEDURES                                                                     | 29 |
|                               |                                                                                        |
| PART II - OTHER INFORMATION   |                                                                                        |
|                               |                                                                                        |
| Item 1.                            | LEGAL PROCEEDINGS                                                                           | 30 |
|                               |                                                                                        |   |
| Item 1A.                           | RISK FACTORS                                                                                | 30 |
|                               |                                                                                        |   |
| Item 2.                            | UNREGISTERED SALES OF EQUITY SECURITIES AND  USE OF PROCEEDS                                | 30 |
|                               |                                                                                        |   |
| Item 3.                            | DEFAULTS ON SENIOR SECURITIES                                                               | 30 |
|                               |                                                                                        |   |
| Item 4.                            | SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS                                        | 30 |
|                               |                                                                                        |   |
| Item 5.                            | OTHER INFORMATION                                                                           | 30 |
|                               |                                                                                        |   |
| Item 6.                            | EXHIBITS                                                                                    | 30 |
|                               |                                                                                        |   |
| SIGNATURES                         | 31                                                                                          |

 

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***PART I – FINANCIAL INFORMATION***

 

***Item 1 – Financial Information***

 

**Manhattan Bancorp and Subsidiary**

**Consolidated Balance Sheets**

 
| ** **                                                                                                                                                        | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                        | ** ** | **(Unaudited)**                  | ** ** | ** **                      | ** ** |
| **Assets**                                                                                                                                                        | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| Cash and due  from banks                                                                                                                                          |       | $                                | 764,466    |                            | $          | 398,333 |   |
| Federal  funds sold                                                                                                                                               |       | 5,715,000                        |       | 8,565,000                       |       |
| Total cash  and cash equivalents                                                                                                                                  |       | 6,479,466                        |       | 8,963,333                       |       |
| Time  deposits-other financial institutions                                                                                                                       |       | 6,594,000                        |       | 2,386,000                       |       |
| Investments  securities-available for sale                                                                                                                        |       | 6,599,005                        |       | 6,148,695                       |       |
| Investments  securities-held to maturity                                                                                                                          |       | 989,714                          |       | 987,275                         |       |
|                                                                                                                                                              |       |                             |       |                            |       |
| Loans                                                                                                                                                             |       | 48,693,920                       |       | 18,198,570                      |       |
| Allowance  for loan losses                                                                                                                                        |       | (700,000                         | )          | (269,000                        | )          |
| Net loans                                                                                                                                                         |       | 47,993,920                       |       | 17,929,570                      |       |
|                                                                                                                                                              |       |                             |       |                            |       |
| Property and  equipment, net                                                                                                                                      |       | 1,419,870                        |       | 1,581,811                       |       |
| Stock in  other financial institutions                                                                                                                            |       | 1,232,150                        |       | 1,048,500                       |       |
| Accrued  interest receivable and other assets                                                                                                                     |       | 497,631                          |       | 321,550                         |       |
|                                                                                                                                                              |       |                             |       |                            |       |
| Total assets                                                                                                                                                      |       | $                                | 71,805,756 |                            | $          | 39,366,734 |   |
|                                                                                                                                                              |       |                             |       |                            |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                    |       |                             |       |                            |       |
| Deposits:                                                                                                                                                         |       |                             |       |                            |       |
| Non-interest  bearing demand                                                                                                                                      |       | $                                | 13,123,976 |                            | $          | 5,395,028 |   |
| Interest  bearing:                                                                                                                                                |       |                             |       |                            |       |
| Demand                                                                                                                                                            |       | 1,596,449                        |       | 1,143,269                       |       |
| Savings and  money market                                                                                                                                         |       | 9,034,521                        |       | 4,244,393                       |       |
| Certificates  of deposit equal to or greater than $100,000                                                                                                        |       | 18,441,928                       |       | 6,190,200                       |       |
| Certificates  of deposit less than $100,000                                                                                                                       |       | 4,877,624                        |       | 889,429                         |       |
| Total  deposits                                                                                                                                                   |       | 47,074,498                       |       | 17,862,319                      |       |
| FHLB  advances                                                                                                                                                    |       | 4,500,000                        |       | —                          |       |
| Accrued  interest payable and other liabilities                                                                                                                   |       | 564,395                          |       | 315,481                         |       |
| Total  liabilities                                                                                                                                                |       | 52,138,893                       |       | 18,177,800                      |       |
|                                                                                                                                                              |       |                             |       |                            |       |
| Commitments  and contingencies                                                                                                                                    |       | —                           |       | —                          |       |
|                                                                                                                                                              |       |                             |       |                            |       |
| Stockholders’  equity                                                                                                                                        |       |                             |       |                            |       |
| Serial  preferred stock-no par value; 10,000,000 shares authorized; none outstanding  in 2008 and 2007                                                            |       | —                           |       | —                          |       |
| Common  stock-no par value; 10,000,000 shares authorized; issued and outstanding,  2,615,806 at September 30, 2008  and 2,487,631 at December 31,  2007 |       | 25,344,709                       |       | 24,078,828                      |       |
| Additional  paid in capital                                                                                                                                       |       | 778,457                          |       | 266,908                         |       |
| Unrealized  gain on available-for-sale securities                                                                                                                 |       | 76,852                           |       | 58,158                          |       |
| Accumulated  deficit                                                                                                                                              |       | (6,533,155                       | )          | (3,214,960                      | )          |
|                                                                                                                                                              |       |                             |       |                            |       |
| Total stockholders’  equity                                                                                                                                  |       | 19,666,863                       |       | 21,188,934                      |       |
|                                                                                                                                                              |       |                             |       |                            |       |
| Total  liabilities and stockholders’ equity                                                                                                                  |       | $                                | 71,805,756 |                            | $          | 39,366,734 |   |

 

The accompanying notes are anintegral part of this financial statement.

 

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**ManhattanBancorp and Subsidiary**

**Consolidated Statements of Operations**

**(Unaudited)**

 
| ** **                                                         | ** ** | **For the**                 | ** ** | **For the**            | ** ** | **For the**                 | ** ** | **For the**                 | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|-----------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                         | ** ** | **three-month**                  | ** ** | **three-month**             | ** ** | **nine-month**                   | ** ** | **initial operating**       | ** ** |
| ** **                                                         | ** ** | **period ended**            | ** ** | **period ended**       | ** ** | **period ended**            | ** ** | **period ended**            | ** ** |
| ** **                                                         | ** ** | **September 30, 2008** | ** ** | **June 30, 2008** | ** ** | **September 30, 2008** | ** ** | **September 30, 2007** | ** ** |
| **Interest  income**                                               |       |                             |       |                        |       |                             |       |                             |       |
| Interest and  fees on loans                                        |       | $                                | 702,348    |                        | $          | 543,551                          |       | $                                | 1,632,554  |   | $ | 21,024 |   |
| Interest on  investment securities                                 |       | 91,170                           |       | 120,485                     |       | 301,093                          |       | —                           |       |
| Interest on  federal funds sold                                    |       | 86,244                           |       | 20,319                      |       | 164,941                          |       | 136,854                          |       |
| Interest on  time deposits-other financial institutions            |       | 28,828                           |       | 11,544                      |       | 65,911                           |       | —                           |       |
|                                                               |       |                             |       |                        |       |                             |       |                             |       |
| Total interest  income                                             |       | 908,590                          |       | 695,899                     |       | 2,164,499                        |       | 157,878                          |       |
|                                                               |       |                             |       |                        |       |                             |       |                             |       |
| **Interest  expense**                                              |       |                             |       |                        |       |                             |       |                             |       |
| NOW, money  market and savings                                     |       | 32,780                           |       | 24,212                      |       | 83,089                           |       | 3,952                            |       |
| Time  deposits                                                     |       | 226,946                          |       | 113,246                     |       | 444,060                          |       | 11,355                           |       |
| FHLB  advances                                                     |       | 50,377                           |       | 2,190                       |       | 52,567                           |       | —                           |       |
|                                                               |       |                             |       |                        |       |                             |       |                             |       |
| Total  interest expense                                            |       | 310,103                          |       | 139,648                     |       | 579,716                          |       | 15,307                           |       |
|                                                               |       |                             |       |                        |       |                             |       |                             |       |
| Net interest  income                                               |       | 598,487                          |       | 556,251                     |       | 1,584,783                        |       | 142,571                          |       |
|                                                               |       |                             |       |                        |       |                             |       |                             |       |
| Provision  for loan losses                                         |       | 102,000                          |       | 163,000                     |       | 431,000                          |       | 102,000                          |       |
|                                                               |       |                             |       |                        |       |                             |       |                             |       |
| Net interest  income after provision for loan losses               |       | 496,487                          |       | 393,251                     |       | 1,153,783                        |       | 40,571                           |       |
|                                                               |       |                             |       |                        |       |                             |       |                             |       |
| **Non-interest  income**                                           |       | 18,033                           |       | 10,648                      |       | 41,582                           |       | 69                               |       |
|                                                               |       |                             |       |                        |       |                             |       |                             |       |
| **Non-interest  expense**                                          |       |                             |       |                        |       |                             |       |                             |       |
| Compensation  and benefits                                         |       | 963,767                          |       | 969,914                     |       | 2,881,714                        |       | 759,434                          |       |
| Occupancy  and equipment                                           |       | 174,233                          |       | 163,491                     |       | 495,398                          |       | 70,838                           |       |
| Technology  and communication                                      |       | 134,490                          |       | 125,111                     |       | 384,433                          |       | 32,572                           |       |
| Professional  and administrative expenses                          |       | 106,663                          |       | 158,172                     |       | 370,868                          |       | 18,037                           |       |
| Other  non-interest expenses                                       |       | 133,839                          |       | 138,573                     |       | 379,547                          |       | 88,940                           |       |
|                                                               |       |                             |       |                        |       |                             |       |                             |       |
| Total  non-interest expenses                                       |       | 1,512,992                        |       | 1,555,261                   |       | 4,511,960                        |       | 969,821                          |       |
|                                                               |       |                             |       |                        |       |                             |       |                             |       |
| Loss before  income taxes                                          |       | (998,472                         | )          | (1,151,362                  | )          | (3,316,595                       | )          | (929,181                         | )          |
|                                                               |       |                             |       |                        |       |                             |       |                             |       |
| Provision  for income taxes                                        |       | —                           |       | 1,600                       |       | 1,600                            |       | 800                              |       |
|                                                               |       |                             |       |                        |       |                             |       |                             |       |
| Net loss                                                           |       | $                                | (998,472   | )                           | $          | (1,152,962                       | )          | $                                | (3,318,195 | ) | $ | (929,981 | ) |
|                                                               |       |                             |       |                        |       |                             |       |                             |       |
| Weighted  average number of shares outstanding (basic and diluted) |       | 2,615,806                        |       | 2,517,210                   |       | 2,540,491                        |       | 1,451,052                        |       |
|                                                               |       |                             |       |                        |       |                             |       |                             |       |
| Basic and  diluted loss per share                                  |       | $                                | (0.38      | )                           | $          | (0.46                            | )          | $                                | (1.31      | ) | $ | (0.64 | ) |

 

Theaccompanying notes are an integral part of this financial statement.

 

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**Manhattan Bancorp and Subsidiary**

**Consolidated Statements of Stockholders’ Equity**

**September 30, 2008 and 2007**

(Unaudited)

 
| ** **                                    | ** ** | ** **            | ** ** | ** **     | ** ** | ** **  | ** ** | ** **        | ** ** | **Accumulated** | ** ** | ** **        | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|----------------|------------|-------------|------------|-------------------|------------|-----------------|------------|-------------------|------------|
| ** **                                    | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | ** **  | ** ** | ** **        | ** ** | **Other**       | ** ** | ** **        | ** ** |
| ** **                                    | ** ** | **Number of**    | ** ** | ** **     | ** ** | **Paid-in** | ** ** | **Comprehensive** | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| **(Unaudited)**                               | ** ** | **Shares**            | ** ** | **Amount**     | ** ** | **Capital** | ** ** | **Loss**          | ** ** | **Deficit**     | ** ** | **Loss**          | ** ** | **Total** | ** ** |
| **Balance at December 31, 2006**         |       | 42,500                |       | 425,000        |       | $           | —     |              | $          | —          |       | (269,392          | )          | $ | — |   | 155,608 |   |
| Issuance of common stock to founders          |       | 2,500                 |       | 25,000         |       |        |       |              |       |            |       |              |       | 25,000 |   |
| Organizational expenses                       |       |                  |       |           |       |        |       | —            |       | (732,544        | )          |              |       | (732,544 | ) |
| Net loss                                      |       |                  |       |           |       |        |       | —            |       | (929,981        | )          |              |       | (929,981 | ) |
| Total comprehensive loss                      |       |                  |       |           |       |        |       | $                 | —     |            |       |              |       |   |   |   |
| **Balance at September 30, 2007**        |       | 45,000                |       | $              | 450,000    |        | $          | —            |       |            |       | $                 | (1,931,917 | ) | $ | — |   | $ | (1,481,917 | ) |
|                                          |       |                  |       |           |       |        |       |              |       |            |       |              |       |   |   |
| **Balance at December 31, 2007**         |       | 2,487,631             |       | $              | 24,078,828 |        | $          | 266,908           |       | $               | —     |              | $          | (3,214,960 | ) | $ | 58,158 |   | $ | 21,188,934 |   |
| Issuance of common stock in private placement |       | 128,175               |       | $              | 1,265,881  |        |       |              |       |            |       |              |       |   | $ | 1,265,881 |   |
| Share-based compensation expense              |       |                  |       |           |       | 511,549     |       |              |       |            |       |              |       | 511,549 |   |
| Unrealized gain on investment securities      |       |                  |       |           |       |        |       | 18,694            |       | —          |       | 18,694            |       | 18,694 |   |
| Net loss                                      |       |                  |       |           |       |        |       | (3,318,195        | )          | (3,318,195      | )          |              |       | (3,318,195 | ) |
| Total comprehensive loss                      |       |                  |       |           |       |        |       | $                 | (3,299,501 | )               |       |              |       |   |   |   |
| **Balance at September 30, 2008**        |       | 2,615,806             |       | $              | 25,344,709 |        | $          | 778,457           |       |            |       | $                 | (6,533,155 | ) | $ | 76,852 |   | $ | 19,666,863 |   |

 

The accompanying notes are an integral partof this financial statement.

 

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**ManhattanBancorp and Subsidiary**

**Consolidated Statements of Cash Flows**

**(Unaudited)**

 
| ** **                                                                                | ** ** | **For the**                 | ** ** | **For the**                 | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                                                | ** ** | **nine-month**                   | ** ** | **initial operating**       | ** ** |
| ** **                                                                                | ** ** | **period ended**            | ** ** | **period ended**            | ** ** |
| ** **                                                                                | ** ** | **September 30, 2008** | ** ** | **September 30, 2007** | ** ** |
| **Cash  flows from operating activities**                                                 |       |                             |       |                             |       |
| Net loss  including organizational expenses in ‘date of inception’ presentation |       | $                                | (3,318,195 | )                                | $          | (929,981 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities:              |       |                             |       |                             |       |
| Net change  in:                                                                           |       |                             |       |                             |       |
| Depreciation  and amortization                                                            |       | 224,314                          |       | 41,337                           |       |
| Provision  for loan losses                                                                |       | 431,000                          |       | 102,000                          |       |
| Share-based  compensation                                                                 |       | 511,549                          |       | 73,307                           |       |
| (Increase)  in accrued interest receivable and other assets                               |       | (190,671                         | )          | (387,735                         | )          |
| Increase in  accrued interest payable and other liabilities                               |       | 248,914                          |       | 257,185                          |       |
|                                                                                      |       |                             |       |                             |       |
| Net cash  used in operating activities                                                    |       | (2,093,089                       | )          | (843,887                         | )          |
|                                                                                      |       |                             |       |                             |       |
| **Cash  flows from investing activities**                                                 |       |                             |       |                             |       |
| Net  (increase) in loans                                                                  |       | (30,495,350                      | )          | (4,813,098                       | )          |
| Increase in  time deposits - other financial institutions                                 |       | (4,208,000                       | )          | —                           |       |
| Proceeds  from repayment and maturities from investment securities                        |       | 568,347                          |       | —                           |       |
| Purchase of  investments                                                                  |       | (987,812                         | )          |                             |       |
| Purchase of  stock in other financial institutions                                        |       | (183,650                         | )          | (1,025,000                       | )          |
| Purchase of  premises and equipment                                                       |       | (62,373                          | )          | (1,416,343                       | )          |
|                                                                                      |       |                             |       |                             |       |
| Net cash  used in investing activities                                                    |       | (35,368,838                      | )          | (7,254,441                       | )          |
|                                                                                      |       |                             |       |                             |       |
| **Cash  flows from financing activities**                                                 |       |                             |       |                             |       |
| Net increase  (decrease) in:                                                              |       |                             |       |                             |       |
| Demand  deposits                                                                          |       | 7,728,948                        |       | 2,189,913                        |       |
| Interest  bearing demand deposits                                                         |       | 453,180                          |       | 38,882                           |       |
| Savings and  money market deposits                                                        |       | 4,790,128                        |       | 2,007,736                        |       |
| Certificates  of deposit equal to or greater than $100,000                                |       | 12,251,728                       |       | 2,523,082                        |       |
| Certificates  of deposit less than $100,000                                               |       | 3,988,195                        |       | 671,085                          |       |
| Organizational  expenses                                                                  |       |                             |       | (732,544                         | )          |
| Increase  from borrowings                                                                 |       | 4,500,000                        |       | —                           |       |
| Net proceeds  from issuance of common stock                                               |       | 1,265,881                        |       | 23,653,828                       |       |
|                                                                                      |       |                             |       |                             |       |
| Net cash  provided by financing activities                                                |       | 34,978,060                       |       | 30,351,982                       |       |
|                                                                                      |       |                             |       |                             |       |
| Net  (decrease) increase in cash and cash equivalents                                     |       | (2,483,867                       | )          | 22,253,654                       |       |
|                                                                                      |       |                             |       |                             |       |
| **Cash and  cash equivalents at beginning of period**                                     |       | 8,963,333                        |       | 206,423                          |       |
|                                                                                      |       |                             |       |                             |       |
| **Cash and  cash equivalents at end of period**                                           |       | $                                | 6,479,466  |                             | $          | 22,460,077 |   |
|                                                                                      |       |                             |       |                             |       |
| **Supplementary  information**                                                            |       |                             |       |                             |       |
|                                                                                      |       |                             |       |                             |       |
| Interest  paid on deposits                                                                |       | $                                | 511,713    |                             | $          | 11,023 |   |
|                                                                                      |       |                             |       |                             |       |
| Income taxes  paid                                                                        |       | $                                | 1,600      |                             | $          | 800 |   |

 

The accompanying notes are an integral partof this financial statement.

 

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**MANHATTAN BANCORP**

**NOTES TO FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2008**

 

**Note 1.   CONSOLIDATED FINANCIAL STATEMENTS**

 

The accompanying unaudited condensedconsolidated financial statements of Manhattan Bancorp (the “Bancorp”) and itswholly-owned subsidiary, Bank of Manhattan, N.A. (the “Bank”), togetherreferred to as the “Company” have been prepared in accordance with theinstructions to Form 10-Q and Article 8 of Regulation S-X.  Accordingly, certain information and notesrequired by accounting principles generally accepted in the United States ofAmerica for annual financial statements are not included herein.  In the opinion of Management, all adjustmentsconsidered necessary for a fair presentation of results for the interim periodspresented have been included.  Theseinterim condensed consolidated financial statements should be read inconjunction with the financial statements and related notes contained in the Company’s2007 Annual Report on Form 10-K as amended.

 

The condensed consolidated financialstatements include accounts of the Bancorp and its wholly-owned financialsubsidiary, Bank of Manhattan, N.A.   For the period from June 19, 2006 (inception) to August 15,2007, the Bancorp was in a development stage, engaging in the preparation ofapplications for regulatory approvals, raising capital, financial planning,systems development, acquisition of equipment and facilities, as well asrecruiting activities.  When the Bankcommenced its operations, the Bancorp officially became a bank holdingcompany.  All net expenses, which wereincurred during the period from June 19, 2006 through August 15,2007, were pre-opening expenses and are reported in the statement ofstockholders’ equity to facilitate the financial presentation of theCompany.  The Consolidated Statement ofOperations included in the report provides no comparable statement for thethree-month periods ended June 30, 2008, the three-month period ended September 30,2008, or the nine-month period ended September 30, 2008, as the Company’soperations did not commence until August 15, 2007.   However, a statement of operations has beenincluded covering the period from August 15, 2007 through the end of September 30,2007, a period of 46 days.

 

The preparation of consolidated condensedfinancial statements in conformity with the accounting principles generallyaccepted in the United States of America 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 havebeen reclassified to conform to the current presentation.  These reclassifications had no effect onshareholders’ equity, net loss or loss per share amounts.

 

**Note 2.   RECENT ACCOUNTING PRONOUNCEMENTS**

 

ACCOUNTING FORUNCERTAINTY IN INCOME TAXES: In July 2006, the FinancialAccounting Standards Board (“FASB”) issued *FASBInterpretation (“FIN”) No. 48, “Accounting for Uncertainty in IncomeTaxes, an interpretation of FASB Statement 109.”*FIN No. 48 prescribes a recognitionthreshold and a measurement attribute for the financial statement recognitionand measurement of a tax position taken or expected to be taken in a taxreturn. Benefits from tax positions should be recognized in the financialstatements only when it is more likely than not that the tax position will besustained upon

 

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examination by the appropriate taxingauthority that would have full knowledge of all relevant information. A taxposition that meets the more-likely-than-not recognition threshold is measuredat the largest amount of benefit that is greater than fifty percent likely ofbeing realized upon ultimate settlement. Tax positions that previously failedto meet the more-likely-than-not recognition threshold should be recognized inthe first subsequent financial reporting period in which that threshold is met.Previously recognized tax positions that no longer meet themore-likely-than-not recognition threshold should be de-recognized in the firstsubsequent financial reporting period in which that threshold is no longer met.FIN No. 48 also provides guidance on the accounting for and disclosure ofunrecognized tax benefits, interest and penalties. The adoption of FIN No. 48as of January 1, 2007 did not impact the Company’s financial statements.

 

In July, 2006, FASB issued FASB StaffPosition (“FSP”) No. 48-1 “*Definition of Settlementin FIN No. 48.” *FSP 48-1provides guidance on how to determine whether a tax position is effectivelysettled for the purpose of recognizing previously unrecognized taxbenefits.  FSP 48-1 was effectiveretroactively as of January 1, 2007 and did not impact the Company’sfinancial statement.

 

FAIR VALUEMEASUREMENTS: In September 2006, the FASB issued SFAS No. 157*, “Fair Value Measurements.”*SFAS No. 157 defines fair value,establishes a framework for measuring fair value under accounting principlesgenerally accepted in the United States of America, and expands disclosuresabout fair value measurements. SFAS No. 157 is effective for the Companyas of January 1, 2008 and is not expected to have a significant impact onthe Company’s financial statements.

 

In February 2007, the FASB issued SFAS No. 159,“*The Fair Value Option for Financial Assets andFinancial Liabilities-Including an Amendment of SFAS 115.” *SFAS No. 159 permits**an entity to choose to measure financial instruments andcertain other items at fair value.  Mostof the provisions of SFAS No. 159 are elective; however the amendment ofSFAS No. 115, “*Accounting for Certain Investmentsin Debt and Equity Securities,”*applies to all entities withavailable for sale or trading securities. For financial instruments elected to be accounted for at fair value, anentity will report the unrealized gains and losses in earnings.  SFAS No. 159 is effective as of thebeginning of an entity’s first fiscal year that begins after November 15,2007.  The Company does not expect theadoption of SFAS No. 159 to have a material effect on the Company’sconsolidated financial statements.

 

In February 2008, the FASB issued FASB StaffPosition (“FSP’) FAS 157-1, “*Application of FASBStatement No. 17 and Other Accounting Pronouncements That Address FairValue Measurements for Purposes of Lease Classification or Measurement UnderStatement 13,*” and FSP FAS 157-2, “*EffectiveDate of FASB Statement No. 157.”*  FSP FAS 157-1 removes leasing from the scopeof SFAS No. 157, “*Fair Value Measurements*.”FSP FAS 157-2 delays the effective date of SFAS No. 157 from 2008 to 2009for all non-financial assets and liabilities, except those that are recognizedor disclosed at fair value in the financial statements on a recurring basis (atleast annually).  The Company does notexpect the implementation of FSP-157-1 to have a material impact on itsfinancial position, results of operations, or cash flows.  Additionally, in accordance with FSP 157-2,the Company will delay the application of SFAS No. 157 for non-financialassets and non-financial liabilities until January 1, 2009 and does notexpect the application to have a material effect on the Company’s financialposition, results of operations, or cash flows.

 

BUSINESS COMBINATIONS:  In December 2007, the FASB issued SFAS No. 141(R),*“Business Combinations”*(“SFAS 141 (R)”)and SFAS No.160, “*Accounting and Reporting of NoncontrolliingInterest in Consolidated Statements, an Amendment of ARB No. 51”*(“FASB160”).  SFAS 141(R) is required tobe adopted concurrently with SFAS 160 and is effective for business combinationtransactions for which the acquisition date is on or after the beginning of thefirst annual reporting period beginning on or after December 31,2008.  This will be effective for theCompany for the calendar year beginning

 

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January 1, 2009.  SFAS 141(R) and SFAS 160 are effectiveprospectively; however, the reporting provisions of SFAS 160 are effectiveretroactively.  The Company does notcurrently have any business combinations scheduled and the Company’s onlyconsolidated subsidiary is wholly owned by the Company.  Management, therefore, does not anticipateany impact on the Company’s financial condition or results of operations fromthe adoption of these accounting pronouncements.

 

GENERALLY ACCEPTEDACCOUNTING PRINCIPLES:  In May 2008,the FASB issued SFAS 162, “*The Hierarchy ofGenerally Accepted Accounting Principles.” *SFAS No. 162**identifiesthe sources of accounting principles and the framework for selecting theprincipals to be used in the preparation of the financial statements ofnongovernmental entities that are presented in conformity with generallyaccepted accounting principles (“GAAP”) in the United States.  The FASB issued SFAS No. 162 because thecurrent GAAP hierarchy, as set forth in the American Institute of CertifiedPublic Accountants (“AICPA”) Statement of Auditing Standards No. 69, “*The Meaning of Present Fairly in Conformity WithGenerally Accepted Accounting Principles,”*is directed to the auditorand not the entity, is complex, and ranks FASB Statements of Financial Conceptsbelow industry practices that are widely recognized as generally accepted butthat are not subject to due process. This statement is effective 60 days following the SEC’s approval of thePublic Company Accounting Oversight Board (“PCAOB”) amendment to AU Section 411,“*The Meaning of Present Fairly in ConformityWith Generally Accepted Accounting Principles.”* The Company does not anticipate the adoptionof SFAS No. 162 to have a material impact of its financial position,results of operations, or cash flows.

 

**Note 3.   INTEREST-EARNING ASSETS WITH OTHER****FINANCIALINSTITUTIONS**

 

At September 30, 2008, the Company hadinterest-earning deposits with other financial institutions of $6.6 million,with a weighted average yield of 2.84%, and an average weighted remaining lifeof approximately two and one-half months.

 

**Note 4.   INVESTMENT SECURITIES**

 

Investment securities have been classified inthe balance sheet according to management’s intent. The following table setsforth the investment securities at their amortized cost and estimated fairvalue with gross unrealized gains and losses as of September 30, 2008 and December 31,2007.

 

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| ** **                               | ** ** | ** **              | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** ** | ** ** |
|------------------------------------------|------------|-------------------------|------------|----------------|------------|----------------|------------|------------|------------|
| ** **                               | ** ** | **Amortized**           | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**   | ** ** |
| ** **                               | ** ** | **Cost**                | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Value**  | ** ** |
| ** **                               | ** ** | **(in thousands)** | ** ** |
| **September 30,  2008**             |       |                    |       |           |       |           |       |       |       |
| **Available-for-sale  securities:**      |       |                    |       |           |       |           |       |       |       |
| U.S.  government and agency securities   |       | $                       | 1,230      |           | $          | 5              |       | $          | —     |   | $ | 1,235 |   |
| Mortgage-backed  securities              |       | 5,292                   |       | 72             |       | —         |       | 5,364      |       |
| **Total  available-for-sale securities** |       | $                       | 6,522      |           | $          | 77             |       | $          | —     |   | $ | 6,599 |   |
|                                     |       |                    |       |           |       |           |       |       |       |
| **Held-to-maturity  securities:**        |       |                    |       |           |       |           |       |       |       |
| State and  municipal securities          |       | $                       | 990        |           | $          | —         |       | $          | —     |   | $ | 990 |   |

 
| ** **                               | ** ** | ** **              | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** ** | ** ** |
|------------------------------------------|------------|-------------------------|------------|----------------|------------|----------------|------------|------------|------------|
| ** **                               | ** ** | **Amortized**           | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**   | ** ** |
| ** **                               | ** ** | **Cost**                | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Value**  | ** ** |
| ** **                               | ** ** | **(in thousands)** | ** ** |
| **December 31,  2007**              |       |                    |       |           |       |           |       |       |       |
| **Available-for-sale  securities:**      |       |                    |       |           |       |           |       |       |       |
| U.S.  government and agency securities   |       | $                       | 1,230      |           | $          | 19             |       | $          | —     |   | $ | 1,249 |   |
| Mortgage-backed  securities              |       | 4,861                   |       | 39             |       | —         |       | 4,900      |       |
| **Total  available-for-sale securities** |       | $                       | 6,091      |           | $          | 58             |       | $          | —     |   | $ | 6,149 |   |
|                                     |       |                    |       |           |       |           |       |       |       |
| **Held-to-maturity  securities:**        |       |                    |       |           |       |           |       |       |       |
| State and  municipal securities          |       | $                       | 987        |           | $          | 4              |       | $          | 2          |   | $ | 989 |   |

 

The fair value of thesesecurities is based upon quoted market prices unless otherwise indicated inNote 7, “*Fair Value – Adoption of SFAS No. 157”.*There were no realized gains or losses for the nine-month period ended September 30,2008. The net unrealized gain on available-for-sale securities included inaccumulated other comprehensive income was approximately $19,000 for thenine-month period ended September 30, 2008. There is no comparable figurefor the comparable nine-month period of 2007. No securities were pledged as December 31,2007. However, available-for-sale securities with an amortized cost ofapproximately $6.0 million (fair value of approximately $6.1 million) werepledged as collateral for Federal Home Loan Bank advances as of September 30,2008.

 

Management does not believethat any of the Company’s investment securities are impaired due to reasons ofcredit quality. Declines in the fair value of available-for-sale securitiesbelow their cost, that are deemed to be other-than-temporary, are reflected inearnings as realized losses. In estimating other-than-temporary losses,management considers among other things: (i) the length of time and theextent to which the fair value has been less than cost, (ii) the financialcondition and near-term prospects of the issuer and (iii) the intent andability of the Company to retain its investment in the issuer for a period oftime sufficient to allow for any anticipated recovery in fair value.

 

At September 30, 2008,the Company had no securities with unrealized losses that were in a continualloss position.

 

Any intra-period decline inmarket values were attributable to changes in market rates of interest ratherthan credit quality, and because the Company has the ability and intent to holdall of its investments until a recovery of fair value, which may be atmaturity, the Company considers none of its investments to be temporarilyimpaired at September 30, 2008.

 

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The amortized cost,estimated fair value and average yield of debt securities at September 30,2008 are shown below. In the case of available-for-sale securities, the averageyields are based on effective rates of 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 securities areclassified in accordance with estimated lives. Expected maturities may differfrom contractual maturities because borrowers have the right to prepayobligations.

 
| ** **                        | ** ** | **Available-for-Sale Securities** | ** ** | **Held-to Maturity Securities** | ** ** |
|-----------------------------------|------------|----------------------------------------|------------|-------------------------------------------|------------|
| ** **                        | ** ** | ** **                             | ** ** | ** **                                | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                        | ** ** | **Amortized**                          | ** ** | **Fair**                                  | ** ** | **Average** | ** ** | **Amortized** | ** ** | **Fair** | ** ** | **Average** | ** ** |
| ** **                        | ** ** | **Cost**                               | ** ** | **Value**                                 | ** ** | **Yield** | ** ** | **Cost** | ** ** | **Value** | ** ** | **Yield** | ** ** |
| ** **                        | ** ** | **(dollars in thousands)**   | ** ** |
| Due in One  Year or Less          |       | $                                      | 613        |                                      | $          | 620 |   | 5.16 | % | $ | — |   | $ | — |   |   |   |
| Due from One  Year to Five Years  |       | 2,500                                  |       | 2,530                                     |       | 5.16 | % | 990 |   | 990 |   | 4.86 | % |
| Due from  Five Years to Ten Years |       | 2,478                                  |       | 2,502                                     |       | 5.66 | % |   |   |   |   |   |   |
| Due after  Ten Years              |       | 931                                    |       | 947                                       |       | 5.22 | % |   |   |   |   |   |   |
|                              |       | $                                      | 6,522      |                                      | $          | 6,599 |   | 5.36 | % | $ | 990 |   | $ | 990 |   | 4.86 | % |

 

**Note 5.   LOANS AND ALLOWANCE FOR LOAN LOSSES**

 

Loans are summarized as follows:

 
| ** **                             | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | **Amount**                       | ** ** | **Percentage of**          | ** ** | **Amount** | ** ** | **Percentage of** | ** ** |
| **(dollars in thousands)**   | ** ** | **Outstanding**                  | ** ** | **Total**                       | ** ** | **Outstanding** | ** ** | **Total** | ** ** |
| Commercial  loans                      |       | $                                | 18,442     |                            | 37.8       | % | $ | 7,876 |   | 43.3 | % |
| Real estate  loans                     |       | 26,526                           |       | 54.5                            | %          | 9,293 |   | 51.1 | % |
| Other loans                            |       | 3,726                            |       | 7.7                             | %          | 1,030 |   | 5.6 | % |
| Total loans,  including net loan costs |       | 48,694                           |       | 100.0                           | %     | 18,199 |   | 100.0 | % |
| Less :  allowance for loan losses      |       | (700                             | )          |                            |       | (269 | ) |   |   |
| Net loans                              |       | $                                | 47,994     |                            |       |   | $ | 17,930 |   |   |   |

 

 

The Company has had noimpaired or non-accrual loans since it commenced business. There were no loanspast due 90 days or more in either interest or principal as of September 30,2008 and December 31, 2007.

 

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

 
| ** **                                     | ** ** | **For the Three** | ** ** | **For the Three** | ** ** | **For the Three** | ** ** | **For the Three** | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **Month Period**       | ** ** | **Month Period**       | ** ** | **Month Period**       | ** ** | **Month Period**       | ** ** |
| ** **                                     | ** ** | **September 30,**      | ** ** | **June 30,**           | ** ** | **March 31,**          | ** ** | **December 31,**       | ** ** |
| ** **                                     | ** ** | **2008**                    | ** ** | **2008**                    | ** ** | **2008**                    | ** ** | **2007**                    | ** ** |
| ** **                                     | ** ** | **(in thousands)**     | ** ** | **(in thousands)**     | ** ** | **(in thousands)**     | ** ** | **(in thousands)**     | ** ** |
| Allowance  balance at beginning of period      |       | $598                        |       | $435                        |       | $269                        |       | $102                        |       |
| Additions to  the allowance charged to expense |       | 102                         |       | 163                         |       | 166                         |       | 167                         |       |
| Recoveries                                     |       | —                      |       | —                      |       | —                      |       | —                      |       |
|                                           |       | 700                         |       | 598                         |       | 435                         |       | 269                         |       |
| Less loans  charged-off                        |       | —                      |       | —                      |       | —                      |       | —                      |       |
|                                           |       |                        |       |                        |       |                        |       |                        |       |
| Allowance  balance at end of period            |       | $700                        |       | $598                        |       | $435                        |       | $269                        |       |

 

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**Note 6.   STOCK-BASED COMPENSATION**

 

During the nine-month period ended September 30,2008, the Company recorded approximately $512,000 of stock-based compensationexpense. At September 30, 2008, unrecorded compensation expense related tonon-vested stock option grants totaled approximately $1.3 million and isexpected to be recognized as follows:

 
| ** **         | ** ** | **Stock Option**   | ** ** |
|--------------------|------------|-------------------------|------------|
| ** **         | ** ** | **Compensation**        | ** ** |
| ** **         | ** ** | **Expense**             | ** ** |
| ** **         | ** ** | **(in thousands)** | ** ** |
| Remainder of  2008 |       | $                       | 176        |   |
| 2009               |       | 692                     |       |
| 2010               |       | 444                     |       |
| 2011               |       | 22                      |       |
| Total              |       | $                       | 1,334      |   |

 

The Company uses the Black-Scholes optionvaluation model to determine the fair value of options. The Company utilizesassumptions on expected life, risk-free rate, expected volatility and dividendyield to determine such values. If grants were to occur, the Company wouldestimate the life of the options by calculating the average of the vestingperiod 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. Expectedvolatility would be based on historical volatility of other financialinstitutions within the Company’s operating area as the Company has limitedmarket history.

 

The following table summarizes the weighted averageassumptions utilized for stock options granted for the period presented:

 
| ** **               | ** ** | **Nine Months**             | ** ** |
|--------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **Ended**                        | ** ** |
| ** **               | ** ** | **September 30, 2008** | ** ** |
| Risk-free  rate          |       | 3.32                             | %          |
| Expected  Dividend Yield |       | 0.00                             | %          |
| Expected  term           |       | 6 years                          |       |
| Expected  volatility     |       | 36.27                            | %          |

 

The following table provides a summary of theaggregate intrinsic value of options outstanding and exercisable as well asoptions granted, exercised, and forfeited during the year to date period ended September 30,2008 and September 30, 2007:

 
| ** **                                      | ** ** | ** ** | ** ** | ** **                | ** ** | **Weighted Average** | ** ** | **Aggregate** | ** ** |
|-------------------------------------------------|------------|------------|------------|---------------------------|------------|---------------------------|------------|---------------|------------|
| ** **                                      | ** ** | ** ** | ** ** | **Weighted Average** | ** ** | **Remaining**             | ** ** | **Intrinsic** | ** ** |
| ** **                                      | ** ** | **Shares** | ** ** | **Exercise Price**   | ** ** | **Contractual Life** | ** ** | **Value**     | ** ** |
| **2008**                                        |       |       |       |                      |       |                      |       |          |       |
| Outstanding  at December 31, 2007          |       | 531,770    |       | $                         | 9.99       |                      |       |          |       |   |
| Granted                                         |       | 53,550     |       | $                         | 8.68       |                      |       |          |       |   |
| Exercised                                       |       | —     |       | —                    |       |                      |       |          |       |
| Expired                                         |       | —     |       | —                    |       |                      |       |          |       |
| Forfeited                                       |       | 39,114     |       | $                         | 9.99       |                      |       |          |       |   |
| Outstanding  at September 30, 2008         |       | 546,206    |       | $                         | 9.85       |                      | 8.97       |          | $          | 22,625 |   |
| Options  exercisable at September 30, 2008 |       | 157,796    |       | $                         | 10.00      |                      | 8.88       |          | $          | — |   |
|                                            |       |       |       |                      |       |                      |       |          |       |
| **2007**                                        |       |       |       |                      |       |                      |       |          |       |
| Outstanding  at December 31, 2006          |       | —     |       | $                         | —     |                      |       |          |       |   |
| Granted                                         |       | 512,670    |       | $                         | 10.00      |                      |       |          |       |   |
| Exercised                                       |       | —     |       | —                    |       |                      |       |          |       |
| Expired                                         |       | —     |       | —                    |       |                      |       |          |       |
| Forfeited                                       |       | —     |       | $                         | —     |                      |       |          |       |   |
| Outstanding  at September 30, 2007         |       | 512,670    |       | $                         | 10.00      |                      | 9.88       |          | $          | 256,335 |   |
| Options  exercisable at September 30, 2007 |       | —     |       | $                         | —     |                      | —     |          | $          | — |   |

 

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**Note 7.   FAIR VALUE MEASUREMENTS**

 

Effective January 1, 2008, the Company adopted Statement ofFinancial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”.SFAS No. 157 clarifies the definition of fair value, describes methodsused to appropriately measure fair value in accordance with generally acceptedaccounting principles in the United States of America, and expands fair valuedisclosure requirements. This statement applies whenever other accountingpronouncements require or permit fair value measurements. The fair valuehierarchy under SFAS No. 157 prioritizes the inputs to valuationtechniques used to measure fair value into three broad levels (Level 1, Level2, and Level 3). Level 1 inputs are unadjusted quoted prices in active markets(as defined) for identical assets or liabilities that the reporting entity hasthe ability to access at the measurement date. Level 2 inputs are inputs, otherthan quoted prices included within Level 1, which are observable for the assetor liability, either directly or indirectly. Level 3 inputs are observableinputs for the asset or liability, and reflect the reporting entity’s ownassumptions about the assumptions that market participants would use in pricing the asset or liability (includingassumptions about risk).

 

The Company performs fair value measurementson certain assets and liabilities as the result of the application ofaccounting guidelines and pronouncements that were relevant prior to theadoption of SFAS No. 157. Some fair value measurements, such as foravailable-for-sale securities, are performed on a recurring basis.

 

The following table summarizes the Company’sassets and liabilities, if any, which were measured at fair value on arecurring basis during the period, with dollars reported in thousands:

 
| ** **                                     | ** ** | ** **             | ** ** | **Quoted Price in** | ** ** | **Significant**    | ** ** | ** **         | ** ** |
|------------------------------------------------|------------|------------------------|------------|-------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                     | ** ** | ** **             | ** ** | **Active Markets**       | ** ** | **Other**          | ** ** | **Significant**    | ** ** |
| ** **                                     | ** ** | ** **             | ** ** | **for Identical**        | ** ** | **Observable**     | ** ** | **Unobservable**   | ** ** |
| ** **                                     | ** ** | **September 30,** | ** ** | **Assets**                    | ** ** | **Inputs**         | ** ** | **Inputs**         | ** ** |
| **Description of Assets/Liabiltity** | ** ** | **2008**               | ** ** | **(Level 1)**            | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| Available-for-sale  securities                 |       | $                      | 6,599      |                          | $          | —             |       | $                  | 6,599      |   | $ | — |   |
|                                                |            |                        |            |                               |            |                    |            |                    |            |  |  |  |  |

 

Available-for-sale securities are valuedbased upon inputs derived principally from observable market data. Changes infair market value are recorded in other comprehensive income as the securitiesare available for sale.

 

**Note 8.   OTHER BORROWINGS**

 

At September 30, 2008, the Company had acollateralized line of credit with the Federal Home Loan Bank (“FHLB”) totaling$5.7 million against which it had outstanding $4.5 million consisting of a FHLBfive-year fixed rate advance at 4.38% maturing on June 27, 2013.

 

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

 

The Company follows SFAS No. 128, “*Earnings per Share”*. Basic earnings (loss) per sharerepresents income available (loss reported) to common stock divided by theweighted average number of common shares outstanding during the period reportedon the Statement of Operations. Diluted earnings (loss) per share reflectadditional common shares that would have been outstanding if dilutive potentialcommon shares had been issued, as well as any adjustment to income that wouldresult from the assumed conversion. There were no dilutive potential commonshares outstanding for any periods reported on the Statement of Operations.

 

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***Item 2 – Management’s Discussion and Analysis ofFinancial 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 further developmentsand their potential effects on Manhattan Bancorp and its subsidiary.  The Company’s forward-looking statementsinvolve risks and uncertainties, including the risks and uncertaintiesdescribed under the caption “Factors Which May Affect Future OperatingResults” found in the Company’s December 31, 2007 10-K/A, ITEM 1A. RiskFactors.  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 holding company, which was incorporated in August 2006 in orderto acquire Bank of Manhattan, N.A. (the “Bank”), a de novo bank which wasacquired on August 14, 2007.  TheBank is a nationally-chartered banking association which was organized underthe laws of the United States on August 15, 2007.  The Bancorp operates exclusively through theBank, and the capital stock of the Bank is its principal asset.  The Bank is located in El Segundo, Californiaand as of September 30, 2008 had $72 million in assets, $48 million in netloans receivable and $48 million in deposits. Unless the context requires otherwise, references in this Form 10-Qto the “Company,” “we” or “us” refer to the Bancorp and its consolidatedsubsidiary, the Bank.

 

***Earnings and Financial Condition Overview***

 

It is customary to compare current quarterand year-to-date results with the corresponding periods in the prior year forearnings presentations.  As the Companydid not commence business until August 15, 2007, there are nocorresponding figures for the first three full quarters of 2007.  To facilitate a better understanding of theCompany’s financial position and the results of its operations, comparisons arebeing made to the prior three-month period ended June 30, 2008, whereappropriate.

 

For the three-months ended September 30,2008, the Company recorded a loss of $998,000 or $0.38 per basic share.   Comparing the Company’s second quarter lossof $1,153,000 or $0.46 per basic share with the current operating quarterreflects an approximate 13.4% reduction in the reported quarterly losses. Loangrowth continued to remain solid although at a reduced level from previousquarters. Due to the deterioration in the general economy, the Company wascautious in granting new credit extensions. The quality of the loan portfolio,coupled with a reduction in the net growth in loans, permitted the Company toexpense $102,000 as the amount necessary to maintain the allowance for loanlosses at acceptable levels.  Despite theeffects of the declining general interest rate environment, the Company wasable to reduce its operating loss with improvements in net interest income, areduction in the amount of its loan loss provision while maintaining itsadequacy, and the control of its operating costs.

 

Net interest income after provision for loanlosses for the three-month period ended September 30, 2008 wasapproximately $496,000, an increase of approximately $103,000 over the priorthree-month period.  This 8% improvementin net interest income was primarily due to an increase in interest income, up 

 

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approximately $213,000 or 31% for thethree-month period ended September 30, 2008 over the previous three-monthperiod ended June 30, 2008. However, due to the infusion of some short-term interest-bearingdeposits, interest expense increased by approximately $170,000, or 122%, duringthe three-month period ended September 30, 2008 over the comparablethree-month period ended June 30, 2008, offsetting much of the improvementfrom increased earning assets.  Therequired provision for loan loss for the three-month period ending September 30,2008 of $102,000, a reduction of approximately $61,000, increased theconsecutive three-month period net interest income after provision toapproximately $103,000, a 26% improvement from June 30, 2008.

 

Non-interest expense decreased approximately$42,000 from approximately $1.555 million in the three-month period ended June 30,2008 to approximately $1.513 million in the three-month period ended September 30,2008.

 

As of September 30, 2008, total assetswere approximately $71.8 million.  Thisrepresents an increase of approximately $32.4 million or 82.4% over the amountreported as of December 31, 2007. The growth in total assets can be attributed to an increase ofapproximately $30.5 million in gross loan balances or 167.6% from theapproximately $18.2 million reported as of December 31, 2007.

 

Funding for the loan growth was obtainedprimarily from deposit growth and advances from the Federal Home Loan Bank,coupled with reductions in federal funds sold. At September 30, 2008, total deposits were approximately $47.1million compared with the balance of approximately $17.9 million as of December 31,2007.  This represents an approximate$29.2 million increase or 163.5%. A five-year fixed rate Federal Home Loan Bankadvance of $4.5 million not present as of December 31, 2007 also providedfunding for loan increases. Reduction in federal funds sold of approximately$2.9 million provided the other source of loan funding.

 

The following table provides selectedfinancial data that highlights the Company’s financial performance for each ofthe four full quarters that it has been in operation:

 

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| ** **                                             | ** ** | **For the three months ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                             | ** ** | **9/30/2008**                                      | ** ** | **6/30/2008** | ** ** | **3/31/2008** | ** ** | **12/31/2007** | ** ** |
| ** **                                             | ** ** | **(Unaudited)**                                    | ** ** |
| **Statements of Operations:**                          |       |                                               |       |   |   |   |   |   |   |
| Interest income                                        |       | $                                                  | 909        |   | $ | 696 |   | $ | 560 |   | $ | 453 |   |
| Interest expense                                       |       | 310                                                |       | 140 |   | 130 |   | 86 |   |
|                                                   |       |                                               |       |   |   |   |   |   |   |
| Net interest income                                    |       | 599                                                |       | 556 |   | 430 |   | 367 |   |
| Provision for loan losses                              |       | 102                                                |       | 163 |   | 166 |   | 167 |   |
|                                                   |       |                                               |       |   |   |   |   |   |   |
| Net interest income after  provision for loan losses   |       | 497                                                |       | 393 |   | 264 |   | 200 |   |
|                                                   |       |                                               |       |   |   |   |   |   |   |
| Non-interest income                                    |       | 18                                                 |       | 11 |   | 13 |   | 1 |   |
| Non-interest expense                                   |       | 1,513                                              |       | 1,557 |   | 1,444 |   | 1,484 |   |
|                                                   |       |                                               |       |   |   |   |   |   |   |
| Net loss from operations                               |       | $                                                  | (998       | ) | $ | (1,153 | ) | $ | (1,167 | ) | $ | (1,283 | ) |
|                                                   |       |                                               |       |   |   |   |   |   |   |
| **Per Share and Other Data:**                          |       |                                               |       |   |   |   |   |   |   |
| Basic and diluted loss per  share                      |       | $                                                  | (0.38      | ) | $ | (0.46 | ) | $ | (0.47 | ) | $ | (0.52 | ) |
| Book value as of period  end                           |       | $                                                  | 7.52       |   | $ | 7.80 |   | $ | 8.17 |   | $ | 8.52 |   |
| Weighted average shares  outstanding-basic and diluted |       | 2,616                                              |       | 2,517 |   | 2,487 |   | 2,487 |   |
|                                                   |       |                                               |       |   |   |   |   |   |   |
| **Balance Sheet Data:**                                |       |                                               |       |   |   |   |   |   |   |
| Investments and fed funds  sold                        |       | $                                                  | 19,898     |   | $ | 13,760 |   | $ | 12,915 |   | $ | 18,087 |   |
| Loans, net                                             |       | $                                                  | 47,994     |   | $ | 41,769 |   | $ | 31,758 |   | $ | 17,930 |   |
| Assets                                                 |       | $                                                  | 71,806     |   | $ | 60,067 |   | $ | 48,526 |   | $ | 39,367 |   |
| Deposits                                               |       | $                                                  | 47,074     |   | $ | 34,727 |   | $ | 27,861 |   | $ | 17,862 |   |
| Shareholders’ equity                              |       | $                                                  | 19,667     |   | $ | 20,393 |   | $ | 20,314 |   | $ | 21,189 |   |
|                                                   |       |                                               |       |   |   |   |   |   |   |
| **Selected Financial Ratios**                          |       |                                               |       |   |   |   |   |   |   |
| Net loss as a percentage  of average assets            |       | -5.07                                              | %          | -8.92 | % | -10.73 | % | -14.46 | % |
| Net loss as a percentage  of average equity            |       | -19.85                                             | %          | -22.84 | % | -22.54 | % | -23.39 | % |
| Dividend payout ratio                                  |       | —                                             |       | — |   | — |   | — |   |
| Equity to asset ratio                                  |       | 27.39                                              | %          | 33.95 | % | 41.86 | % | 53.82 | % |
| Net interest margin                                    |       | 3.21                                               | %          | 4.71 | % | 4.34 | % | 4.56 | % |
|                                                   |       |                                               |       |   |   |   |   |   |   |
| **Credit Quality**                                     |       |                                               |       |   |   |   |   |   |   |
| Allowance for loan losses                              |       | $                                                  | 700        |   | $ | 598 |   | $ | 435 |   | $ | 269 |   |
| Allowance /total loans                                 |       | 1.44                                               | %          | 1.41 | % | 1.35 | % | 1.48 | % |
| Non-performing loans                                   |       | $                                                  | —     |   | $ | — |   | $ | — |   | $ | — |   |
| Net (recoveries)/  charge-offs                         |       | $                                                  | —     |   | $ | — |   | $ | — |   | $ | — |   |

 

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***RESULTS OF OPERATIONS***

 

***Net Interest Income***

 

To facilitate a better understanding of theCompany’s financial position and the results of its operations, comparisons aremade to the prior three-month period ended June 30, 2008.

 

TheCompany’s earnings depend largely upon our net interest income, which is thedifference between the income we earned on interest-bearing assets, such asloans, and the interest we pay on deposits and borrowed funds.  Net interest income is related to (i) therelative amounts of interest earning assets and liabilities and (ii) theinterest rates earned and paid upon these balances.  Total interest income canfluctuate based upon the mix of earning assets between loans, investments andfederal funds sold and the related rates associated with their balances.  Some of the funding sources for these assetsalso have an interest cost which can fluctuate based upon the mix ofinterest-bearing liabilities and the related rates associated with theirbalances.

 

The interest rate spreadrepresents the difference between the weighted average yield on interestearning assets and the weighted average rate paid on interest bearingliabilities.

 

Net interest margin is netinterest income expressed as a percentage of average total interest earningassets.  Net interest margin is affectedby changes in the yields earned on assets and rates paid on liabilities,referred to as rate changes, and changes in the relative amounts of interestearning assets and interest bearing liabilities, referred to as volume changes.  Interest rates earned and paid are affectedprincipally by our competition, general economic conditions and other factorsbeyond the Company’s control, such as federal economic policies, the generalsupply of money in the economy, legislative tax policies, governmentalbudgetary matters and the actions of the Federal Reserve Board.

 

The following table sets forth interestincome, interest expense, net interest income before provision for loan lossesand net interest margin for the periods presented:

 
| ** **                                            | ** ** | **Three Months Ended**     | ** ** | ** **        | ** ** |
|-------------------------------------------------------|------------|--------------------------------------|------------|-------------------|------------|
| ** **                                            | ** ** | **September 30,**               | ** ** | **June 30,** | ** ** | **Percent** | ** ** |
| ** **                                            | ** ** | **2008**                             | ** ** | **2008**          | ** ** | **Change** | ** ** |
| ** **                                            | ** ** | **(Unaudited)**                      | ** ** |
| ** **                                            | ** ** | **(Dollars in thousands)** | ** ** |
| Interest income                                       |       | $                                    | 909        |              | $          | 696 |   | 30.60 | % |
| Interest expense                                      |       | 310                                  |       | 140               |       | 121.43 | % |
| Net interest income before  provision for loan losses |       | $                                    | 599        |              | $          | 556 |   | 7.73 | % |
| Net interest margin                                   |       | 3.21                                 | %          | 4.71              | %          | -31.86 | % |

 

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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 twoconsecutive three-month periods indicated:

 

**ANALYSIS OFNET INTEREST INCOME**

 
| ** **

** **                                  | ** ** | **(Unaudited)**                                                    | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **(Dollars in thousands)**                               | ** ** |
| ** **                                              | ** ** | **Three months ended September 30, 2008** | ** ** | **Three months ended June 30, 2008** | ** ** |
| ** **                                              | ** ** | ** **                                                         | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                              | ** ** | ** **                                                         | ** ** | **Interest** | ** ** | **Average** | ** ** | ** ** | ** ** | **Interest** | ** ** | **Average** | ** ** |
| ** **                                              | ** ** | **Average**                                                        | ** ** | **Income/** | ** ** | **Rate** | ** ** | **Average** | ** ** | **Income/** | ** ** | **Rate** | ** ** |
| ** **                                              | ** ** | **Balance**                                                        | ** ** | **Expense** | ** ** | **Earned/Paid** | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Earned/Paid** | ** ** |
| **Interest-earning assets:**                            |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Federal funds sold                                      |       | $                                                                  | 17,528     |   | $ | 86 |   | 1.95 | % | $ | 4,013 |   | $ | 20 |   | 2.00 | % |
| Deposits with other  financial instituions              |       | 3,813                                                              |       | 29 |   | 3.03 | % | 868 |   | 12 |   | 5.56 | % |
| Investments                                             |       | 7,051                                                              |       | 91 |   | 5.13 | % | 6,888 |   | 120 |   | 7.01 | % |
| Loans(1)                                                |       | 45,820                                                             |       | 703 |   | 6.10 | % | 35,745 |   | 544 |   | 6.12 | % |
| Total interest-earning  assets                          |       | 74,212                                                             |       | 909 |   | 4.87 | % | 47,514 |   | 696 |   | 5.89 | % |
| Non-interest-earning  assets                            |       | 4,096                                                              |       |   |   |   |   | 3,892 |   |   |   |   |   |
| Total assets                                            |       | $                                                                  | 78,308     |   |   |   |   |   | $ | 51,406 |   |   |   |   |   |
|                                                    |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities:**                       |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Demand                                                  |       | $                                                                  | 1,499      |   | $ | 0 |   | 0.10 | % | $ | 1,499 |   | $ | 0 |   | 0.10 | % |
| Savings and money market                                |       | 7,239                                                              |       | 33 |   | 1.81 | % | 5,154 |   | 24 |   | 1.87 | % |
| Certificates of deposit                                 |       | 32,261                                                             |       | 227 |   | 2.80 | % | 13,679 |   | 113 |   | 3.32 | % |
| FHLB advances                                           |       | 4,501                                                              |       | 50 |   | 4.38 | % | 198 |   | 2 |   | 4.38 | % |
| Total interest-bearing  liabilities                     |       | 45,500                                                             |       | 311 |   | 2.72 | % | 20,530 |   | 140 |   | 2.73 | % |
| Non-interest-bearing demand  deposits                   |       | 12,256                                                             |       |   |   |   |   | 10,394 |   |   |   |   |   |
| Total funding sources                                   |       | 57,756                                                             |       |   |   | 2.14 | % | 30,924 |   |   |   | 1.82 | % |
| Non-interest-bearing  liabilities                       |       | 537                                                                |       |   |   |   |   | 400 |   |   |   |   |   |
| Shareholders’ equity                               |       | 20,015                                                             |       |   |   |   |   | 20,082 |   |   |   |   |   |
| Total liabilities and  shareholders’ equity        |       | $                                                                  | 78,308     |   |   |   |   |   | $ | 51,406 |   |   |   |   |   |
|                                                    |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Excess of interest-earning  assets over funding sources |       | $                                                                  | 16,456     |   |   |   |   |   | $ | 16,590 |   |   |   |   |   |
| Net interest income                                     |       |                                                               |       | $ | 598 |   |   |   |   |   | $ | 556 |   |   |   |
| Net interest rate spread                                |       |                                                               |       |   |   | 2.16 | % |   |   |   |   | 3.16 | % |
| Net interest margin                                     |       |                                                               |       |   |   | 3.21 | % |   |   |   |   | 4.71 | % |

 

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(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 costs net of amortized fees included intotal net income were approximately $14,000 for the three-month period ended September 30,2008 and $15,000 for the three-month period ended June 30, 2008.

 

The table below sets forth changes for theconsecutive three-month periods ended September 30, 2008 and June 30,2008 for average earning assets, average interest bearing liabilities, andtheir respective rates:

 

**VARIANCE IN BALANCES AND RATES**

 
| ** **                                | ** ** | **(Unaudited)**                                    | ** ** |
|-------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                | ** ** | **(dollars in thousands)**               | ** ** |
| ** **                                | ** ** | **Average Balance**                           | ** ** | ** ** | ** ** | ** ** | ** ** | **Average Yield/Rate** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **for the three months ended** | ** ** | ** ** | ** ** | ** ** | ** ** | **for the three months ended** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **September 30,**                             | ** ** | **June 30,** | ** ** | **Variance** | ** ** | **September 30,** | ** ** | **June 30,** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **2008**                                           | ** ** | **2008** | ** ** | **dollar** | ** ** | **percent** | ** ** | **2008** | ** ** | **2008** | ** ** | **Variance** | ** ** |
|                                      |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest-earning assets:**              |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal funds sold                        |       | $                                                  | 17,528     |   | $ | 4,013 |   | $ | 13,515 |   | 336.78 | % | 1.95 | % | 2.00 | % | -0.05 | % |
| Deposits with other financial instituions |       | 3,813                                              |       | 868 |   | 2,945 |   | 339.29 | % | 3.03 | % | 5.56 | % | -2.53 | % |
| Investments                               |       | 7,051                                              |       | 6,888 |   | 163 |   | 2.37 | % | 5.13 | % | 7.01 | % | -1.87 | % |
| Loans                                     |       | 45,820                                             |       | 35,745 |   | 10,075 |   | 28.19 | % | 6.10 | % | 6.12 | % | -0.02 | % |
| Total interest-earning assets             |       | $                                                  | 74,212     |   | $ | 47,514 |   | $ | 26,698 |   | 56.19 | % | 4.87 | % | 5.89 | % | -1.02 | % |
|                                      |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities:**         |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing demand                   |       | $                                                  | 1,499      |   | $ | 1,499 |   | $ | — |   | 0.00 | % | 0.10 | % | 0.10 | % | 0.00 | % |
| Savings and money market                  |       | 7,239                                              |       | 5,154 |   | 2,085 |   | 40.45 | % | 1.81 | % | 1.87 | % | -0.06 | % |
| Certificates of deposit                   |       | 32,261                                             |       | 13,679 |   | 18,582 |   | 135.84 | % | 2.80 | % | 3.32 | % | -0.52 | % |
| FHLB advances                             |       | 4,501                                              |       | 198 |   | 4,303 |   | 2175.51 | % | 4.38 | % | 4.38 | % | 0.00 | % |
| Total interest-bearing liabilities        |       | $                                                  | 45,500     |   | $ | 20,530 |   | $ | 24,970 |   | 121.63 | % | 2.72 | % | 2.73 | % | -0.02 | % |

 

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A volume and rate variance table is providedbelow which sets forth the dollar differences in interest earned and paid foreach major category of interest-earning assets and interest-bearing liabilitiesfor the consecutive three-month periods ended September 30, 2008 and June 30,2008:

 
| ** **                                 | ** ** | **For the three months ended**                      | ** ** |
|--------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **September 30, 2008 over June 30, 2008** | ** ** |
| ** **                                 | ** ** | **Volume**                                                              | ** ** | **Rate** | ** ** | **Total** | ** ** |
| ** **                                 | ** ** | **(Unaudited)**                                                         | ** ** |
| **Interest income:**                       |       |                                                                    |       |   |   |   |   |
| Federal funds sold                         |       | $                                                                       | 68         |   | $ | (2 | ) | $ | 66 |   |
| Deposits with other  financial instituions |       | 41                                                                      |       | (24 | ) | 17 |   |
| Investments                                |       | 3                                                                       |       | (32 | ) | (29 | ) |
| Loans                                      |       | 159                                                                     |       | — |   | 159 |   |
| Net increase (decrease)                    |       | 271                                                                     |       | (58 | ) | 213 |   |
|                                       |       |                                                                    |       |   |   |   |   |
| **Interest expense:**                      |       |                                                                    |       |   |   |   |   |
| Interest bearing demand                    |       | —                                                                  |       | — |   | — |   |
| Savings and money market                   |       | 10                                                                      |       | (1 | ) | 9 |   |
| Certificates of deposit                    |       | 155                                                                     |       | (42 | ) | 113 |   |
| FHLB advances                              |       | 48                                                                      |       | — |   | 48 |   |
| Net increase (decrease)                    |       | 213                                                                     |       | (43 | ) | 170 |   |
| Total net increase  (decrease)             |       | $                                                                       | 58         |   | $ | (15 | ) | $ | 43 |   |

 

A review of the above tables shows that theoverall increase in net interest income of approximately $43,000 between thetwo consecutive quarters ending at September 30, 2008 and June 30,2008 is the result of several factors.

 

Among the most significant factors in theincrease in net interest income is the overall growth in earning assets, upapproximately $26.7 million or 56.2% between June 30, 2008 and September 30,2008. The benefit of this increase in earning assets was, however, softenedsomewhat by the temporary change during this three-month period in the mix ofinterest-earning assets from loans towards federal funds sold.  The percentage of average loan dollarsoutstanding, as a percentage of interest-earning assets grew from 28.9% percentas of December 31, 2007 to 58.6% as of March 31, 2008, and to 75.2%as of June 30, 2008 then fell back to 61.7% as of September 30, 2008.

 

As noted in the ***Earnings and Financial Condition Overview***, the Bank’sdeposits grew significantly during the quarter from customers funds, which wereshort-term and subject to unscheduled withdrawal.  Due to the nature of these funds, their mostsensible utilization was limited to placement in overnight federal fundssold.  Accordingly, approximately half ofthe increase in average earning assets occurred in the overnight federal fundssold with earning rates averaging below 2%.

 

This movement in the utilization of fundscoupled with the overall growth in assets resulted in the increase of interestincome of approximately $213,000, with approximately $271,000 due to volumeincreases, which more than fully offsetting the result of the general market interestrate decline of approximately $58,000. While general interest rates held steady during the third quarter of2008, the pricing of new earning assets at existing market rates broughtaverage yields down by 102 basis points.

 

The category of loans, however, was able tobenefit from a solid volume variance of approximately $159,000 with theeffective decline in average effective loan yields so small that the reportedamount was less than $1,000.

 

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Interest expense increased by $170,000, 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 thechange in outstanding average interest-bearing liabilities was $213,000.  This was attributable to the establishment ofthe Federal Home Loan Bank advance, (which occurred on June 30, 2008, andwas present for the entire third quarter), and to the acceptance of largetemporary short-term deposits in the Bank’s *Liquid Certificate ofDeposit,*which allows the Bank’s customer the option of a one-time penalty-freewithdrawal. The rate on the Federal Home Loan Bank advance is fixed at4.38%.  Accordingly, there is no ratevariance anticipated on the advance. However, the decline on the effective interest rate on *Certificates of Deposits* from 3.32% during the three-monthperiod ended June 30, 2008 to 2.80% during the subsequent three-monthperiod ended September 30, 2008 provided a reduction in interest expenseof approximately $42,000.

 

The following table presents the weightedaverage yield on each specified category of interest earning assets, theweighted average rate paid on each specified category of interest bearingliabilities, the resulting interest rate spread and the net interest margin forthe nine-month period indicated:

 

**ANALYSIS OFNET INTEREST INCOME**

 
| ** **                                              | ** ** | **(Unaudited)**                                                   | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **(Dollars in thousands)**                              | ** ** |
| ** **                                              | ** ** | **Nine months ended September 30, 2008** | ** ** |
| ** **                                              | ** ** | ** **                                                        | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                              | ** ** | ** **                                                        | ** ** | **Interest** | ** ** | **Average** | ** ** |
| ** **                                              | ** ** | **Average**                                                       | ** ** | **Income/** | ** ** | **Rate** | ** ** |
| ** **                                              | ** ** | **Balance**                                                       | ** ** | **Expense** | ** ** | **Earned/Paid** | ** ** |
| **Interest-earning  assets:**                           |       |                                                              |       |   |   |   |   |
| Federal  funds sold                                     |       | $                                                                 | 9,612      |   | $ | 165 |   | 2.29 | % |
| Deposits  with other financial instituions              |       | 2,292                                                             |       | 66 |   | 3.85 | % |
| Investments                                             |       | 7,018                                                             |       | 301 |   | 5.73 | % |
| Loans(1)                                                |       | 35,016                                                            |       | 1,633 |   | 6.23 | % |
| Total  interest-earning assets                          |       | 53,938                                                            |       | 2,165 |   | 5.36 | % |
| Non-interest-earning  assets                            |       | 3,948                                                             |       |   |   |   |   |
| Total assets                                            |       | $                                                                 | 57,886     |   |   |   |   |   |
|                                                    |       |                                                              |       |   |   |   |   |
| **Interest-bearing  liabilities:**                      |       |                                                              |       |   |   |   |   |
| Demand                                                  |       | $                                                                 | 1,144      |   | $ | 1 |   | 0.12 | % |
| Savings and  money market                               |       | 5,313                                                             |       | 82 |   | 2.06 | % |
| Certificates  of deposit                                |       | 18,930                                                            |       | 444 |   | 3.13 | % |
| FHLB  advances                                          |       | 1,577                                                             |       | 53 |   | 4.38 | % |
| Total interest-bearing  liabilities                     |       | 26,964                                                            |       | 580 |   | 2.87 | % |
| Non-interest-bearing  demand deposits                   |       | 10,210                                                            |       |   |   |   |   |
| Total  funding sources                                  |       | 37,174                                                            |       |   |   | 2.08 | % |
| Non-interest-bearing  liabilities                       |       | 408                                                               |       |   |   |   |   |
| Shareholders’  equity                              |       | 20,304                                                            |       |   |   |   |   |
| Total  liabilities and shareholders’ equity        |       | $                                                                 | 57,886     |   |   |   |   |   |
|                                                    |       |                                                              |       |   |   |   |   |
| Excess of  interest-earning assets over funding sources |       | $                                                                 | 16,764     |   |   |   |   |   |
| Net interest  income                                    |       |                                                              |       | $ | 1,585 |   |   |   |
| Net interest  rate spread                               |       |                                                              |       |   |   | 2.49 | % |
| Net interest  margin                                    |       |                                                              |       |   |   | 3.92 | % |

 

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(1)          The average balanceof loans is calculated net of deferred loan fees/cost, but would includenon-accrual loans, if any, with a zero yield. Loan costs net of amortized fees included in total net income wereapproximately $39,000 for the nine-month period ended September 30, 2008.

 

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No comparison can be made to a correspondingor consecutive nine-month period as none presently exists.

 

***Provision for Loan Losses***

 

The Company made provisions for loan lossesof $102,000 for the three-month period ended September 30, 2008, comparedto $163,000 for the previous three-month period ended June 30, 2008.  These provisions were determined based uponthe periodic credit review of the loan portfolio, consideration of past loanloss experience, current and predicted economic conditions, and other pertinentfactors.  For further analysis of theadequacy of the loan loss reserve, see *Asset Quality andAllowance for Loan Losses.*

 

***Non-Interest Income***

 

Non-interest income for the three-monthperiod ended September 30, 2008 and June 30, 2008 was negligible.

 

***Non-Interest Expense***

 

The following table sets forth changes forthe two consecutive three-month periods ending September 30, 2008 and June 30,2008, allowing comparisons between these two quarters:

 
|                                      |   | **For the three months ended** |       |               |   |         |       |
|-------------------------------------------|--------|----------------------------------------------------|------------|--------------------|--------|--------------|------------|
|                                      |   | **September, 30,**                            | ** ** | **June, 30,** |   | **Variance** |       |
|                                      |   | **2008**                                           | ** ** | **2008**           |   | **Dollars**  | ** ** | **Percent** |   |
|                                      |   | **(dollars in thousands)**               |       |               |   |         |       |
|                                      |   | **(Unaudited)**                                    |       |               |   |         |       |
| Compensation  and benefits                |   | $                                                  | 964        |               | $      | 970          |       | $ | (6 | ) | -0.6 | % |
| Occupancy  and equipment                  |   | 174                                                |       | 163                |   | 11           |       | 6.7 | % |
| Technology  and communication             |   | 134                                                |       | 125                |   | 9            |       | 7.2 | % |
| Professional  and administrative expenses |   | 107                                                |       | 158                |   | (51          | )          | -32.3 | % |
| Other  non-interest expenses              |   | 134                                                |       | 139                |   | (5           | )          | -3.6 | % |
| Total  non-interest expenses              |   | $                                                  | 1,513      |               | $      | 1,555        |       | $ | (42 | ) | -2.7 | % |

 

The differences in expense between the secondand third quarters of 2008 can be primarily attributed to the following:

 

·                  Savings in costsassociated with seasonal reduction in employer payroll tax costs and reductionin accruals to reflect savings in certain employee benefit programs.

 

·                  Increased costassociated with increase property insurance and maintenance and repair cost.

 

·                  Increased dataprocessing costs associated with increasing customer base and contractualobligations.

 

·                  The non-recurrenceof costs associated with the preparation of the Company’s annual report toshareholders, which were present only in the second quarter of 2008.

 

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***FINANCIAL CONDITION***

 

The Company’s increase in total assets levelto $71.8 million as of September 30, 2008 represents more than an 82%increase, or approximately $32.4 million, from the total assets level of $39.4million as of December 31, 2007. The growth is centered in loans, which were funded primarily by locallygenerated deposits.

 

***Loans***

 

Total gross loans as of September 30,2008 increased by approximately $30.5 million over December 31, 2007.Although outstanding loan balances increased in all categories, most of themonetary growth occurred in real estate loans, where the total grew by morethan $17.3 million or 187%.

 

The table below sets forth the changes from December 31,2007 to September 30, 2008 in the composition of the loan portfolio:

 

**LoanClassifications:**

 
| **(dollars in thousands)** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | **Variance** | ** ** |
|--------------------------------------|------------|------------------------|------------|-----------------------|------------|--------------|------------|
| **(unaudited)**                      | ** ** | **2008**               | ** ** | **2007**              | ** ** | **Dollars**  | ** ** | **Percent** | ** ** |
| Commercial  loans                    |       | $                      | 18,423     |                  | $          | 7,855        |       | $ | 10,568 |   | 134.54 | % |
| Real estate  loans                   |       | 26,568                 |       | 9,243                 |       | 17,325       |       | 187.44 | % |
| Other loans                          |       | 3,717                  |       | 1,024                 |       | 2,693        |       | 262.99 | % |
| Total loans                          |       | 48,708                 |       | 18,122                |       | 30,586       |       | 168.78 | % |
| Add:  Purchase premium               |       | 43                     |       | 50                    |       | (7           | )          |   |   |
| Add:  Unamortized costs              |       | 54                     |       | 40                    |       | 14           |       |   |   |
| Less:  Deferred fees                 |       | (111                   | )          | (13                   | )          | (98          | )          |   |   |
| Less :  Allowance for loan losses    |       | (700                   | )          | (269                  | )          | (431         | )          |   |   |
| Net loans                            |       | $                      | 47,994     |                  | $          | 17,930       |       | $ | 30,064 |   | 167.67 | % |

 

Of the Bank’s total loans outstanding as of September 30,2008, 25.5% were due in one year or less, 15.2% were due in one to five years,and 59.3% were due after five years.  Asis customary in the banking industry, loans can be renewed by mutual agreementbetween the borrower and the Bank. Because we are unable to accurately estimate the extent to which ourborrowers will renew their loans, the following table is based on contractualmaturities, reflecting gross outstanding loans without consideration ofpurchase premium, deferred fees or deferred costs.

 

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**LoanMaturity Schedule as of September 30, 2008**

**(Unaudited)**

 
| ** **                                | ** ** | **Maturing**                         | ** ** | ** **                | ** ** |
|-------------------------------------------|------------|--------------------------------------|------------|---------------------------|------------|
| ** **                                | ** ** | **Within One**                  | ** ** | **One to Five** | ** ** | **After Five** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Year**                             | ** ** | **Years**                 | ** ** | **Year** | ** ** | **Total** | ** ** |
| ** **                                | ** ** | **(dollars in thousands)** | ** ** |
|                                      |       |                                 |       |                      |       |   |   |   |   |
| Commercial                                |       | $                                    | 11,055     |                      | $          | 2,906 |   | $ | 4,462 |   | $ | 18,423 |   |
| Real estate                               |       | 616                                  |       | 3,594                     |       | 22,358 |   | 26,568 |   |
| Other loans                               |       | 745                                  |       | 893                       |       | 2,079 |   | 3,717 |   |
| Total                                     |       | $                                    | 12,416     |                      | $          | 7,393 |   | $ | 28,899 |   | $ | 48,708 |   |
|                                      |       |                                 |       |                      |       |   |   |   |   |
| Loans with  pre-determined interest rates |       | $                                    | 1,059      |                      | $          | 4,454 |   | $ | 7,861 |   | $ | 13,374 |   |
| Loans with  floating or adjustable rates  |       | 11,357                               |       | 2,939                     |       | 21,038 |   | 35,334 |   |
| Total                                     |       | $                                    | 12,416     |                      | $          | 7,393 |   | $ | 28,899 |   | $ | 48,708 |   |

 

Of the gross loan dollars outstanding as of September 30,2008, approximately 73% had adjustable rates. Most of the adjustable rate loans generally have interest rates tied tothe prime rate (53% of the total adjustable rate loan dollars outstanding) andwill adjust with changes in the rate on a daily basis.

 

The balance of the adjustable rate loans aretied to other indices subject to periodic adjustment prior to the contractmaturity.

 

*Commercial Loans*

 

The Bank offers a variety ofcommercial loans, including secured and unsecured term and revolving lines ofcredit, equipment loans and accounts receivable loans.  As of September 30, 2008, approximately92% of the commercial loans had adjustable rates.  The Bank underwrites secured term loans andrevolving lines of credit primarily on the basis of a borrower’s cash flow andthe ability to service the debt, although we rely on the liquidation of theunderlying collateral as a secondary payment source, where applicable.  Should the borrower default and the Bank forecloseson the assets, we may not be able to recover the full amount of the loan.

 

*Real Estate Loans*

 

The Bank’s real estate loansare secured primarily by commercial property, including a significantpercentage in multi-family complexes.  Approximately 59% of the real estate loans are adjustable during theterm of the loan.  Approximately 84% ofthe real estate loans have a remaining maturity between five and tenyears.  As of September 30, 2008,the weighted average ratio of the original loan extension to the underlyingvalue of the property was approximately 49% with weighted average debt servicecoverage of 1.46.  No individual loan tovalue ratio exceeded 73%.

 

*Other Loans*

 

The Bank offers other typesof 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 80% of the appraised value of the borrower’s property at the time oforigination.

 

***Off-Balance Sheet CreditCommitments and Contingent Obligations***

 

We enter into or may issuefinancial instruments with off-balance sheet credit risk in the normal courseof business to meet the financial needs of our customers.  Since inception through March 31, 2008,these had

 

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been limited to undisbursedcommitments to extend credit to both businesses and individuals.  Beginning with the second quarter of 2008,the Bank issued several letters of credit for the first time, totaling$70,000.  All commitments noted abovewere associated with loans and were therefore subject to the same creditunderwriting policies and practices as those used for the loans reflected inthe financial statements.  When deemedadvisable, the Bank obtains collateral to support such commitments.

 

Commitments to extend credit are agreements to lend up to a specificamount to a customer as long as there is no violation of any condition in thecontract.  Commitments generally havefixed expiration dates or other termination clauses, which may require paymentof a fee.  Since we expect somecommitments to expire without being drawn upon, the total commitment amounts donot necessarily represent future loans. Therewas $8.8 million in undisbursed loan commitments as of September 30, 2008,an increase of $1.5 million or 20.5% from the December 31, 2007 amount of$7.3 million.

 

***Non-Performing Assets***

 

Non-performing assetsconsist of non-performing loans and other real estate owned (“OREO”).  Non-performing loans are (i) loans whichhave been placed on non-accrual status; (ii) loans which are contractuallypast due 90 days or more with respect to principal or interest, have not beenrestructured or placed on non-accrual status, and are accruing interest; and (iii) troubleddebt restructures ( “TDRs”).  OREO iscomprised of real estate acquired in satisfaction of the loan either throughforeclosure or deed in lieu of foreclosure.

 

The Bank had nonon-performing assets as of September 30, 2008 and December 31, 2007.

 

***Deposits***

 

Deposits are the Bank’sprimary source of funds.  The followingtable sets forth the amount of deposits outstanding by category at September 30,2008 and December 31, 2007, and the net changes between the two periods.

 
| **(dollars in thousands)**       | ** ** | **September30,** | ** ** | **December 31,** | ** ** | **Variance** | ** ** |
|--------------------------------------------|------------|------------------|------------|-----------------------|------------|--------------|------------|
| **(unaudited)**                            | ** ** | **2008**         | ** ** | **2007**              | ** ** | **Dollars**  | ** ** | **Percent** | ** ** |
| **Deposit  Classifications:**              |       |             |       |                  |       |         |       |   |   |
| Noninterest  bearing deposits              |       | $                | 13,124     |                  | $          | 5,395        |       | $ | 7,729 |   | 143.26 | % |
| Interest  bearing demand                   |       | 1,596            |       | 1,143                 |       | 453          |       | 39.63 | % |
| Savings and  money market                  |       | 9,034            |       | 4,244                 |       | 4,790        |       | 112.87 | % |
| Certificate  of deposit $100,000 and over  |       | 18,442           |       | 6,190                 |       | 12,252       |       | 197.93 | % |
| Certificate  of deposit less than $100,000 |       | 4,878            |       | 890                   |       | 3,988        |       | 448.09 | % |
| Total  deposits                            |       | $                | 47,074     |                  | $          | 17,862       |       | $ | 29,212 |   | 163.54 | % |

 

As of September 30,2008, 27.9% of the Company’s deposits were non-interest-bearing demanddeposits, a slight decrease from December 31, 2007 at 30.2%.  At December 31, 2007, we had no brokeredfunds on deposit.  At September 30,2008, the Bank held approximately $ 900,000 in brokered funds. All other fundshave been placed with the Bank by local depositors at competitive rates withinthe Bank’s marketing area.  While thegoal of the Bank is to fund credit commitments using local funding sources, itis anticipated that some of the future funding sources may include brokeredfunds.

 

The *Analysis ofNet Interest Income,*found within this document, summarizes thedistribution of the average deposit balances and the average rates paid ondeposits during the Bank’s two consecutive full quarters ended September 30,2008 and for the nine-month period ended September 30, 2008.

 

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The following table showsthe maturity of all of the Bank’s time deposits as of September 30, 2008:

 
| **Maturities**                        | ** ** | **Amounts**             | ** ** |
|---------------------------------------|------------|-------------------------|------------|
| **(unaudited)**                       | ** ** | **(in thousands)** | ** ** |
| Three months  or less                 |       | $                       | 15,677     |   |
| Over three  and through twelve months |       | 7,643                   |       |
| Over twelve  months                   |       | —                  |       |
| Total                                 |       | $                       | 23,320     |   |

 

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

 

TheCompany maintains an allowance for loan losses (“ALL”) to provide for potentiallosses in its loan portfolio.  Additionsto the allowance are made by charges to operating expense in the form of aprovision for loan losses.  All loansthat are judged to be uncollectible will be charged against the allowance,while recoveries would be credited to the allowance.  We have instituted loan policies designedprimarily for internal use, to adequately evaluate and assess the analysis ofthe risk factors associated with the Bank’s loan portfolio, to enable us toassess such risk factors prior to granting new loans and to assess thesufficiency of the allowance.  We conductan evaluation on the loan portfolio monthly.

 

Thecalculation of the adequacy of the ALL necessarily includes estimates bymanagement applied to known loan portfolio elements.  We employ a 10-point loan grading system inan effort to more accurately track the inherent quality of the loanportfolio.  The 10-point system assigns avalue of “1” or “2” to loans that are substantially risk free.  Modest, average and acceptable risk loans areassigned point values of “3”, “4”, and “5”, respectively.  Loans on the watch list are assigned a pointvalue of “6.”   Point values of “7,” “8,”“9” and “10” are assigned, respectively, to loans classified as specialmention, substandard, doubtful and loss. Using these risk factors, managementcontinues the analysis of the general reserves applying quantitative factorsbased upon different risk scenarios.

 

Inaddition, management considers other trends that are qualitative relative toour marketplace, demographic trends, the risk rating of the loan portfolios asdiscussed above, amounts and trends in non-performing assets and concentrationfactors.

 

***Regulatory Capital***

 

During the second quarter of 2008, theCompany entered into a Stock Purchase Agreement with Carpenter Fund Manager GP,LLC, the General Partner of the Carpenter Community BancFund, pursuant to whichthe Fund agreed to purchase 1,500,000 shares of Manhattan Bancorp’s commonstock at $10.00 per share for an aggregate purchase of $15 million.  The agreement specifies that the purchasewill occur in two separate closings.  Thefirst closing, which occurred in June, 2008 and was equivalent to 4.9% of theCompany’s post closing outstanding stock, resulted in the infusion of$1,281,750.   Funds totaling $1.0 millionwere subsequently transferred to the Bank. The second and final close is anticipated to occur prior to the end of2008, subject to receipt of all required regulatory approvals and certain otherconditions precedent to closing.

 

The Bank is subject to various regulatorycapital requirements 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

 

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prompt corrective action, the Bank must meetspecific capital guidelines that involve quantitative measures of the Bank’sassets, liabilities, and certain off-balance sheet items as calculated underregulatory accepted accounting practices. The Bank’s capital amounts and classifications are also subject toqualitative judgments by the regulators such as components, risk-weightings,and other factors.

 

Quantitative measures established byregulation to ensure capital adequacy require both the Company and the Bank tomaintain the following minimum amounts and ratios (set forth in the tablebelow) of total and Tier 1 Capital to risk-weighted assets and Tier 1 Capitalto average assets. As of September 30, 2008, the Company and the Bankexceeded all applicable capital adequacy requirements.

 

Under the Federal Reserve Board’s guidelines,Manhattan Bancorp is a “small bank holding company,” and thus qualifies for anexemption from the consolidated risk-based and leverage capital adequacyguidelines applicable to bank holding companies with assets of $500 million ormore.  However, while not required to doso under the Federal Reserve Board’s capital adequacy guidelines, the Companystill maintains levels of capital on a consolidated basis which qualifies it as“well capitalized.”

 

The following table sets forth the Company’sand the Bank’s regulatory capital ratios as of September 30, 2008:

 
| ** **                             | ** ** | ** **              | ** ** | **To Be Adequately** | ** ** | **To Be Well** | ** ** |
|----------------------------------------|------------|-------------------------|------------|--------------------------------|------------|--------------------------|------------|
| ** **                             | ** ** | **Actual**              | ** ** | **Capitalized**                | ** ** | **Capitalized**          | ** ** |
| **(unaudited)**                        | ** ** | **Amount**              | ** ** | **Ratio**                      | ** ** | **Amount**               | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| ** **                             | ** ** | **(in thousands)** | ** ** |
| **Company**                            |       |                    |       |                           |       |                     |       |   |   |   |   |   |   |
| Total  Capital (risk-weighted assets)  |       | $                       | 20,314     |                           | 35.8       | %                        | $          | 4,537 |   | 8 | % | $ | 5,671 |   | 10 | % |
| Tier 1  Capital (risk-weighted assets) |       | $                       | 19,590     |                           | 34.5       | %                        | $          | 2,268 |   | 4 | % | $ | 3,403 |   | 6 | % |
| Tier 1  Capital (average assets)       |       | $                       | 19,590     |                           | 25.0       | %                        | $          | 3,132 |   | 4 | % | $ | 3,915 |   | 5 | % |
|                                   |       |                    |       |                           |       |                     |       |   |   |   |   |   |   |
| **Bank**                               |       |                    |       |                           |       |                     |       |   |   |   |   |   |   |
| Total  Capital (risk-weighted assets)  |       | $                       | 19,765     |                           | 34.9       | %                        | $          | 4,537 |   | 8 | % | $ | 5,671 |   | 10 | % |
| Tier 1  Capital (risk-weighted assets) |       | $                       | 19,041     |                           | 33.6       | %                        | $          | 2,268 |   | 4 | % | $ | 3,403 |   | 6 | % |
| Tier 1  Capital (average assets)       |       | $                       | 19,041     |                           | 24.3       | %                        | $          | 3,132 |   | 4 | % | $ | 3,915 |   | 5 | % |

 

***Liquidity and LiquidityManagement***

 

Liquidity management forbanks requires that funds always be available to pay anticipated depositwithdrawals, fund loan commitments, and meet other commitments on a timely andcost effective basis.  The acquisition ofdeposits is our primary source of funds. This relatively stable and low-cost source of funds has, along with theinitial balances in stockholder’s equity, provided substantially all of thefunding since the Bank’s inception.

 

We also have liquidity as anet seller of overnight federal funds at a level that would cushion in part anyunexpected increase in demand for loans or decrease in funds deposited.  During the three-month period ended June 30,2008, we had an average balance of $4.0 million in overnight federal funds soldrepresenting approximately 8% of our average assets. During the three-monthperiod ended September 30, 2008, we had an average balance of $17.5million in overnight federal funds sold representing approximately 22% of ouraverage assets.  Both ratios are farabove the minimum guideline of 3% established in the Bank’s liquidity policy.

 

To meet liquidity needs, theCompany maintains a portion of its funds in cash deposits in other banks,federal funds and investment securities. As of December 31, 2007, liquid assets (including cash, federalfunds sold, interest-bearing deposits in other financial institutions and available-for-saleinvestment securities that have not been pledged as collateral), as apercentage of the Company’s deposits, were 98.0%.  As of September 30, 2008, liquid assetsas a percentage of the Company’s deposits, although declining, remainacceptable at 31.8%.

 

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While liquidity was not amajor concern in 2007, management has established and is seeking to establishsecondary sources of liquidity.  As of September 30,2008, the Bank maintains lines of credit totaling $6 million with twocorrespondent banks for the purchase of overnight federal funds.  The lines are subject to availability offunds and have restrictions as to the number of days used during definedperiods of time.  Another method that theBank currently has available for acquiring additional deposits is through theacceptance of “brokered deposits” (defined to include not only depositsacquired with deposit brokers, but also deposits bearing interest rates farabove the local market rates), typically attracting large certificates ofdeposits at high interest rates.  TheBank tested its access to overnight federal funds facilities once since itbegan operations. The Bank had a nominal amount of “brokered deposits” as of September 30,2008 of approximately $ 900,000 or about 2% of total deposits.

 

The Bank has established acredit line with the Federal Home Loan Bank of San Francisco and has outstandingas of September 30, 2008 a five-year fixed rate advance of $4.5 million at4.38%.

 

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

 

TheCompany’s market risk results primarily from two sources, credit risk andinterest rate risk.  Risk management isan important part of our operations and a key element of our overall financialresults.  Banking regulators, in recentyears, have emphasized appropriate risk management, prompting banks to haveadequate systems to identify, monitor and manage risks.  The Bank has both board and managementcommittees who meet on a regular basis to oversee risk functions.  The Company’s Audit Committee is responsiblefor overseeing internal auditing functions and for interfacing with the Company’sexternal auditors.  The Bank’s LoanCommittee establishes Loan Policy, reviews loans made by management andapproves 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/LiabilityCommittee reviews investments made by management, and monitors compliance withinvestment, interest rate risk and liquidity policies.

 

***Credit Risk***

 

Credit risk generally arisesas a result of the Bank’s lending activities, but may also be present in theBank’s investment functions.  To managethe credit risk inherent in our lending activities, we rely on the adherence tounderwriting standards and loan policies as well as our allowance for loanlosses.  The Bank employs frequentmonitoring procedures and takes prompt corrective action when necessary.  Additionally, the Bank’s loan portfolio andthe ALL 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 raterisk include changes in the slope of the yield curves over time, imperfectcorrelation in the adjustment of rates earned and paid on different instrumentswith similar characteristics, interest-rate-related embedded options such asloan floors, ceilings, and prepayments, as well as callable investmentsecurities and early withdrawal of time deposits.

 

The potential impact of interest rate risk issignificant because of the liquidity and capital adequacy consequences thatreduced earnings or losses may imply. While we recognize and accept that interest rate

 

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risk is a routine part of banking operations,the objective of interest rate risk management is to measure, monitor andcontrol exposure of net interest income to excessive risks associated withinterest rate movements.

 

Understanding the inherent weakness intraditional gap analysis to properly measure interest rate risk, the Bankemploys modeling techniques which measure the affect of interest rate shocks onthe net interest income and the market value of equity on the Bank’s existingmix of assets and liabilities.

 

The results of the model’s simulations on thepotential loss of net interest income as of September 30, 2008 reflect thefollowing:

 

**Earnings at Risk**

 

| **Rate**                        | ** ** | **Maximum**   | ** ** | **% (Loss) Gain**   | ** ** |
|---------------------------------|------------|---------------|------------|-------------------------------|------------|
| **Shock**                       | ** ** | **Policy**    | ** ** | **in Net Interest** | ** ** |
| **(in basis points)** | ** ** | **Guideline** | ** ** | **Income**                    | ** ** |
| -300                            |       | -15           | %          | -6.7                          | %          |
| -200                            |       | -10           | %          | -4.2                          | %          |
| -100                            |       | -5            | %          | -2.0                          | %          |
| +100                            |       | -5            | %          | 1.8                           | %          |
| +200                            |       | -10           | %          | 3.6                           | %          |
| +300                            |       | -15           | %          | 5.5                           | %          |

 

The method employed in rate shocking theearnings at risk was “ramping”, (i.e. changing the indicated rate movementgradually over a 12 month horizon). Based upon the model simulation as of September 30, 2008, the Bank’sinterest rate risk exposure as measured by rate movement on net interest incomeis within policy guidelines.

 

The results of the model’s simulations on thepotential loss of the Company’s equity as of September 30, 2008 reflectthe following:

 

**Market Value of Equity**

 

| **Rate**                        | ** ** | **Maximum**   | ** ** | **% (Loss) Gain**   | ** ** |
|---------------------------------|------------|---------------|------------|-------------------------------|------------|
| **Shock**                       | ** ** | **Policy**    | ** ** | **in Market**            | ** ** |
| **(in basis points)** | ** ** | **Guideline** | ** ** | **Value of Equity** | ** ** |
| -300                            |       | -30           | %          | 11.3                          | %          |
| -200                            |       | -20           | %          | 10.5                          | %          |
| -100                            |       | -10           | %          | 5.2                           | %          |
| +100                            |       | -10           | %          | -4.0                          | %          |
| +200                            |       | -20           | %          | -7.8                          | %          |
| +300                            |       | -30           | %          | -11.3                         | %          |

 

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

 

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Based upon the model simulation as of September 30,2008, the Bank interest rate exposure as measured by rate movement on themarket value of the Bank’s equity is within policy guidelines.

 

***Item 4 – Controls and Procedures***

 

The Company maintains disclosurecontrols and procedures (as defined in the Exchange Act Rule 13a-15(e))that are designed to assure that information required to be disclosed in ourSecurities Exchange Act of 1934 reports 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.

 

In designing and evaluating thedisclosure controls and procedures, management recognizes that any controls andprocedures, no matter how well-designed and operated, can provide reasonableassurance only of achieving the desired control objectives, and managementnecessarily is required to apply its judgment in weighing the costs andbenefits of possible new or different controls and procedures.  Limitations are inherent in all controlsystems, so no evaluation of controls can provide absolute assurance that allcontrol issues and any fraud within the Company have been detected.

 

As required by Exchange Act Rule 13a-15(b), as of the end of theperiod covered by this report the Company, under the supervision and withparticipation of the Chief Executive Officer and Chief Financial Officer,evaluated the effectiveness of our disclosure controls and procedures.  Based upon this evaluation, the Chief ExecutiveOfficer and Chief Financial Officer concluded that our disclosure controls andprocedures were effective as of that date.

 

During the quarter ended September 30,2008, there were no significant changes in our internal controls over financialreporting (as defined in Rule 13a-15(f) of the Securities ExchangeAct of 1934, as amended) that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

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**PART II– OTHER INFORMATION**

 

***Item 1. – LegalProceedings***

 

The Company is nota party to any legal proceedings.

 

***Item 1A. – RiskFactors***

 

As a smaller reporting company, the Companyis not required to provide the information required by this item as a part ofthe Form 10-Q.

 

***Item 2 –Unregistered Sale of Equity Securities and Use of Proceeds***

 

None

 

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

 

Not Applicable.

 

***Item 4 –Submission of Matters to the Vote of Security Holders***

 

None

 

***Item 5 – OtherInformation***

 

None

 

***Item 6 –Exhibits***

 
| **Exhibit  Number** | ** ** | **Index to Exhibits**                                                                                                                                                 | ** ** | **Page** |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| 11                  |       | Statement Regarding Computation of Net  Income (Loss) per Share                                                                                                                 |       | (1)      |
| 31.1                |       | Certification of the Chief Executive  Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the  Securities Exchange Act of 1934, as amended                        |       | 32       |
| 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                        |       | 33       |
| 32.1                |       | Certification of the 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 |       | 34       |
| 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               |       | 35       |

 

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(1)       The information required by this exhibit isincorporated by reference from Note 9 to the Company’s financial statementsincluded herein.

###  

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### **SIGNATURES**

 

Pursuant to the requirement of the Securities and Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|   |                    | **MANHATTAN BANCORP**          |
|--------|-------------------------|--------------------------------|
|   |                    |                           |
|   |                    |                           |
| Date:  | November 12,  2008 | /s/  Jeffrey M. Watson         | . |   |
|   |                    | Jeffrey  M. Watson             |
|   |                    | President  and                 |
|   |                    | Chief  Executive Officer       |
|   |                    | (Principal  Executive Officer) |
|   |                    |                           |
|   |                    |                           |
| Date:  | November 12,  2008 | /s/  Dean Fletcher             | . |   |
|   |                    | Dean  Fletcher                 |
|   |                    | Executive  Vice President and  |
|   |                    | Chief  Financial Officer       |
|   |                    | (Principal  Financial and      |
|   |                    |  Accounting  Officer)     |

 

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