United States ~~Securities and Exchange Commission~~

Securities and Exchange Commission

Washington, D. C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June~~September 30, 2012

Commission File Number 000-54116

MANHATTAN BANCORP

(Exact name of registrant as specified in its charter)

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

2141 Rosecrans Avenue, Suite 1100

El Segundo, California 90245

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (310) 606-8000

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

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

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

Large accelerated filer o		Accelerated filer o

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

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

As of ~~July~~October 31, 2012, there were 12,~~193~~186,~~100~~143 shares of the issuer’s common stock outstanding.

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Manhattan Bancorp

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED ~~JUNE~~SEPTEMBER 30, 2012

TABLE OF CONTENTS

			PAGE	~~PAGE~~
PART I — FINANCIAL INFORMATION
~~Item 1.~~	Item 1.	FINANCIAL STATEMENTS
		CONSOLIDATED BALANCE SHEETS	3	3
		CONSOLIDATED STATEMENTS OF OPERATIONS	4	4
		CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)	5	5
		CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY	6	6
		CONSOLIDATED STATEMENTS OF CASH FLOWS	7	7
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	8	8
~~Item 2.~~	Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	44	45
~~Item 3.~~	Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	67	71
~~Item 4.~~	Item 4.	CONTROLS AND PROCEDURES	67	71
PART II - OTHER INFORMATION
~~Item 1.~~	~~LEGAL~~Item ~~PROCEEDINGS~~1.	LEGAL PROCEEDINGS	67	72
~~Item 1A.~~	~~RISK~~Item ~~FACTORS~~1A.	RISK FACTORS	67	72
~~Item 2.~~	~~UNREGISTERED~~Item ~~SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	69	73
~~Item 3.~~	~~DEFAULTS~~Item ~~UPON SENIOR SECURITIES~~3.	DEFAULTS UPON SENIOR SECURITIES	69	73
~~Item 4.~~	~~MINE~~Item ~~SAFETY DISCLOSURES~~4.	MINE SAFETY DISCLOSURES	69	73
~~Item 5.~~	~~OTHER~~Item ~~INFORMATION~~5.	OTHER INFORMATION	69	73
~~Item 6.~~	~~EXHIBITS~~Item 6.	EXHIBITS	70	74
SIGNATURES			71	75

Table of Contents

PART I — FINANCIAL INFORMATION

Manhattan Bancorp and Subsidiaries

Consolidated Balance Sheets

(in thousands)

	6/30/2012			12/31/2011
	September 30, 2012			December 31, 2011
	(Unaudited)
Assets
Cash and due from banks	$	137,~~541~~881		$	6,779
Federal funds sold/interest bearing demand funds	2050,~~751~~560			38,756
Total cash and cash equivalents	3458,~~292~~441			45,535
Time deposits - other financial institutions	21,~~103~~105			3,952
Investment securities - available for sale, at fair value	9,~~664~~041			9,460
Loans held for sale, at fair value	7075,~~577~~745			—
Loans held for sale, at lower of cost or fair value	~~327~~325			—
Loans held for investment	~~288~~279,~~138~~048			168,736
Allowance for loan losses	(21,~~085~~598		)	(2,355		)
Net loans held for investment	~~286~~277,~~053~~450			166,381
Total loans, net	~~356~~353,~~957~~520			166,381
Premises and equipment, net	9,~~583~~403			4,201
Federal Home Loan Bank and Federal Reserve stock	3,~~760~~619			1,986
Goodwill	7,396			—
Core deposit intangible	2,~~845~~710			1,863
Other real estate owned	3,581			3,581
Investment in limited partnership fund	56,~~302~~492			—
Mortgage servicing rights	23,~~167~~402			—
Accrued interest receivable	~~791~~851			675
Other receivables	~~10,493~~400			—
Other assets	69,~~923~~371			1,750
Total assets	~~455~~469,~~857~~332			239,384
Liabilities and Shareholders’ Equity
Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing demand	~~125~~147,~~636~~761			70,188
Interest bearing:
Demand	15,~~703~~688			10,480
Savings and money market	~~111~~117,~~506~~935			62,678
Certificates of deposit equal to or greater than $100,000	7268,~~158~~231			25,949
Certificates of deposit less than $100,000	4624,~~199~~149			31,857
Total deposits	~~371~~373,~~202~~764			201,152
FHLB advances and other borrowings	2630,~~016~~965			—
Accrued interest payable and other liabilities	69,~~384~~605			3,044
Total liabilities	~~403~~414,~~602~~334			204,196
Stockholders’ equity
Serial preferred stock - no par value; 10,000,000 shares authorized; issued and outstanding: none in 2012 and 2011	—			—
Common stock - no par value; 30,000,000 authorized; issued and outstanding: 12,193,100 in 2012 and 358 in 2011	—			—
Common stock - no par value; 30,000,000 authorized; issued and outstanding: 12,186,433 in 2012 and 358 in 2011	—			—
Additional paid in capital	59,~~592~~586			36,006
Accumulated other comprehensive income	13136			483
Accumulated defecit	(74,~~354~~763		)	(3,992		)
Total stockholders’ equity	5254,~~251~~959			32,497
Non-controlling interest	439			2,691
Total equity	5254,~~255~~998			35,188
Total liabilities and stockholders’ equity	$	~~455~~469,~~857~~332		$	239,384

The accompanying notes are an integral part of these financial statements

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Manhattan Bancorp and Subsidiaries

Consolidated Statements of Operations

(Unaudited, dollars in thousands, except per share amounts)

For the Three Months

For the ~~Six~~Nine Months

Ended June 30,

Ended September 30,

2012

2011

2012

2011

Interest income

Interest and fees on loans

35,~~283~~086

53,~~290~~428

510,~~790~~876

811,~~494~~922

Interest on investment securities

6145

8381

~~134~~178

~~169~~251

Interest on federal funds sold

2318

3330

4362

6593

Interest on time deposits-other financial institutions

3221

1217

80100

Total interest income

35,~~371~~154

53,~~438~~560

511,~~979~~133

812,~~808~~366

Interest expense

NOW, money market and savings

69139

4652

~~111~~250

93144

Time deposits

~~104~~161

~~185~~115

~~186~~347

~~400~~515

FHLB advances and other borrowed funds

38126

—

38164

—

Total interest expense

~~211~~426

~~231~~167

~~335~~761

~~493~~659

Net interest income

34,~~160~~728

53,~~207~~393

510,~~644~~372

811,~~315~~707

Provision for allowance for loan losses

~~682~~112

~~257~~3,019

~~267~~379

~~861~~3,076

Net interest income after provision for loan losses

24,~~478~~616

~~4,950~~374

59,~~377~~993

78,~~454~~631

Non-interest income

Whole loan sales and warehouse lending fees

~~283~~315

—

~~283~~598

—

Advisory income

~~163~~607

—

~~163~~771

—

Trading income

~~674~~2,276

—

~~674~~2,950

—

Mortgage banking, including gain on sale on loans held for sale

~~977~~8,665

—

~~977~~9,643

—

Earnings on MIMS-1 limited partnership fund

46191

—

46236

—

Other bank fees and income

~~205~~283

~~250~~323

~~359~~642

~~639~~828

Rental income

9262

—

~~187~~248

—11

Gain on recovery of acquired loans

~~170~~335

~~433~~1,554

~~305~~640

~~804~~1,554

Gain on sale of securities

—1

—

~~528~~529

—

Total non-interest income

212,~~610~~735

~~683~~1,877

316,~~522~~257

12,~~443~~393

Non-interest expenses

Compensation and benefits

410,~~356~~039

21,~~021~~542

616,~~643~~682

35,~~888~~430

Occupancy and equipment

~~511~~1,024

~~316~~355

~~810~~1,834

~~744~~1,099

Technology and communication

~~530~~971

~~241~~376

~~771~~1,741

~~520~~963

Professional fees

1,~~249~~067

~~768~~585

13,~~975~~042

1,~~349~~847

FDIC insurance and regulatory assessments

88184

~~126~~37

~~148~~332

~~188~~226

Amortization of intangibles

97135

~~235~~78

~~175~~310

~~318~~396

Other non-interest expenses

~~(346~~1,300

)

~~958~~225

~~322~~1,622

1,~~414~~565

Total non-interest expenses

614,~~485~~720

43,~~665~~198

1025,~~844~~563

811,~~421~~526

Income (loss) before income taxes

(12,~~397~~631

)

~~968~~(947

)

~~(1,945~~687

)

~~476~~(502

)

Provision for income taxes

134

2720

1319

(277

)

Net income (loss)

(12,~~410~~627

)

~~941~~(967

)

~~(1,958~~668

)

~~503~~(495

)

Less: Net income (loss) attributable to the non-controlling interest

Less: Net income attributable to the non-controlling interest

—

Net income (loss) attributable to common stockholders of Manhattan Bancorp

(12,~~414~~592

)

~~909~~(967

)

~~(1,962~~629

)

~~464~~(495

)

Weighted average number of shares outstanding (basic and diluted)

912,~~482~~192,~~371~~013

8,~~176~~195,~~244~~469

89,~~820~~975,~~920~~436

8,~~176~~195,~~244~~469

Basic and diluted earnings (loss) per share

(0.1521

)

(0.1112

)

(0.2206

)

(0.06

)

The accompanying notes are an integral part of these financial statements

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Manhattan Bancorp and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited, dollars in thousands)

	For the Three Months						For the ~~Six~~Nine Months
	Ended June 30,						Ended June 30,
	Ended September 30,						Ended September 30,
	2012			2011			2012			2011
Net income (loss)	$	(12,~~414~~592	)	$	~~909~~(967	)	$	~~(1,962~~629	)	$	~~464~~(495	)
Other comprehensive income (loss):
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during periods	(13		)	96			(813		)	161
Unrealized holding gains arising during periods	123			76			156			238
Less: reclassification adjustment for gains included in net loss	—			—			528			—
Less: reclassification adjustment for gains included in net income	—			—			(529		)	—
Other comprehensive income (loss):	~~(13~~123		)	9676			(~~285~~373		)	~~161~~238
Comprehensive income (loss)	$	(12,~~427~~715	)	$	~~1,005~~(891	)	$	~~(2,247~~256	)	$	~~625~~(257	)

The accompanying notes are an integral part of these financial statements.

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Manhattan Bancorp and Subsidiaries

Consolidated Statements of Changes in Total Equity

For the ~~Six~~Nine ~~Months~~months Ended ~~June~~September 30, 2012

(Unaudited, dollars in thousands)

										Accumulated
					Additional					Other
	Common Stock				Paid-in		Accumulated			Comprehensive			Non-controlling			Total
	Shares		Amount		Capital		Deficit			Income			Interest			Equity
Balance at December 31, 2011	358		$	—	$	36,006	$	(3,992	)	$	483		$	2,691		$	35,188
Merger of entities under common control on May 31, 2012	(358	)	—		3,733		(1,400		)	~~(185~~26		)	(2,691		)	(~~543~~332		)
Issuance of common stock to accounting acquirer in business combination	8,195,469		—		—		—			—			—			—
Cancellation of restricted stock	(6,667	)
Transfer of legal acquirer’s common stock in business combination	3,997,631		—		19,823		—			—			—			19,823
Share-based compensation expense	—		—		3024		—			—			—			3024
Unrealized gain on investment securities, net of reclassification of realized gains of $528	—		—		—		—			(285		)	—			(285		)
Unrealized loss on investment securities, net of reclassification of realized gains of $529	—		—		—		—			(373		)	—			(373		)
Net loss	—		—		—		(1,962		)	—			4			(1,958		)
Net income	—		—		—		629			—			39			668
Balance at June 30, 2012	12,193,100		$	—	$	59,592	$	(7,354	)	$	13		$	4		$	52,255
Balance at September 30, 2012	12,186,433		$	—	$	59,586	$	(4,763	)	$	136		$	39		$	54,998

The accompanying notes are an integral part of these financial statements

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Manhattan Bancorp and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited, dollars in thousands)

	For the Six Months Ended,
	For the Nine Months Ended,
	June 30,
	September 30,
	2012			2011
Cash flows from operating activities
Net income (loss)	$	~~(1,958~~668	)	$	~~503~~(495	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Proceeds from sales and principal reductions of mortgage loans held for sale	74344,~~581~~176			—
Originations and purchases of mortgage loans held for sale	(68332,~~205~~330		)	—
Net gains on sales of loans held for sale	(110,~~151~~811		)	—
Net mark to market on mortgage loans held for sale	~~262~~(716		)	—
Net increase in mortgage servicing asset	(~~291~~1,526		)	—
Provision for loan losses	~~267~~379			~~861~~3,076
Net amortization of premium on securities	(260		)	(105		)
Net accretion (amortization) of discount/premium on securities	(446		)	177
Net gains on sales of securities available for sale	(~~528~~529		)	—
Earnings on limited partnership fund	(46236		)	—
Depreciation and amortization	~~254~~523			~~233~~361
Amortization of core deposit intangibles	~~175~~310			~~318~~396
Stock-based compensation expense	3024			4230
Net (increase) decrease in other assets	(1,929		)	(1,721		)
Net decrease in other assets	5,567			2,069
Net increase (decrease) in other liabilities	(1,709		)	1,805
Net increase in other liabilities	1,513			127
Net cash (used in) provided by operating activities	(508		)	1,936
Net cash provided by operating activities	6,566			5,741
Cash flows from investing activities
Net (increase) decrease in loans held for investment	(1911,~~968~~477		)	3244,~~680~~873
Decrease in time deposits - other financial institutions	12,~~849~~847			611,~~388~~419
Proceeds from principal payments and maturities of investment securities	34,~~795~~605			3,~~240~~448
Proceeds from the sale of investment securities	5,~~028~~029			—
Proceeds from sale of other real estate owned	—			1,605
Investment in limited partnership fund	(3,500		)	—
Investment in limited partnership fund	(2,500		)	—
Redemption of Federal Reserve and Federal Home Loan Bank stock	(101		)	279
Redemption of Federal Reserve and Federal Home Loan Bank stock	(242		)	186
Purchase of premises and equipment	(192		)	(142		)
Purchase of premises and equipment	(103		)	(67		)
Transactions with affiliates	(331		)	—
Transactions with affiliates	(543		)	(3,606		)
Net cash acquired in business combination (see Note 2)	21,550			—
Net cash provided by investing activities	818,~~866~~430			4059,~~426~~877
Cash flows from financing activities
Net (decrease) increase in deposits	(29,584		)	(55,917		)
Net decrease in deposits	(27,021		)	(63,426		)
Net increase (decrease) in borrowings	914,~~983~~931			(1211,~~000~~950		)
Net cash used in financing activities	(1912,~~601~~090		)	(6775,~~917~~376		)
Net decrease in cash and cash equivalents	(11,243		)	(25,555		)
Net increase (decrease) in cash and cash equivalents	12,906			(9,758		)
Cash and cash equivalents at beginning of period	45,535			74,178
Cash and cash equivalents at end of period	$	3458,~~292~~441		$	4864,~~623~~420
Supplementary information:
Interest paid	$	~~257~~365		$	~~544~~520
Income taxes paid	$	—19		$	~~735~~14

The accompanying notes are an integral part of these financial statements

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Manhattan Bancorp and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Manhattan Bancorp (the “Bancorp”) is a bank holding company organized under the laws of the state of California. Its principal subsidiary, Bank of Manhattan, N.A. (the “Bank”), is a national banking association headquartered in the South Bay area of Southern California that offers relationship banking services and residential mortgages to entrepreneurs, family-owned and closely-held middle market businesses, real estate investors and professional service firms. Deposits with the Bank are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to the applicable limits of the law. The Bank is a member bank of the Federal Reserve System. Through its wholly-owned subsidiary, MBFS Holdings, Inc. (“MBFS”), Manhattan Bancorp also indirectly ~~owns~~owned until November 7, 2012 a 70% interest in Manhattan Capital Markets LLC (“MCM”), which, either directly or through its wholly-owned subsidiaries, generates revenues primarily from trading income, facilitating trades in whole loans between institutional clients, and advisory services regarding the evaluation and packaging of bond portfolios of other institutions. As discussed in more detail in Note 16, the Bancorp sold its entire interest in MBFS, including its indirect interest in MCM, on November 7, 2012.

On May 31, 2012, the Bancorp completed its acquisition of Professional Business Bank (“PBB”) through a merger of PBB with and into the Bank, with the Bank as the surviving institution (the “Merger”). Immediately prior to the Merger, PBB completed a transaction in which its holding company, CGB Holdings, Inc. (“CGB Holdings”), was merged into PBB and accounted for using the historical balances as entities under common control.

In the Merger, Bancorp issued an aggregate of 8,195,469 shares of its common stock to the shareholders of PBB, representing a ratio of 1.7991 shares of Bancorp common stock for each share of PBB common stock outstanding at the effective time of the Merger. The Bancorp shares issued to the PBB shareholders in the Merger constituted approximately 67.2% of the Bancorp’s common stock after giving effect to the Merger.

Accounting principles generally accepted in the United States of America (“U.S. GAAP”) require that a company whose security holders retain the majority voting interest in the combined business be treated as the acquirer for financial reporting purposes. Accordingly, the Merger was accounted for as a reverse acquisition whereby PBB was treated as the acquirer for accounting and financial reporting purposes. Prior to the Merger the statements of operations and the balance sheet reflect that of PBB. The assets and liabilities of Manhattan Bancorp were reported at fair value in a transaction that constituted a business combination subject to the acquisition method of accounting as detailed in Accounting Standards Codification (“ASC”) 805, Business Combinations. See Note 2 for additional information on the Merger.

Basis of Financial Statement Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of the Bancorp and its wholly-owned subsidiaries, the Bank and MBFS Holdings, collectively referred to as the “Company.” All material intercompany accounts and transactions have been eliminated in consolidation. The accounting and reporting policies of the Company conform to U.S. GAAP. In the opinion of Management, all adjustments considered necessary for a fair presentation of results for the interim periods presented have been included. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s 2011 Annual Report on Form 10-K and the Company’s Registration Statement on Form S-4/A dated April 30, 2012. Operating results for the ~~six~~nine months ended ~~June~~ September 30, 2012 are not necessarily indicative of the results that may be expected for the year ended December 31, 2012.

Reclassifications

Certain amounts in prior presentations have been reclassified to conform to the current presentation. These reclassifications had no effect on previously reported shareholders’ equity, net income (loss) or earnings (loss) per share amounts.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for loan losses. Other significant estimates which may be subject to change include fair value determinations and disclosures, impaired investments and loans (including troubled debt restructurings), intangibles and goodwill related to the Merger, gains from mortgage banking activities, and the valuation of deferred tax assets.

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Recent Accounting Pronouncements

The following accounting pronouncements applicable to the Company were recently issued or became effective during the ~~six~~nine months ended ~~June~~ September 30, 2012:

In May of 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The primary purpose of ASU 2011-04 is to improve the comparability of fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards (“IFRSs”). ASU 2011-04 does not require additional fair value measurements and is not intended to establish valuation standards or affect valuation practices outside of financial reporting. Certain amendments clarify the intent about the application of existing fair value measurement and disclosure requirements. The amendments in ASU 2011-04 apply to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in a reporting entity’s shareholders’ equity in the financial statements. ASU 2011-04 became effective for the Company on January 1, 2012 and required additional fair value disclosures but did not have a material impact on the Company’s results of operations or financial position.

In June of 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income. ASU 2011-05 eliminates the option of presenting changes in other comprehensive income as part of the statement of changes in shareholders’ equity. All non-owner changes in shareholders’ equity must be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. Regardless of whether an entity chooses to present comprehensive income in a single continuous statement or in two separate but consecutive statements, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statements(s) where the components of net income and the components of other comprehensive income are presented. The revisions to the presentation of comprehensive income in the financial statements became effective for the Company on January 1, 2012 and are reflected herein.

In December of 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210), Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 requires that entities disclose both gross information and net information about instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The objective of this disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements prepared under IFRSs. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Retrospective application is required for all comparative periods. Adoption of ASU 2011-11 is not expected to have a significant impact on the Company’s financial position.

In December of 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 to defer only those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments. The amendments were made to allow the FASB time to re-deliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. Entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-5. All other requirements in ASU 2011-05 are not affected by ASU 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements.

In July of 2012, the FASB issued ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment. This revised standard is intended to reduce the cost and complexity of testing indefinite-lived intangible assets other than goodwill for impairment. It allows companies to perform a “qualitative” assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary, similar in approach to the goodwill impairment test. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this standard is not expected to have a significant impact on the Company’s financial position.

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Investment Securities

Bonds, notes and debentures for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts.

Investments not classified as held-to-maturity securities are classified as available-for-sale securities. Under the available-for-sale classification, securities can be sold in response to a variety of situations, including but not limited to changes in interest rates, fluctuations in deposit levels or loan demand, liquidity requirements, or the need to restructure the portfolio to better match the maturity or interest rate characteristics of liabilities with assets. Securities classified as available-for-sale are accounted for at their current fair value rather than amortized historical cost. Unrealized gains or losses are excluded from net income (loss) and reported as an amount net of taxes as a separate component of accumulated other comprehensive income (loss) included in stockholders’ equity. Premiums or discounts on held-to-maturity and available-for-sale securities are amortized or accreted into income using the interest method.

At each reporting date, investment securities are assessed to determine whether there is any other-than-temporary impairment. The classification of other-than-temporary impairment depends on whether the Company intends to sell the security before recovery of its cost basis, and on the nature of the impairment. If the Company intends to sell a security or it is more likely than not it will be required to sell a security prior to recovery of its cost basis, it would be required to record an other than temporary loss in an amount equal to the entire difference between the fair value and amortized cost. If a security is determined to be other-than-temporarily impaired but the Company does not intend to sell the security, only the credit component of impairment is recognized in earnings and the impairment associated with non-credit factors, such as market liquidity, is recognized in other comprehensive income (loss), net of tax. The cost basis of any other-than-temporarily impaired security is written down by the amount of any impairment adjustment recognized in earnings.

Originated loans

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances reduced by any charge-offs, net of deferred loan fees or costs, unearned discounts, and net of allowance for loan losses or specific valuation accounts. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan. Interest on loans is accrued daily and recognized over the terms of the loans and is calculated using the simple-interest method based on principal amounts outstanding.

Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Generally, the accrual of interest on loans is discontinued when principal or interest is past due 90 days based on the contractual terms of the loan or when, in the opinion of management, there is reasonable doubt as to collectability. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on nonaccrual loans is subsequently recognized only to the extent that cash is received and the loan’s principal balance is deemed collectable. Interest accruals are resumed on such loans only when they are brought current with respect to interest and principal for a period of at least ~~six~~nine months and when, in the judgment of management, the loans are estimated to be fully collectible as to all principal and interest.

The Company’s loan portfolio consists primarily of the following loan types:

· Commercial and industrial loans: Commercial and industrial loans are loans for commercial, corporate and business purposes, including issuing letters of credit. The Company’s commercial business loan portfolio is comprised of loans for a variety of purposes and generally is secured by equipment, machinery and other business assets. Commercial business loans generally have terms of five years or less and interest rates that float in accordance with a designated published index. Substantially all of such loans are secured and backed by the personal guarantees of the owners of the business.

· Commercial real estate loans: Commercial real estate loans are primarily secured by apartment buildings, office and industrial buildings, warehouses, small retail shopping centers and various special purpose properties, including hotels, restaurants and nursing homes. Although terms vary, commercial real estate loans generally have amortizations of 15 to 25 years, as well as balloon payments of two to five years, and terms which provide that the interest rates thereon may be adjusted annually at the Company’s discretion, based on a designated index.

· Residential multifamily real estate: Residential multifamily loans generally involve a greater degree of credit risk than residential real estate loans due to the reliance on the successful operation of the project. This loan type is particularly sensitive to adverse economic conditions.

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· Residential real estate loans: Residential real estate loans are generally smaller in size and are homogenous because they exhibit similar characteristics.

· Real estate construction: Construction loans consist of vacant land and property that is in the process of improvement. Repayment of these loans can be dependent on the sale of the property to third parties or the successful completion of the improvements by the builder for the end user. In the event a loan is made on property that is not yet improved for the planned development, there is the risk that approvals will not be granted or will be delayed. Construction loans also run the risk that improvements will not be completed on time or in accordance with specifications and projected costs. Construction real estate loans generally have terms of one year to 18 months during the construction period and interest rates based on a designated index.

· Home equity lines of credit: Home equity lines are secured by a 1st or 2nd Trust Deed on a single family residence. The risk involved in home equity lines of credit is dependent on the value of the underlying collateral and the existence of other liens on the property.

· Other: Other loans consist of consumer loans that generally have higher interest rates than mortgage loans. The risk involved in consumer loans is the type and nature of the collateral and, in certain cases, the absence of collateral. Other loans consist of education loans, vehicle loans and other secured and unsecured loans that have been made for a variety of consumer purposes.

Acquired Loans

Acquired loans ~~from the Merger~~ are recorded at fair value at the date of acquisition and include both nonperforming loans with evidence of credit deterioration since their origination date and performing loans with no such credit deterioration. The Company is accounting for a significant majority of the loans, including loans with evidence of credit deterioration acquired in the Merger in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, formerly known as Statement of Position (“SOP”) 03-3. In accordance with ASC 310-30, the Company has pooled performing loans at the date of purchase. The loans were aggregated into pools based on the common risk characteristics.

The difference between the undiscounted cash flows expected to be collected at acquisition and the investment in the loan, or the “accretable yield,” is recognized as interest income on a level-yield method over the life of the loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “nonaccretable difference,” are not recognized as a yield adjustment, loss accrual or valuation allowance. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining life. Decreases in expected cash flows are recognized as impairment. If the Company does not have the information necessary to reasonably estimate cash flows to be expected, it may use the cost recovery method or cash basis method of income recognition. Valuation allowances on these impaired loans reflect only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately are not to be received).

The excess of cash flows expected to be collected over the initial fair value of acquired loans is referred to as accretable yield and is accreted into interest income over the estimated life of the acquired loans using the effective yield method. The accretable yield will change due to:

· Estimate of the remaining life of acquired loans which may change the amount of future interest income

· Estimate of the amount of contractually required principal and interest payments over the estimated life that will not be collected (the nonaccretable difference)

· Indices for acquired loans with variable rates of interest

· Improvement in the amount of expected cash flows

Acquired loans not accounted for under ASC 310-30 are subject to the provisions of ASC 310-20. The cash flows associated with these loans determine the amount of the purchase discount that is to be accreted over the life of the loan using the effective interest method. Management periodically reassesses the net realizable value and in the event that credit losses inherent in the ~~portfolio are higher than expectations, records an allowance for loan losses to the extent that the carrying value exceeds the amounts expected to be collected.~~

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portfolio are higher than expectations, records an allowance for loan losses to the extent that the carrying value exceeds the amounts expected to be collected.

Allowance for Loan Losses

The allowance for loan losses is a valuation allowance for probable losses embedded in the Company’s existing loan portfolios as of the measurement date. In order to determine the adequacy of our loan loss allowance to absorb future losses, management performs periodic credit reviews of the loan portfolio. In so doing, management considers current economic conditions, historical credit loss experiences and other factors. Although management uses the best information available to make these estimates, future adjustments to the allowance may be necessary due to changes in economic, operating, and regulatory conditions, most of which are beyond the Company’s control. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

When establishing the allowance for loan losses, management categorizes loans into risk categories generally based on the nature of the collateral and the basis of repayment. These risk categories are pass, special mention, substandard, doubtful and loss. The relevant risk characteristics of these risk categories are more fully described in Note 4. Loss estimates are reviewed periodically and, as adjustments become necessary, they are recorded in the results of operations in the periods in which they become known. The allowance is increased by provisions for loan losses which, in turn, are charged to expense. The balance of a loan deemed uncollectible is charged against the allowance for loan losses when management believes that collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance.

Commitments to extend credit, commercial letters of credit, and standby letters of credit are recorded in the financial statements when they become payable. The credit risk associated with these commitments, when indistinguishable from the underlying funded loan, is considered in our determination of the allowance for loan losses. Other liabilities in the balance sheet include the portion of the allowance which was distinguishable and related to undrawn commitments to extend credit.

The allowance consists of specific and general components, also referred to as individually evaluated and collectively evaluated, respectively, for impairment in the accompanying disclosures. The specific component relates to individual loans that are classified as impaired on a case-by-case basis. The general component of the Company’s allowance for loan losses, which covers potential losses for all non-impaired loans, typically is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company with consideration also given to peer bank loss experience. This historic loss experience is supplemented with the consideration of how current factors might impact each portfolio segment. These factors and trends include the current levels of: delinquencies and impaired loans; charge-offs and recoveries; changes in underwriting standards; changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit and geographic concentrations.

In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and such agencies may require the Company to recognize additional provisions to the allowance based upon judgments that differ from those of management.

Impaired Loans

A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Troubled debt restructurings (“TDRs”), which are described in more detail below, also are classified as impaired.

Commercial and commercial real estate loans classified as substandard or doubtful are individually evaluated for impairment. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans may be collectively evaluated for impairment. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

If a loan is classified impaired, a specific reserve is recorded for the loan equal to the difference between the loan’s carrying value and the present value of estimated future cash flows using the loan’s effective rate or at the fair value of collateral if repayment is expected solely from the collateral. TDRs are identified separately for impairment disclosures, as described in more detail below.

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Troubled Debt Restructurings

A TDR is a loan for which the Company grants a concession to the borrower that the Company would not otherwise consider due to a borrower’s financial difficulties. A loan’s terms which may be modified or restructured due to a borrower’s financial difficulty include, but are not limited to, a reduction in the loan’s stated interest rate below the market rate for a borrower with similar credit characteristics, an extension of the loan’s maturity, and/or a reduction in the face amount of the debt. The amount of a debt reduction, if any, is charged off at the time of restructuring. For other concessions, a specific reserve typically is recorded for the difference between the loan’s book value and the present value of the TDR’s expected future cash flows discounted at the loan’s original effective interest rate. This specific reserve is accreted into interest income over the expected remaining life of the TDR using the interest method. TDRs typically are placed on non-accrual status until a sustained period of repayment performance, usually ~~six~~nine months or longer. However, the borrower’s performance prior to the restructuring, or other significant events at the time of restructuring, may be considered in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status after a shorter performance period. If the borrower’s performance under the new terms is not reasonably assured, the loan remains classified as a nonaccrual loan. Subsequent to being restructured, a TDR may be classified “substandard” or “doubtful” based on the borrower’s repayment performance as well as any other changes in the borrower’s creditworthiness. Loans that were paid current at the time of modification may be upgraded in their classification after a sustained period of repayment performance~~, usually six months or longer~~. TDRs are identified separately for impairment disclosures and are measured at the present value of estimated future cash flows discounted at the loan’s effective rate at the time of restructuring. If a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For any TDRs that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

Gains from Mortgage Banking Activities

Mortgage banking activity income is recognized when the Company records a derivative asset upon committing to originate a loan with a borrower at a specified interest rate, recording the funded loan at fair value, and subsequently selling the loan to an investor. This derivative asset is recognized at fair value, which reflects the fair value of the commitment after considering contractual loan origination-related fees, estimated sale premiums, direct loan origination costs, the estimated fair value of the expected net future cash flows associated with servicing of loans, and the probability of funding the loan. Also included in gains from mortgage banking activities are changes to the fair value of loan commitments, forward sale commitments, and loans held for sale that occur during their respective holding periods. Substantially all the gains or losses are recognized during the loan holding period as such loans are recorded at fair value. Mortgage servicing rights are recognized as assets based on their fair value upon the sale of loans when the servicing is retained by the Company.

The Company records an estimated liability for obligations associated with loans sold which it may be required to repurchase due to breaches of representations and warranties, early payment defaults or to indemnify an investor for loss incurred which the investor attributes to underwriting or other issues for which the Company is responsible. The Company periodically evaluates the estimates used in calculating these expected losses and adjustments are reported in earnings. As uncertainty is inherent in these estimates, actual amounts paid or charged off could differ from the amount recorded. The provision for repurchases is recorded in other non-interest expense in the consolidated statements of operations.

Mortgage Servicing Rights

The Company measures its mortgage servicing rights (“MSRs”) at fair value. This election was made to facilitate the potential future implementation of a risk mitigation strategy to hedge against potential adverse changes in the fair value of its MSRs which may arise from future changes in interest rates and other market factors. The Company has not implemented hedging strategies for its MSRs at this time.

The fair value of MSRs is estimated by using a cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, servicing costs, ancillary income, and other economic factors based on current market conditions.

Assumptions incorporated into the MSRs valuation model reflect management’s best estimate of factors that a market participant would use in valuing the MSRs. Although sales of MSRs do occur, MSRs do not trade in an active market with readily observable prices so the precise terms and conditions of sales are not available. The Company considers its MSR values to represent a reasonable estimate of their fair value.

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Goodwill

Net assets of entities acquired in purchase transactions are recorded at fair value at the date of acquisition. The historical cost basis of individual assets and liabilities are adjusted to reflect their fair value. Any excess of the purchase price over the estimated fair value is recorded as goodwill. Goodwill is not amortized for book purposes, although it is reviewed for potential impairment on an annual basis, or if events or circumstances indicate a potential impairment. The impairment test is performed in two phases. The first step of the goodwill impairment test compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired; however, if the carrying amount of the reporting unit exceeds its fair value, the Company must proceed with step two. In step two the implied fair value of goodwill, defined as the excess of fair value of the reporting unit over the fair values of the assets and liabilities of the reporting unit as they would be determined in an acquisition, is estimated. If the carrying amount of the goodwill is more than its implied fair value, it is impaired and an impairment charge must be recognized. The test for potential impairment of goodwill must be conducted at least annually, which the Company will conduct such test as of September 30 of each year beginning in the year following the recording of goodwill.

Core Deposit Intangible

The Company has a premium on acquired deposits which represents the intangible value of deposit relationships resulting from deposit liabilities assumed in the Merger. Core deposit intangible assets are amortized over five to seven years. The Company evaluates the remaining useful lives of its core deposit intangible assets each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization. If the estimate of an intangible asset’s remaining useful life is changed, the remaining carrying amount of the intangible asset is amortized prospectively over the revised remaining useful life. The balance of core deposit intangibles, net of accumulated amortization at ~~June~~ September 30, 2012 and December 31, 2011 is $2.87 million and $1.9 million, respectively. Amortization expense for the ~~six~~nine months ended ~~June~~ September 30, 2012 and 2011 totaled $~~175~~310 thousand and $~~318~~396 thousand, respectively. Amortization expense for the three months ended ~~June~~ September 30, 2012 and 2011 totaled $97135 thousand and $8378 thousand, respectively. Amortization of core deposit intangibles, totaling approximately $~~542~~540 thousand per year, is expected to continue until fully amortized in 2017.

Income Taxes

Deferred income taxes are recognized for estimated future tax effects attributable to income tax carry forwards as well as temporary differences between income tax and financial reporting purposes. Valuation allowances are established when necessary to reduce the deferred tax asset to the amount expected to be realized. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted accordingly through the provision for income taxes.

The Company is required to establish a valuation reserve to cover the potential loss of these benefits, primarily due to its net loss since inception. Therefore, a valuation allowance was recorded for the entire amount of the Company’s deferred tax asset at ~~June~~ September 30, 2012 and December 31, 2011.

The Company has adopted the most current accounting guidance that clarifies the accounting for uncertainty in tax positions taken or expected to be taken on a tax return and provides that the tax effects from an uncertain tax position can be recognized in the financial statements only if, based on its merits, the position is more likely than not to be sustained on audit by taxing authorities. Interest and penalties related to uncertain tax positions, if any, are recorded as part of income tax expense. Management believes that all tax positions taken to date are highly certain and, accordingly, no accounting adjustment has been made to the financial statements.

Fair Value of Financial Instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions. Changes in assumptions or in market conditions could significantly affect these estimates.

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Note 2. BUSINESS COMBINATION

On May 31, 2012, the Bancorp completed its acquisition of PBB through a merger of PBB with and into the Bank, with the Bank as the surviving institution. Immediately prior to the Merger, PBB completed a transaction in which its holding company, CGB Holdings, was merged into PBB and accounted for using the historical balances as entities under common control. In the Merger, the Bancorp issued an aggregate of 8,195,469 shares of its common stock to the shareholders of PBB, representing a ratio of 1.7991 shares of Bancorp common stock for each share of PBB common stock outstanding at the effective time of the Merger. The Bancorp shares issued to the PBB shareholders in the Merger constituted approximately 67.2% of the Bancorp’s outstanding common stock after giving effect to the Merger.

U.S. GAAP requires that a company whose security holders retain the majority voting interest in the combined business be treated as the acquirer for financial reporting purposes. Accordingly, the Merger was accounted for as a reverse acquisition whereby PBB was treated as the acquirer for accounting and financial reporting purposes. Therefore, the net assets and liabilities of PBB were carried forward in the Merger at the historical cost basis; whereas the assets, liabilities and noncontrolling interest of the Company were reported at fair value.

To determine the fair values at the date of the Merger, the Company engaged third party valuation specialists to assist in the process of valuing the loan portfolio, time deposits, real estate property and the Bancorp’s common stock. Mortgage servicing assets, derivative instruments, loans held for sale, debt and lease arrangements were valued through internal models, all of which utilize a methodology based on discounted cash flows. Personal property and equipment were valued at their depreciated balances, and the receivable from broker was valued at par as it represents the cash settlement of loans sold. Goodwill of $7.4 million was recorded, which is equal to the excess of the consideration transferred over the fair value of identifiable net assets acquired in connection with the Merger.

Prior to the Merger the statement of operations reflect only the operations of PBB. Following the Merger, the statements of operations reflect the operations of both PBB and the Company. The number of shares issued and outstanding, additional paid-in capital and all references to share quantities of the Company in these notes have been retroactively adjusted to reflect the equivalent number of shares issued by the Company in the Merger, while PBB’s historical equity is being carried forward. Acquisition costs incurred during the ~~six~~nine months ended ~~June~~ September 30, 2012 totaled approximately $1.2 million attributable to the Merger and have been included in professional fees in the statements of operations in 2012. Additionally, the Company incurred severance costs related to the Merger that totaled $1.4 million during the ~~six~~nine months ended ~~June~~ September 30, 2012.

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The following table is an unaudited condensed balance sheet showing the preliminary fair values of the assets acquired and the liabilities assumed as of May 31, 2012, the date of the Merger; the fair values are preliminary as they are subject adjustment based upon the receipt of final appraisals and valuation reports (dollars in thousands):

Assets:
Cash and due from banks	$		5,972
Federal funds sold/interest-bearing deposits in other financial institutions	15,578
Subtotal cash and cash equivalents	21,550
Investment securities available for sale	8,239
Loans held for sale	76,390
Loans held for investment	99,971
Premises and equipment	5,534
Investment in limited partnership	2,756
Core deposit intangible	1,156
Receivable from broker	6,729
Mortgage servicing rights	1,877
Mortgage banking derivatives	1,985
Other assets	6,956
Total assets	233,143

Liabilities:
Deposits	199,633
Borrowings	16,034
Other liabilities	5,049
Total liabilities	220,716

Net assets acquired	12,427
Total consideration transferred (Manhattan Bancorp common shares)	19,823
Resulting goodwill	$	7,396

Included in the table above are loans with fair values totaling approximately $36.8 million which were not subjected to the requirements of ASC 310-30 but have instead been accounted for in accordance with ASC 310-20. At the date of the Merger, the gross contractual amounts receivable for these loans totaled approximately $41.0 million with an estimated $40.0 million expected to be collected.

The fair value of the non-controlling interest in MCM was determined to be zero at the Merger date, based on the Company’s evaluation and conclusion thereon as to the fair value of the underlying assets and liabilities of MCM .

Goodwill recorded in the Merger resulted from the expected synergies of the combined operations of the newly merged entities as well as intangibles that do not qualify for separate recognition such as the acquired workforce. There is no tax deductible goodwill in the transaction.

The following supplementary pro forma information is provided in accordance with ASC 805:

	Revenue
	Revenues (interest income)		Net income (loss)
	(Interest		Earnings
	Income)		(Loss)
	(unaudited, in thousands)
Acquired entity actual from acquisition to June 30, 2012	$	793	$	(1,183	)
Acquired entity actual January 1, 2012 through May 31, 2012	$	3,419	$	(2,992	)
Supplemental pro forma combined for January 1, 2012 to June 30, 2012	$	10,393	$	(3,418	)
Supplemental pro forma combined for:
Supplemental pro forma combined for January 1, 2011 to June 30, 2011	$	12,033	$	(5,874	)
January 1, 2012 to September 30, 2012	$	14,552	$	(1,176	)
January 1, 2011 to September 30, 2011	$	16,768	$	(5,118	)

The pro forma information for 2012 was adjusted to exclude approximately $~~932~~1.2 ~~thousand~~million of ~~Merger-related~~acquisition ~~transaction~~ costs incurred in 2012; such costs were ~~accordingly~~ included in the 2011 pro forma information above.

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Note 3. INVESTMENT SECURITIES

Investment securities have been classified in the balance sheet according to management’s intent. The following table sets forth the investment securities at their amortized cost and estimated fair value with gross unrealized gains and losses as of ~~June~~September 30, 2012, and December 31, 2011.

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(unaudited, in thousands)
June 30, 2012
September 30, 2012
Available-for-sale securities:
U.S. government and agency securities:
Residential mortgage-backed securities	$	87,~~157~~532	$	4590	$	~~(16~~—	)	$	87,~~186~~622
Private label mortgage-backed securities	1,~~476~~373		246		—			1,~~478~~419
Total available-for-sale securities	$	98,~~633~~905	$	47136	$	~~(16~~—	)	$	9,~~664~~041

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in thousands)
December 31, 2011:
Available-for-sale securities:
U.S. government and agency securities:
Debentures	$	1,517	$	1	$	—	$	1,518
Residential mortgage-backed securities	1,941		42		—		1,983
Municipal Securities	5,492		467		—		5,959
Total available-for-sale securities	$	8,950	$	510	$	—	$	9,460

AAn ~~decrease~~increase in unrealized gains and losses on available-for-sale securities of $13123 thousand is included in accumulated other comprehensive income for the three month period ended September 30, 2012, while a decrease in unrealized gains and losses on available-for-sale securities of $~~285~~373 thousand ~~were~~is included in accumulated other comprehensive income for the ~~three~~nine ~~and six~~ month ~~periods~~period ended ~~June~~September 30, 2012~~, respectively~~. During the ~~six~~nine months ended ~~June~~September 30 2012, the Company sold $4.5 million in securities at a gain of $~~528~~529 thousand. There were no sales during 2011.

Securities with a fair value of $6.72 million and $7.2 million as determined by the Federal Home Loan Bank of San Francisco (“FHLB”) at ~~June~~September 30, 2012 and December 31, 2011, respectively, were pledged to secure borrowings from the FHLB. At ~~June~~September 30, 2012, two private label mortgage-backed securities (“MBS”) acquired in the Merger totaling $1.2 million were issued by one issuer. At ~~June~~September 30, 2012, the Company’s private label MBS, comprised of five securities totaling $1.54 million, had a net unrealized gain of $246 thousand. Of these, two securities totaling $1.2 million were rated below investment grade and had an unrealized gain of $245 thousand.

In estimating other-than-temporary losses, management considers among other things (i) the length of time and the extent to which the fair value has been less than amortized cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Any intra-period decline in the market value of the Company’s investment securities during 2012 or 2011 was attributable to changes in market rates of interest rather than credit quality. Accordingly, as of ~~June~~September 30, 2012 and December 31, 2011, management believes that the gross unrealized losses ~~detailed in the table above~~ are temporary and no impairment loss should be realized in the Company’s consolidated statements of operations. There were no securities in a continual loss position at September 30, 2012 and December 31, 2011.

The amortized cost, estimated fair value, and yield of debt securities at September 30, 2012 are shown in the table below. The weighted average yields are based on the estimated effective yields at period end. The estimated effective yields are computed based on interest income at the coupon interest rate, adjusted for the amortization of premiums and accretion of discounts. Expected maturities may differ from contractual maturities because borrowers have the right to prepay obligations.

	Amortized		Fair
	Cost		Value
	(unaudited, dollars in thousands)
Due in One Year or Less	$	1,606	$	1,619
Due from One Year to Five Years	4,212		4,245
Due from Five Years to Ten Years	680		692
Due after Ten Years	2,407		2,485
Totals	$	8,905	$	9,041

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The following table reflects unrealized losses for securities that were in a continual loss position as of June 30, 2012:

June 30, 2012

Less than 12 Months

12 months or longer

Total

Gross

Number of

Fair

Unrealized

Number of

Fair

Unrealized

Number of

Fair

Unrealized

Description of securities

Securities

Value

Losses

Securities

Value

Losses

Securities

Value

Losses

(unaudited, in thousands)

Securities available for sale:

U.S. government and agency securities:

Residential mortgage-backed securities

6,597

(16

)

—

6,597

(16

)

There were no securities in a continual loss position at December 31, 2011.

The amortized cost, estimated fair value, and yield of debt securities at June 30, 2012 are shown in the table below. The weighted average yields are based on the estimated effective yields at period end. The estimated effective yields are computed based on interest income at the coupon interest rate, adjusted for the amortization of premiums and accretion of discounts. Expected maturities may differ from contractual maturities because borrowers have the right to prepay obligations.

					Weighted
	Amortized		Fair		Average
	Cost		Value		Yield
	(unaudited, in thousands)
Due in One Year or Less	$	1,464	$	1,413	3.09	%
Due from One Year to Five Years	4,553		4,554		2.76	%
Due from Five Years to Ten Years	688		730		4.70	%
Due after Ten Years	2,928		2,967		3.36	%
	$	9,633	$	9,664	3.14	%

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Note 4. LOANS HELD FOR INVESTMENT, ALLOWANCE AND CREDIT QUALITY

Loans held for investment are summarized as follows:

	June 30 2012					December 31, 2011
	September 30 2012					December 31, 2011
	Amount			Percentage		Amount			Percentage
	Outstanding			of Total		Outstanding			of Total
	(unaudited)
	(dollars in thousands)
Commercial	$	9683,~~423~~364		3329.59	%	$	46,474		27.5	%
Commercial real estate	~~144~~153,~~183~~925			5055.02	%	98,934			58.6	%
Residential multifamily real estate	23,021			8.0	%	14,644			8.7	%
Residential real estate	38,860			13.9	%	20,907			12.4	%
Residential real estate	8,365			2.9	%	709			0.4	%
Real estate - construction	1,306			0.5	%	35			0.1	%
Real estate - construction	2,542			0.9	%	35			0.1	%
Other	1,593			0.6	%	2,386			1.4	%
Home equity lines of credit	11,496			4.0	%	5,554			3.3	%
Total loans, including net loan costs	279,048			100.0	%	168,736			100.0	%
Other	2,108			0.7	%	2,386			1.4	%
Allowance for loan losses	(1,598		)			(2,355		)
Total loans, including net loan costs	288,138			100.0	%	168,736			100.0	%
Net loans	$	277,450				$	166,381
Allowance for loan losses	(2,085		)			(2,355		)
Net loans	$	286,053				$	166,381

	June 30, 2012						December 31, 2011
	September 30, 2012						December 31, 2011
	Performing		Nonperforming		Total		Performing		Nonperforming		Total
Acquired loans, subject to ASC 310-30	$	143,247	$	6,246	$	149,493	$	96,288	$	1,384	$	97,672
	(unaudited, in thousands)						(in thousands)
Acquired loans, subject to ASC 310-20	72,725		—		$	72,725	21,694		—		$	21,694
Acquired loans, subject to ASC 310-30	$	134,082	$	4,611	$	138,693	$	96,288	$	1,384	$	97,672
Originated loans	63,617		2,303		$	65,920	46,922		2,448		$	49,370
Acquired loans, subject to ASC 310-20	75,430		322		75,752		21,694		—		21,694
Total loans	$	279,589	$	8,549	$	288,138	$	164,904	$	3,832	$	168,736
Originated loans	63,546		1,057		64,603		46,922		2,448		49,370
Total loans	$	273,058	$	5,990	$	279,048	$	164,904	$	3,832	$	168,736

At ~~June~~September 30, 2012 and December 31, 2011, loans with outstanding principal balances of $~~173~~183.95 million and $57.5 million, respectively, were pledged to secure borrowings from the FHLB.

In connection with the Merger, acquired performing loans at May 31, 2012 include $36.8 million of loans at fair value that are accounted for under ASC 310-20. On the date of the Merger, these loans had an outstanding balance of $38.3 million and a related discount of $1.5 million. Merger date information related to performing and nonperforming acquired loans accounted for under ASC 310-30 is as follows:

	Contractual Balance Outstanding		Estimated Contractual Payments		Accretable Yield			Non- Accretable Yield			Fair Value		Carrying Value
	(Dollars in thousands)

Performing loans	$	65,038	$	79,267	$	(13,994	)	$	(3,043	)	$	62,230	$	62,230

Non-performing loans	$	1,971	$	2,377	$	(65	)	$	(1,422	)	$	890	$	890

The estimated contractual payments in the tables above include the estimated impact of prepayments on the loans purchased. These same prepayments are also utilized in estimating the total expected cash flows to be collected.

1918

Table of Contents

The following table reflects changes in accretable yield and nonaccretable difference of acquired loans accounted for under ASC 310-30 (dollars in thousands) for the periods presented:

	For the Three Months Ended
	June 30, 2012						June 30, 2011
	September 30, 2012						September 30, 2011
	(unaudited, in thousands)
	Accretable			Nonaccretable			Accretable			Nonaccretable
Balance at the beginning of the period	$	2941,~~126~~394		$	37,~~437~~831		$	2728,~~939~~574		$	129,~~662~~445
Interest income recognized in earnings	(12,~~847~~445		)	—			(24,~~582~~132		)	—
Additions(1)	143,~~058~~124			43,~~465~~725			—			—
Reclassification of nonaccretable to accretable due	—			—			2,542			(2,542		)
Reclassification of nonaccretable to accretable due to improvement in cash flows	—			—			1,709			(1,709		)
Amounts transferred to accretable due to loan payoffs	57294			(57351		)	~~675~~243			(~~675~~243		)
Amounts not recognized due to chargeoffs on transfers	—			(14		)	—			—
Amounts not recognized due to chargeoffs on transfers to other real estate	—			—			—			—
Balance at the end of period	$	4142,~~394~~367		$	711,~~831~~205		$	2826,~~574~~394		$	97,~~445~~493

	For the Six Months Ended
	For the Nine Months Ended
	June 30, 2012						June 30, 2011
	September 30, 2012						September 30, 2011
	(unaudited, in thousands)
	Accretable			Nonaccretable			Accretable			Nonaccretable
Balance at the beginning of the period	$	28,161		$	6,050		$	27,287		$	19,200
Interest income recognized in earnings	(35,~~495~~940		)	—			(59,~~197~~329		)	—
Additions(1)	14,058			4,465			—			—
Additions(2)	17,182			8,190			—			—
Transfer of CGB loans (2)	—			—			—			(3,216		)
Transfer of CGB loans (3)	—			—			—			(3,216		)
Reclassification of nonaccretable to accretable due	2,613			(2,613		)	5,755			(5,755		)
Reclassification of nonaccretable to accretable due to improvement in cash flows	2,613			(2,613		)	7,464			(7,464		)
Amounts transferred to accretable due to loan payoffs	57351			(57408		)	~~729~~972			(~~729~~972		)
Amounts not recognized due to chargeoffs on transfers	—			(14		)	—			(55		)
Amounts not recognized due to chargeoffs on transfers to other real estate	—			(14		)	—			(55		)
Balance at the end of period	$	4142,~~394~~367		$	711,~~831~~205		$	2826,~~574~~394		$	97,~~445~~493

(1) Additions included ~~above~~for the three months ending September 30,2012 reflect increases associated with updated cash flow estimates prepared based on current loan terms. The cash flow estimate updates were necessary to reflect changed terms in the loan portfolio (renewals, refinances, etc.) in order to properly assess current accretable and ~~non-accretable~~nonaccretable ~~yield~~differences. These ~~associated~~updates ~~with~~to ~~loans~~estimated ~~acquired~~cash flows did not result in any significant change to the ~~Merger~~estimated fair value of acquired loans as of the acquisition date as presented on the previous page. Accordingly, the offsetting entry to these additions was to estimated contractual payments receivable and goodwill was not adjusted.

(2) On ~~December~~Additions ~~31,~~included ~~2010,~~above ~~the~~reflect ~~Company~~increases ~~sold~~to ~~$13.5~~accretable ~~million~~and innonaccretable ~~loans~~yield atassociated ~~fair~~with ~~value~~loans ~~(its~~acquired ~~historical cost basis post-merger) and $1.5 million~~ in ~~other real estate owned at fair value to its wholly owned subsidiary CGB Asset Management, Inc. On March 30, 2011,~~ the ~~ownership~~business ofcombination ~~CGB~~described ~~Asset~~in ~~Management,~~Note ~~Inc.~~2 ~~was~~plus ~~transferred~~additions ~~from~~described ~~CGB~~in ~~Holdings,~~(1) ~~Inc~~above. ~~to Carpenter Community BancFunds through an exchange of common stock. The transfer was accounted for at historical cost because the companies were under common control.~~

20(3) On December 31, 2010 the Company sold $13.5 million in loans at fair value (its historical basis post-merger) and $1.5 million in other real estate owned at fair value to its wholly owned subsidiary CGB Asset Management, Inc. On March 30, 2011, the ownership of CGB Asset Management, Inc. was transferred from CGB Holdings, Inc. to Carpenter Community BancFunds through an exchange of common stock. The transfer was accounted for at historical cost because the companies were under common control.

Table of Contents

Credit Quality

Delinquency

The following table shows the delinquency status of the loans held for investment portfolio as of ~~June~~ September 30, 2012 and December 31, 2011:

	June 30, 2012
	September 30, 2012
	Current		30 to 59 Days		60 to 89 Days		90 Days or more		Total
	(unaudited, in thousands)
Commercial	$	9482,~~012~~094	$	951,019	$	—250	$	~~2,316~~1	$	9683,~~423~~364
Commercial real estate	~~139~~152,~~663~~365		581,505		—55		~~4,462~~		~~144~~153,~~183~~925
Residential multifamily real estate	23,021		—		—		—		23,021
Residential real estate	38,760						100		38,860
Residential real estate	8,142		—		—		223		8,365
Real estate - construction	1,306								1,306
Real estate - construction	2,542		—		—		—		2,542
Other	1,593								1,593
Home equity lines of credit	11,496		—		—		—		11,496
Total	$	276,118	$	2,524	$	305	$	101	$	279,048
Other	1,511		8		—		589		2,108
Total loans, including net loan costs	$	280,387	$	161	$	—	$	7,590	$	288,138

	December 31, 2011
	Current		30 to 59 Days		60 to 89 Days		90 Days or more		Total
	(in thousands)
Commercial	$	42,281	$	818	$	7	$	3,368	$	46,474
Commercial real estate	95,525		261		—		3,148		98,934
Residential multifamily real estate	14,644		—		—		—		14,644
Residential real estate	20,612		—		30		265		20,907
Residential real estate	709		—		—		—		709
Real estate - construction	35		—		—		—		35
Home equity lines of credit	5,446		49		—		59		5,554
Other	2,278		49		—		59		2,386
Other	2,386		—		—		—		2,386
Total	$	160,731	$	1,128	$	37	$	6,840	$	168,736
Total loans, including net loan costs	$	161,026	$	1,128	$	7	$	6,575	$	168,736

There were no loans past due 90 days or more that are still accruing interest as of ~~June~~ September 30, 2012 and December 31, 2011.

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Risk Categories

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt. These factors include, but are not limited to current financial information, historical payment experience, credit documentation, public information, and current economic trends. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a monthly basis. The Company uses the following definitions for risk ratings:

Pass: Loans with satisfactory risk are classified as “pass.” Loans considered to be satisfactory risk are divided into six additional categories, based primarily on the borrower’s financial strength and ability to service the debt and the amount of supervision required by the loan officer. All new extensions of credit should qualify for one of the six “pass” grades.

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, this potential weakness may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have at least one well-defined weakness that could jeopardize the liquidation of the debt. There is a distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Table of Contents

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss: Loans classified as loss are considered uncollectible. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is impractical to defer writing off this virtually worthless asset, even though partial recovery may be affected in the future. Losses should be taken in the period in which they are deemed to be uncollectible.

Based on management’s most recent analysis, the risk category of loans by type of loan as of ~~June~~ September 30, 2012 and December 31, 2011 follows:

	June 30, 2012
	September 30, 2012
			Special
	Pass		Mention		Substandard		Doubtful		Total
	(unaudited, in thousands)
Commercial	$	8371,~~732~~203	$	78,~~108~~367	$	43,~~395~~274	$	~~1,188~~520	$	9683,~~423~~364
Commercial real estate	~~132~~139,~~216~~060		14,~~319~~252		10,~~648~~613		—		~~144~~153,~~183~~925
Residential multifamily real estate	23,021		—		—		—		23,021
Residential real estate	36,681		1,748		431		—		38,860
Residential real estate	8,365		—		—		—		8,365
Real estate - construction	1,306		—		—		—		1,306
Real estate - construction	2,542		—		—		—		2,542
Other	1,542		37		14				1,593
Home equity lines of credit	10,410		863		223		—		11,496
Total Loans	$	249,792	$	14,404	$	14,332	$	520	$	279,048
Other	2,047		44		17		—		2,108
Total Loans	$	262,333	$	9,334	$	15,283	$	1,188	$	288,138
	December 31, 2011
			Special
	Pass		Mention		Substandard		Doubtful		Total
	(in thousands)
Commercial	$	38,258	$	2,423	$	3,410	$	2,383	$	46,474
Commercial real estate	89,459		2,500		6,975		—		98,934
Residential multifamily real estate	13,799		845		—		—		14,644
Residential real estate	182		283		244		—		709
Real estate - construction	35		—		—		—		35
Home equity lines of credit	5,554		—		—		—		5,554
Other	2,364		22		—		—		2,386
Total Loans	$	149,651	$	6,073	$	10,629	$	2,383	$	168,736

The Company had no loans classified as loss at June 30, 2012 or December 31, 2011.

	December 31, 2011
			Special
	Pass		Mention		Substandard		Doubtful		Total
	(in thousands)
Commercial	$	38,258	$	2,423	$	3,410	$	2,383	$	46,474
Commercial real estate	89,459		2,500		6,975		—		98,934
Residential real estate	19,535		1,128		244		—		20,907
Real estate - construction	35		—		—		—		35
Other	2,364		22		—		—		2,386
Total Loans	$	149,651	$	6,073	$	10,629	$	2,383	$	168,736

22The Company had no loans classified as loss at September 30, 2012 or December 31, 2011.

Table of Contents

Impaired Loans

A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. TDRs, which are described in Note 1, also are classified as impaired. The table below reflects the Company’s impaired loans as of September 30, 2012 and December 31, 2011:

The table below reflects the Company’s impaired loans as of June 30, 2012 and December 31, 2011:

	September 30, 2012						December 31, 2011
	Unpaid				Allowance for		Unpaid				Allowance for
	Principal		Recorded		Loan Losses		Principal		Recorded		Loan Losses
	Balance		Investment		Allocated		Balance		Investment		Allocated
	(unaudited, in thousands)						(in thousands)
With no related allowance recorded:
Commercial	$	1,628	$	1,061	$	—	$	937	$	937	$	—
Commercial real estate	288		288		—		—		—		—
Residential real estate	16		16		—		244		244		—
Other	14		14		—		59		59		—
Subtotal	1,946		1,379		—		1,240		1,240		—

With an allowance recorded:
Commercial	—		—		—		1,208		1,208		627
Subtotal	—		—		—		1,208		1,208		627

Totals	$	1,946	$	1,379	$	—	$	2,448	$	2,448	$	627

	June 30, 2012				December 31, 2011
	Unpaid		Allowance for		Unpaid		Allowance for
	Principal		Loan Losses		Principal		Loan Losses
	Balance		Allocated		Balance		Allocated
	(unaudited, in thousands)				(in thousands)
With no related allowance recorded:
Commercial	$	626	$	—	$	937	$	—
Commercial real estate	26		—		—		—
Multifamily real estate	—		—		—		—
Residential real estate	190		—		244		—
Real estate - construction	—		—		—		—
Home equity lines of credit	20		—		—		—
Other	21		—		59		—
Subtotal	$	883	$	—	$	1,240	$	—
With an allowance recorded:
Commercial	$	1,132	$	568	$	1,208	$	627
Commercial real estate	288		38		—		—
Multifamily real estate	—		—		—		—
Residential real estate	—		—		—		—
Real estate - construction	—		—		—		—
Home equity lines of credit	—		—		—		—
Other	—		—		—		—
Subtotal	$	1,420	$	606	$	1,208	$	627
TOTAL	$	2,303	$	606	$	2,448	$	627

Table of Contents

The following tables include the impaired loan average balances and interest income information for the income statement periods presented in these financial statements:

	Three Months Ended June 30,
	Three Months Ended September 30,
	2012						2011
					Cash Basis						Cash Basis
	Average		Interest		Interest		Average		Interest		Interest
	Recorded		Income		Income		Recorded		Income		Income
	Investment		Recognized		Recognized		Investment		Recognized		Recognized
	(unaudited, in thousands)
All impaired loans
Commercial	$	21,~~190~~403	$	111	$	111	$	21,~~416~~578	$	—	$	—
Commercial real estate	~~290~~302		—		—		—		—		—
Multifamily real estate	—		—		—		—		—		—
Residential real estate	112		8		8		355		—		—
Residential real estate	213		—		—		—		—		—
Real estate - construction	—		—		—		—		—		—
Home equity lines of credit	19		—		—		—		—		—
Other	17		—		—		—		—		—
Other	19		—		—		81		—		—
	$	1,834	$	9	$	9	$	1,933	$	—	$	—
	$	2,730	$	11	$	11	$	2,497	$	—	$	—

	Six Months Ended June 30,
	Nine Months Ended September 30,
	2012						2011
					Cash Basis						Cash Basis
	Average		Interest		Interest		Average		Interest		Interest
	Recorded		Income		Income		Recorded		Income		Income
	Investment		Recognized		Recognized		Investment		Recognized		Recognized
	(unaudited, in thousands)
All impaired loans
Commercial	$	21,~~439~~647	$	11—	$	11—	$	1,~~611~~052	$	—	$	—
Commercial real estate	~~193~~201		—13		—13		—		—		—
Multifamily real estate	—		—		—		—		—		—
Residential real estate	158		8		8		236		—		—
Residential real estate	225		—		—		—		—		—
Real estate - construction	—		—		—		—		—		—
Home equity lines of credit	6		—		—		—		—		—
Other	11		—		—		—		—		—
Other	6		—		—		54		—		—
	$	2,017	$	21	$	21	$	1,288	$	—	$	—
	$	2,869	$	11	$	11	$	1,665	$	—	$	—

The table below reflects the Company’s loans on non-accrual status, excluding loans accounted for under ASC 310-30, for the periods indicated:

	June 30, 2012		December 31, 2011
	September 30, 2012		December 31, 2011
	(unaudited)
	(in thousands)
Non-accrual Loans
Commercial	$	1,061	$	2,145
Commercial	$	1,758	$	2,145
Commercial real estate	288		—
Commercial real estate	314		—
Residential real estate	16		244
Residential multifamily real estate	—		—
Other	14		59
Residential real estate	190		244
Total	$	1,379	$	2,448
Real estate - construction	—		—
Home equity lines of credit	20		—
Other	21		59
Total	$	2,303	$	2,448

2422

Table of Contents

Troubled Debt Restructurings

As of ~~June~~September 30, 2012 and December 31, 2011, the Company had TDRs totaling $~~2.2~~777 thousand and $2.4 million, respectively, as presented in the following tables for those loans categories for which TDR balances existed as of the dates presented. As provided for in U.S. GAAP, TDRs modified prior to a business combination and accounted for under ASC ~~301~~310-30 are not included in these disclosures.

	As of and for the Six Months Ended June 30, 2012
	As of and for the Nine Months Ended September 30, 2012
		Pre-Modification		Post-Modification
		Outstanding		Outstanding				Lost
	Number of	Recorded		Recorded		Foregone		Interest
	Contracts	Investment		Investment		Principal		Income
	(unaudited in thousands except for number of contracts)
Commercial	31	$	21,~~285~~236	$	~~1,929~~485	$	—567	$	1372
Residential real estate	1	250		250		—		—
Commercial real estate	1	294		263		—		10
Home equity lines of credit	1	20		18		—		—
Residential real estate	1	21		16		—		1
Other	1	1922		1713		—		—1
	6	$	2,574	$	2,214	$	—	$	13
	4	$	1,573	$	777	$	—	$	84
	As of and for the Year Ended December 31, 2011
		Pre-Modification		Post-Modification
		Outstanding		Outstanding				Lost
	Number of	Recorded		Recorded		Foregone		Interest
	Contracts	Investment		Investment		Principal		Income
	(in thousands except for number of contracts)
Commercial	5	$	2,549	$	2,141	$	—	$	19
Residential real estate	1	250		250		—		—
	6	$	2,799	$	2,391	$	—	$	19

	As of and for the Year Ended December 31, 2011
		Pre-Modification		Post-Modification
		Outstanding		Outstanding				Lost
	Number of	Recorded		Recorded		Foregone		Interest
	Contracts	Investment		Investment		Principal		Income
	(in thousands except for number of contracts)
Commercial	5	$	2,549	$	2,141	$	—	$	19
Residential real estate	1	250		250		—		—
	6	$	2,799	$	2,391	$	—	$	19

Troubled debt modification activity during the income statement periods is presented in the following tables for those loan categories where occurred during the periods ended:

	For the Six Months Ended June 30, 2012
		Pre-Modification		Post-Modification				Lost
	Number of	Outstanding Recorded		Outstanding Recorded		Forgiven		Interest
	Contracts	Investment		Investment		Principal		Income
	(unaudited, in thousands)
Home equity lines of credit	1	$	21	$	21	—		1
Other	1	22		22		—		1
Total	2	$	43	$	43	$	—	$	2

	For the Six Months Ended June 30, 2011
		Pre-Modification		Post-Modification				Lost
	Number of	Outstanding Recorded		Outstanding Recorded		Forgiven		Interest
	Contracts	Investment		Investment		Principal		Income
	(unaudited, in thousands)
Commercial	1	$	800	$	800	$	—	$	—
Commercial real estate	1	213		213		—		—
Total	2	$	1,013	$	1,013	$	—	$	—

Table of Contents

As depicted in the tables above, there was no principal forgiven on TDRs in 2012 or 2011. In addition, there were no TDR re-defaults that occurred in 2012 or 2011, and there were no commitments to lend additional funds to borrowers whose terms have been modified in TDRs as of June 30, 2012 and December 31, 2011.

	For the Nine Months Ended September 30, 2012
		Pre-Modification		Post-Modification				Lost
	Number of	Outstanding Recorded		Outstanding Recorded		Forgiven		Interest
	Contracts	Investment		Investment		Principal		Income
	(unaudited, in thousands)
Commercial real estate	1	$	294	$	263	$	—	$	10
Residential real estate	1	21		16		—		1
Other	1	22		13		—		1
Total	3	$	337	$	292	$	—	$	12

	For the Nine Months Ended September 30, 2011
		Pre-Modification		Post-Modification				Lost
	Number of	Outstanding Recorded		Outstanding Recorded		Forgiven		Interest
	Contracts	Investment		Investment		Principal		Income
	(unaudited, in thousands)
Commercial	1	$	1,250	$	1,208	$	567	$	7
Residential real estate	1	250		250		—		—
Total	2	$	1,500	$	1,458	$	567	$	7

	For the Three Months Ended September 30, 2012
		Pre-Modification		Post-Modification				Lost
	Number of	Outstanding Recorded		Outstanding Recorded		Forgiven		Interest
	Contracts	Investment		Investment		Principal		Income
	(unaudited, in thousands)
Commercial real estate	1	$	294	$	263	$	—	$	10
Total	1	$	294	$	263	$	—	$	10

	For the Three Months Ended September 30, 2011
		Pre-Modification		Post-Modification				Lost
	Number of	Outstanding Recorded		Outstanding Recorded		Forgiven		Interest
	Contracts	Investment		Investment		Principal		Income
	(unaudited, in thousands)
Commercial real estate	1	$	557	$	557	—		—
Total	1	$	557	$	557	$	—	$	—

Allowance for Loan Losses

The allowance for loan losses is a valuation allowance for probable losses embedded in the Company’s existing loan portfolios as of the measurement date. In order to determine the adequacy of the Company’s loan loss allowance to absorb future losses, management performs periodic credit reviews of the loan portfolio. In so doing, management considers current economic conditions, historical credit loss experiences and other factors. Although management uses the best information available to make these estimates, future adjustments to the allowance may be necessary due to changes in economic, operating, and regulatory conditions, most of which are beyond the Company’s control. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

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The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt. (See “Risk Categories” in this same Note for a description of the various risk categories.) The Company employs a 10-point loan grading system in an effort to more accurately track the inherent quality of the loan portfolio. The 10-point system assigns a value of “1” or “2” to loans that are substantially risk free. Modest, average, and acceptable risk loans are assigned point values of “3”, “4”, and “5”, respectively. Loans on the pass watch list are assigned a point value of “6.” Point values of “7,” “8,” “9,” and “10” are assigned, respectively, to loans classified as special mention, substandard, doubtful and loss. Using these risk factors, management conducts an analysis of the general reserves applying quantitative factors based upon different risk scenarios. In addition, management considers other trends that are qualitative relative to the Company’s marketplace, current demographic factors, the risk rating of the loan portfolios as discussed above, amounts in non-performing assets, and concentration factors. The following table reflects the activity in the allowance for loan losses during the periods presented:

	Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011					~~2011~~
	Beginning									Provision			Ending		Beginning							Provision			Ending
	(unaudited, in thousands)
	Balance			Charge-offs			Recoveries			(Reduction)			Balance		Balance		Charge-offs			Recoveries		(Reduction)			Balance
Balance, beginning of period	$	2,085		$	1,402		$	2,355		$	1,177
	(unaudited, in thousands)														(unaudited, in thousands)
Charged off loans
Allowance for loan losses:
Commercial	(585		)	(1,528		)	(1,080		)	(1,545		)
Commercial	$	1,813		$	(513	)	$	2		$	169		$	1,471	$	748	$	(508	)	$	—	$	491		$	731
Commercial real estate	—			(85		)	(1		)	—
Commercial real estate	355			—			—			164			519		288		—			—		45			333
Residential real estate held for investment	—			—			(13		)	(59		)
Construction real estate	—			—			—			1			1		—		—			—		45			45
Other	(14		)	(245		)	(42		)	(86		)
Residential 1-4 family real estate	28			(13		)	—			(15		)	—		44		(60		)	—		52			36
Total charge-offs	(599		)	(1,858		)	(1,136		)	(1,690		)
Residential multi-family real estate	46			—			—			17			63		54		—			—		—			54
Provision for loan losses
Home equity lines of credit	47			—			—			(31		)	16		44		—			—		—			44
Commercial	(122		)	2,110			47			2,111
Other	66			(30		)	17			(38		)	15		—		(68		)	—		228			160
Commercial real estate	41			491			205			451
Total	$	2,355		$	(556	)	$	19		$	267		$	2,085	$	1,178	$	(636	)	$	—	$	861		$	1,403
Residential real estate held for investment	92			329			63			381
	Three Months Ended June 30,
Real estate - construction	(1		)	(45		)	(3		)	—
	2012														2011
Other	35			134			67			133
	Beginning									Provision			Ending		Beginning							Provision			Ending
Unallocated	67			—			—
	Balance			Charge-offs			Recoveries			(Reduction)			Balance		Balance		Charge-offs			Recoveries		(Reduction)			Balance
Total Provision (Reduction)	112			3,019			379			3,076
	(unaudited, in thousands)														(unaudited, in thousands)
Balance, end of period	$	1,598		$	2,563		$	1,598		$	2,563
Allowance for loan losses:
Commercial	$	1,396		$	(434	)	$	2		$	507		$	1,471	$	1,167	$	(195	)	$	—	$	(241	)	$	731
Commercial real estate	358			(1		)	—			162			519		108		—			—		225			333
Construction real estate	1			—			—			—			1		48		—			—		(3		)	45
Residential 1-4 family real estate	16			(13		)	—			(3		)	—		27		(59		)	—		68			36
Residential multi-family real estate	43			—						20			63		32		—			—		22			54
Home equity lines of credit	13			—			—			3			16		19		—			—		25			44
Other	7			(2		)	17			(7		)	15		5		(6		)	—		161			160
Total	$	1,834		$	(450	)	$	19		$	682		$	2,085	$	1,406	$	(260	)	$	—	$	257		$	1,403

The following table reflects changes in the allowance for loan losses for acquired loans accounted for under ASC310-30 for the periods presented:

	Six Months Ended June 30,
	Nine Months Ended September 30,
	2012			2011
	(unaudited, in thousands)
Beginning balance of allowance for loan losses	$	310		$	—
Provision for loan losses on acquired loans	—67			~~232~~1,138
Reduction in provision based on improvement in expected cash flows	(310		)	(176		)
Ending balance of allowance for loan losses	$	—67		$	56962

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The following tables present the allowance for loan losses by portfolio segment and impairment method as of the following dates:

									Residential		Home equity
	September 30, 2012
			Commercial		Construction		Residential		~~multi-family~~		~~lines of~~
	Commercial		real estate		real estate		real estate		~~real estate~~Other		~~credit~~Unallocated		~~Other~~Total		~~Total~~
	(unaudited, in thousands)
Allowance as of June 30, 2012 allocated to:
Allowance allocated to:
Individually evaluated for impairment	$	~~568~~—	$	38—	$	—	$	—	$	—	$	—	$	—	$	~~606~~
Collectively evaluated for impairment	~~903~~744		~~481~~543		1—		—156		6321		1667		151,531		~~1,479~~
Loans under ASC 310-30	—36		—16		—		—15		—		—		—67		—
Totals	$	1,471	$	519	$	1	$	—	$	63	$	16	$	15	$	2,085
Total	$	780	$	559	$	—	$	171	$	21	$	67	$	1,598
Loans as of June 30, 2012:
Loans by evaluation method:
Individually evaluated for impairment	$	1,~~758~~061	$	~~314~~288	$	—	$	—16	$	—14	$	~~210~~—	$	211,379	$	~~2,303~~
Collectively evaluated for impairment	7768,~~625~~107		3750,~~039~~169		36		119,~~323~~270		71,~~173~~394		~~11,286~~—		1138,~~860~~976		~~136,342~~
Loans under ASC 310-30	1714,~~040~~196		~~106~~103,~~830~~468		21,~~506~~270		719,~~042~~574		~~15,848~~185		—		~~227~~138,693		~~149,493~~
Totals	$	96,423	$	144,183	$	2,542	$	8,365	$	23,021	$	11,496	$	2,108	$	288,138
Total	$	83,364	$	153,925	$	1,306	$	38,860	$	1,593	$	—	$	279,048
									Residential		Home equity
			Commercial		Construction		Residential		multi-family		lines of
	Commercial		real estate		real estate		real estate		real estate		credit		Other		Total
	(in thousands)
Allowance as of December 31, 2011 allocated to:
Individually evaluated for impairment	$	627	$	—	$	—	$	—	$	—	$	—	$	—	$	627
Collectively evaluated for impairment	876		355		—		75		46		—		66		1,418
Loans under ASC 310-30	310		—		—		—		—		—		—		310
Totals	$	1,813	$	355	$	—	$	75	$	46	$	—	$	66	$	2,355
Loans as of December 31, 2011:
Individually evaluated for impairment	$	2,145	$	—	$	—	$	—	$	—	$	244	$	59	$	2,448
Collectively evaluated for impairment	29,044		26,705		35		244		5,164		5,310		2,114		68,616
Loans under ASC 310-30	15,285		72,229		—		465		9,480		—		213		97,672
Totals	$	46,474	$	98,934	$	35	$	709	$	14,644	$	5,554	$	2,386	$	168,736

	December 31, 2011
			Commercial		Construction		Residential
	Commercial		real estate		real estate		real estate		Other		Unallocated		Total
	(in thousands)
Allowance allocated to:
Individually evaluated for impairment	$	627	$	—	$	—	$	—	$	—	$	—	$	627
Collectively evaluated for impairment	876		355		—		121		66		—		1,418
Loans under ASC 310-30	310		—		—		—		—		—		310
Total	$	1,813	$	355	$	—	$	121	$	66	$	—	$	2,355

Loans by evaluation method:
Individually evaluated for impairment	$	2,145	$	—	$	—	$	244	$	59	$	—	$	2,448
Collectively evaluated for impairment	29,053		26,705		35		10,718		2,114		—		68,625
Loans under ASC 310-30	15,276		72,229		—		9,945		213		—		97,663
Total	$	46,474	$	98,934	$	35	$	20,907	$	2,386	$	—	$	168,736

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Note 5. LOANS HELD FOR SALE

Prior to the Merger, PBB did not engage in loan sale activity. The following table summarizes loans held for sale following the Merger:

	June 30, 2012
	September 30, 2012
	(unaudited)
	(in thousands)
Originated by the Bank (at fair value)	$	6568,~~134~~791
Purchased from other financial institutions:
Carried at fair value	56,~~443~~954
Total loans held for sale at fair value	7075,~~577~~745
Purchased from other financial institutions:
Carried at cost	~~327~~325
	$	7076,~~904~~070

Loans originated by the Company which are held for sale at fair value are typically sold within 30 days. ~~Negative~~Positive fair value adjustments of $~~262~~1.0 million and $567 thousand were recorded on loans held for sale during the three and ~~six~~nine months ended ~~June~~September 30, 2012, respectively. Purchased loans that are hedged are carried at fair value for purposes of managing interest rate risk. To this end, the Bank had forward sale contracts to sell all of its purchased loans carried at fair value as of ~~June~~September 30, 2012 to BOM Capital, LLC (“BOMC”), aan ~~mortgage-centric~~ institutional mortgage broker-dealer and wholly-owned subsidiary of MCM, which had forward sale contracts to sell these loans to external counterparties.

28Consistent with industry practice, the Company has established a contingent liability account for fraud, early payoffs and early payment defaults that may arise from mortgage loans sold to investors. At September 30, 2012 this contingency reserve totaled $301 thousand. Since the Company’s inception, it has incurred no losses due to early payoffs, early payment defaults, or fraud related to loans sold to investors.

~~Table~~There ofwere ~~Contents~~no delinquent loans held for sale at September 30, 2012. There were no loans held for sale at December 31, 2011.

Consistent with industry practice, the Company has established a contingent liability account for fraud, early payoffs and early payment defaults that may arise from mortgage loans sold to investors. At June 30, 2012 this contingency reserve totaled $211 thousand. Since the Company’s inception, it has incurred no losses due to early payoffs, early payment defaults, or fraud related to loans sold to investors.

There were no delinquent loans held for sale at June 30, 2012. There were no loans held for sale at December 31, 2012.

Note 6. MORTGAGE SERVICING RIGHTS

Mortgage servicing rights are fair valued on a recurring basis using significant unobservable inputs (level 3) as further described in Note 10. Prior to the Merger, the Company’s operations did not include MSRs. The following table summarizes the Company’s MSR activity ~~and key MSR valuation assumptions for the periods indicated~~:

	For the Three and Six Months Ended
	Three Months Ended			Nine Months Ended
	June 30, 2012
	September 30, 2012			September 30, 2012
	(unaudited, in thousands)
Balance at the beginning of the period	$	—2,167		$	—
Additions resulting from:
Acquired in Merger	~~1,877~~—			1,877
Loans sold with servicing retained	~~582~~1,579			2,161
Changes in fair value due to:
Time and payoffs	(35344		)	(379		)
Changes in assumptions	~~(257~~—		)	(257		)
Balance at the end of the period	$	23,~~167~~402		$	3,402
Unpaid principal balance of loans serviced for others at June 30, 2012	$	216,653
	June 30, 2012
	(unaudited)
Mortgage servicing rights as a % of associated mortgage loans	1.00		%
Discount rate	10.50		%
Total prepayment speeds	13.10		%
Expected weighted average life (years)	5.97
Weighted average servicing fee	0.27		%

The following table provides the key MSR valuation assumptions as of September 30, 2012:

Mortgage servicing rights as a % of associated mortgage loans	0.92	%
Discount rate	10.50	%
Total prepayment speeds	12.90	%
Expected weighted average life (years)	6.02
Weighted average servicing fee	0.26	%

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The book value of the Company’s MSRs reflects their fair value and not their market value, which may be higher or lower given current market conditions and could change favorably or unfavorably in the future.

The following table reflects the sensitivity test performed by the Company to evaluate the estimated impact of potential changes in economic factors on the fair value of its MSRs. The Company has identified two key criteria to test: 1) changes in the discount rate due to potential changes in market yield assumptions, and 2) changes in prepayment speeds as a result of potential changes in interest rates. Test results related to prepayment speeds were predicated on one-percent movements in U.S. Treasury 10-year yields which, in turn, were assumed to result in a 0.50% change in interest rates for new loans. The prepayment incentive or disincentive arising from a plus or minus 0.50% change in rates for new loans was the key factor in deriving projected prepayment speeds for the remaining life of the underlying loans.

	September 30, 2012
	(unaudited, dollars in thousands)
	Change In Prepayment Speed Due to a 0.5% Change in Interest Rates						Change in Discount Rate
Sensitivity test criteria	- 0.50		%	+0.50		%	-1.00		%	1.00		%

Resulting values	$	2,968		$	3,844		$	3,529		$	3,284
Increase/(decrease) in value from book value at September 30, 2012
Amount	$	(434	)	$	442		$	127		$	(118	)
Percent	-12.8		%	13.0		%	3.7		%	-3.5		%

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	June 30, 2012
	(unaudited, dollars in thousands)
	Change In Prepayment Speed Due to a 0.5% Change in Interest Rates						Change in Discount Rate
Sensitivity test criteria	- 0.50		%	+ 0.50		%	-1.00		%	1.00		%
Resulting values	$	1,779		$	2,503		$	2,246		$	2,094
Increase/(Decrease) in value from book value at June 30, 2012	$	(388	)	$	336		$	79		$	(73	)
Increase/(Decrease) in value from book value at June 30, 2012	-17.9		%	15.5		%	3.6		%	3.4		%

The results of this test are estimates based on hypothetical scenarios, whereby each criterion is modeled in isolation. In reality, changes in one factor might result in changes in several other factors, some of which may not have been included in this analysis. As a result, actual future changes in MSR values may differ significantly from those displayed below.

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Note 7. DEFERRED TAXES

At ~~June~~September 30, 2012, the Company had a federal net operating loss carry forward of approximately $2422.08 million that will begin expiring in 2027 and a state net operating loss carry forward of approximately $2627.65 million that will begin expiring in 2017. The following is a summary of the components of the Company’s net deferred tax asset at ~~June~~September 30, 2012 and December 31, 2011:

	June 30,			December 31,
	September 30,			December 31,
	2012			2011
	(unaudited)
	(in thousands)
Deferred tax assets:
Federal and state loss carry forwards	$	10,~~326~~661		$	1,244
Credit losses	2,~~276~~050			868
Accrued expenses	~~1,312~~673			—
Interest on nonaccrual loans	~~129~~130			—
Depreciation differences	—			168
Share-based compensation	235			168
Share-based compensation	228			—
Start up and organizational costs	680			417
Start up and organizational costs	692			417
Unfavorable leases	52			—
Unfavorable leases	61			—
Credit carryforward	44			—
Liabilities	170			—
Premium on deposits acquired in merger	106			167
Premium on deposits acquired in merger	151			167
Liabilities	150			—
Other	4682			1,169
Total deferred tax assets	1514,~~435~~863			4,033
Valuation allowance	(1312,~~123~~607		)	(2,074		)
Deferred tax liabilities:
Deferred loan costs	(9284		)	~~(1,153~~—		)
Depreciation differences	(~~720~~728		)	—(1,153		)
Core deposit intangible	(1,~~164~~114		)	(767		)
Favorable leases	(~~185~~176		)	—
Investment in subsidiaries	(83		)	(39		)
Other	(6871		)	—
Net deferred tax assets	$	—		$	—

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Note 8. FHLB ADVANCES, ~~OTHER BORROWINGS~~ AND ~~SUBSEQUENT~~OTHER ~~EVENT~~BORROWINGS

At ~~June~~September 30, 2012, the Bank has a $95101.76 million borrowing capacity with the FHLB, which is collateralized by loans with principal balances of $~~173~~183.95 million and securities with a fair value of $6.72 million as determined by the FHLB. The carrying amount of advances outstanding at ~~June~~September 30, 2012 and December 31, 2011 totaled $1924.76 million and $0, respectively. Balances at ~~June~~September 30, 2012 consist of open advances totaling $1520.0 million and a term advance of $4.76 million maturing on June 27, 2013, with interest payable semi-annually at a contractual rate of 4.38%.

The Bank has a $1.1 million mortgage on a branch location at ~~June~~September 30, 2012 with interest-only payments at a contractual rate of 5%, due in full on April 5, 2021. The mortgage is carried at $1.3 million reflecting the purchase accounting at the time of the Merger.

At ~~June~~September 30, 2012, the Bank maintains lines of credit totaling $17 million with correspondent banks for obtaining overnight funds. The lines are subject to availability and have restrictions as to the number of days funds can be used each month.

Related Party Credit Facility

In connection with the Merger, the Company acquired debt with an approximate fair value of $5 million which ~~remains~~remained outstanding at ~~June~~September 30, 2012. The discussion that follows includes details related to the borrowing arrangement prior to the acquisition and assumed by the Company in the Merger. As discussed in more detail in Note 16, the principal balance and all accrued but unpaid interest under this borrowing arrangement was repaid in full on November 5, 2012.

Bancorp entered into a Credit Agreement dated July 25, 2011 (the “Credit Agreement”) with Carpenter Fund Management Company, LLC, as administrative agent (“Agent”), and Carpenter Community Bancfund, L.P. and Carpenter Community Bancfund-A, L.P., as lenders (the “Lenders”). The Credit Agreement provided for (i) an initial loan to Bancorp in the amount of $5 million (the “Initial Loan”), and (ii) a subsequent loan to Bancorp in the amount of $2 million (the “Optional Loan”) to be made at the sole and exclusive option of the Lenders at the written request of Bancorp given not later than November 30, 2011. Bancorp received the proceeds from the Initial Loan on July 26, 2011, and used the proceeds to make a $5 million loan to MCM. The Optional Loan was not requested.

As of July 25, 2011, Carpenter Fund Manager GP, LLC, which is the general partner of Carpenter Community Bancfund, L.P. and Carpenter Community Bancfund-A, L.P., beneficially owned 1,500,000 shares of the Company’s common stock, or 37.6% of the issued and outstanding shares of the Company. Carpenter Fund Manager, GP, LLC has the right to appoint one representative to the Company’s Board of Directors for so long as it beneficially owns at least 10% of the issued and outstanding shares of the Company.

The obligations of Bancorp under the Credit Agreement were initially secured by a first priority pledge of all of the equity interests of the Bank. Loans under the Credit Agreement bear interest at a rate of 8.0% per annum and initially had a final maturity date of June 30, 2012. Bancorp is permitted to make voluntary prepayments at any time without payment of a premium, and is required to make mandatory prepayments (without payment of a premium) with (i) net cash proceeds from certain issuances of capital stock, (ii) net cash proceeds from certain issuances of debt, and (iii) net cash proceeds from certain asset sales.

The Credit Agreement contains customary representations, warranties and affirmative and negative covenants applicable to Bancorp and its subsidiaries, including, among other things, restrictions on liens, indebtedness, investments, acquisitions, dispositions, affiliate transactions, leases, fundamental changes, and dividends and other distributions. In addition, Bancorp was initially required to maintain a minimum consolidated net worth of $18 million plus the net cash proceeds of any issuance of capital stock by Bancorp after July 25, 2011, and a total tier one leverage capital ratio of 10.0%. The Bank was initially required to maintain total risk based capital and tier one leverage capital ratios of not less than 12.0% and 10.0%, respectively.

The Credit Agreement also provides that Bancorp may not issue or sell any shares of its common stock, or other securities representing the right to acquire shares of common stock, representing more than 4.9% of the issued and outstanding shares of Bancorp, or any shares of preferred stock other than pursuant to the Small Business Lending Fund. In addition, if Bancorp offers for sale any shares of its common stock or other securities in a public offering or private placement, the Agent or its designees or affiliates are entitled to purchase any such securities that are not subscribed for and purchased by other investors at the same price and on such other financial terms as such securities are offered and sold to other investors.

The Credit Agreement includes customary events of default, including nonpayment of principal, interest or other amounts; violation of covenants; incorrectness of representations and warranties; bankruptcy or similar proceedings; ERISA events; and change of control.30

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On November 21, 2011, in connection with its entry into the Merger Agreement providing for the acquisition of PBB, the Bancorp entered into a First Amendment to Credit Agreement (the “First Amendment”) with the Agent and the Lenders. The First Amendment provides for the following changes to the Credit Agreement, which took effect upon execution of the First Amendment: (i) an omnibus amendment to allow the Bancorp and its subsidiaries to enter into the Merger Agreement and consummate the Merger; and (ii) the reduction of the consolidated net worth requirement of the Company from $18 million to $16 million.

The First Amendment also provides for the following changes to the Credit Agreement, which took effect upon the closing of the Merger: (i) the elimination of the first priority pledge of all equity interests of the Bank in favor of the Agent on behalf of the Lenders, which had previously been made by the Bancorp pursuant to the Credit Agreement and that certain Stock Pledge and Security Agreement dated as of July 25, 2011; (ii) the elimination of a right previously given to the Agent, its designees or affiliates to purchase any securities not otherwise subscribed for or purchased by other investors in a public offering or private placement of shares of the Bancorp’s common stock or other securities; (iii) the modification of a prohibition against the acquisition or lease exceeding $200,000 in any fiscal year of real property by the Bancorp or any subsidiary of the Bancorp to enable the Bancorp to acquire real property and assume real property leases in connection with the Merger; and (iv) the elimination of a restriction placed upon the Bancorp’s issuance or sale of any shares of the Bancorp’s common stock, or other securities representing the right to acquire shares of the Bancorp’s common stock, representing more than 4.9% of the issued and outstanding shares of the Bancorp, or any shares of preferred stock other than pursuant to the Small Business Lending Fund.

On January 18, 2012, the Bancorp entered into a Second Amendment to Credit Agreement (the “Second Amendment”) with the Agent and the Lenders. The Second Amendment provides for the following changes to the Credit Agreement, which took effect upon the closing of the Merger: (1) an extension of the maturity date of the loans outstanding under the Credit Agreement from June 30, 2012 to September 15, 2012; (2) a reduction in the total tier one leverage capital ratio that must be maintained by the Company from 10% to 7%; (3) a reduction in the total risk based capital and tier one leverage capital ratios that must be maintained by the Bank from 12% and 10% to 10% and 7%, respectively; and (4) the addition of a provision that will allow either the Bancorp or the Agent (on behalf of the Lenders), at its option, to convert all or any portion of the unpaid principal balance of the loans outstanding under the Credit Agreement (not to exceed $4,000,000, in the aggregate) into shares of common stock of the Bancorp, with the number of shares of common stock to be issued upon conversion to be equal to the quotient obtained by dividing (a) the principal amount to be so converted by (b) the Book Value Per Share of Manhattan Common Stock (as such term is defined in the Merger Agreement). This conversion option initially could be exercised prior to September 15, 2012 and at any time commencing on or after the earlier of (i) 10 business days after the closing of the rights offering to be conducted by the Bancorp pursuant to the terms of the Merger Agreement after the closing of the Merger; or (ii) September 1, 2012. The conversion option is considered to be a derivative subject to fair value measurement. The fair value of the option is de minimus at ~~June~~September 30, 2012.

On September 15, 2012, the Bancorp entered into a Third Amendment to Credit Agreement (the “Third Amendment”) with the Agent and the Lenders. The Third Amendment provides for an extension of the maturity date of the loans outstanding under the Credit Agreement from September 15, 2012 to December 31, 2012, and a corresponding delay in the right of the Bancorp and the Agent (on behalf of the Lenders), to convert all or any portion of the unpaid principal balance of the loans outstanding under the Credit Agreement (not to exceed $4,000,000, in the aggregate) into shares of common stock of the Bancorp. This conversion option may now be exercised prior to December 31, 2012 and at any time commencing on or after (i) 10 business days after the closing of the rights offering to be conducted by the Bancorp pursuant to the terms of the Merger Agreement and (ii) December 15, 2012.

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Note 9. SHARE-BASED COMPENSATION

In accordance with the terms of the Merger Agreement, the previously issued share-based awards of both PBB and the Bancorp remained outstanding after completion of the Merger. The fair value of the Bancorp awards was evaluated and included in the business combination’s purchase price consideration for vested instruments. The fair value of the unvested portion has been and will continue to be expensed in the post-acquisition statements of operations of the Company. For PBB, the stock options and restricted shares were adjusted to reflect the share-exchange ratio and exercise price as required by the terms of the Merger Agreement. This modification of the PBB awards resulted in no additional compensation expense. As such, the compensation expense for these awards will continue using the amounts computed prior to the Merger. Awards included in the table below vest through 2014. A summary of the outstanding share-based awards as of ~~June~~September 30, 2012 is as follows:

		Weighted Average
	Number of Shares	Weighted Average Fair Value
	Shares	Fair Value
	(unaudited)
Restricted Stock:
Restricted stock:
Outstanding	4639,~~000~~333	$	13.7410
Vested and expected to vest	4639,~~000~~333	$	13.7410
Options
Options:
Outstanding	~~637~~495,~~729~~480	$	1.2936
Exercisable	~~417~~385,~~870~~583	$	1.1130
Vested and expected to vest	~~593~~495,~~062~~480	$	1.2836

During the ~~six~~nine months ended ~~June~~September 30, 2012 and 2011, the Company recorded $3024 thousand and $4230 thousand, respectively, of stock-based compensation expense. At ~~June~~September 30, 2012, unrecorded compensation expense related to non-vested stock option grants and restricted stock grants totaled $~~203~~206 thousand, which is expected to be recognized as follows:

	Share-Based
	Share Based
	Compensation
	Compensation Expense
	Expense
	(unaudited, in thousands)
Remainder of 2012	$	7041
2013	~~117~~146
2014	1619
Total	$	~~203~~206

No options were granted during the three or ~~six~~nine months ended ~~June~~September 30, 2012 and 2011.

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Note 10. FAIR VALUE MEASUREMENTS

Current accounting literature defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. It also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The literature describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

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The following table summarizes the Company’s assets and liabilities which were measured at fair value on a recurring and non-recurring basis at ~~June~~September 30, 2012 and December 31, 2011:

~~June~~September 30, 2012

			Quoted Price in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
Description of Asset/Liability	Balance		(Level 1)		(Level 2)		(Level 3)
	(unaudited, in thousands)
Measured on a recurring basis:
Available-for-sale securities	$	9,~~664~~041	$	—	$	9,~~664~~041	$	—
Loans held for sale	7076,~~904~~070		—		—		7076,~~904~~070
Derivative asset for rate lock commitments	14,~~547~~380		—		—		14,~~547~~380
Derivative asset for forward sale commitments	25211		—		—		25211
Mortgage servicing rights	23,~~167~~402		—		—		23,~~167~~402
Derivative liability for forward sale commitments	~~837~~2,947		—		—		~~837~~2,947
Measured on a non-recurring basis:
Impaired loans - collateral dependent	~~519~~280		—		—		~~519~~280
Impaired loans - cash flow dependent	1,~~784~~099		—		—		1,~~784~~099
Other real estate owned	3,581		—		—		3,581
December 31, 2011
			Quoted Price in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
Description of Asset/Liability	Balance		(Level 1)		(Level 2)		(Level 3)
	(in thousands)
Measured on a recurring basis:
Available-for-sale securities	$	9,460	$	1,518	$	7,456	$	486
Measured on a non-recurring basis:
Impaired loans - collateral dependent	524		—		—		524
Impaired loans - cash flow dependent	1,924		—		—		1,924
Other real estate owned	3,581		—		—		3,581

December 31, 2011

			Quoted Price in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
Description of Asset/Liability	Balance		(Level 1)		(Level 2)		(Level 3)
	(in thousands)

Measured on a recurring basis:
Available-for-sale securities	$	9,460	$	1,518	$	7,456	$	486
Measured on a non-recurring basis:
Impaired loans - collateral dependent	524		—		—		524
Impaired loans - cash flow dependent	1,924		—		—		1,924
Other real estate owned	3,581		—		—		3,581

The following is a summary description of the valuation methodologies for assets and liabilities recorded at fair value:

· Fair values for available-for-sale securities, including our private label MBS, are provided by third-party broker/dealers who obtain these values through a nationally recognized pricing service, Interactive Data Corporation’s 360 View (“IDC”). IDC utilizes real time market price discovery along with actual security performance including cash flow structure to determine market values. If quoted market prices are not available, the fair value is determined by a matrix pricing, which is a mathematical technique widely used in the securities industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the relationship of securities to other benchmark quoted securities (Level 2 inputs). Based on the ~~June~~September 30, 2012 valuation analysis, we believe the Company will receive all principal and interest due to each security.

· The Bank records its loans held for sale at fair value for all loans originated by the Bank as well as all loans which were both purchased and hedged. The fair value of loans originated by the Bank which are held for sale to private investors is based on the price of a forward sale contract for delivery of similar loans within 15 days of period end. The fair value of loans originated by the Bank which are held for sale to government-sponsored entities is based on the delivery price for the loans into mortgaged backed to-be-announced securities (“TBAs”) plus the estimated value of the associated MSR, the value of which is derived in a manner consistent with the MSR methodology described below. The fair value of purchased loans that are both held for sale and hedged is derived by adjusting each loan’s purchase price for the estimated change in value arising from changes in interest rates subsequent to each loan’s purchase date.

· The fair value of rate lock commitments is based on the estimated future cash flows associated with each loan being locked as of period end. These future cash flows primarily consist of the anticipated price for each loan that will be paid by investors, net of each loan’s par balance, plus any anticipated loan fees that will be paid by borrowers less any loan origination expenses that will be incurred by the Bank. The net amount of these cash flows is adjusted for the estimated probability of that each loan will be funded successfully (i.e., “pull through rate”).

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origination expenses that will be incurred by the Bank. The net amount of these cash flows is adjusted for the estimated probability of that each loan will be funded successfully (i.e., “pull through rate”).

· The fair value of forward contracts (TBAs) is based on quoted prices for identical instruments as derived from Bloomberg as of the measurement date. The values of TBAs arising from BOMC’s riskless trading activity are recorded on a net basis as either a derivative asset or derivative liability.

· The fair value of forward sale agreements is based on the change in the price investors would pay for loans as of the date each forward sale agreement is executed compared with the estimated price investors would pay for identical loans as of period end. The Bank records its “best efforts” forward sale agreements at fair value for all forward sale agreements that were not deemed to be derivatives but qualified for fair value accounting. The value of “best efforts” forward sale agreements is adjusted for anticipated pull through rates.

· Although the sales of MSRs do occur, MSRs do not trade in an active market with readily available observable prices; therefore, the precise terms and conditions of sales are not available. The fair value of MSRs related to the portfolio of loans being serviced for others is determined by computing the present value of the expected net servicing income from the servicing portfolio. Key assumptions incorporated into the MSR valuation model and the MSR sensitivity analysis can be found in Note 6. The book value of our MSRs reflects their fair value, not their market value. Given current market conditions, we likely would realize a material loss if we were to sell our servicing portfolio in the current market. Market conditions could change favorably or unfavorably in the future.

· The fair value of impaired loans is based on an evaluation at the time the loan is originally identified as impaired, and periodically thereafter, at the lower of cost or fair value. Fair value on impaired loans is measured based on the value of the collateral securing these loans, if the loan is collateral dependent, or based on the discounted cash flows for non-collateral dependent loans, and are classified at a level 3 in the fair value hierarchy. For impaired loans, the discount rate applied to expected future cash flows is each loan’s original effective rate. Collateral on collateral dependent loans may be real estate and/or business assets including equipment, inventory and/or accounts receivable and is determined based on appraisals performed by qualified licensed appraisers hired by the Company. These loans fall within the level 2 of the fair value hierarchy. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Such discounts are typically significant and result in a Level 3 classification of the inputs for determining fair value. For unsecured loans, the estimated future discounted cash flows of the business or borrower, are used in evaluating the fair value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

· The fair value of other real estate owned represents the fair value of properties as established by recently conducted appraisal of the property (Level 3).

The ~~following~~activity ~~disclosure~~for of the ~~carrying~~nine ~~amounts~~months ~~and~~ended estimated fair values of the Company’s financial instruments is based on available market information and appropriate valuation methodologies. Since considerable judgment is required to estimate fair values, the estimates presented below are not necessarily indicative of the amounts the Company could have realized in a current market exchange as of JuneSeptember 30, 2012 ~~and~~in ~~December 31,~~assets ~~2011.~~classified ~~The~~within ~~use~~Level 3 of ~~different~~the ~~market assumptions or~~ valuation ~~methodologies~~hierarchy ~~may~~consisted ~~have a material effect on the estimated fair value amounts.~~of:

	Nine Months Ended September 30, 2012
	Mortgage loans held for sale			Mortgage servicing rights			Interest rate lock commitments, net		Forward delivery commitments
	(unaudited, in thousands)

Balance, beginning of period	$	—		$	—		$	—	$	—
Balance acquired in Merger	76,390			1,877			1,944		42
Realized and unrealized gains (losses)	715			(636		)	2,436		(1,316		)
Purchases	332,330			—			—		—
Issuances	—			2,161			—		—
Settlements	(333,365		)	—			—		1,485
Transfers into Level 3	—			—			—		—
Transfers out of Level 3	—			—			—		—
Balance, end of period	$	76,070		$	3,402		$	4,380	$	211

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The ~~tables~~following ~~below~~disclosure ~~present~~of the carrying amounts and estimated fair values of the Company’s financial instruments atis ~~June~~based on available market information and appropriate valuation methodologies. Since considerable judgment is required to estimate fair values, the estimates presented below are not necessarily indicative of the amounts the Company could have realized in a current market exchange as of September 30, 2012 and December 31, 2011. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.

	June 30, 2012
	Carrying Value		Estimated Fair Value
	(unaudited, in thousands)
Financial Assets:
Cash and due from banks	$	13,541	$	13,541
Federal funds sold	20,751		20,751
Time deposits - other financial institutions	2,103		2,103
Investment securities - available for sale	9,664		9,664
Loans held for sale, at fair value	70,577		70,577
Loans held for sale, at lower of cost or fair value	327		327
Loans held for investment, net	286,053		284,012
FHLB stock and Federal Reserve stock	3,760		3,760
Investment in Limited Partnership Fund	5,302		5,302
Derivative asset for rate lock commitments	1,547		1,547
Derivative asset for forward sale commitments	25		25
Mortgage servicing rights	2,167		2,167
Accrued interest receivable	791		791
Financial Liabilities:
Non-interest bearing demand deposits	$	125,636	$	125,636
Interest-bearing demand deposits, savings, money market accounts	127,209		127,209
Certificates of deposits	118,357		118,470
FHLB advances and borrowings	26,016		25,715
Derivative liability for forward sale commitments	837		837
Accrued interest payable	454		454
	December 31, 2011
	Carrying Value		Estimated Fair Value
	(in thousands)
Financial Assets:
Cash and due from banks	$	6,779	$	6,779
Federal funds sold	38,756		38,756
Time deposits - other financial institutions	3,952		3,952
Investment securities - available for sale	9,460		9,460
Loans held for investment, net	166,381		165,755
FHLB stock and Federal Reserve stock	1,986		1,986
Accrued interest receivable	675		675
Financial Liabilities:
Non-interest bearing demand deposits	$	70,188	$	70,188
Interest-bearing demand deposits, savings, money market accounts	73,158		73,158
Certificates of deposits	57,806		58,200
Accrued interest payable	61		61

The tables below present the carrying amounts and fair values of the Company’s financial instruments at September 30, 2012 and December 31, 2011.

	September 30, 2012
	Carrying Value		Estimated Fair Value
	(unaudited, in thousands)
Financial Assets:
Cash and due from banks	$	7,881	$	7,881
Federal funds sold	50,560		50,560
Time deposits - other financial institutions	1,105		1,105
Investment securities - available for sale	9,041		9,041
Loans held for sale, at fair value	75,745		75,745
Loans held for sale, at lower of cost or fair value	325		325
Loans held for investment, net	277,450		275,203
FHLB stock and Federal Reserve stock	3,619		3,619
Investment in Limited Partnership Fund	6,492		6,492
Derivative asset for rate lock commitments	4,380		4,380
Derivative asset for forward sale commitments	211		211
Mortgage servicing rights	3,402		3,402
Accrued interest receivable	851		851

Financial Liabilities:
Non-interest bearing demand deposits	$	147,761	$	147,761
Interest-bearing demand deposits, savings, money market accounts	133,623		133,623
Certificates of deposits	92,380		92,489
FHLB advances and borrowings	30,965		30,954
Derivative liability for forward sale commitments	2,947		2,947
Accrued interest payable	581		581

	December 31, 2011
	Carrying Value		Estimated Fair Value
	(in thousands)
Financial Assets:
Cash and due from banks	$	6,779	$	6,779
Federal funds sold	38,756		38,756
Time deposits - other financial institutions	3,952		3,952
Investment securities - available for sale	9,460		9,460
Loans held for investment, net	166,381		165,755
FHLB stock and Federal Reserve stock	1,986		1,986
Accrued interest receivable	675		675

Financial Liabilities:
Non-interest bearing demand deposits	$	70,188	$	70,188
Interest-bearing demand deposits, savings, money market accounts	73,158		73,158
Certificates of deposits	57,806		58,200
Accrued interest payable	61		61

The following are summary descriptions of the valuation methodologies used for assets and liabilities measured at fair value and for estimating fair value for financial instruments not recorded at fair value:

· The carrying amounts for cash, due from banks, and federal funds sold approximate their fair values due to the overnight maturity nature of these assets.

· The carrying amounts for time deposits at financial institutions approximate their fair values due to the relatively short term nature of these assets which have an average maturity of four months.

· Fair values for available-for-sale securities are provided by third-party broker/dealers who obtain these values through IDC. IDC utilizes real time market price discovery along with actual security performance including cash flow structure to determine market values. If quoted market prices are not available, the fair value is determined by a matrix pricing, which is a mathematical technique widely used in the securities industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the relationship of securities to other benchmark quoted securities (level 2 inputs). Based on the June 30, 2012 valuation analysis, we believe the Company will receive all principal and interest due to each security.

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· Fair values for available-for-sale securities are provided by third-party broker/dealers who obtain these values through IDC. IDC utilizes real time market price discovery along with actual security performance including cash flow structure to determine market values. If quoted market prices are not available, the fair value is determined by a matrix pricing, which is a mathematical technique widely used in the securities industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the relationship of securities to other benchmark quoted securities (level 2 inputs). Based on the September 30, 2012 valuation analysis, we believe the Company will receive all principal and interest due to each security.

· The Bank records its loans held for sale at fair value for all loans originated by the Bank as well as all loans which were both purchased and hedged. The fair value of loans originated by the Bank which are held for sale to private investors is based on the price of a forward sale contract for delivery of similar loans within 15 days of period end. The fair value of loans originated by the Bank which are held for sale to government-sponsored entities is based on the delivery price for the loans into TBAs plus the estimated value of the associated MSR, the value of which is derived in a manner consistent with the MSR methodology described below. The fair value of purchased loans that are both held for sale and hedged is derived by adjusting each loan’s purchase price for the estimated change in value arising from changes in interest rates subsequent to each loan’s purchase date. The carrying values of loans held for sale and reported at the lower of cost or fair value approximate their fair values, primarily due to the variable nature of their interest rates and/or the short amount of time these loans typically remain on the Bank’s balance sheet (i.e., less than 30 days).

· The fair value of loans held for investment is based on the hypothetical exit price which does not represent the estimated intrinsic value of the loans if held for investment. As such, significant judgment is required in determining fair value, which can vary significantly depending on a market participant’s considerations and assumptions. For purposes of the disclosure for financial instruments above, the fair value for unimpaired loans held for investment (net) is estimated by discounting the expected future cash flows using current offer rates for similar loans, adjusted by the Company’s allowance for loan losses, which is considered to be level 3 in the fair value hierarchy. The fair value of impaired loans is based on an evaluation at the time the loan is originally identified as impaired, and periodically thereafter, at the lower of cost or fair value. Fair value on impaired loans is measured based on the value of the collateral securing these loans, if the loan is collateral dependent, or based on the discounted cash flows for non-collateral dependent loans, and are classified at a level 3 in the fair value hierarchy. For impaired loans, the discount rate applied to expected future cash flows is each loan’s effective rate. Collateral on collateral dependent loans may be real estate and/or business assets including equipment, inventory and/or accounts receivable and is determined based on appraisals performed by qualified licensed appraisers hired by the Company. These loans fall within the Level 2 of the fair value hierarchy. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Such discounts are typically significant and result in a level 3 classification of the inputs for determining fair value. For unsecured loans, the estimated future discounted cash flows of the business or borrower, are used in evaluating the fair value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

· The carrying amounts for non-marketable securities, consisting of stock at the FHLB and the Federal Reserve Bank of San Francisco, are a reasonable estimate of fair value.

· The carrying amount for the Bank’s investment in MIMS-1, L.P. (“MIMS-1”) is a reasonable estimate of fair value, primarily due to short-term holding period for the underlying investments of this fund. The lack of observable inputs results in the classification of the investments as Level 3.

· The fair value of rate lock commitments is based on the estimated future cash flows associated with each loan being locked as of period end. These future cash flows primarily consist of the anticipated price for each loan that will be paid by investors, net of each loan’s par balance, plus any anticipated loan fees that will be paid by borrowers less any loan origination expenses that will be incurred by the Bank. The net amount of these cash flows is adjusted for the estimated probability that each loan will be funded successfully (i.e., “pull through rate”).

· The fair value of TBAs is based on quoted prices for identical instruments as derived from Bloomberg as of the measurement date. The values of TBAs arising from BOMC’s riskless trading activity are recorded on a net basis as either a derivative asset or derivative liability.

· Although the sales of MSRs do occur, MSRs do not trade in an active market with readily available observable prices; therefore, the precise terms and conditions of sales are not available. The fair value of MSRs related to the portfolio of loans being serviced for others is determined by computing the present value of the expected net servicing income from the servicing portfolio. Key assumptions incorporated into the MSR valuation model are actual and expected prepayment rates, servicing costs, and ancillary income. The book value of the Company’s MSRs reflects their fair value, not their market value. Given current market conditions, the Company likely would realize a material loss if it were to sell its servicing portfolio in the current market. Market conditions could change favorably or unfavorably in the future.

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· Although the sales of MSRs do occur, MSRs do not trade in an active market with readily available observable prices; therefore, the precise terms and conditions of sales are not available. The fair value of MSRs related to the portfolio of loans being serviced for others is determined by computing the present value of the expected net servicing income from the servicing portfolio. Key assumptions incorporated into the MSR valuation model are actual and expected prepayment rates, servicing costs, and ancillary income. The book value of the Company’s MSRs reflects their fair value, not their market value. Given current market conditions, the Company likely would realize a material loss if it were to sell its servicing portfolio in the current market. Market conditions could change favorably or unfavorably in the future.

· The carrying amounts for accrued interest receivable are a reasonable estimate of fair value.

· The disclosed fair values of demand deposits, money market accounts, and savings accounts are equal to the amounts payable on demand, or carrying amounts, at the reporting date. Since the expected life of these accounts significantly exceeds their overnight maturity, the disclosed fair values understate the premium a willing buyer likely would pay for these financial instruments. The fair values of certificates of deposit are estimated by discounting their expected future cash flows by current rates paid for deposits with similar remaining maturities and are considered to be level 3 in the fair value hierarchy.

· The fair values of FHLB fixed-rate term borrowings are estimated by discounting their expected future cash flows by current rates charged for borrowings with similar remaining maturities. The carrying amounts for overnight FHLB borrowings approximate their fair values due to their one-day maturity. The fair value of the Bank’s mortgage note was estimated by discounting its expected future cash flows using an estimated current rate for a similar loan. The carrying amount for the Credit Agreements is a reasonable estimate of their fair value is considered to be Level 3 in the fair value hierarchy.

· The fair value of forward sale agreements is based on the change in the price investors would pay for loans as of the date each forward sale agreement is executed compared with the estimated price investors would pay for identical loans as of period end. Also, the Bank records its “best efforts” forward sale agreements at fair value for all forward sale agreements that were not deemed to be derivatives but qualified for fair value accounting. The value of “best efforts” forward sale agreements is adjusted for anticipated pull through rates.

· The carrying amounts for accrued interest payable are a reasonable estimate of fair value.

The fair values of the Company’s financial instruments typically will change when market interest rates change and that change may be either favorable or unfavorable to the Company. As a result, management attempts to match the expected cash flows of the Company’s financial instruments to the extent believed necessary to maintain the risk of adverse changes in the net value of the Company’s financial instruments within acceptable levels. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Also, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Since the extent to which borrowers and depositors will respond to potential future changes in market rates is difficult to accurately forecast, management relies on myriad assumptions and utilizes considerable judgment when managing the potential risk of adverse changes in the net values of the Company’s financial instruments.

Note 11. EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share represents the earnings (loss) attributable to common shareholders, which excludes the earnings (loss) attributable to the non-controlling interest, divided by the weighted average number of common shares outstanding during the periods reported on the consolidated statements of operations. Diluted earnings (loss) per share includes the effects of unvested shares of restricted stock when the impact is dilutive and excludes such instruments when anti-dilutive as is the case in those periods in which the Company has a net loss. The Company also has other potentially dilutive securities in the form of stock options awarded to employees of the Company and its subsidiaries. Diluted earnings (loss) per share include the effect of these options using the treasury method only if the effect on earnings per share is dilutive. The shares presented in the table below have been adjusted to reflect the share exchange ratio as required in the merger.

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The weighted average number of shares outstanding and the weighted average number of shares outstanding for purposes of calculating earnings (loss) per share is presented in the table below:

	For the Three Months						For the ~~Six~~Nine Months
	Ended June 30,						Ended June 30,
	Ended September 30,						Ended September 30,
	2012			2011			2012			2011
Weighted average basic shares outstanding	912,~~482~~192,~~371~~013			8,~~176~~195,~~244~~469			89,~~820~~975,~~920~~436			8,~~176~~195,~~244~~469
Potential dilutive shares related to stock options and restricted stock	0—			0—			0—			0—
Weighted average diluted shares outstanding	912,~~482~~192,~~371~~013			8,~~176~~195,~~244~~469			89,~~820~~975,~~920~~436			8,~~176~~195,~~244~~469
Antidilutive restricted stock	3528,~~467~~800						3528,~~467~~800
Antidilutive stock options	~~504~~385,~~485~~583			194,589			~~504~~385,~~485~~583			194,589
Basic and diluted earnings (loss) per share	$	(0.1521	)	$	(0.1112	)	$	(0.2206	)	$	(0.06	)

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Note 12. SEGMENT INFORMATION

The Company segregates its operations into four primary segments: non-mortgage banking operations (Commercial Bank), mortgage banking operations (Mortgage Bank), non-banking financial operations (MCM), and “Other,” which includes Bancorp, MBFS and eliminations between the Company’s bank and non-bank segments. The Company estimates the operating results of each segment based upon internal management systems and assumptions, which are subject to change and may not be consistent with methodologies that an external party may choose to employ. Accounting policies for segments are the same as those described in Note 1. Segment performance is evaluated using operating income. Transactions among segments are made at estimated market rates. The following table provides a breakdown of the Company’s assets by segment.

	As of
	September 30, 2012			December 31, 2011
	June 30, 2012			December 31, 2011
	(unaudited)
	(in thousands)
Segment assets:
Commercial Bank	$	~~446~~449,~~779~~578		$	239,384
Mortgage Bank	7589,~~525~~436			—
Intra-company eliminations	(6873,~~152~~687		)	—
Total Bank	~~454~~465,~~152~~327			239,384
MCM	85,~~803~~412			—
Other	(71,~~098~~407		)	—
Total segment assets	$	~~455~~469,~~857~~332		$	239,384

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The following table provides a breakdown of key operating measures by segment.

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2012			2011			2012			2011
	(unaudited, in thousands)
Net interest income, after loan loss provision:
Commercial Bank	$	24,~~459~~106		$	~~4,950~~374		$	59,~~358~~464		$	78,~~454~~631
Mortgage Bank	39559			—			39598			—
Intra-company eliminations	—			—			—			—
Total Bank	24,~~498~~665			~~4,950~~374			510,~~397~~062			78,~~454~~631
MCM	(2049		)	—			(2069		)	—
Other	—			—			—			—
Total net interest income, after loan loss provision	$	24,~~478~~616		$	~~4,950~~374		$	59,~~377~~993		$	78,~~454~~631
Non-interest income:
Commercial Bank	$	~~504~~899		$	~~683~~1,877		$	12,~~416~~317		$	12,~~443~~393
Mortgage Bank	~~973~~8,592			—			~~973~~9,562			—
Intra-company eliminations	—			—			—			—
Total Bank	19,~~477~~491			~~683~~1,877			211,~~389~~879			12,~~443~~393
MCM	13,~~216~~555			—			14,~~216~~770			—
Other	(83311		)	—			(83392		)	—
Total non-interest income	$	212,~~610~~735		$	~~683~~1,877		$	316,~~522~~257		$	12,~~443~~393
Total revenue:
Commercial Bank	$	35,~~824~~437		$	65,~~121~~437		$	712,~~344~~781		$	1014,~~251~~759
Mortgage Bank	19,~~052~~297			—			110,~~052~~346			—
Intra-company eliminations	(40146		)	—			(40185		)	—
Total Bank	414,~~836~~588			65,~~121~~437			822,~~356~~942			1014,~~251~~759
MCM	13,~~229~~612			—			14,~~229~~840			—
Other	(84311		)	—			(84392		)	—
Total revenue	$	517,~~981~~889		$	65,~~121~~437		$	927,~~501~~390		$	1014,~~251~~759
Segment profit (loss):
Commercial Bank	$	(~~780~~588	)	$	~~909~~(947	)	$	(13,~~328~~632	)	$	~~464~~(502	)
Mortgage Bank	~~(588~~3,460		)	—			~~(588~~2,870		)	—
Intra-company eliminations	—			—			—			—
Total Bank	(12,~~368~~872		)	~~909~~(947		)	(~~1,916~~762		)	~~464~~(502		)
MCM	14(144		)	—			14(130		)	—
Other	(6097		)	—			~~(60~~1,579		)	—
Total segment profit (loss) before taxes	$	(12,~~414~~631	)	$	~~909~~(947	)	$	~~(1,962~~687	)	$	~~464~~(502	)

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Note 13. INVESTMENT IN LIMITED PARTNERSHIP FUND

In connection with the Merger, the Company acquired an investment in MIMS-1, which was organized as a Delaware limited partnership on July 30, 2010 for the primary purpose of investing, reinvesting, and trading in private label and agency mortgage-backed and asset-backed securities. It commenced operations on August 20, 2010. The investment objective of MIMS-1 is to seek a high total return consisting of both current income and capital gains. The general partner of MIMS-1 is Manhattan Investment Management Services, Inc. (“MIMS”), an indirect wholly-owned subsidiary of MCM. The current term of the investment expires July 31, 2014, and is renewable for an additional one-year term if agreed to by the general partner and a majority of the limited partners. The Bank owned 3421.8543% of MIMS-1 as of ~~June~~September 30, 2012. The Bank earned $46191 thousand and $236 thousand during the three and ~~six~~nine months ended ~~June~~September 30, 2012, ~~representing only the amount that was earned subsequent to the Merger~~respectively. MIMS earned $66399 thousand and $465 thousand during the three and ~~six~~nine months ended ~~June~~September 30, 2012, respectively, for its role as general partner of MIMS-1~~, representing only the amount that was earned subsequent to the Merger~~.

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Note 14. DERIVATIVES AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

Derivatives of BOMC

BOMC is engaged in buying and selling securities for a diverse group of customers, primarily financial institutions. As an introducing broker-dealer, BOMC introduces these customer transactions for clearance to its clearing broker on a fully-disclosed basis.

In the normal course of business, BOMC effectuates buy and sell orders from customers in mortgaged backed TBA securities. In order to mitigate principal risk, BOMC does not take a position in these transactions but rather arranges for simultaneous buyers and sellers for all transactions prior to executing either a buy trade or a sell trade. (BOMC’s transactions are deemed to be “Riskless Principal Transactions” per Federal Reserve System Regulation Y, Part 225 - Subpart C - Sec. 225.28.)

TBAs, which provide for the delayed delivery of the underlying financial instruments, are deemed to be derivatives and involve off-balance sheet financial risk. The contractual or notional amounts related to these transactions reflect BOMC’s volume and activity rather than the amounts at risk. Instead, the risk related to BOMC’s TBA activity, which is due primarily to counterparty risk, is limited to the unrealized fair valuation gains recorded in the Consolidated Balance Sheets. These gains are substantially dependent upon the value of the underlying financial instruments and are affected by market forces such as market volatility and changes in interest rates.

Quantitative Disclosures for Derivative Financial Instruments Used by BOMC for Trading Purposes

The notional amounts and fair values of derivative financial instruments for BOMC are as follows for the periods indicated:

	Notional Amount
	As of June 30,
	As of September 30,
	2012
	(unaudited, in thousands)
Mortgage-backed Securities:
Forward contracts (TBAs) Purchased	$	12,~~889~~126,~~572~~863
Forward contracts (TBAs) Sold	$	(12,~~889~~126,~~572~~863	)
	$	—

	Fair Value
	Assets		Liabilities
	(unaudited, in thousands)
Mortgage-backed securities:
Forward contracts (TBAs) as of June 30, 2012 (unaudited):	$	7,802	$	(7,657	)
Forward contracts (TBAs) as of September 30, 2012 (unaudited):	$	12,172	$	(12,139	)
Forward contracts (TBAs) as of December 31, 2011	$	—	$	—

All of BOMC’s transactions in TBAs with off-balance sheet risk outstanding at ~~June~~September 30, 2012 are short-term in nature with maturities of three months or less. The fair values of these derivative financial instruments are included in other assets in the net amounts of $~~145~~33 thousand as of ~~June~~September 30, 2012. The unrealized gains are netted against unrealized losses on the Consolidated Statements of Operations.

42Included in the above amounts for BOMC are forward buy contracts from the Bank of $218.1 million at a gain of $3.3 million and forward sale contracts to the Bank of $65.4 million at a loss of $630 thousand.

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Included in the above amounts for BOMC are forward buy contracts from the Bank of $137.2 million at a gain of $773 thousand and forward sale contracts to the Bank of $22.9 million at a loss of $4 thousand.

Mortgage Bank Instruments with Off-Balance Sheet Risk

The Company’s mortgage bank originates loans primarily for sale to external investors. In order to mitigate interest rate risk, the Company typically locks interest rates with borrowers prior to funding loans while simultaneously locking a price to sell the loans to external investors.

Rate lock commitments with borrowers and commitments to purchase loans from other institutions at specific prices are considered derivatives and must be valued on a fair value basis. The notional amount of these commitments as of ~~June~~September 30, 2012 was $~~120~~169.03 million. Net ~~losses~~gains of ~~zero~~$3.0 million and $372.6 ~~thousand~~million were recorded on these commitments during the three and ~~six~~nine months ended ~~June~~September 30, 2012, respectively.

All mandatory obligations to sell loans at a specific price in the future are considered to be derivatives and must be recorded at fair value. The Bank records its non-mandatory forward contracts, related to the sale of its loans, on a fair value basis, provided such commitments qualify for fair value treatment and are not otherwise considered to be derivatives. The notional amount of outstanding forward contracts as of June 30, 2012 was $182.1 million. Net gains of zero and $594 thousand on these forward contracts were recorded for the three and six months ended June 30, 2012, respectively.41

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All mandatory obligations to sell loans at a specific price in the future are considered to be derivatives and must be recorded at fair value. The Bank records its non-mandatory forward contracts, related to the sale of its loans, on a fair value basis, provided such commitments qualify for fair value treatment and are not otherwise considered to be derivatives. The notional amount of outstanding forward contracts as of September 30, 2012 was $327.7 million. Net losses of $2.1 million and $1.5 million on these forward contracts were recorded for the three and nine months ended September 30, 2012, respectively.

Commercial Bank Instruments with Off-Balance-Sheet Risk

In the ordinary course of business, the Company’s commercial bank enters into financial commitments to meet the financing needs of its customers, primarily through commitments to extend credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk not recognized in the Company’s consolidated financial statements.

The Company’s exposure to loan loss in the event of nonperformance on commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for loans reflected in the consolidated financial statements. The Company had the following outstanding financial commitments whose contractual amount represents credit risk:

	June 30, 2012		December 31, 2011
	September 30, 2012		December 31, 2011
	(unaudited, in thousands)
Commitments to extend credit	$	7576,~~957~~081	$	22,799
Standby letters of credit	~~864~~705		694
Total commitments	$	76,~~821~~786	$	23,493

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Standby letters of credit are conditional commitments to guarantee the performance of a customer of the Company to a third party. Since many of the commitments and standby letters of credit are expected to expire without being drawn upon, the total amounts do not necessarily represent future loans or cash requirements. The Company evaluates each client’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, is based on management’s credit evaluation of the customer. A reserve for commitments to extend credit has been established and totals $~~130~~201 thousand and $391 thousand as of ~~June~~September 30, 2012 and December 31, 2011, respectively.

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Note 15. RELATED PARTY TRANSACTIONS

In the ordinary course of business, the Bank may grant loans to certain officers and directors and the companies with which they are associated. Management believes all loans and loan commitments to such parties are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time of comparable transaction with other persons. The Bank had no related party loans outstanding at ~~June~~September 30, 2012 or December 31, 2011.

Deposits from related parties at ~~June~~September 30, 2012 and December 31, 2011 totaled $13.92 million and $2.4 million respectively.

See Note 8 for additional details on a related party credit agreement.

In connection with the Merger, Bancorp agreed to conduct a rights offering open to all shareholders of the Bancorp, excluding the Carpenter Community Bancfunds, which collectively owned 74.8% of the Bancorp’s outstanding common stock immediately following the Merger. The Bancorp currently intends to conduct this offering during the fourth quarter of 2012. The Bancorp will seek to raise up to $10,000,000 from the sale of shares of the Bancorp’s common stock at a per share price equivalent to the book value per share of Bancorp common stock as of the end of the month preceding the month in which the registration statement relating to the rights offering becomes effective. This disclosure does not constitute an offer of any securities for sale.

44Note 16. SUBSEQUENT EVENTS

On November 9, 2012, the Bancorp and the Lenders entered into a Securities Purchase Agreement (the “Purchase Agreement”), which provided for (i) the sale by the Bancorp of all of the shares of capital stock (the “Shares”) of its wholly owned subsidiary, MBFS, and (ii) the assignment by the Bancorp of its entire right in and to that certain Promissory Note dated as of July 25, 2011 (the “MCM Note”), made by MCM in favor of the Bancorp in the aggregate principal amount of $5.0 million, in each case to the Lenders for an aggregate purchase price of $5.0 million (the “Purchase Price”). The consummation of the transactions contemplated by the Purchase Agreement was completed simultaneously with the signing of the Purchase Agreement on November 9, 2012, and for accounting purposes will be effective October 31, 2012. Prior to the consummation of such transactions, the Bancorp received an

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opinion from its financial advisor, Sandler O’Neill & Partners, L.P. confirming that the portion of the Purchase Price attributable to the sale of the Shares is fair, from a financial point of view, to the Bancorp. The value of consideration received exceeded the carrying amount of the assets exchanged by $1.3 million, which was recognized as additional paid in capital.

Pursuant to the terms of the Purchase Agreement, the Bancorp used a portion of the Purchase Price to repay $516,667 of accrued but unpaid interest and $4,283,333 of the outstanding principal balance of the loans outstanding under the Credit Agreement. In addition, and pursuant to and in accordance with the terms of the Credit Agreement, the Lenders converted the remaining $716,667 of the outstanding principal balance of the loans outstanding under the Credit Agreement into an aggregate of 169,424 shares of the Bancorp’s common stock. The number of shares of common stock issued by the Bancorp was determined by dividing the sum of the unpaid principal balance by the Book Value Per Share of the MNHN Common Stock (as defined in the Merger Agreement), or $4.23 per share. As a result of the consummation of these transactions, the principal balance and all accrued but unpaid interest under the Credit Agreement has been repaid in full.

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Manhattan Bancorp and its subsidiaries (collectively, the “Company”) intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these provisions. All statements other than statements of historical fact are “forward-looking statements” for purposes of Federal and state securities laws. Words such as “will likely result,” “aims,” “anticipates,” “believes,” “could,” “estimates,” “expects,” “hopes,” “intends,” “may,” “plans,” “projects,” “seeks,” “should,” “will,” and variations of these words and similar expressions are intended to identify forward-looking statements.

Forward-looking statements are based on the Company’s current expectations and assumptions regarding its business, the regulatory environment, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. The Company’s actual results may differ materially from those contemplated by the forward-looking statements. The Company cautions you therefore against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, the following: the impact of changes in interest rates; a continuing decline in economic conditions or the failure of economic conditions to improve; increased competition among financial service providers; the Company’s ability to attract deposit and loan customers; the quality of the Company’s earning assets; government regulation; risks associated with the recent acquisition of Professional Business Bank, including risks and uncertainties relating to the successful integration of the companies’ businesses, the anticipated cost saving arising from the merger, reputational risks, and the reaction of the companies’ customers and employees to the merger; and management’s ability to manage the Company’s operations. For further discussion of these and other risk factors, see “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, in the Company’s Registration Statement on Form S-4/A dated April 30, 2012, and in this Quarterly Report on Form 10-Q.

Forward-looking statements speak only as of the date they are made, and the Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, whether as a result of new information, future developments or otherwise, except as may be required by law.

General

Manhattan Bancorp (“Bancorp”) was incorporated in the State of California in August 2006. Bancorp has one banking subsidiary, Bank of Manhattan, N.A. (the “Bank”). The Bank is a nationally-chartered banking association organized under the laws of the United States, which commenced its banking operations on August 15, 2007. Bancorp operates primarily through the Bank, and the investment in the Bank is its principal asset. The Bank’s headquarters is located in El Segundo, California and at ~~June~~ September 30, 2012, following completion of the May 31, 2012 merger described below, had $~~456~~469 million in assets, including $~~286~~277 million in net loans held for investment, $7176 million in loans held for sale and $~~371~~374 million in deposits.

~~Bancorp,~~Through ~~through~~ its wholly-owned subsidiary, MBFS Holdings, Inc. (“MBFS”), ~~owns~~Bancorp also indirectly owned until November 5, 2012 a 70% interest in Manhattan Capital Markets LLC (“MCM”), which, ~~owns~~either ~~100%~~directly ofor ~~BOM~~through ~~Capital~~its wholly-owned subsidiaries, ~~LLC~~generates ~~(formerly~~revenues ~~Bodi~~primarily ~~Capital~~from ~~LLC)~~trading ~~(“BOMC”)~~income, anfacilitating trades in whole loans between institutional ~~broker-dealer~~clients, ~~specializing~~and advisory services regarding the evaluation and packaging of bond portfolios of other institutions. As discussed in ~~mortgage~~more ~~related~~detail ~~transactions~~in Note 16 of the accompanying Notes to Consolidated Financial Statements, Bancorp sold its entire interest in MBFS, including its indirect interest in MCM, on November 5, 2012. MCM is located in Woodland Hills, California and at ~~June~~ September 30, 2012 had $85.80 million in assets primarily in cash and cash equivalent balances. References throughout the remainder of this Quarterly Report on Form 10-Q to MCM shall be deemed to include BOM Capital, LLC (formerly Bodi Capital LLC) (“BOMC”), a wholly-owned subsidiary of MCM, and MCM’s other direct and indirect subsidiaries.

Bancorp is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended, and is subject to examination and regulation by the Federal Reserve Board (the “FRB”). The Bank is subject to supervision, examination and regulation by the Office of the Comptroller of Currency (“the “OCC”). As a nationally chartered financial institution, the Bank is a Federal Reserve Bank member. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to the maximum limits thereof.

On May 31, 2012, the Bancorp completed its acquisition of Professional Business Bank (“PBB”) through a merger of PBB with and into the Bank, with the Bank as the surviving institution (the “Merger”). Immediately prior to the Merger, PBB completed a ~~transaction in which its holding company, CGB Holdings, Inc. (“CGB Holdings”), was merged into PBB and accounted for using the historical balances as entities under common control.~~

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transaction in which its holding company, CGB Holdings, Inc. (“CGB Holdings”), was merged into PBB and accounted for using the historical balances as entities under common control.

Accounting principles generally accepted in the United States of America (“U.S. GAAP”) require that a company whose security holders retain the majority voting interest in the combined business be treated as the acquirer for financial reporting purposes. Accordingly, the Merger was accounted for as a reverse acquisition whereby PBB was treated as the acquirer for accounting and financial reporting purposes. Prior to the Merger, the statements of operations and balance sheet reflect that of only PBB. The assets and liabilities of Manhattan Bancorp were reported at fair value in a transaction that constituted a business combination subject to the acquisition method of accounting as detailed in Accounting Standards Codification (“ASC”) 805, Business Combinations.

As a result of the Merger, the Bank added 4 full-service branch offices, all in California with 2 locations in Pasadena, one in Montebello and one in Glendale. See Note 2 of Notes to the Consolidated Financial Statements for more detailed information on the Merger.

Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to the “Company,” “we” or “us” refers to Bancorp and its consolidated subsidiaries, the Bank and MBFS, and its subsidiary, MCM.

Management’s discussion and analysis of financial condition and results of operations is intended to provide a better understanding of the significant changes in trends relating to the Company’s financial condition, results of operation, liquidity and interest rate sensitivity. The following discussion and analysis should be read in conjunction with the unaudited financial statements contained within this report including the notes thereto.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. GAAP and general practices in the banking industry. Certain of those accounting policies are considered critical accounting policies, because they require us to make assumptions and judgments regarding circumstances or trends that could affect the carrying values of our material assets, such as, for example, assumptions regarding economic conditions or trends that could impact our ability to fully collect our loans or ultimately realize the carrying values of certain of our other assets, such as securities available for sale and our deferred tax assets. Those assumptions and judgments are necessarily based on current information available to us regarding those economic conditions or trends or other circumstances. If adverse changes were to occur in the events, trends or other circumstances on which our assumptions or judgments had been based, or other unanticipated events were to happen that might affect our operating results, under U.S. GAAP it could become necessary for us to reduce the carrying values of the affected assets on our balance sheet. In addition, because reductions in the carrying value of assets are sometime effectuated by or require charges to income, such reductions also may have the effect of reducing our income.

Our critical accounting policies consist of the accounting policies and practices we follow in determining (i) the sufficiency of the allowance we establish for loan losses; (ii) the carrying values of impaired loans and the sufficiency of the specific reserves thereon; (iii) the estimated future cash flows of troubled debt restructurings or the fair value of the collateral associated with collateral-dependent troubled debt restructurings; (iv) the fair values of derivative instruments, mortgage servicing rights, loans and contingent liabilities associated with mortgage banking activities;(v) the fair values of investment securities that we hold for sale; (vi) the amount of our deferred tax asset, consisting primarily of tax loss carryforwards and tax credits that we believe will be able to use to offset income taxes in future periods, (vii) the assumptions used and resulting fair values of amounts recorded in acquisition accounting, including but not limited to loans, deposits, intangibles and goodwill and (viii) the evaluation of expected cash flows and the resulting impact on accretable yield and nonaccretable differences on acquired loans. Significant changes in the Company’s critical accounting policies or their application during the six months ended June 30, 2012, as compared to our critical accounting policies in effect during 2011, consist of those matters resulting from the Merger as further described in the accompanying consolidated condensed financial statements and notes thereto.

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policies or their application during the nine months ended September 30, 2012, as compared to our critical accounting policies in effect during 2011, consist of those matters resulting from the Merger as further described in the accompanying consolidated condensed financial statements and notes thereto.

Additional information regarding our critical accounting policies and estimates is contained in the sections captioned “Critical Accounting Policies and Estimates” in Item 7, entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our 2011 10-K and readers of this report are urged to read those sections of that 10-K.

~~Earnings Overview~~46

~~For~~Table ~~the three-month and six month periods ended June 30, 2012, the Company recorded a net loss attributable to common stockholders~~ of $(1.4) million or $(0.15)(1) per basic share and fully-diluted share of common stock and $(2.0) million or $(0.22)(1) per basic share and fully-diluted share of common stock, respectively. For the same periods in the prior year, the Company recorded net income attributable to common stockholders of $909 thousand or $0.11(2) per basic and fully-diluted share of common stock and $464 thousand or $0.06(2) per basic and fully-diluted share of common stock, respectively.Contents

~~The~~Selected ~~net~~Financial ~~loss~~Data ~~for~~— ~~the~~Income six months ended June 30, 2012 was $(2.0) million and includes the effect of $1.2 million in acquisition costs. Additionally, the Company incurred severance costs related to the Merger that totaled $1.4 million during the six months ended June 30, 2012. Absent those expenses, the year to date 2012 net income was comparable to the $464 thousand net income for the six months ended June 30, 2011. The underlying components of the Company’s increased operating expenses are best viewed in the context of individual business units, as summarized below.Statement

The ~~mortgage~~following ~~banking~~table ~~activities~~reflects ~~added~~selected byfinancial ~~the~~data ~~Merger~~and ~~contributed~~ratios ~~noninterest~~for ~~income of $1.0 million to~~ the ~~second~~nine ~~quarter~~months and ~~six~~for ~~months~~the quarters ended ~~June~~ September 30, 2012~~. For~~ ~~the~~and ~~same periods, employee-related expenses totaled $1~~2011.~~2 million which, when combined with other expenses of the division, resulted in a net pretax segment loss of $588 thousand.~~

MCM’s revenues totaled $1.2 million for the second quarter and six months ended June 30, 2012. For the same periods, employee-related expense, which is variable and typically fluctuates proportionately with earnings, totaled $900 thousand. Other operational expenses reduced the pretax net income of MCM to $14 thousand for the second quarter and six months ended June 30, 2012.

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2012			2011			2012			2011
	(unaudited, dollars and shares in thousands)
Statements of Operations:
Interest income	$	5,154		$	3,560		$	11,133		$	12,366
Interest expense	426			167			761			659

Net interest income	4,728			3,393			10,372			11,707
Provision for loan losses	112			3,019			379			3,076

Net interest income after provision	4,616			374			9,993			8,631

Non-interest income	12,735			1,877			16,257			2,393
Non-interest expense	14,720			3,198			25,563			11,526
Income taxes	4			20			19			(7		)

Net income (loss) after tax	$	2,627		$	(967	)	$	668		$	(495	)

Net income (loss) attributable to common stockholders of Manhattan Bancorp	$	2,592		$	(967	)	$	629		$	(495	)

Per Share and Other Data:
Basic and diluted loss per share	$	0.21		$	(0.12	)	$	0.06		$	(0.06	)
Weighted average shares outstanding basic and diluted	12,192			8,195			9,975			8,195

Other Earnings-Related Data
Return on average assets(a)	2.25		%	-1.52		%	0.27		%	-0.24		%
Return on average equity(b)	19.28		%	-10.93		%	2.03		%	-1.90		%
Net interest margin	4.56		%	5.70		%	4.63		%	6.06		%
Dividend payout ratio	—			—			—			—
Average equity to average assets	11.66		%	13.87		%	13.08		%	12.49		%
Net charge-offs	$	599		$	1,858		$	1,136		$	1,690
Net charge-offs to average total loans	0.94		%	4.06		%	0.41		%	1.33		%

~~Our commercial bank realized~~ (a)Net ~~pretax net~~ loss of $(781) thousand in the second quarter of 2012, which was $1.7 million less than its $968 thousand pretax net income in the same quarter of 2011. In spite of the one month of additional operations added as a ~~result~~percentage of ~~the~~average ~~Merger, interest income declined $2~~assets.1 million while interest expense remained flat for the second quarter of 2012. A significant portion of the decrease in interest income is due to reduced ASC 310-30 accretion in the first six months of 2012. In the first six months of 2011, the Bank recognized significant gains on loan payoffs in excess of loan carrying values. As a result of the organic growth in the loan portfolio, general reserves were increased through a provision for loan losses which increased $425 thousand in the second quarter of 2012 as compared to the same period in 2011 although the year to date provision of $267 thousand reflects a decrease of $594 thousand compared to the same period in the prior year. Loan yields continue at historic lows while, at the same time, the commercial bank’s operating expenses increased by $1.7 million and $2.4 million, respectively, for the three and six months ended June 30, 2012. The increase in these expenses was primarily related to infrastructural enhancements, increased staffing levels, and merger-related activities.

(1b) ~~Earnings~~Net (loss) ~~per~~as ~~share excludes~~ a $9percentage ~~thousand~~of ~~net~~average ~~loss and $4 thousand net income attributable to the non-controlling interests for the three and six months ended June 30, 2012, respectively.~~equity

(2) Earnings (loss) per share excludes a $32 thousand net income and $39 thousand net income attributable to the non-controlling interests for the three and six months ended June 30, 2011, respectively.

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Summary of Financial ~~Condition~~Results — Quarter ended September 30, 2012

The Company’s ~~business~~reported ~~combination~~net ~~increased~~operating ~~its~~income ~~balance~~of ~~sheet~~$2.6 atmillion for the ~~May 31~~three months ended September 30, 2012 ~~acquisition~~representing ~~date~~an asincrease ~~follows:~~of $3.6 million compared to a net operating loss of $(967) thousand for the same period one year ago. The Company reported earnings per diluted share of $0.21 for the current quarter compared to a loss per diluted share of $(0.12) for the same quarter in 2011.

Cash and cash equivalents	$	21,550
Investment securities available for sale	8,239
Loans held for sale	76,390
Loans held for investment	99,971
Premises and equipment	5,534
Investment in limited partnership	2,756
Goodwill	7,396
Core deposit intangible	1,156
Receivable from broker	6,729
Mortgage servicing rights	1,877
Mortgage banking derivatives	1,985
Other assets	6,956
Total assets	240,539
Liabilities:
Deposits	199,633
Borrowings	16,034
Other liabilities	5,049
Total liabilities	220,716
Total consideration transferred (Manhattan Bancorp common shares)	$	19,823

The increase in earnings during the period ended September 30, 2012 compared to the same period in 2011 resulted primarily from an increase in non-interest income related to mortgage banking activities, partially offset by an increase in non-interest expenses associated with those same activities. Net interest income declined in the quarter ended September 30, 2012 as compared to the same period in 2011, partially offset by a decrease in provision for loan losses. See the specific sections below for details regarding these changes.

~~Following~~The ~~the~~table ~~completion~~below ofhighlights the ~~Merger,~~changes ~~assets as of June 30, 2012 totaled $455.9 million, an increase of $216.5 million compared to the $239.4 million~~ in ~~total assets as of December 31, 2011. Fair value additions to total assets from~~ the ~~Merger~~nature ~~totaled~~and ~~$232.5~~sources ~~million, offset primarily by decreases from other operational activity, including net loan sales~~ of ~~$5.8~~income ~~million~~ and ~~principal pay downs and sales of investment securities with carrying values of $7~~expense.~~3 million.~~

The loan portfolio consists of loans held for investment and loans held for sale. Loans held for investment net of allowance for loan losses increased by $119.7 million to $286.1 million as of June 30, 2012 compared to $166.4 million as of December 31, 2011. This portfolio growth was comprised of $99.9 million due to the Merger, and net new loan originations of $19.8 million for the first six months of 2012. Prior to the Merger, PBB had not recently engaged in the sale of loans. However, the acquisition resulted in the addition of loans held for sale with a fair value of $76.4 million as of May 31, 2012. Loans held for sale remained relatively stable at $70.9 million at June 30, 2012 with the $5.5 million net change reflecting the turnover and restoration of the held for sale portfolio as depicted in the statement of cash flows.

	For the Three Months
	Ended September 30,					Increase (Decrease)
	2012		2011			Amount			Percent
	(unaudited, dollars in thousands)

Interest income	$	5,154	$	3,560		$	1,594		44.8	%
Interest expense	426		167			259			155.1	%

Net interest income	4,728		3,393			1,335			39.3	%
Provision for loan losses	112		3,019			(2,907		)	-96.3	%

Net interest income after provision	4,616		374			4,242			1134.2	%

Non-interest income	12,735		1,877			10,858			578.5	%
Non-interest expense	14,720		3,198			11,522			360.3	%
Income taxes	4		20			(16		)	-80.0	%

Net income (loss) after tax	$	2,627	$	(967	)	$	3,594		-371.7	%

~~Investment~~Net ~~securities~~Interest ~~totaled~~Income $9.7 million at June 30, 2012, up slightly from the $9.5 million as of December 31, 2011. The change reflects $8.2 million in investments acquired in the Merger less the effect of principal pay downs, investment sales and ~~the associated amortization of premiums on securities.~~Margin

~~Deposits~~Net ~~totaled~~interest ~~$371.2~~income, ~~million~~the atdifference ~~June 30,~~between ~~2012,~~interest upearned ~~$170.0~~on ~~million~~loans ~~from~~and ~~December 31,~~investments ~~2011. This~~and ~~change~~interest ~~resulted~~paid ~~from~~on deposits is the ~~Merger~~principal ~~which~~component ~~added~~of ~~$199~~the Company’s earnings.6 Net ~~million~~interest ~~partially~~income ~~offset~~is affected by ~~decreases~~changes in ~~depositor~~the ~~balances~~nature ~~totaling~~and ~~$29.6~~volume ~~million. The~~of ~~overall~~earning ~~mix~~assets ofheld ~~deposit~~during ~~types~~the ~~remained~~quarter, ~~stable~~the rates earned on such assets and the rates paid on interest bearing liabilities.

~~While~~Net ~~the~~interest ~~Company~~income ~~had~~for nothe ~~borrowings~~quarter asended ofSeptember ~~December 31~~30, ~~2011~~2012 was $4.7 million, ~~debt~~which ~~acquired~~was comprised of $5.2 million in interest income and $426 thousand in interest expense. Net interest income for the ~~business~~quarter ~~combination~~ended ~~added~~September 30, 2011 was $163.4 million, which was comprised of $3.6 million in interest income and $167 thousand in interest expense. Net interest income for the ~~Company~~quarter ~~borrowed~~ended September 30, 2012 represented an ~~additional~~increase of $101.3 million, or 39.3%, from the ~~FHLB,~~same ~~bringing~~period one year earlier. The increase in net interest income from the ~~total~~same ~~borrowings~~period one year ago was primarily attributable to ~~$26~~an ~~million~~increase in average earning assets as a result of ~~June 30~~loan growth from the Merger, ~~2012~~partially offset by lower yields on earning assets and slightly higher cost of interest bearing liabilities.

The composition of the average balance sheet impacts change in net interest income. For the quarter ended September 30, 2012 average earning assets of $412.1 million represented an increase of $175.9 million, or 74.5%, compared to $236.2 million for the same period in 2011. The increase in earning assets is principally the result of the earning assets acquired in the Merger. The Company’s loan-to-deposit ratio, a measure of leverage, averaged 98.5% during the quarter ended September 30, 2012, which represented an increase compared to an average of 78.2% for the same quarter of 2011 as a result of higher loan growth relative to deposit funding.

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The Company’s ~~allowance~~net ~~for~~interest ~~loan~~margin ~~losses~~(net asinterest ofincome ~~June~~divided by average earning assets) for the quarter ended September 30, 2012 was $24.156% ~~million,~~compared orto 05.7270% ofin ~~gross~~the ~~loans~~same ~~held~~period ~~for~~one ~~investment~~year earlier. The ~~percentage~~decrease ~~coverage~~in ~~has~~net ~~declined~~interest asmargin awas ~~result~~primarily ofdue ~~the~~to ~~Merger~~decreased ~~since~~yield ~~the~~on ~~acquired~~earning ~~loans~~assets ~~were~~along ~~recorded~~with atslightly ~~fair~~higher ~~value~~cost ~~and~~of ~~thus~~interest dobearing ~~not require a separate reserve at June 30, 2012~~liabilities. InThe ~~comparison,~~lower atyield ~~year-end~~on ~~2011,~~interest ~~the~~earning ~~Company’s~~assets ~~allowance~~ was ~~$2.4~~primarily ~~million~~influenced ~~which~~by ~~represented~~lower ~~1.40%~~yields ofon ~~gross~~ loans; ~~held~~the ~~for~~higher ~~investment. As~~yield ofin ~~June~~the quarter ending September 30, ~~2012,~~2011 ~~impaired~~was ~~loans~~the ~~totaled~~result ~~$2.3 million,~~ of ~~which~~a ~~$2.2~~greater ~~million~~amount ~~were considered troubled debt restructurings (“TDRs”). As~~ of ~~year-end~~yield ~~2011,~~accretion ~~impaired~~from loans ~~totaled~~accounted ~~$2.4~~for ~~million~~under ofASC ~~which~~310-20 ~~$2.3~~and ~~million~~ASC ~~were considered TDRs. As of June~~ 310-30, ~~2012,~~than ~~specific~~during ~~loan~~the ~~allowances~~same ofperiod ~~$605~~in ~~thousand were established for impaired loans, and all impaired loans were on non-accrual status~~2012.

~~Total~~The ~~equity~~following attable ~~June 30,~~shows ~~2012~~the ~~was~~composition ~~$52.3~~of ~~million,~~average ~~representing~~earning aassets ~~48%~~and ~~increase~~average ~~from~~funding ~~year-end 2011~~sources, ~~primarily~~average ~~due~~yields toand ~~the additional equity totaling approximately $19.2 million as recorded in the Merger~~rates, ~~offset~~and by the ~~$2.0~~net ~~million~~interest ~~loss~~margin infor the ~~six~~quarters ~~months~~ ended ~~June~~September 30, 2012 and 2011.

Capital ratios for the Bank continue to exceed levels required by banking regulators to be considered “well-capitalized, ” which is the highest level specified by regulators. As of June 30, 2012, the Bank’s total risk-adjusted capital ratio, tier 1 risk-adjusted capital ratio, and tier 1 capital ratio were 11.94%, 12.56%, and 14.72%, respectively, well above the regulatory requirements of 10%, 6%, and 5%, respectively, to be considered “well-capitalized.”

	Three months ended September 30,
	2012						2011
			Interest						Interest
	Average		Income/		Yield/		Average		Income/		Yield/
	Balance		Expense		Cost		Balance		Expense		Cost
	(unaudited, in thousands)
Interest-earning assets:
Federal funds sold	$	28,027	$	18	0.26	%	$	48,525	$	30	0.25	%
Deposits with other financial institutions	3,003		5		0.66	%	8,102		21		1.03	%
Investments(a)	9,402		45		1.90	%	10,351		81		3.10	%
Loans(b)	371,688		5,086		5.44	%	169,205		3,428		8.04	%
Total interest-earning assets	412,120		5,154		4.98	%	236,183		3,560		5.98	%
Non-interest-earning assets	55,334						19,001
Total assets	$	467,454					$	255,184

Interest-bearing liabilities:
Demand	16,191		2		0.05	%	8,972		1		0.04	%
Savings and money market	112,542		137		0.48	%	63,979		51		0.32	%
Certificates of deposit	111,687		161		0.57	%	75,310		115		0.61	%
FHLB advances and other borrowings	28,443		126		1.76	%	46		—		0.00	%
Total interest-bearing liabilities	268,863		426		0.63	%	148,307		167		0.45	%
Non-interest-bearing demand deposits	137,024						68,072
Total funding sources	405,887				0.42	%	216,379				0.31	%
Non-interest-bearing liabilities	7,073						3,406
Shareholders' equity	54,494						35,399
Total liabilities and shareholders' equity	$	467,454					$	255,184

Excess of interest-earning assets over funding sources	$	6,233					$	19,804
Net interest income			$	4,728					$	3,393
Net interest rate spread					4.56	%					5.67	%
Net interest margin					4.56	%					5.70	%

(a) Dividend income from the Bank's investment in non-marketable stocks of approximately $36 thousand and $5 thousand for the first nine months of 2012 and the first nine months of 2011, respectively is included in investment income; however, the corresponding average balances are included in other assets.

(b) The average balance of loans is calculated net of deferred loan fees/costs but includes non-accrual loans, if any, with a zero yield.

Table of Contents

~~Selected~~The ~~Financial~~following ~~Highlights~~table -shows ~~Operations~~the effect of the interest differential of volume and rate changes for the quarters ended September 30, 2012 and 2011. The change in interest due to both rate and volume has been allocated in proportion to the relationship of absolute dollar amounts of change in each.

	For the Three Months						For the Six Months
	For the Three Months Ended
	Ended June 30,						Ended June 30,
	September 30, 2012 over 2011
	2012			2011			2012			2011
	Total			Rate			Volume
	(unaudited, dollars and shares in thousands)
	(unaudited, in thousands)
Statements of Operations:
Interest income:
Interest income	$	3,371		$	5,438		$	5,979		$	8,808
Federal funds sold/ interest-bearing demand funds	$	(12	)	$	1		$	(13	)
Interest expense	211			231			335			493
Deposits with other financial institutions	(16		)	(4		)	(12		)
Net interest income	3,160			5,207			5,644			8,315
Investments	(36		)	(32		)	(4		)
Provision for loan losses	682			257			267			861
Loans	1,658			(1,820		)	3,478
Net interest income after provision	2,478			4,950			5,377			7,454
Net increase (decrease)	1,594			(1,855		)	3,449
Non-interest income	2,610			683			3,522			1,443
Interest expense:
Non-interest expense	6,485			4,665			10,844			8,421
Interest bearing demand	1			—			1
Net income (loss) after tax	$	(1,397	)	$	968		$	(1,945	)	$	476
Savings and money market	86			38			48
Net income (loss) attributable to common stockholders of Manhattan Bancorp	$	(1,414	)	$	909		$	(1,962	)	$	464
Certificates of deposit	46			(9		)	55
Per Share and Other Data:
FHLB advances and other borrowings	126			63			63
Basic and diluted loss per share	$	(0.15	)	$	0.11		$	(0.22	)	$	0.06
Net increase (decrease)	259			92			167
Weighted average shares outstanding basic and diluted	9,482			8,176			8,821			8,176
Total net increase (decrease)	$	1,335		$	(1,947	)	$	3,282
Other Earnings-Related Data
Return on average assets(a)	-1.85		%	1.37		%	-1.46		%	0.33		%
Return on average equity(b)	-14.01		%	11.33		%	-10.47		%	2.76		%
Net interest margin	4.65		%	7.96		%	4.69		%	6.22		%
Dividend payout ratio	—			—			—			—
Average equity to average assets	13.24		%	12.08		%	13.93		%	11.88		%
Net charge-offs	$	431		$	260		$	537		$	636
Net charge-offs to average total loans	0.88		%	0.55		%	0.47		%	0.69		%

~~(a)Net~~Interest ~~loss as a percentage of average assets. (b)Net loss as a percentage of average equity~~Income

Interest income of $5.2 million in the quarter ended September 30, 2012 represented an increase of $1.6 million, or 44.8%, from $3.6 million in the same quarter one year earlier. The average yield on earning assets was 4.98% for the quarter ended September 30, 2012 compared to 5.98% for the quarter ended September 30, 2011. The increase in interest income was primarily due to an increase in earning assets, partially offset by a decrease in the yield on earning assets.

Average gross loans were $371.7 million for three months ended September 30, 2012, an increase of $202.5 million or 119.7% from $169.2 million for the same period one year earlier. Average loans comprised 90.2% of average earning assets in the three months ended September 30, 2012 compared to 71.6% in the second quarter of 2011.

Other earning assets, consisting of investment securities, federal funds sold and interest-bearing deposits, averaged $40.4 million for the quarter ended September 30, 2012, a decrease of $26.5 million or 39.7% from $67.0 million for the three months ended September 30, 2011.

Interest Expense

Interest expense was $426 thousand for the quarter ended September 30, 2012, which represented an increase of $259 thousand, or 155.1%, from $167 thousand for the comparable period of 2011. The increase in interest expense was primarily due to an increase in average interest bearing liabilities compared to the same period in 2011, which is primarily due to the interest bearing liabilities acquired in the Merger during the second quarter of 2012. Average interest-bearing liabilities were $268.9 million for the three months ended September 30, 2012, an increase of $120.6 million, or 81.3%, from $148.3 million for the same period one year earlier.

Average interest bearing deposits were $240.4 million for the quarter ended September 30, 2012, which represented 63.7% of total average deposits and was an increase of $92.2 million, or 62.2%, from $148.3 million representing 68.5% of total average deposits in the third quarter of 2011.

Other (non-deposit) interest bearing liabilities are primarily comprised of FHLB and other borrowings, and are primarily used to supplement the Company’s funding requirements. Other interest bearing liabilities averaged $28.4 million in the three months ended September 30, 2012 and $46 thousand for the comparable period of 2011.

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~~Selected~~The ~~Financial~~average ~~Highlights~~rate —paid ~~Financial~~on ~~Condition~~interest-bearing liabilities was 0.42% in the quarter ended September 30, 2012 compared to 0.31% for the same period in 2011.

	As of
	6/30/2012			12/31/2011
	(dollars and shares in thousands, except per share amounts)
	(unaudited)
Balance Sheet Data:
Assets	$	455,857		$	239,384
Loans, net	288,138			168,736
Loans held for sale	70,904			—
Cash and investments	46,059			58,947
Goodwill and other intangibles	10,241			1,863
Deposits	371,202			201,152
Borrowings	26,016			—
Total shareholders’ equity	52,251			32,497
Total equity	52,255			35,188
Total equity to total assets ratio	11.46		%	14.70		%
Allowance for loan losses (ALLL)	$	2,085		$	2,355
ALLL to loans held for investment	0.72		%	1.40		%
Non-performing assets to ALLL	282.21		%	256.01		%
Non-performing assets to loans and OREO	2.02		%	3.50		%
Non-performing loans (nonaccrual loans)	$	2,303		$	2,448
Other real estate owned	3,581			3,581
Total non-performing assets	$	5,884		$	6,029
Book value per common share	$	4.29		$	90.77
Tangible book value per common share	$	3.45		$	85.57
Total shares outstanding - period end	12,193			358

Credit Risk and Provision for Credit Losses

~~RESULTS~~The OFCompany ~~OPERATIONS~~maintains an allowance for loan losses (“ALLL”) to provide for potential losses in its loan portfolio. Additions to the allowance are made by charges to operating expense in the form of a provision for loan losses. All loans that are judged to be uncollectible will be charged against the allowance, while recoveries would be credited to the allowance. We have instituted loan policies designed primarily for internal use, to adequately evaluate and assess the analysis of the risk factors associated with the Bank’s loan portfolio, to enable us to assess such risk factors prior to granting new loans and to assess the sufficiency of the allowance. We conduct an evaluation on the loan portfolio monthly.

~~Net~~The ~~Interest~~calculation ~~Income~~of the adequacy of the ALLL necessarily includes estimates by management applied to known loan portfolio elements. We employ a 10-point loan grading system in an effort to more accurately track the inherent quality of the loan portfolio. The 10-point system assigns a value of “1” or “2” to loans that are substantially risk free. Modest, average and acceptable risk loans are assigned point values of “3”, “4”, and “5”, respectively. Loans on the pass watch list are assigned a point value of “6.” Point values of “7,” “8,” “9” and “10” are assigned, respectively, to loans classified as special mention, substandard, doubtful and loss. Using these risk factors, management conducts an analysis of the general reserves applying quantitative factors based upon different risk scenarios. In addition, management considers other trends that are qualitative relative to our marketplace, demographic trends, the risk rating of the loan portfolios as discussed above, amounts and trends in non-performing assets and concentration factors.

~~Net~~The ~~interest~~Company ~~Income~~charged-off ~~(“NII”),~~$599 athousand ~~key~~during ~~component~~the ofthree ~~the~~months ~~Company’s~~ended ~~ability~~September 30, 2012 compared to ~~generate~~$1.9 ~~earnings,~~million isduring the ~~difference~~three ~~between~~months ~~the~~ended ~~interest~~September 30, ~~income~~2011. The weCompany ~~earn~~did onnot ~~interest-bearing~~have ~~assets,~~any ~~such~~loan asrecoveries ~~loans~~during ~~and~~the ~~other~~third ~~interest-earning~~quarter ~~assets,~~of ~~and~~2012 ~~the~~or ~~interest~~2011. weThe ~~pay~~Company onrecorded ~~deposits~~a ~~and~~provision ~~borrowed~~for ~~funds. Since~~credit ~~NII~~losses isof ~~impacted~~$112 bythousand for the ~~relative~~three ~~amounts~~months ofended ~~interest-earning~~September 30, ~~assets~~2012 ~~and~~due ~~liabilities~~to ~~and~~the ~~interest~~new ~~rates~~credit ~~earned~~funding ~~and~~in ~~paid~~the onquarter. The ~~those~~Company ~~balances,~~recorded ~~total~~a ~~NII~~provision ~~can~~for ~~fluctuate~~credit ~~based~~losses ~~upon~~of ~~the~~$3.0 ~~mix~~million offor ~~earning~~the ~~assets~~quarter ~~(e.g.~~ending September 30, ~~loans~~2011, ~~and~~which ~~investments)~~resulted ~~and~~from ~~funding~~loans ~~liabilities~~being ~~(e.g.,~~charged ~~demand~~off ~~deposits~~ and ~~borrowings)~~growth in the loan portfolio.

~~NII~~The ~~oftentimes~~following isschedule ~~expressed~~provides asan ~~interest~~analysis rate spread (“spread”) and net interest margin (“NIM”). Spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate paid on funding sources or liabilities. NIM represents NII as a percentage of ~~total average interest-earning assets. Spread is similar to NIM; however, unlike NIM, spread expresses~~ the ~~nominal~~allowance ~~average~~for ~~difference~~credit ~~between~~losses ~~borrowing and lending rates without compensating~~ for the ~~fact~~quarters ~~that~~ended ~~the~~September 30, ~~amount~~2012 ~~of earning assets~~ and ~~borrowed~~2011, ~~funds may be different.~~respectively:

Spread and NIM are affected primarily by two factors: 1) changes in the yields on earning assets and funding liabilities due to changes in interest rates, and 2) changes in the amounts and mix of average interest-earning assets and funding liabilities (i.e., volume changes). Interest rates earned and paid are affected primarily by our competition, general economic conditions, and other factors beyond our control, including FRB policies and actions as well as governmental economic, tax, and budget initiatives.

	Three Months Ended
	September 30,
	2012			2011
	(unaudited, in thousands)

Balance, beginning of period	$	2,085		$	1,402
Charged off loans
Commercial	(585		)	(1,528		)
Commercial real estate	—			(85		)
Other	(14		)	(245		)
Total charge-offs	(599		)	(1,858		)
Provision for loan losses
Commercial	(122		)	2,110
Commercial real estate	41			491
Residential real estate held for investment	92			329
Real estate - construction	(1		)	(45		)
Other	35			134
Unallocated	67			—
Total Provision (Reduction)	112			3,019

Balance, end of period	$	1,598		$	2,563

Table of Contents

The ~~Company’s~~allowance ~~NII totaled $3.2 million~~ for ~~the~~loan ~~three~~losses ~~months~~was ~~ended June 30, 2012, down~~ $21.06 million, ~~(40%)~~or ~~compared to the same period in 2011~~0. ~~This~~57% ~~decrease~~of istotal ~~principally due to reduced discount accretion for~~ loans ~~accounted~~held for ~~under~~investment, ~~ASC~~at ~~310-30 as the Bank recognized significant gains on loan payoffs in excess of the loan carry values. Average earning assets increased for the three months ended June~~September 30, 2012, bycompared to $102.86 million, (4or 1.59%) ~~compared~~of tototal ~~the~~loans, ~~three~~at ~~months ended June~~September 30, 2011. ~~Average~~The ~~loan~~decrease ~~balances~~in ~~increased~~the byallowance ~~$41.8 million (23%)~~ for ~~the~~loan ~~second~~losses ~~quarter~~from ofSeptember 30, ~~2012~~2011 ~~compared~~ to ~~the second quarter of 2011~~September 30, ~~principally~~2012 ~~due~~is ~~to the Merger. The favorable impact of the growth in earning assets was mitigated by a concurrent decrease in spread from 7.96% to 4.65%,~~ primarily ~~due~~attributable to ~~lower~~charge-offs ~~loan~~being ~~yields~~taken ~~and~~for ~~reduced discount accretion on~~ loans ~~accounted~~ for ~~under~~which ~~ASC~~the ~~310-30.~~Company ~~The~~had ~~overall~~made ~~yield~~provisions offor ~~our~~specific ~~loan~~reserves ~~portfolios declined to 5.81%~~ in the ~~second~~third quarter of ~~2012 from 11.43% in the same period in~~ 2011~~. The decline in loan yields reflected heightened competition for loans~~, ~~especially~~thus ~~commercial loans, in a historically low interest rate environment, in addition to~~ the ~~reduced~~remaining ~~ASC~~allowance ~~310-30~~for ~~discount accretion. This was exacerbated by a greater portion of our average~~ loan ~~balances~~losses ~~being~~remains ~~comprised~~adequate ofto ~~mortgage~~cover ~~loans,~~the ~~which typically have lower yields than most commercial~~ loans, ~~especially~~that ~~when~~are ~~compared~~not ~~with~~covered ~~the~~under ~~Company’s legacy commercial loan portfolio in the early part of 2011~~ASC310.

~~The~~Based ~~following~~on ~~table~~an ~~presents~~evaluation ~~the~~of ~~weighted~~individual ~~average~~credits, ~~yield~~historical oncredit ~~each~~loss ~~category~~experience ofby ~~interest-earning~~loan ~~assets~~type, ~~the~~economic ~~weighted~~conditions, ~~average~~and ~~rate~~the ~~paid~~Company’s onreassessment ~~each category~~ of ~~interest-bearing~~risks ~~liabilities~~noted above, management has allocated the ~~resulting~~allowance ~~spread,~~for ~~and~~loan ~~the~~losses ~~NIM~~as follows for the periods ~~indicated~~ending September 30, 2012 and December 31, 2011:

	Three months ended June 30,
	September 30, 2012				December 31, 2011
	2012							2011
	Amount		Percent		Amount			Percent
			Interest							Interest
Commercial	$	780	49	%	$	1,813		77	%
	Average		Income/			Yield/		Average		Income/		Yield/
Commercial real estate	559		35	%	355			15	%
	Balance		Expense			Cost		Balance		Expense		Cost
Residential real estate	171		11	%	121			5	%
	(unaudited, in thousands)
Other	21		1	%	66			3	%
Interest-earning assets:
Unallocated	67		4	%	—			0	%
Federal funds sold	$	37,065	$	23		0.25	%	$	54,404	$	33	0.24	%
Total	$	1,598	100	%	$	2,355		100	%
Deposits with other financial institutions	3,381		4			0.48	%	11,034		32		1.16	%
Investments(a)	4,402		61			5.57	%	10,414		83		3.20	%
Loans(b)	227,415		3,283			5.81	%	185,635		5,290		11.43	%
Total interest-earning assets	272,263		3,371			4.98	%	261,487		5,438		8.34	%
Non-interest-earning assets	29,142							21,633
Total assets	$	301,405						$	283,120
Interest-bearing liabilities:
Demand	11,597		1			0.03	%	9,179		1		0.04	%
Savings and money market	76,220		68			0.36	%	57,318		45		0.31	%
Certificates of deposit	73,114		104			0.57	%	110,860		185		0.67	%
FHLB advances and other borrowings	5,504		38			2.78	%	57		—		0.00	%
Total interest-bearing liabilities	166,435		211			0.51	%	177,414		231		0.52	%
Non-interest-bearing demand deposits	90,541							68,130
Total funding sources	256,976					0.33	%	245,544				0.38	%
Non-interest-bearing liabilities	4,536							3,387
Shareholders’ equity	39,893							34,189
Total liabilities and shareholders’ equity	$	301,405						$	283,120
Excess of interest-earning assets over funding sources	$	15,287						$	15,943
Net interest income			$	3,160						$	5,207
Net interest rate spread						4.65	%					7.96	%
Net interest margin						4.67	%					7.99	%

~~(a) Dividend~~At ~~income~~September 30, ~~from~~2012 the ~~Bank’s~~Company ~~investment~~had innonperforming ~~non-marketable~~assets ~~stocks~~ of ~~approximately~~ $347.9 ~~thousand~~million, ~~and~~or $31.7% ~~thousand~~of ~~for~~total ~~the~~assets, ~~first~~compared ~~six~~to ~~months~~$13.3 ofmillion, ~~2012~~or ~~and~~5.6% ~~the~~of ~~first~~total ~~six~~assets, ~~months~~on ofDecember 31, 2011,. ~~respectively~~The isfollowing ~~included~~summarizes innonperforming ~~investment~~assets ~~income;~~at ~~however~~September 30, ~~the~~2012 ~~corresponding~~and ~~average~~December 31, ~~balances are included in other assets~~2011.

(b) The average balance of loans is calculated net of deferred loan fees/costs but includes non-accrual loans, if any, with a zero yield.

	September 30, 2012		December 31, 2011
	(unaudited)
	(in thousands)

Loans on nonaccrual status	$	1,379	$	2,448

Loans accruing past 90 days	—		21

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