United States

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 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 October 31, 2012, there were 12,186,143 shares of the issuer’s common stock outstanding.

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Manhattan Bancorp

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2012

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			PAGE

PART I — FINANCIAL INFORMATION

	Item 1.	FINANCIAL STATEMENTS

		CONSOLIDATED BALANCE SHEETS	3

		CONSOLIDATED STATEMENTS OF OPERATIONS	4

		CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)	5

		CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY	6

		CONSOLIDATED STATEMENTS OF CASH FLOWS	7

		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	8

	Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	44

	Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	67

	Item 4.	CONTROLS AND PROCEDURES	67

PART II - OTHER INFORMATION

	Item 1.	LEGAL PROCEEDINGS	67

	Item 1A.	RISK FACTORS	67

	Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	69

	Item 3.	DEFAULTS UPON SENIOR SECURITIES	69

	Item 4.	MINE SAFETY DISCLOSURES	69

	Item 5.	OTHER INFORMATION	69

	Item 6.	EXHIBITS	70

SIGNATURES			71

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PART I — FINANCIAL INFORMATION

Manhattan Bancorp and Subsidiaries

Consolidated Balance Sheets

(in thousands)

	September 30, 2012			December 31, 2011
	(Unaudited)
*Assets*
Cash and due from banks	$	7,881		$	6,779
Federal funds sold/interest bearing demand funds	50,560			38,756
Total cash and cash equivalents	58,441			45,535
Time deposits - other financial institutions	1,105			3,952
Investment securities - available for sale, at fair value	9,041			9,460
Loans held for sale, at fair value	75,745			—
Loans held for sale, at lower of cost or fair value	325			—
Loans held for investment	279,048			168,736
Allowance for loan losses	(1,598		)	(2,355		)
Net loans held for investment	277,450			166,381
Total loans, net	353,520			166,381
Premises and equipment, net	9,403			4,201
Federal Home Loan Bank and Federal Reserve stock	3,619			1,986
Goodwill	7,396			—
Core deposit intangible	2,710			1,863
Other real estate owned	3,581			3,581
Investment in limited partnership fund	6,492			—
Mortgage servicing rights	3,402			—
Accrued interest receivable	851			675
Other receivables	400			—
Other assets	9,371			1,750
Total assets	469,332			239,384

*Liabilities and Stockholders’ Equity*
Deposits:
Non-interest bearing demand	147,761			70,188
Interest bearing:
Demand	15,688			10,480
Savings and money market	117,935			62,678
Certificates of deposit equal to or greater than $100,000	68,231			25,949
Certificates of deposit less than $100,000	24,149			31,857
Total deposits	373,764			201,152
FHLB advances and other borrowings	30,965			—
Accrued interest payable and other liabilities	9,605			3,044
Total liabilities	414,334			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: 12,186,433 in 2012 and 358 in 2011	—			—
Additional paid in capital	59,586			36,006
Accumulated other comprehensive income	136			483
Accumulated defecit	(4,763		)	(3,992		)
Total stockholders’ equity	54,959			32,497
Non-controlling interest	39			2,691
Total equity	54,998			35,188

Total liabilities and stockholders’ equity	$	469,332		$	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 Nine Months
	Ended September 30,					Ended September 30,
	2012		2011			2012		2011

Interest income
Interest and fees on loans	$	5,086	$	3,428		$	10,876	$	11,922
Interest on investment securities	45		81			178		251
Interest on federal funds sold	18		30			62		93
Interest on time deposits-other financial institutions	5		21			17		100
Total interest income	5,154		3,560			11,133		12,366

Interest expense
NOW, money market and savings	139		52			250		144
Time deposits	161		115			347		515
FHLB advances and other borrowed funds	126		—			164		—
Total interest expense	426		167			761		659

Net interest income	4,728		3,393			10,372		11,707

Provision for allowance for loan losses	112		3,019			379		3,076

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

Non-interest income
Whole loan sales and warehouse lending fees	315		—			598		—
Advisory income	607		—			771		—
Trading income	2,276		—			2,950		—
Mortgage banking, including gain on sale on loans held for sale	8,665		—			9,643		—
Earnings on MIMS-1 limited partnership fund	191		—			236		—
Other bank fees and income	283		323			642		828
Rental income	62		—			248		11
Gain on recovery of acquired loans	335		1,554			640		1,554
Gain on sale of securities	1		—			529		—
Total non-interest income	12,735		1,877			16,257		2,393

Non-interest expenses
Compensation and benefits	10,039		1,542			16,682		5,430
Occupancy and equipment	1,024		355			1,834		1,099
Technology and communication	971		376			1,741		963
Professional fees	1,067		585			3,042		1,847
FDIC insurance and regulatory assessments	184		37			332		226
Amortization of intangibles	135		78			310		396
Other non-interest expenses	1,300		225			1,622		1,565
Total non-interest expenses	14,720		3,198			25,563		11,526

Income (loss) before income taxes	2,631		(947		)	687		(502		)

Provision for income taxes	4		20			19		(7		)

Net income (loss)	2,627		(967		)	668		(495		)
Less: Net income attributable to the non-controlling interest	35		—			39		—
Net income (loss) attributable to common stockholders of Manhattan Bancorp	$	2,592	$	(967	)	$	629	$	(495	)

Weighted average number of shares outstanding (basic and diluted)	12,192,013		8,195,469			9,975,436		8,195,469

Basic and diluted earnings (loss) per share	$	0.21	$	(0.12	)	$	0.06	$	(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 Nine Months
	Ended September 30,					Ended September 30,
	2012		2011			2012			2011

Net income (loss)	$	2,592	$	(967	)	$	629		$	(495	)
Other comprehensive income (loss):
Unrealized gains (losses) on securities:
Unrealized holding gains arising during periods	123		76			156			238
Less: reclassification adjustment for gains included in net income	—		—			(529		)	—
Other comprehensive income (loss):	123		76			(373		)	238
Comprehensive income (loss)	$	2,715	$	(891	)	$	256		$	(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 Nine months Ended September 30, 2012

(Unaudited, dollars in thousands)

					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		)	26			(2,691		)	(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	—		—		24		—			—			—			24
Unrealized loss on investment securities, net of reclassification of realized gains of $529	—		—		—		—			(373		)	—			(373		)
Net income	—		—		—		629			—			39			668
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 Nine Months Ended,
	September 30,
	2012			2011

Cash flows from operating activities
Net income (loss)	$	668		$	(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	344,176			—
Originations and purchases of mortgage loans held for sale	(332,330		)	—
Net gains on sales of loans held for sale	(10,811		)	—
Net mark to market on mortgage loans held for sale	(716		)	—
Net increase in mortgage servicing asset	(1,526		)	—
Provision for loan losses	379			3,076
Net accretion (amortization) of discount/premium on securities	(446		)	177
Net gains on sales of securities available for sale	(529		)	—
Earnings on limited partnership fund	(236		)	—
Depreciation and amortization	523			361
Amortization of core deposit intangibles	310			396
Stock-based compensation expense	24			30
Net decrease in other assets	5,567			2,069
Net increase in other liabilities	1,513			127
Net cash provided by operating activities	6,566			5,741

Cash flows from investing activities
Net (increase) decrease in loans held for investment	(11,477		)	44,873
Decrease in time deposits - other financial institutions	2,847			11,419
Proceeds from principal payments and maturities of investment securities	4,605			3,448
Proceeds from the sale of investment securities	5,029			—
Investment in limited partnership fund	(3,500		)	—
Redemption of Federal Reserve and Federal Home Loan Bank stock	(101		)	279
Purchase of premises and equipment	(192		)	(142		)
Transactions with affiliates	(331		)	—
Net cash acquired in business combination (see Note 2)	21,550			—
Net cash provided by investing activities	18,430			59,877

Cash flows from financing activities
Net decrease in deposits	(27,021		)	(63,426		)
Net increase (decrease) in borrowings	14,931			(11,950		)
Net cash used in financing activities	(12,090		)	(75,376		)

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	$	58,441		$	64,420

Supplementary information:
Interest paid	$	365		$	520
Income taxes paid	$	19		$	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 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 nine months ended 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 nine months ended 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 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 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

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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.

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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.

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 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. 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 September 30, 2012 and December 31, 2011 is $2.7 million and $1.9 million, respectively. Amortization expense for the nine months ended September 30, 2012 and 2011 totaled $310 thousand and $396 thousand, respectively. Amortization expense for the three months ended September 30, 2012 and 2011 totaled $135 thousand and $78 thousand, respectively. Amortization of core deposit intangibles, totaling approximately $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 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 nine months ended 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 nine months ended 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:

	Revenues (interest income)		Net income (loss)
	(unaudited, in thousands)

Acquired entity actual January 1, 2012 through May 31, 2012	$	3,419	$	(2,992	)

Supplemental pro forma combined for:
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 $1.2 million of acquisition costs incurred in 2012; such costs were 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 September 30, 2012, and December 31, 2011.

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(unaudited, in thousands)
September 30, 2012
Available-for-sale securities:
U.S. government and agency securities:
Residential mortgage-backed securities	$	7,532	$	90	$	—	$	7,622
Private label mortgage-backed securities	1,373		46		—		1,419
Total available-for-sale securities	$	8,905	$	136	$	—	$	9,041

	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

An increase in unrealized gains and losses on available-for-sale securities of $123 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 $373 thousand is included in accumulated other comprehensive income for the nine month period ended September 30, 2012. During the nine months ended September 30 2012, the Company sold $4.5 million in securities at a gain of $529 thousand. There were no sales during 2011.

Securities with a fair value of $6.2 million and $7.2 million as determined by the Federal Home Loan Bank of San Francisco (“FHLB”) at September 30, 2012 and December 31, 2011, respectively, were pledged to secure borrowings from the FHLB. At September 30, 2012, two private label mortgage-backed securities (“MBS”) acquired in the Merger totaling $1.2 million were issued by one issuer. At September 30, 2012, the Company’s private label MBS, comprised of five securities totaling $1.4 million, had a net unrealized gain of $46 thousand. Of these, two securities totaling $1.2 million were rated below investment grade and had an unrealized gain of $45 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 September 30, 2012 and December 31, 2011, management believes that the gross unrealized losses 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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Note 4. LOANS HELD FOR INVESTMENT, ALLOWANCE AND CREDIT QUALITY

Loans held for investment are summarized as follows:

	September 30 2012					December 31, 2011
	Amount			Percentage		Amount			Percentage
	Outstanding			of Total		Outstanding			of Total
	(unaudited)
	(dollars in thousands)
Commercial	$	83,364		29.9	%	$	46,474		27.5	%
Commercial real estate	153,925			55.2	%	98,934			58.6	%
Residential real estate	38,860			13.9	%	20,907			12.4	%
Real estate - construction	1,306			0.5	%	35			0.1	%
Other	1,593			0.6	%	2,386			1.4	%
Total loans, including net loan costs	279,048			100.0	%	168,736			100.0	%
Allowance for loan losses	(1,598		)			(2,355		)
Net loans	$	277,450				$	166,381

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

Acquired loans, subject to ASC 310-30	$	134,082	$	4,611	$	138,693	$	96,288	$	1,384	$	97,672
Acquired loans, subject to ASC 310-20	75,430		322		75,752		21,694		—		21,694
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 September 30, 2012 and December 31, 2011, loans with outstanding principal balances of $183.5 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.

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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
	September 30, 2012						September 30, 2011
	(unaudited, in thousands)
	Accretable			Nonaccretable			Accretable			Nonaccretable
Balance at the beginning of the period	$	41,394		$	7,831		$	28,574		$	9,445
Interest income recognized in earnings	(2,445		)	—			(4,132		)	—
Additions(1)	3,124			3,725			—			—
Reclassification of nonaccretable to accretable due to improvement in cash flows	—			—			1,709			(1,709		)
Amounts transferred to accretable due to loan payoffs	294			(351		)	243			(243		)
Amounts not recognized due to chargeoffs on transfers to other real estate	—			—			—			—
Balance at the end of period	$	42,367		$	11,205		$	26,394		$	7,493

	For the Nine Months Ended
	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	(5,940		)	—			(9,329		)	—
Additions(2)	17,182			8,190			—			—
Transfer of CGB loans (3)	—			—			—			(3,216		)
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	351			(408		)	972			(972		)
Amounts not recognized due to chargeoffs on transfers to other real estate	—			(14		)	—			(55		)
Balance at the end of period	$	42,367		$	11,205		$	26,394		$	7,493

(1) Additions included 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 nonaccretable differences. These updates to estimated cash flows did not result in any significant change to the 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) Additions included above reflect increases to accretable and nonaccretable yield associated with loans acquired in the business combination described in Note 2 plus additions described in (1) above.

(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.

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Credit Quality

Delinquency

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

	September 30, 2012
	Current		30 to 59 Days		60 to 89 Days		90 Days or more		Total
	(unaudited, in thousands)
Commercial	$	82,094	$	1,019	$	250	$	1	$	83,364
Commercial real estate	152,365		1,505		55				153,925
Residential real estate	38,760						100		38,860
Real estate - construction	1,306								1,306
Other	1,593								1,593
Total	$	276,118	$	2,524	$	305	$	101	$	279,048

	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 real estate	20,612		—		30		265		20,907
Real estate - construction	35		—		—		—		35
Other	2,278		49		—		59		2,386
Total	$	160,731	$	1,128	$	37	$	6,840	$	168,736

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

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.

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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 September 30, 2012 and December 31, 2011 follows:

	September 30, 2012
			Special
	Pass		Mention		Substandard		Doubtful		Total
	(unaudited, in thousands)
Commercial	$	71,203	$	8,367	$	3,274	$	520	$	83,364
Commercial real estate	139,060		4,252		10,613		—		153,925
Residential real estate	36,681		1,748		431		—		38,860
Real estate - construction	1,306		—		—		—		1,306
Other	1,542		37		14				1,593
Total Loans	$	249,792	$	14,404	$	14,332	$	520	$	279,048

	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

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

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:

	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

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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 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	$	1,403	$	1	$	1	$	1,578	$	—	$	—
Commercial real estate	302		—		—		—		—		—
Residential real estate	112		8		8		355		—		—
Real estate - construction	—		—		—		—		—		—
Other	17		—		—		—		—		—
	$	1,834	$	9	$	9	$	1,933	$	—	$	—

	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	$	1,647	$	—	$	—	$	1,052	$	—	$	—
Commercial real estate	201		13		13		—		—		—
Residential real estate	158		8		8		236		—		—
Real estate - construction	—		—		—		—		—		—
Other	11		—		—		—		—		—
	$	2,017	$	21	$	21	$	1,288	$	—	$	—

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

	September 30, 2012		December 31, 2011
	(unaudited)
	(in thousands)
Commercial	$	1,061	$	2,145
Commercial real estate	288		—
Residential real estate	16		244
Other	14		59
Total	$	1,379	$	2,448

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Troubled Debt Restructurings

As of September 30, 2012 and December 31, 2011, the Company had TDRs totaling $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 310-30 are not included in these disclosures.

	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	1	$	1,236	$	485	$	567	$	72
Commercial real estate	1	294		263		—		10
Residential real estate	1	21		16		—		1
Other	1	22		13		—		1
	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

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:

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	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	$	—	$	—

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 September 30, 2012 and December 31, 2011.

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:

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

Balance, beginning of period	$	2,085		$	1,402		$	2,355		$	1,177
Charged off loans
Commercial	(585		)	(1,528		)	(1,080		)	(1,545		)
Commercial real estate	—			(85		)	(1		)	—
Residential real estate held for investment	—			—			(13		)	(59		)
Other	(14		)	(245		)	(42		)	(86		)
Total charge-offs	(599		)	(1,858		)	(1,136		)	(1,690		)
Provision for loan losses
Commercial	(122		)	2,110			47			2,111
Commercial real estate	41			491			205			451
Residential real estate held for investment	92			329			63			381
Real estate - construction	(1		)	(45		)	(3		)	—
Other	35			134			67			133
Unallocated	67			—			—
Total Provision (Reduction)	112			3,019			379			3,076

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

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

	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			1,138
Reduction in provision based on improvement in expected cash flows	(310		)	(176		)
Ending balance of allowance for loan losses	$	67		$	962

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

	September 30, 2012
			Commercial		Construction		Residential
	Commercial		real estate		real estate		real estate		Other		Unallocated		Total
	(unaudited, in thousands)

Allowance allocated to:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment	744		543		—		156		21		67		1,531
Loans under ASC 310-30	36		16		—		15		—		—		67
Total	$	780	$	559	$	—	$	171	$	21	$	67	$	1,598

Loans by evaluation method:
Individually evaluated for impairment	$	1,061	$	288	$	—	$	16	$	14	$	—	$	1,379
Collectively evaluated for impairment	68,107		50,169		36		19,270		1,394		—		138,976
Loans under ASC 310-30	14,196		103,468		1,270		19,574		185		—		138,693
Total	$	83,364	$	153,925	$	1,306	$	38,860	$	1,593	$	—	$	279,048

	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:

Manhattan Bancorp 10-Q