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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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U.S. Securities and Exchange Commission
Washington, D. C. 20549

FORM 10-K

Commission File Number 000-54116

MANHATTAN BANCORP
(Exact name of registrant as specified in its charter)

2141 Rosecrans Avenue, Suite 1160
El Segundo, California 90245
(Address of principal executive offices) (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock
(Title of class)

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act: Yes o    No ý

         Indicate by check mark whether the registrant (1) 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 ý    No o

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

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this From 10-K or any amendment to this Form 10-K. o

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

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

         The aggregate market value of common equity held by non-affiliates computed by reference to the average bid and asked price of such common equity, as of June 30, 2010 was approximately $9,868,985.

         As of March 24, 2011, there were 3,987,631 shares of the issuer's common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the issuer's definitive proxy statement for the 2011 annual meeting of shareholders are incorporated by reference in Part III of this Annual Report.

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Manhattan Bancorp
December 31, 2010
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FORWARD-LOOKING STATEMENTS

        This Annual Report on Form 10-K 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. 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; 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; and management's ability to manage the Company's operations. For further discussion of these and other risk factors, see "Item 1A. Risk Factors."

        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.

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PART I

ITEM 1.    BUSINESS

General

        Manhattan Bancorp, a California corporation ("Bancorp") was incorporated 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 is located in El Segundo, California and at December 31, 2010 had $151 million in assets, $91 million in net loans receivable and $124 million in deposits.

        On October 1, 2009, Bancorp, through its wholly-owned subsidiary, MBFS Holdings, Inc. ("MBFS"), acquired a 70% interest in BOM Capital, LLC (formerly Bodi Capital LLC) ("BOMC"), a full-service mortgage-centric broker/dealer. On November 30, 2010, a recapitalization and restructuring was completed whereby a newly-formed limited liability company, Manhattan Capital Markets LLC ("MCM"), acquired 100% of BOMC in a multi-step transaction. MBFS holds a 70% interest in MCM. MCM is located in Calabasas, California and at December 31, 2010 had $2 million in assets primarily in cash or cash equivalent balances. References throughout the remainder of this Annual Report on Form 10-K to MCM shall be deemed to include BOMC 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.

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

Banking Services

        The Bank's primary goal is to operate and grow into a profitable community-oriented financial institution serving primarily entrepreneurs, small and medium-sized businesses, business service professionals and owners/owner-users of commercial, industrial, and multi-family properties in the Los Angeles County market area.

        The Bank promotes relationship-based products and services to meet the banking needs of its defined customer base. It offers a full range of deposit products including non-interest bearing demand deposits and interest bearing checking accounts, savings accounts and certificates of deposit. Wire transfers, electronic bill payment, overdraft protection, and assorted retail banking services are offered to all customers, and the Bank offers cash management services to its commercial checking account customers.

        The Bank originates loans based on specific underwriting guidelines. A large portion of these loans are secured by commercial real estate. However, the Bank does offer both secured and unsecured commercial term loans and lines of credit, and construction loans for individual and commercial properties. To a much lesser extent, the Bank has made home equity and other consumer loans. In October 2010, the Bank began to originate consumer mortgages with the intent to resell the majority of such loans to qualified investors. The Bank has not, nor does it intend, to originate loans that are deemed sub-prime credits.

        The Bank offers Internet banking services, which allow customers to review their account information, issue stop payment orders, pay bills, transfer funds, order checks and inquire about credit products

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electronically. It also offers qualified customers the ability to process deposits through remote item capture from their place of business.

Capital Market Services

        The Company offers mortgage related advisory and broker/dealer services through its indirect subsidiary MCM. MCM provides both fee and incentive based consulting services to banks, mortgage bankers and institutional investors. MCM's subsidiary, BOMC, trades mortgage loans and mortgage backed securities with institutional investors. BOMC is subject to regulatory supervision by the Financial Industry Regulatory Authority ("FINRA") and the U.S. Securities and Exchange Commission ("SEC"). Further, the Federal banking agencies expect banking organizations in their oversight role over functionally regulated subsidiaries, such as registered investment advisors, to assure appropriate controls are maintained that include establishing alternative sources of emergency support from the parent holding company, non-bank affiliates or external third parties, prior to seeking support from the bank; instituting effective policies and procedures for identifying potential circumstances triggering the need for financial support and the process for obtaining such support; implementing effective controls, including stress testing and compliance reviews; implementing policies and procedures to ensure compliance with disclosure and advertising requirements to clearly differentiate the investments in advised funds from obligations of the bank or insured deposits; and ensuring proper management, regulatory and financial reporting of contingent liabilities arising out of its investment advisory activities. The Company believes it has taken appropriate action to implement and audit compliance with these requirements.

        Incentive based investment advisory services are provided through Manhattan Investment Management Services Inc. ("MIMS") an indirect wholly-owned subsidiary of MCM. MIMS currently has an application pending with the State of California to be a registered Investment Adviser and will be regulated by the State of California, if approved.

        MCM also provides consulting services to others through its two other indirect wholly-owned subsidiaries Manhattan Advisor Services Inc, ("MASI"), which provides general consulting, and Manhattan Mortgage Warehouse Inc. ("MMW"), which specializes in mortgage warehouse lending consulting.

Competition and Geographic Market Area

        The relevant geographical market for the Bank is Los Angeles County. Utilizing the El Segundo headquarters as the hub, the Bank's business development officers serve existing and solicit prospective customers from outlying areas, such as the South Bay, Westside, downtown Los Angeles, South Los Angeles and other surrounding communities. As a business-oriented bank, most of the day-to-day banking activity is conducted through the use of in branch banking services and remote deposit capture devices.

        The banking business in California generally, and specifically in the market area which we serve, is highly competitive with respect to virtually all products and services and has become increasingly so in recent years. The industry continues to consolidate, directly affected by the more recent economic downturn, and strong, unregulated competitors continue to enter the banking markets with focused products targeted at highly profitable customer segments. Many generally unregulated competitors have been able to compete across geographic boundaries and provide customers increasing access to meaningful alternatives to banking services in nearly all significant products. These competitive trends are likely to continue. We compete for loans and deposits with other commercial banks, as well as with savings and loan associations, credit unions, thrift and loan companies, and other financial and non-financial institutions, including finance companies, leasing companies, insurance companies, brokerage firms, and investment banking firms. With respect to commercial bank competitors, the business is largely dominated by a relatively small number of major banks with many offices operating over a wide geographical area. These banks have, among other advantages, the ability to finance wide-ranging and effective advertising

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campaigns and to allocate their investment resources to regions of highest yield and demand. Many of the major banks operating in the area offer certain services which we do not offer directly (but some of which we offer through correspondent institutions). By virtue of their greater total capitalization, such banks also have substantially higher lending limits.

        In recent years, increased competition has also developed from specialized finance and non-finance companies that offer money market and mutual funds, wholesale finance, credit card, and other consumer finance services, including on-line banking services and personal finance software. Strong competition for deposit and loan products affects the interest rates of those products as well as the other terms on which they are offered to customers. Mergers and acquisitions by and between financial institutions have placed additional pressure on banks within the industry to streamline their operations, reduce expenses, and increase revenues to remain competitive. Competition has also intensified due to Federal and state interstate banking laws and failed bank receivership opportunities, which permit banking organizations to expand geographically.

        Technological innovation has also resulted in increased competition in the financial services market as customers now expect a choice of several delivery systems and channels, including telephone, mail, home computer online banking, ATMs, self-service branches, and/or in-store branches.

        In order to compete effectively, we have created a sales and service culture that combines the experience of our senior officers, which includes the extensive sales orientation of larger financial institutions, with the commitment to service and a focus on the individual needs of our clients, which is found at the best community banks. We seek to provide a level of service and decision-making responsiveness not generally offered by larger institutions while at the same time providing management sophistication not universally found at local community banks.

        As noted above, our primary service area consists of the County of Los Angeles, with a particular emphasis on the Westside, South Bay and Los Angeles airport areas. As in most major U.S. cities, large banks dominate the banking industry in Los Angeles County. However, rather than these large financial institutions, we believe our primary competitors for the small and medium-sized business customer are other community banks that can provide the service and responsiveness attractive to small and medium-sized business customers.

        The Bank monitors concentrations of funds which are provided by a single investor or from a single related source on a monthly basis to assist in its assessment of liquidity. As of December 31, 2010 there were nine relationships representing approximately 42.5% of all Bank deposits.

Employees

        As of December 31, 2010, the Company had 73 full-time employees. None of our employees are represented by a union or covered by a collective-bargaining agreement.

Economic Conditions and Legislative and Regulatory Developments

        The Company's profitability, like most financial institutions, is primarily dependent on interest rate differentials. These rates are highly sensitive to many factors that are beyond the Company's control and cannot be predicted, such as inflation, recession and unemployment, and the impact that future changes in domestic and foreign economic conditions might have on the Company cannot be predicted.

        The Company's business is also influenced by the monetary and fiscal policies of the Federal government and the policies of regulatory agencies. The FRB implements national monetary policies (with objectives such as maintaining price stability and reducing unemployment) through its open-market operations in U.S. Government securities, by adjusting the required level of reserves for depository institutions subject to its reserve requirements, and by varying the target Federal funds and discount rates applicable to borrowings by depository institutions. The actions of the FRB in these areas influence the

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growth of bank loans, investments, and deposits and also affect interest earned on interest-earning assets and interest paid on interest-bearing liabilities. The nature and impact of any future changes in monetary and fiscal policies on the Company cannot be predicted.

        From time to time, Federal and state legislation is enacted that may have the effect of materially increasing the cost of doing business, limiting or expanding permissible activities, or affecting the competitive balance between banks and other financial services providers. In response to the economic downturn and financial industry instability, legislative and regulatory initiatives were, and are expected to continue to be, introduced and implemented, which substantially intensify the regulation of the financial services industry. Moreover, especially in the current economic environment, bank regulatory agencies have been very aggressive in responding to concerns and trends identified in examinations, and this has resulted in the increased issuance and continuation of enforcement actions to financial institutions requiring action to address credit quality, liquidity and risk management and capital adequacy, as well as other safety and soundness concerns.

The Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank")

        Dodd-Frank represents landmark legislation, which followed other legislative and regulatory initiatives in 2008 and 2009 in response to the recent economic downturn and financial industry instability. Dodd-Frank impacts many aspects of the financial industry and, in many cases, will impact larger and smaller financial institutions and community banks differently over time. Dodd-Frank includes, among other things, the following: (i) the creation of a Financial Services Oversight Counsel to identify emerging systemic risks and improve interagency cooperation; (ii) expanded FDIC resolution authority to conduct the orderly liquidation of certain systemically significant non-bank financial companies in addition to depository institutions; (iii) the establishment of strengthened capital and liquidity requirements for banks and bank holding companies, including minimum leverage and risk-based capital requirements no less than the strictest requirements in effect for depository institutions as of the date of enactment; (iv) enhanced regulation of financial markets, including the derivative and securitization markets, and the elimination of certain proprietary trading activities by banks; (v) requirement by statute that bank holding companies serve as a source of financial strength for their depository institution subsidiaries; (vi) the elimination and phase out of trust preferred securities from Tier 1 capital with certain exceptions; (vii) a permanent increase of the previously implemented temporary increase of FDIC deposit insurance to $250 thousand and an extension of Federal deposit coverage until January 1, 2013 for the full net amount held by depositors in non-interesting bearing transaction accounts; (viii) authorization for financial institutions to pay interest on business checking accounts; (ix) changes in the calculation of FDIC deposit insurance assessments, such that the assessment base will no longer be the institution's deposit base, but instead, will be its average consolidated total assets less its average tangible equity and increase the minimum reserve ratio for the Deposit Insurance Fund (the "DFI") from 1.15% to 1.35%; (x) the elimination of remaining barriers to de novo interstate branching by banks; (xi) expanded restrictions on transactions with affiliates and insiders and lending limits for derivative transactions, repurchase agreements and securities lending and borrowing transactions; (xii) the transfer of oversight of Federally chartered thrift institutions to the OCC and state-chartered savings banks to the FDIC, and the elimination of the Office of Thrift Supervision; (xiii) provisions that affect corporate governance and executive compensation at most United States publicly traded companies, including (1) stockholder advisory votes on executive compensation, (2) executive compensation "clawback" requirements for companies listed on national securities exchanges in the event of materially inaccurate statements of earnings, revenues, gains or other criteria, (3) enhanced independence requirements for compensation committee members, and (4) authority for the SEC to adopt proxy access rules which would permit stockholders of publicly traded companies to nominate candidates for election as director and have those nominees included in a company's proxy statement; and (xiv) the creation of a Consumer Financial Protection Bureau, which is authorized to promulgate and enforce consumer protection regulations relating to bank and non-bank financial products and examine and enforce these regulations on banks with more than $10 billion in assets.

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        The Company cannot predict the extent to which the interpretations and implementation of this wide-ranging Federal legislation may affect it. Many of the requirements of Dodd-Frank will be implemented over time and most will be subject to regulations implemented over the course of several years. There can be no assurance that these or future reforms (such as possible new standards for commercial real estate lending or new stress testing guidance for all banks) arising out of studies and reports required by Dodd-Frank will not significantly increase the Company's compliance or other operating costs and earnings or otherwise have a significant impact on its business, financial condition and results of operations. Dodd-Frank is likely to impose more stringent capital, liquidity and leverage requirements or otherwise adversely affect the Company's business. As a result of the changes required by Dodd-Frank, the profitability of the Company's business activities may be impacted and it may be required to make changes to certain of its business practices. These changes may also require the Company to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements.

EESA and ARRA

        Previous legislation enacted in response to the recent economic downturn and financial industry instability included the Emergency Economic Stabilization Act of 2008 ("EESA"), enacted on October 3, 2008, and the American Recovery and Reinvestment Act of 2009 ("ARRA"), enacted on February 17, 2009. Pursuant to EESA, the United States Department of the Treasury ("U.S. Treasury") was authorized to create the $700 billion Troubled Assets Relief Program ("TARP") to purchase, insure, hold and sell a wide variety of financial instruments, and, as implemented under the Capital Purchase Program ("CPP"), included authorization for up to $250 billion in senior preferred stock of qualifying United States banks and savings associations or their holding companies.

        In order to participate in the CPP, financial institutions were required to adopt certain standards for executive compensation and corporate governance imposed by EESA. These standards generally applied to the Chief Executive Officer, Chief Financial Officer and the three next most highly compensated senior executive officers. The standards included (1) ensuring that incentive compensation for senior executives did not encourage unnecessary and excessive risks that threaten the value of the financial institution; (2) required clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other criteria that were later proven to be materially inaccurate; (3) prohibition on making golden parachute payments to senior executives; and (4) agreement not to deduct for tax purposes executive compensation in excess of $500 thousand for each senior executive.

        ARRA amended EESA and imposed certain new, more stringent executive compensation and corporate expenditure limits on all current and future TARP recipients. The executive compensation standards under ARRA include, but are not limited to, (i) prohibitions on bonuses, retention awards and other incentive compensation, other than restricted stock grants which do not fully vest during the TARP period up to one-third of an employee's total annual compensation, (ii) prohibitions on golden parachute payments for departure from a company, (iii) an expanded clawback of bonuses, retention awards, and incentive compensation if payment is based on materially inaccurate statements of earnings, revenues, gains or other criteria, (iv) prohibitions on compensation plans that encourage manipulation of reported earnings, (v) retroactive review of bonuses, retention awards and other compensation previously provided by TARP recipients if found by the U.S. Treasury to be inconsistent with the purposes of TARP or otherwise contrary to the public interest, (vi) required establishment of a companywide policy regarding "excessive or luxury expenditures," and (vii) inclusion in a participant's proxy statements for annual stockholder meetings of a non-binding "Say on Pay" stockholder vote on the compensation of executives.

        The Company elected to participate in the CPP and in December 2008 issued $1.7 million worth of preferred stock to the Treasury Department pursuant to this program. Following the receipt of additional capital from a private placement, the Company sought and received permission to repurchase the $1.7 million worth of preferred stock form the Treasury Department in September 2009. Shortly thereafter,

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the Company reached an agreement regarding the value of the warrant issued in conjunction with the CPP with the redemption completed in October 2009. Certain reporting requirements associated with the Company's participation continued into 2010. The Company complied with all such requirements through August 31, 2010, the date on which it ceased being subject to such requirements.

International Capital and Liquidity Initiatives

        The international Basel Committee on Banking Supervision (the "Basel Committee") is a committee of central banks and bank supervisors and regulators from the major industrialized countries. The Basel Committee develops broad policy guidelines for use by each country's supervisors in determining the supervisory policies they apply. In December 2009, the Basel Committee released two consultative documents proposing significant changes to bank capital, leverage and liquidity requirements, commonly referred to as "Basel III." The Group of Twenty Finance Ministers and Central Bank Governors (commonly referred to as the G-20), including the United States, endorsed the Basel III reform package and their proposed phase in timelines in November, 2010. Basel III provides for increases in the minimum Tier 1 common equity ratio and the minimum requirement for the Tier 1 capital ratio. Basel III additionally includes (i) a "capital conservation buffer" on top of the minimum requirement designed to absorb losses in periods of financial and economic distress, and (ii) an additional required countercyclical buffer percentage to be implemented according to a particular nation's circumstances. These capital requirements are further supplemented under Basel III by a non-risk-based leverage ratio. Basel III also reaffirms the Basel Committee's intention to introduce higher capital requirements on securitization and trading activities at the end of 2011.

        The Basel III liquidity proposals have three main elements: (i) a "liquidity coverage ratio" designed to meet the bank's liquidity needs over a 30-day time horizon under an acute liquidity stress scenario, (ii) a "net stable funding ratio" designed to promote more medium and long-term funding over a one-year time horizon, and (iii) a set of monitoring tools that the Basel Committee indicates should be considered as the minimum types of information that banks should report to supervisors.

        Implementation of Basel III in the United States will require implementing regulations and guidelines by United States banking regulators, which may differ in significant ways from the recommendations published by the Basel Committee. It is unclear how United States banking regulators will define "well-capitalized" in their implementation of Basel III and to what extent and when smaller banking organizations in the United States will be subject to these regulations and guidelines. Basel III standards, if adopted, could lead to significantly higher capital requirements, higher capital charges and more restrictive leverage and liquidity ratios.

        Dodd-Frank also includes provisions related to increased capital and liquidity requirements. Such provisions would establish minimum leverage and risk-based capital requirements on a consolidated basis for all depository institution holding companies and insured depository institutions that cannot be less than the strictest requirements in effect for depository institutions as of the date of enactment, July 21, 2010.

Federal Banking Agency Compensation Guidelines

        Guidelines adopted by the Federal banking agencies pursuant to the Federal Deposit Insurance Act ("FDI Act") prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder. In June 2010, the Federal bank regulatory agencies jointly issued additional comprehensive guidance on incentive compensation policies (the "Incentive Compensation Guidance") intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The Incentive Compensation Guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a

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group, is based upon the key principles that a banking organization's incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization's ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization's board of directors. Any deficiencies in compensation practices that are identified may be incorporated into the organization's supervisory ratings, which can affect its ability to make acquisitions or perform other actions. The Incentive Compensation Guidance provides that enforcement actions may be taken against a banking organization if its incentive compensation arrangements or related risk-management control or governance processes pose a risk to the organization's safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

        On February 7, 2011, the Board of Directors of the FDIC approved a joint proposed rulemaking to implement Section 956 of Dodd-Frank for banks with $1 billion or more in assets. Section 956 prohibits incentive-based compensation arrangements that encourage inappropriate risk taking by covered financial institutions and are deemed to be excessive, or that may lead to material losses. The proposed rule would move the U.S. closer to aspects of international compensation standards by 1) requiring deferral of a substantial portion of incentive compensation for executive officers of particularly large institutions described above; 2) prohibiting incentive-based compensation arrangements for covered persons that would encourage inappropriate risks by providing excessive compensation; 3) prohibiting incentive-based compensation arrangements for covered persons that would expose the institution to inappropriate risks by providing compensation that could lead to a material financial loss; 4) requiring policies and procedures for incentive-based compensation arrangements that are commensurate with the size and complexity of the institution; and 5) requiring annual reports on incentive compensation structures to the institution's appropriate Federal regulator. A joint rule making proposal will be published for comment by all of the banking agencies and the SEC, among other agencies.

        The scope, content and application of the U.S. banking regulators' policies on incentive compensation continue to evolve in the aftermath of the economic downturn. It cannot be determined at this time whether compliance with such policies will adversely affect the ability of the Company and the Bank to hire, retain and motivate key employees.

Supervision and Regulation

General

        The Company, the Bank, MBFS and its subsidiary, MCM, are extensively regulated under both Federal and state law. Set forth below is a summary description of certain laws that relate to the regulation of the Company and the various affiliated companies. The description does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations.

The Company

Bank Holding Company Regulation

        As a bank holding company, Bancorp is subject to regulation and examination by the FRB under the Bank Holding Company Act of 1956, as amended ("BHCA"). Accordingly, Bancorp is subject to the FRB's regulations and its authority to:

•

Require periodic reports and such additional information as the FRB may require regarding the operations of the bank holding company and its nonbank subsidiaries;



•

Require bank holding companies to maintain increased levels of capital;

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Require that bank holding companies serve as a source of financial and managerial strength to subsidiary banks and commit resources as necessary to support each subsidiary bank;



•

Restrict the ability of bank holding companies to declare dividends or obtain dividends or other distributions from their subsidiary banks;



•

Terminate an activity or terminate control of or liquidate or divest certain subsidiaries, affiliates or investments if the FRB believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of any bank subsidiary;



•

Take formal or informal enforcement action or issue other supervisory directives and assess civil money penalties for non-compliance under certain circumstances;



•

Require the prior approval of senior executive officer or director changes and prohibit golden parachute payments, including change in control agreements, or new employment agreements with such payment terms, which are contingent upon termination;



•

Regulate provisions of certain bank holding company debt, including the authority to impose interest ceilings and reserve requirements on such debt and require prior approval to purchase or redeem securities in certain situations; and



•

Approve acquisitions and mergers with banks and consider certain competitive, management, financial or other factors in granting these approvals in addition to similar California or other state banking agency approvals which may also be required.

        Subject to prior notice or FRB approval, bank holding companies may generally engage in, or acquire shares of companies engaged in, activities determined by the FRB to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Bank holding companies which elect and retain "financial holding company" status pursuant to the Gramm-Leach-Bliley Act of 1999 ("GLBA") may engage in these nonbanking activities and broader securities, insurance, merchant banking and other activities that are determined to be "financial in nature" or are incidental or complementary to activities that are financial in nature without prior FRB approval. Pursuant to GLBA and Dodd-Frank, in order to elect and retain financial holding company status, a bank holding company and all depository institution subsidiaries of a bank holding company must be well capitalized and well managed, and, except in limited circumstances, depository subsidiaries must be in satisfactory compliance with the Community Reinvestment Act ("CRA"), which requires banks to help meet the credit needs of the communities in which they operate. Failure to sustain compliance with these requirements or correct any non-compliance within a fixed time period could lead to divestiture of subsidiary banks or require all activities to conform to those permissible for a bank holding company. Bancorp has not elected financial holding company status and neither Bancorp nor the Bank has engaged in any activities determined by the FRB to be financial in nature or incidental or complementary to activities that are financial in nature.

Securities Exchange Act of 1934

        Bancorp is subject to the public reporting requirements of the Securities and Exchange Act of 1934, as amended, generally applicable to publicly held companies. Its securities are registered with the SEC under Section 12(g) of the Exchange Act, which requires the filing of periodic reports and proxy statements, as well as certain other reporting obligation.

Sarbanes-Oxley Act of 2002

        Bancorp is subject to the Sarbanes-Oxley Act of 2002, which implements a broad range of corporate governance and accounting measures for public companies designed to promote honesty and transparency in corporate America and better protect investors from corporate wrongdoing. The Sarbanes-Oxley Act's

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principal legislation and the derivative regulation and rule-making promulgated by the Securities and Exchange Commission include:

•

the creation of an independent accounting oversight board;



•

auditor independence provisions that restrict non-audit services that accountants may provide to their audit clients;



•

additional corporate governance and responsibility measures, including the requirement that the Chief Executive Officer and Chief Financial Officer certify financial statements;



•

a requirement that companies establish and maintain a system of internal control over financial reporting and that an independent accountant provide to the company an independent opinion regarding its assessment of the effectiveness of such internal control over financial reporting; (this requirement does not apply to smaller reporting companies such as Bancorp);



•

a requirement that the company's independent accountants provide an attestation report with respect to the company's internal control over financial reporting (this requirement does not apply to smaller reporting companies such as Bancorp);



•

the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer's securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement;



•

an increase in the oversight of, and enhancement of certain requirements relating to audit committees of public companies and how they interact with the company's independent auditors;



•

the requirement that audit committee members must be independent and are absolutely barred from accepting consulting, advisory or other compensatory fees from the issuer;



•

the requirement that companies disclose whether at least one member of the committee is a "financial expert" (as such term is defined by the SEC) and if not, why not;



•

expanded disclosure requirements for corporate insiders, including accelerated reporting of stock transactions by insiders and a prohibition on insider trading during pension blackout periods;



•

a prohibition on personal loans to directors and officers, except certain loans made by insured financial institutions;



•

disclosure of a code of ethics and the requirement of filing of a Form 8-K for a change or waiver of such code;



•

mandatory disclosure by analysts of potential conflicts of interest; and



•

a range of enhanced penalties for fraud and other violations.

The Bank

        The Bank, as a nationally chartered bank, is subject to primary supervision, periodic examination, and regulation by the OCC. To a lesser extent, the Bank is also subject to certain regulations promulgated by the FRB and the FDIC, as administrator of the DIF. The Federal bank regulatory agencies have extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. The regulatory agencies have adopted guidelines to assist in identifying and addressing potential safety and soundness concerns before an institution's capital becomes impaired. The guidelines establish operational and managerial standards generally relating to: (1) internal controls, information systems, and internal audit systems; (2) loan documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset growth and asset quality; and (6) compensation, fees, and benefits.

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Further, the regulatory agencies have adopted safety and soundness guidelines for asset quality and for evaluating and monitoring earnings to ensure that earnings are sufficient for the maintenance of adequate capital and reserves. If, as a result of an examination, the OCC should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the Bank's operations are unsatisfactory or that the Bank or its management is violating or has violated any law or regulation, the OCC, and separately the FDIC as insurer of the Bank's deposits, have residual authority to:

•

Require affirmative action to correct any conditions resulting from any violation or practice;



•

Direct an increase in capital and the maintenance of higher specific minimum capital ratios, which may preclude the Bank from being deemed well capitalized and restrict its ability to accept certain brokered deposits;



•

Restrict the Bank's payment of dividends;



•

Restrict the Bank's growth geographically, by products and services, or by mergers and acquisitions;



•

Enter into informal or formal enforcement orders, including memoranda of understanding, written agreements and consent or cease and desist orders or prompt corrective action orders to take corrective action and cease unsafe and unsound practices;



•

Require the prior approval of senior executive officer or director changes and prohibit golden parachute payments, including change in control agreements, or new employment agreements with such payment terms, which are contingent upon termination;



•

Remove officers and directors and assess civil monetary penalties; and



•

Take possession of and close and liquidate the Bank.

Dividends

        The ability of the Bank to pay dividends is subject to certain legal limitations. No national bank may pay dividends from its capital; all dividends must be paid out of net profits then on hand, after deducting for expenses including losses and bad debts. The payment of dividends out of net profits of a national bank is further limited by a limitation, which prohibits a bank from declaring a dividend on its shares of common stock until the surplus fund equals the amount of capital stock, or if the surplus fund does not equal the amount of capital stock, until one-tenth of the bank's net profits of the preceding half-year, in the case of quarterly or semi-annual dividends, or the preceding two consecutive half-year periods, in the case of annual dividends, are transferred to the surplus fund before each dividend is declared.

        The approval of the OCC is required, if the total of all dividends declared by a national bank in any calendar year shall exceed the total of its net profits for that year combined with its net profits for the two preceding years, less any required transfers to surplus or a fund for the retirement of any preferred stock. The OCC has adopted guidelines, which set forth factors which are to be considered by a national bank in determining the payment of dividends. A national bank, in assessing the payment of dividends, is to evaluate the bank's capital position, its maintenance of an adequate allowance for loan and lease losses, and the need to review or develop a comprehensive capital plan, complete with financial projections, budgets and dividend guidelines. Therefore, the payment of dividends by a national bank is also governed by its ability to maintain minimum required capital levels and an adequate allowance for loan and lease losses. Additionally, the OCC may prohibit the payment of any dividend that would constitute an unsafe and unsound banking practice.

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        The ability of Bancorp and any non-bank subsidiary to pay dividends may also be limited by applicable state law. For example, the California General Corporation Law prohibits Bancorp from paying dividends on our common stock unless: (i) retained earnings, immediately prior to the dividend payment, equals or exceeds the amount of the dividend or (ii) immediately after giving effect to the dividend the sum of Bancorp's assets (exclusive of goodwill and deferred charges) would be at least equal to 125% of its liabilities and the current assets of Bancorp would be at least equal to its current liabilities, or, if the average of its earnings before taxes on income and before interest expense of the two preceding fiscal years was less than the average of its interest expense of the two preceding fiscal years, at least equal to 125% of its current liabilities.

        Shareholders are entitled to receive dividends only when and if declared by Bancorp's Board of Directors. Bancorp presently intends to follow a policy of retaining earnings, if any, for the purpose of increasing its net worth and reserves. Accordingly, it is anticipated that no cash dividends will be declared in the foreseeable future, and no assurance can be given that Bancorp's earnings will permit the payment of dividends of any kind in the future. The future dividend policy of Bancorp will be subject to the discretion of the Board of Directors and will depend upon a number of factors, including future earnings, financial condition, liquidity, and general business conditions.

Capital Adequacy Requirements

        Bank holding companies and banks are subject to various regulatory capital requirements administered by state and Federal banking agencies. Increased capital requirements are expected as a result of expanded authority set forth in Dodd-Frank and the Basel III international supervisory developments discussed above. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting, and other factors. At December 31, 2010, Bancorp's and the Bank's capital ratios exceeded the minimum percentage requirements to be deemed "well capitalized" for regulatory purposes

        The current risk-based capital guidelines for bank holding companies and banks adopted by the Federal banking agencies are expected to provide a measure of capital that reflects the degree of risk associated with a banking organization's operations for both transactions reported on the balance sheet as assets, such as loans, and those recorded as off-balance sheet items, such as commitments, letters of credit and recourse arrangements. The risk-based capital ratio is determined by classifying assets and certain off-balance sheet financial instruments into weighted categories, with higher levels of capital being required for those categories perceived as representing greater risks and dividing its qualifying capital by its total risk-adjusted assets and off-balance sheet items. Bank holding companies and banks engaged in significant trading activity may also be subject to the market risk capital guidelines and be required to incorporate additional market and interest rate risk components into their risk-based capital standards. As of December 31, 2009 and December 31, 2010, the Bank's Total Risk-Based Capital Ratio was 27.0% and 22.4% respectively, and its Tier 1 Risked-Based Capital Ratio was 25.8% and 21.2% respectively.

        Qualifying capital is classified depending on the type of capital:

•

"Tier 1 capital" currently includes common equity and capital received from trust preferred offerings, subject to the new provisions of Dodd-Frank. Under Dodd-Frank, depository institution holding companies with more than $15 billion in total consolidated assets as of December 31, 2009, are no longer be able to include trust preferred securities as Tier 1 regulatory capital after the end of a 3-year phase-out period beginning 2013, and would need to replace any outstanding trust preferred securities issued prior to May 19, 2010 with qualifying Tier 1 regulatory capital during the phase-out period. For institutions with less than $15 billion in total consolidated assets, existing trust preferred capital will still qualify as Tier 1. Small bank holding companies with less than

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$500 million in assets could issue new trust preferred securities that could still qualify as Tier 1, however the market for any new trust preferred capital raises is uncertain.

•

"Tier 2 capital" includes hybrid capital instruments, other qualifying debt instruments, a limited amount of the allowance for loan and lease losses, and a limited amount of unrealized holding gains on equity securities. Following the phase-out period under Dodd-Frank, trust preferred securities will be treated as Tier 2 capital.



•

"Tier 3 capital" consists of qualifying unsecured debt. The sum of Tier 2 and Tier 3 capital may not exceed the amount of Tier 1capital.

        Under the current capital guidelines, there are three fundamental capital ratios: a total risk-based capital ratio, a Tier 1 risk-based capital ratio and a Tier 1 leverage ratio. To be deemed "well capitalized" a bank must have a total risk-based capital ratio, a Tier 1 risk-based capital ratio and a Tier 1 leverage ratio of at least ten percent, six percent and five percent, respectively.

        In addition to the requirements of Dodd-Frank and Basel III, the Federal banking agencies may change existing capital guidelines or adopt new capital guidelines in the future and have required many banks and bank holding companies subject to enforcement actions to maintain capital ratios in excess of the minimum ratios otherwise required to be deemed well capitalized, in which case institutions may no longer be deemed well capitalized and may therefore be subject to restrictions on taking brokered deposits.

        Bancorp and the Bank are also required to maintain a leverage capital ratio designed to supplement the risk-based capital guidelines. Banks and bank holding companies that have received the highest rating of the five categories used by regulators to rate banks and that are not anticipating or experiencing any significant growth must maintain a ratio of Tier 1 capital (net of all intangibles) to adjusted total assets of at least 3%. All other institutions are required to maintain a leverage ratio of at least 100 to 200 basis points above the 3% minimum, for a minimum of 4% to 5%. Pursuant to Federal regulations, banks must maintain capital levels commensurate with the level of risk to which they are exposed, including the volume and severity of problem loans. Federal regulators may, however, set higher capital requirements when a bank's particular circumstances warrant. As of December 31, 2010, the Bank's leverage capital ratio was 16.6%, and the Company's leverage capital ratio was 18.1%, both ratios exceeding regulatory minimums.

Prompt Corrective Action Provisions

        The FDI Act provides a framework for regulation of depository institutions and their affiliates, including parent holding companies, by their Federal banking regulators. Among other things, it requires the relevant Federal banking regulator to take "prompt corrective action" with respect to a depository institution if that institution does not meet certain capital adequacy standards, including requiring the prompt submission of an acceptable capital restoration plan. Supervisory actions by the appropriate Federal banking regulator under the prompt corrective action rules generally depend upon an institution's classification within five capital categories as defined in the regulations. The relevant capital measures are the capital ratio, the Tier 1 capital ratio, and the leverage ratio.

        A depository institution's capital tier under the prompt corrective action regulations will depend upon how its capital levels compare with various relevant capital measures and the other factors established by the regulations. A bank will be: (i) "well capitalized" if the institution has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) "adequately capitalized" if the institution has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 4.0% or greater, and a leverage ratio of 4.0% or greater and is not "well capitalized"; (iii) "undercapitalized" if the institution has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio of less than 4.0%, or a leverage ratio of less than 4.0%; (iv) "significantly undercapitalized" if the institution has a total risk-based

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capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0%, or a leverage ratio of less than 3.0%; and (v) "critically undercapitalized" if the institution's tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters.

        The FDI Act generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be "undercapitalized." "Undercapitalized" institutions are subject to growth limitations and are required to submit a capital restoration plan. The regulatory agencies may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. In addition, for a capital restoration plan to be acceptable, the depository institution's parent holding company must guarantee that the institution will comply with such capital restoration plan. The bank holding company must also provide appropriate assurances of performance. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to 5.0% of the depository institution's total assets at the time it became undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is "significantly undercapitalized." "Significantly undercapitalized" depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become "adequately capitalized," requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. "Critically undercapitalized" institutions are subject to the appointment of a receiver or conservator.

        The appropriate Federal banking agency may, under certain circumstances, reclassify a well capitalized insured depository institution as adequately capitalized. The FDI Act provides that an institution may be reclassified if the appropriate Federal banking agency determines (after notice and opportunity for a hearing) that the institution is in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice. The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory provisions as if the institution were in the next lower category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information other than the capital levels of the institution.

Deposit Insurance

        The FDIC is an independent Federal agency that insures deposits, up to prescribed statutory limits, of Federally insured banks and savings institutions and safeguards the safety and soundness of the banking and savings industries. The FDIC insures our customer deposits through the DIF up to prescribed limits for each depositor. Pursuant to Dodd-Frank, the maximum deposit insurance amount has been permanently increased to $250 thousand and all non-interest-bearing transaction accounts are insured through December 31, 2012. The amount of FDIC assessments paid by each DIF member institution is based on its relative risk of default as measured by regulatory capital ratios and other supervisory factors. Due to the greatly increased number of bank failures and losses incurred by DIF, as well as the recent extraordinary programs in which the FDIC has been involved to support the banking industry generally, the FDIC's DIF was substantially depleted and the FDIC has incurred substantially increased operating costs. In November 2009, the FDIC adopted a requirement for institutions to prepay in 2009 their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011, and 2012. The Bank prepaid its assessments based on the calculations of the projected assessments at that time.

        As required by Dodd-Frank, the FDIC adopted a new DIF restoration plan which became effective on January 1, 2011. Among other things, the plan: (1) raises the minimum designated reserve ratio, which the FDIC is required to set each year, to 1.35 percent (from the former minimum of 1.15 percent) and removes

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the upper limit on the designated reserve ratio (which was formerly capped at 1.5 percent) and consequently on the size of the fund; (2) requires that the fund reserve ratio reach 1.35 percent by 2020; (3) eliminates the requirement that the FDIC provide dividends from the fund when the reserve ratio is between 1.35 percent and 1.5 percent; and (4) continues the FDIC's authority to declare dividends when the reserve ratio at the end of a calendar year is at least 1.5 percent, but grants the FDIC sole discretion in determining whether to suspend or limit the declaration or payment of dividends. The FDI Act continues to require that the FDIC's Board of Directors consider the appropriate level for the designated reserve ratio annually and, if changing the designated reserve ratio, engage in notice-and-comment rulemaking before the beginning of the calendar year. The FDIC has set a long-term goal of getting its reserve ratio up to 2% of insured deposits by 2027. In connection with these changes, the Company expects its FDIC deposit insurance premiums to increase.

        On February 7, 2011, the FDIC approved a final rule, as mandated by Dodd-Frank, changing the deposit insurance assessment system from one that is based on total domestic deposits to one that is based on average consolidated total assets minus average tangible equity. In addition, the final rule creates a scorecard-based assessment system for larger banks (those with more than $10 billion in assets) and suspends dividend payments if the DIF reserve ratio exceeds 1.5 percent, but provides for decreasing assessment rates when the DIF reserve ratio reaches certain thresholds. Larger insured depository institutions will likely pay higher assessments to the DIF than under the old system. Additionally, the final rule includes a new adjustment for depository institution debt whereby an institution would pay an additional premium equal to 50 basis points on every dollar of long-term, unsecured debt held as an asset that was issued by another insured depository institution, excluding debt guaranteed under the Temporary Liquidity Guarantee Program (the "TLGP"), to the extent that all such debt exceeds 3 percent of the other insured depository institution's Tier 1 capital. The new rule is expected to take effect for the quarter beginning April 1, 2011.

        The Bank's FDIC insurance expense totaled $190 thousand for 2010. FDIC insurance expense includes deposit insurance assessments and Financing Corporation ("FICO") assessments related to outstanding FICO bonds to fund interest payments on bonds to recapitalize the predecessor to the DIF. These assessments will continue until the FICO bonds mature in 2017. Total FICO assessments totaled $10 thousand for 2010.

        The Bank is generally unable to control the amount of premiums that it is required to pay for FDIC insurance. If there are additional bank or financial institution failures or if the FDIC otherwise determines, the Bank may be required to pay even higher FDIC premiums than the recently increased levels. These announced increases and any future increases in FDIC insurance premiums may have a material and adverse affect on the Company's earnings and could have a material adverse effect on the value of, or market for, Bancorp's common stock.

        The FDIC may terminate a depository institution's deposit insurance upon a finding that the institution's financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices that pose a risk to the DIF or that may prejudice the interest of the bank's depositors. The termination of deposit insurance for the Bank would also result in the revocation of the Bank's charter by the OCC.

Interstate Banking and Branching

        Under the Riegle-Neal Interstate Banking and Branch Efficiency Act of 1994, as amended by Dodd-Frank, bank holding companies and banks generally have the ability to acquire or merge with banks in other states, and banks may also acquire or establish new branches to the same extent as banks established in any other state and provided they satisfy supervisory requirements for such expansion. Interstate branches are subject to certain laws of the states in which they are located. The Bank presently has no interstate branches.

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Operations and Consumer Compliance Laws

        The Bank must comply with numerous Federal anti-money laundering, data security, privacy and consumer protection statutes and implementing regulations, including the USA PATRIOT Act of 2001, the Bank Secrecy Act, the CRA, the Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act, the Equal Credit Opportunity Act, the Truth in Lending Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the National Flood Insurance Act and various Federal and state privacy protection laws. Noncompliance with these laws could subject the Bank to lawsuits and could also result in administrative penalties, including, fines and reimbursements. The Bank and Bancorp are also subject to Federal and state laws prohibiting unfair or fraudulent business practices, untrue or misleading advertising and unfair competition.

        These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans, and providing other services. Failure to comply with these laws and regulations can subject the Bank to various penalties, including but not limited to enforcement actions, injunctions, fines or criminal penalties, punitive damages to consumers, and the loss of certain contractual rights.

ITEM 1A.    RISK FACTORS

        In addition to the other information on the risks the Company faces and our management of risk contained in this annual report or in our regulatory filings, the following are the most significant risks which may adversely affect our business and operations. Events or circumstances arising from one or more of these risks could adversely affect the Company's business, financial condition, operating results and prospects, and the value and price of our common stock could decline. The risks identified below are not intended to be a comprehensive list of all risks we face, and additional risk may also impair our business operations and results. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. This discussion of risk factors may include forward-looking statements. For cautions about relying on such forward-looking statements, please see the initial page of this Report on Form 10-K.

WE DO NOT HAVE A HISTORY OF PROFITABILITY.

        The Company has incurred net losses of $4.7 million, $5.0 million, $4.4 million and $2.2 million for the years ended December 31, 2010, 2009, 2008 and 2007, respectively. The losses that occurred during the current year were, to some degree, the results of anticipated costs associated with developing our operating infrastructure. There were also unanticipated costs associated with executive management transitions. The effects of the current economic downturn may continue to adversely impact the Company's overall financial performance and results of operations. There can be no assurance that the Company will achieve profitability in the future.

DIFFICULT MARKET CONDITIONS HAVE ADVERSELY AFFECTED OUR INDUSTRY.

        Declines in the housing market over the past several years, with falling home prices and increasing foreclosures, unemployment and under-employment, have negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of asset values by many financial institutions. These write-downs have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have significantly reduced or ceased providing funding to borrowers, including to other financial institutions. This market turmoil and tightening of credit have led to an increased level of commercial and consumer

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delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally.

        A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on the Company and others in the banking industry. In particular, the Company may face the following risks in connection with these events:

•

The Company expects to face increased regulation of the banking industry. Compliance with such regulation may increase costs and limit the Company's ability to pursue business opportunities.



•

Market developments may continue to affect consumer confidence levels and may cause further declines in credit card usage and adverse changes in payment patterns, causing increased delinquencies and default rates, which could impact our charge-offs and provision for credit losses.



•

The process the Company uses to estimate losses inherent in its credit exposure or estimate the value of certain assets requires difficult, subjective, and complex judgments, including forecasts of economic conditions and how these economic predictions might impact the ability of our borrowers to repay their loans or affect the value of assets. During uncertain economic times, these assessments are more difficult, and can impact the reliability of the process.



•

The Company's ability to borrow from other financial institutions could be adversely affected by further disruptions in the capital markets or other events.



•

Competition in the banking industry could intensify as a result of the increasing consolidation of financial services companies in connection with current market conditions.

        Overall, during the past several years, the general business environment has had an adverse effect on business in our market area and there is no assurance that the environment will improve in the near future. Until conditions improve, we expect that our business, financial condition and results of operations will be negatively impacted.

POOR ECONOMIC CONDITIONS IN THE SOUTHERN CALIFORNIA REAL ESTATE MARKET MAY CAUSE US TO SUFFER HIGHER DEFAULT RATES ON OUR LOANS AND DECREASED VALUE OF THE ASSETS WE HOLD AS COLLATERAL.

        A substantial majority of our assets and deposits have been and will be generated in Southern California, and at December 31, 2010, approximately 59% of the Company's loans were real estate loans, most of which are secured by real property in Southern California. During 2010, the real estate market in Southern California continued to deteriorate significantly, as evidenced by declining prices, reduced transaction volume, and increased foreclosure rates, and this deterioration may be expected to result in an increase in the level of the Company's nonperforming loans, particularly commercial real estate loans. When real estate prices decline, the value of real estate collateral securing the Company's loans is reduced. As a result, the Company may experience greater charge-offs and, similarly, its ability to recover on defaulted loans by foreclosing and selling the real estate collateral may be diminished and as a result the Company is more likely to suffer losses on defaulted loans. If this real estate trend in the Company's market areas continues or worsens, the result could be reduced income, increased expenses, and less cash available for lending and other activities, which could have a material and adverse effect on the Company's financial condition and results of operations.

WE MAY SUFFER LOSSES IN OUR LOAN PORTFOLIO DESPITE STRICT ADHERENCE TO UNDERWRITING PRACTICES.

        The Company attempts to mitigate the risks inherent in extending credit by adhering to specific underwriting practices, managed by credit professionals. These practices include analysis of a borrower's prior credit history, financial statements, tax returns, and cash flow projections, valuations of collateral

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based on reports of independent appraisers and verifications of liquid assets. Although we believe that our underwriting criteria is appropriate for the various kinds of loans we make, we may incur losses on loans that meet our underwriting criteria, and these losses may exceed the amounts set aside as reserves in the Bank's allowance for loan losses. If the Company's underwriting practices prove to be ineffective, the Company may incur losses in its loan portfolio, which could have a material and adverse effect on our financial condition and results of operations.

        Bank regulatory agencies, as an integral part of their examination process, review our loans and allowance for loan losses. This is also the practice of the Company's independent auditors. A review of the Bank's loans was completed as recently as October 2010 by a third party loan review, where all recommendations regarding the risk weighting of bank credits were implemented. While we believe that our allowance for loan losses is adequate to cover potential losses, we cannot guarantee that future increases to the allowance for loan losses may not be required by regulators or other third party loan review or financial audits. Any of these occurrences could materially and adversely affect our financial condition and results of operations.

WE COULD BE AT A DISADVANTAGE WHEN COMPETING FOR DEPOSITS AND LOANS WITH LARGER INSTITUTIONS THAT HAVE LARGER LENDING LIMITS AND ESTABLISHED CUSTOMER CONTACTS.

        Within the Los Angeles metropolitan area, the Company faces intense competition for loans, deposits, and other financial products and services. Increased competition within the Company's pricing market may result in reduced loan originations and deposits. Ultimately, the Company may not be able to compete successfully against current and future competitors.

        Many competitors offer the types of loans and banking services that the Company offers. These competitors include national banks, regional banks and other independent banks. The Company also faces competition from many other types of financial institutions, including finance companies, brokerage firms, insurance companies, mortgage banks and other financial intermediaries. In particular, the Company's competitors include financial institutions whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and mount extensive promotional and advertising campaigns. Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions may have larger lending limits which would allow them to serve the credit needs of larger customers. These institutions may be able to offer the same loan products and services the Company offers at more competitive rates and prices.

        If the Company is unable to attract and retain banking customers, it may be unable to maintain its loan portfolio and deposit levels, and its financial condition and results of operations may be materially and adversely affected.

WE ARE DEPENDENT ON KEY PERSONNEL AND THE LOSS OF ONE OR MORE OF THOSE KEY PERSONNEL MAY MATERIALLY AND ADVERSELY AFFECT OUR PROSPECTS.

        Competition for qualified employees in the banking industry is intense, and there are limited numbers of qualified persons with knowledge of, and experience in, the California community banking industry. The process of recruiting personnel with the combination of skills and attributes required to carry out our strategies is often lengthy. The Company's success depends to a significant degree upon its ability to attract and retain qualified management, loan origination, finance, administrative, marketing and business development, and technical personnel, and upon the continued contributions of our management and personnel. In particular, our progress towards profitability had been and continues to be highly dependent upon the abilities of key executives and certain other employees. There have been several changes in key executive positions since the Company's inception and there is no guarantee that other changes may not occur. If the Company fails to attract and retain the necessary personnel, the Company's financial condition and results of operations may be materially and adversely affected.

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WE FACE LIMITS ON OUR ABILITY TO LEND.

        The Bank's legal lending limit as of December 31, 2010 was approximately $3.4 million. Accordingly, the size of the loans which we can offer to potential customers is less than the size of loans which many of our competitors with larger lending limits can offer. The Bank's lending limit affects our ability to seek relationships with the area's larger and more established businesses. We cannot be assured of any success in attracting or retaining customers seeking larger loans or that we can engage in participations of those loans on terms favorable to us. Moreover, to the extent that the Company incurs losses and does not obtain additional capital, the Company's lending limit, which depends upon the amount of its capital, will decrease, which could have a material and adverse effect on the Company's financial condition and results of operations.

INTEREST RATE FLUCTUATIONS AND OTHER CONDITIONS WHICH ARE OUT OF OUR CONTROL COULD HARM PROFITABILITY.

        Our net interest income before provision for loan losses and net income depends to a great extent on "rate differentials," i.e., the difference between the income we receive from our loans, securities and other earning assets, and the interest expense we pay on our deposits and other liabilities. These rates will be highly sensitive to many factors which will be beyond our control, including general economic conditions, both domestic and foreign, and the monetary and fiscal policies of various governmental and regulatory authorities, in particular, the Board of Governors of the Federal Reserve System. Changes in monetary policy, including changes in interest rates, will influence not only the interest the Company receives on its loans and investment securities and the amount of interest it pays on deposits, it will also affect the Company's ability to originate loans and obtain deposits and its costs in doing so. It is impossible to predict the nature or extent of the effect on our operations of monetary policy changes or other economic trends over which we have no control, such as unemployment and inflation. In addition, factors like natural resource prices, international conflicts and terrorist attacks and other factors beyond our control may adversely affect our business. If the rate of interest the Company pays on its deposits and other borrowings increases more than the rate of interest it earns on its loans and other investments, the Company's net interest income, and therefore its financial condition and results of operations, could be materially and adversely affected. Similarly, the Company's financial condition and results of operations could be materially and adversely affected if the rates on its loans and other investments fall more quickly than those on its deposits and other borrowings.

WE RELY ON COMMUNICATIONS, INFORMATION, OPERATING AND FINANCIAL CONTROL SYSTEMS TECHNOLOGY FROM THIRD-PARTY SERVICE PROVIDERS.

        We rely heavily on third-party service providers for much of our communications, information, operating and financial control systems technology, including customer relations management, general ledger, and loan servicing and loan origination systems. Any failure or interruption or breach in security of these systems could result in a material adverse effect on our ability to operate efficiently and expose the Company to regulatory, legal and reputation risks.

OUR INABILITY TO PROPERLY MANAGE LIQUIDITY RISKS MAY IMPAIR OUR OPERATIONS AND JEOPARDIZE OUR FINANCIAL CONDITION.

        Liquidity is an essential component of our business. An inability to raise funds at reasonable costs, whether through deposits, borrowings, the sale of loans, or other sources may have a material and adverse effect on our liquidity, financial condition and results of operation. Lack of access to funding sources may at times affect our entire industry or may specially relate to our Company, such as a result of adverse regulatory actions against us, or a deterioration of the confidence of customers and potential customers in the ability of our Company to meet their financial needs.

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FINANCIAL SERVICES LEGISLATION AND REGULATORY REFORMS MAY HAVE A SIGNIFICANT IMPACT ON OUR BUSINESSES AND RESULTS OF OPERATIONS.

        The Dodd-Frank Act was signed into law on July 21, 2010, and many of its provisions have extended implementation periods and delayed effective dates and will require extensive rulemaking by regulatory authorities as well as require multiple studies to be conducted. The Dodd-Frank Act, including future rules implementing its provisions and the interpretation of those rules, could limit our ability to pursue business opportunities we might otherwise consider engaging in, impose additional costs on us, result in significant loss of revenue, impact the value of assets we hold, or otherwise significantly adversely affect our businesses. In particular, the potential impact of the Dodd-Frank Act on our operations and activities, both currently and prospectively, include, among others:

•

a reduction in the ability to generate or originate revenue-producing assets as a result of compliance with heightened capital and liquidity standards;



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increased cost of operations due to greater regulatory oversight, supervision and examination of banks and bank holding companies, and higher deposit insurance premiums;



•

an increase in FDIC deposit insurance premiums;



•

a potential reduction in fee income due to limits on interchange fees applicable to larger institutions which could effectively reduce the fees we can charge; and



•

the limitation on the ability to expand consumer product and service offerings due to anticipated stricter consumer protection laws and regulations.

        Further, we may be required to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements under the Dodd-Frank Act, which may have a material and adverse impact results of operations and financial condition.

UNPRECEDENTED MARKET VOLATILITY

        The capital and credit markets have been experiencing volatility and disruption for more than two years. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers seemingly without regard to those issuers' underlying financial strength. If current levels of market disruption and volatility continue or worsen, there can be no assurance that the Company will not experience an adverse effect, which may be material, on the Company's ability to access capital and on its financial condition and results of operations.

        Several factors could cause the price of Bancorp's common stock to fluctuate substantially in the future, including:

•

announcements of developments related to the Company's business;



•

fluctuations in the Company's results of operations;



•

sales of substantial amounts of the Company's securities into the marketplace;



•

general conditions in the Company's markets or the worldwide economy;



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a shortfall in revenues or earnings compared to securities analysts' expectations;



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changes in analysts' recommendations or projections and



•

disclosure of adverse regulatory developments.

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WE MAY NOT HAVE THE ABILITY TO ATTRACT CAPITAL NECESSARY TO MAINTAIN REGULATORY RATIOS AND FUND GROWTH.

        The Company may need to raise additional capital in the future to provide it with sufficient capital resources and liquidity to meet its commitments and business needs, particularly if its asset quality or earnings were to deteriorate significantly. The Company's ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of its control, and its financial performance. Economic conditions and the loss of confidence in financial institutions may increase the Company's cost of funding and limit access to certain customary sources of capital.

        The Company cannot assure that such capital will be available on acceptable terms or at all. Any occurrence that may limit the Company's access to the capital markets, such as a decline in the confidence of debt purchasers, depositors of the Bank or counterparties participating in the capital markets may adversely affect the Company's capital costs and its ability to raise capital and, in turn, its liquidity. Moreover, if the Company needs to raise capital in the future, it may have to do so when many other financial institutions are also seeking to raise capital and would have to compete with those institutions for investors. An inability to raise additional capital on acceptable terms when needed could have a materially adverse effect on the Company's financial condition and results of operations.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

        None

ITEM 2.    PROPERTIES

        The Company has entered into a lease, which commenced on July 1, 2007, for the Company's main office and our corporate headquarters located at 2141 Rosecrans Avenue, Suite 1160, in the city of El Segundo, California. The lease is for a term of seven years, with one option to renew for five years. Under the lease, we occupy approximately 7,600 square feet on the ground floor of a six-story multi-tenant building complex known as The Plaza at Continental Park. The current base rent is $20,996 per month, with annual increases of 3% per year as of July 1 each year.

        The Company has also entered into a lease agreement for satellite office of its mortgage division, which commenced on November 1, 2010. The property is located at 11975 El Camino Real Suite 103, in the city of San Diego, California. The lease is for a term of 26 months, with one option to renew for three years. Under the lease, the company occupy's 2,511 square feet on the ground floor of the three story building. The current base rent is $6,403.05 per month, with an increase of approximately 3% at the beginning of the 13^th and 25^th month respectively.

        For the use of MCM and its subsidiaries the Company entered into a lease on June 1, 2010, with a term of 24 months. The lease provides the Company with the option to terminate the lease at the end of twelve months. If the Company exercises this option to terminate the lease early, a fee in the amount of $6,996 must be paid by the Company to the lessor. The property is located at 5023 Parkway Calabasas, in the city of Calabasas, California. The current rent is $14,513 per month.

        The Company has two other month-to-month leases for temporary locations in El Segundo ($3,000 per month) and New York ($5,361 per month). Total occupancy expense for the year ended December 31, 2010 was $733 thousand compared to $459 thousand for the year ended December 31, 2009.

ITEM 3.    LEGAL PROCEEDINGS

        To the best of our knowledge, there are no pending legal proceedings to which the Company is a party and which may have a materially adverse effect upon the Company's property, business or results of operations.

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ITEM 4.    REMOVED AND RESERVED

PART II

ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

        On September 4, 2007, shares of Bancorp's common stock began quotations on the Over the Counter Bulletin Board ("OTCBB") under the symbol "MNHN.OB." Bancorp stock is not listed on any exchange. The OTCBB is a regulated quotation service that displays real-time bid and ask prices and volume information in over-the-counter equity securities. Unlike the NASDAQ however, the OTCBB does not impose listing standards and does not provide automated trade executions. Any investment in Bancorp common stock should be considered a long-term investment as there is currently no active trading market for the Company's stock.

        The information in the following table indicates the highest and lowest trade and volume of trading for Bancorp's common stock for each calendar quarter during each of the two most recent fiscal years, and is based upon information provided by the OTCBB. The information does not include transactions for which no public records are available. These prices are based upon the actual prices of stock transactions.

Shareholders

        As of March 10, 2011, we have approximately 177 shareholders of record. There are no other classes of equity securities outstanding.

Dividends

        To date, we have not paid any cash dividends. As a bank holding company that currently has no significant assets other than its equity interest in the Bank and MBFS, the Company's ability to declare dividends depends primarily upon dividends it receives from its subsidiaries. The dividend practice of the Bank and MBFS, like the Company's dividend practice, will depend upon its earnings, financial position, current and anticipated cash requirements and other factors deemed relevant by the subsidiaries' Board of Directors at the time.

        Shareholders are entitled to receive dividends only when and if declared by the Company's Board of Directors. The Company presently intends to follow a policy of retaining earnings, if any, for the purpose of increasing the net worth and reserves of the Company. Accordingly, it is anticipated that no cash dividends will be declared in the foreseeable future, and no assurance can be given that the Company's earnings will permit the payment of dividends of any kind in the future. The future dividend policy of the Company will be subject to the discretion of the Board of Directors and will depend upon a number of factors, including future earnings, financial condition, liquidity, and general business conditions.

        Please see Item 1, "Business—Supervision and Regulation—Dividends" for additional discussion of dividends and the statutes and regulations that restrict the Company's ability to pay dividends.

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Securities Authorized for Issuance under Equity Compensation Plans

        The following table provides information as of December 31, 2010 with respect to the shares of our common stock that may be issued under existing equity compensation plans.

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ITEM 6.    SELECTED FINANCIAL DATA

        The following table sets forth our statistical information as of and for the years ended December 31, 2010, December 31, 2009 and December 31, 2008. Also included is statistical information as of December 31, 2007 and for the period from August 15, 2007 (the date the Bank commenced operations) until December 31, 2007. The data should be read in conjunction with the Company's audited statements and related notes included in Item 8 of this Annual Report on Form 10-K. All averages for 2007 are calculated based upon the initial operating period noted above. Amounts are in thousands, except for per share figures.

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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

        Management's discussion and analysis of financial condition and results of operation 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 audited financial statements contained within this report including the notes thereto. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under Item 1A "Risk Factors" and elsewhere in this Report.

OVERVIEW

        The Company recorded a net loss of $4.7 million ($1.16 basic and fully-diluted loss per share) for the year ended December 31, 2010 as compared to a net loss of $5.0 million ($1.26 basic and fully diluted loss per share) for the year ended December 31, 2009, a 7.9% decrease. The decrease in the net loss between these two full-year operating periods is primarily due to:

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An increase in annual net interest income resulting from higher average net earning assets outstanding during 2010 over 2009, which benefitted from an increase in the net interest margin



•

A decrease in the amount of the loan provision needed to cover reductions in the loan loss allowance due to charge-offs

        These benefits were offset by the following:

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The costs associated with management transitions during 2010, composted of recruiting, severance, and consulting fees



•

Start-up costs associated with launching the mortgage division



•

The net effect of a full year of operational costs from non-banking subsidiaries in 2010 compared to the much shorter three month period in 2009

        The improvement in the net interest income after provisions for loan losses was sufficient to diminish much of the effect of the increase in net non-interest in expense between annual periods.

        The following provides a summary of operating results for the year ended December 31, 2010:

•

Interest income for the year ended December 31, 2010 was approximately $6.5 million, which represents an increase of approximately $1.9 million or 41.7% compared to $4.6 million for the year ended December 31, 2009. Higher overall earning assets yields during 2010 resulted from a shift from lower yielding Federal funds and time deposits placed with other financial institutions towards higher yielding loans and investments. The latter category grew from an annual average of 79.3% for 2009 to 83.9% for 2010. The resulting improvement increased the effective yield on interest-earning assets from 4.90% for 2009 to 5.27% for 2010.



•

Interest expense for the year ended December 31, 2010 was approximately $1.0 million, which represents an increase of only approximately $156 thousand or 18.5%. This limited increase was achieved despite the growth in the average percentage of interest-bearing liabilities to average funding sources, which increased from 71.8% for 2009 to 74.7% for 2010. Yields on interest-bearing liabilities decreased, with their effective cost of interest-bearing liabilities declining from 1.78% for 2009 to 1.38% for 2010.



•

As a result of the items mentioned above, net interest income totaled approximately $5.5 million, which represents an increase of approximately $1.8 million or 46.9% from the year ended

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December 31, 2009. For the year ended December 31, 2010 the net interest margin was 4.46%, which compares favorably to 4.00% for the year ended December 31, 2009, representing an improvement of 46 basis points. For a more detailed discussion regarding net interest income, please see "Net-Interest Income" below.

•

For the year December 31, 2010, non-interest income totaled approximately $7.7 million, an increase of $6.7 from the year ending December 31, 2009. This 661.6% increase is primarily the direct result of the Company's entrance into the non-bank activities associated with MCM. For a more detailed discussion regarding non-interest income, please see "Non-interest Income" below.



•

Non-interest expenses for the year ended December 31, 2010 were approximately $17.2 million an increase of $8.6 million from the similar period ended December 31, 2009. Most of the 75.8% increase is the result of increased compensation and benefits, which represents approximately $6.5 million of the growth in non-interest expenses year over year. For a more detailed discussion regarding non-interest expenses, please see "Non-interest Expenses" below.

        The following provides a summary of significant annual changes in the financial condition of the Company as of December 31, 2010 compared to December 31, 2009:

•

Fed funds sold and interest-bearing demand balances totaled $37.2 million at December 31, 2010, approximately $13.0 million lower than the balances reflected at December 31, 2009. At December 31, 2009, the Company had both short-term advances from the Federal Home Loan Bank (the "FHLB") of $7.5 million and $16.5 million in short-term CDARS deposits. As of December 31, 2010, there were no short-term advances from either FHLB or CDARS. For a more detailed discussion regarding the sources of funds, please see "Deposits and Borrowed Funds" below.



•

With the introduction of the Bank's mortgage division, the December 31, 2010 balance sheet reflects approximately $3.5 million in loans held for sale for which there is no comparable number at December 31, 2009. Gross loans not held for sale totaled approximately $89.2 million at December 31, 2010 or 10.7% higher than that reported at December 31, 2009. For a more detailed discussion regarding the sources of funds, please see "Loans" below.



•

The Company has had no non-performing loans from its inception to December 31, 2010, although loans which were performing were charged-off when the full collectability became evident, prior to any default by the borrowers. The Company's allowance for loan losses was $1.9 million or 2.10% of gross loans excluding loans held for sale at December 31, 2010 compared to $1.2 million or 1.50% of loans at December 31, 2009. For a more detailed discussion regarding the sources of funds, please see "Non-Performing Assets," "Provision for Loan Losses," and "Allowance for Loan Losses" below.



•

Total deposits were approximately $122.2 million at December 31, 2010, approximately 10.2% higher than that reported at December 31, 2009. As noted above, there were no short-term CDARS deposits at December 31, 2010 and the reduction of approximately $16.5 million is reflected in the approximately $20.4 million decline in Certificates of Deposit equal to or greater than $100 thousand. However, there were other temporary funds included in the December 31, 2010 balances, particularly in the non-interest-bearing demand category. For a more detailed discussion regarding the sources of funds, please see "Deposits and Borrowed Funds" below.



•

Shareholders' equity totaled approximately $24.3 million at December 31, 2010, representing a decrease of approximately 14.4% over that reported at December 31, 2009.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that our most critical accounting policies upon which our financial condition depends, and which involve the most complex or subjective decisions or assessments, are as follows:

Allowance for loan losses

        The Company maintains an allowance for loan losses ("ALL") 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 and 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.

        The calculation of the adequacy of the ALL 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 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 continues the analysis of the general reserves by 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.

Investment Securities

        The Company has both investment securities classified as held-to-maturity and available-for-sale. The held-to-maturity classification requires that securities be recorded at cost, adjusted for amortization of premiums and accretion of discounts over the estimated period to maturity, or to an earlier call date, if appropriate, on an effective interest yield basis. These securities would include those that management has the intent and the ability to hold into the foreseeable future.

        Under the available-for-sale classification, securities can be sold in response to certain conditions, such as changes in interest rates, fluctuations in deposit levels or loan demand or need to restructure the portfolio to better match the maturity of 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 and reported as an amount net of taxes as a separate component of accumulated other comprehensive income (or loss) included in shareholders' equity.

        At each reporting date, investment securities are assessed to determine whether there is other-than-temporary impairment. If it is probable that the Company will be unable to collect all amounts due to the contractual terms of a debt security not impaired at acquisition, other-than-temporary impairment shall be considered to have occurred. Such impairment, if any, is required to be recognized in current earnings rather than as a separate component of shareholders' equity. Realized gains and losses on sales are determined on a specific-identification basis. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. For mortgage-backed securities, the amortization or accretion is based upon estimated average lives of the securities. The lives of the securities can fluctuate based upon the amount of prepayments received on the assets.

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Goodwill

        When the Company acquired its interest in MCM, the business had been in operation prior to the date when the acquisition occurred. The Company paid a premium on this acquisition, and said premium is recorded as an intangible asset in the form of goodwill.

        Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired. In accordance with current accounting practice, goodwill is not amortized whereas identifiable intangible assets with finite lives are amortized over their useful lives. On an annual basis, the Company tests goodwill for impairment. The assessment of the impairment occurred on August 31, 2010 and reflected no impairment at that time. Accordingly, the carrying value of the Goodwill was $297,391 as of both December 31, 2010 and December 31, 2009.

        Intangible assets with definite useful lives are amortized over their estimated useful lives to the estimated residual values. Goodwill is the only intangible asset with an indefinite life on the Company's balance sheet.

Deferred Tax Assets

        As discussed in Note 12 of the Consolidated Financial Statements, the realization of any benefit from the deferred tax asset is dependent on an estimation of future earnings. Due to the Company's net loss position, all tax benefits that apply to this operating loss, as well as losses from pre-opening expenses, have been offset with a tax valuation allowance of equal amount. The ability to recognize any benefit from operating losses is directly related to the Company's demonstrated ability to record profits within the foreseeable future. While we believe that we will become profitable, it is more likely than not that we will not generate sufficient taxable income in the near future to significantly or fully use the tax benefits currently available. In this case, we are required to establish a valuation reserve to cover the potential loss of these benefits. As noted, at present the valuation allowance fully offsets any potential benefit. If future income should prove to be nonexistent or less than the amount of the deferred tax assets within the tax years to which it applies, the asset many not be realized and no benefit will result.

RESULTS OF OPERATIONS

Net Loss

        The Company reported a net loss of $4.7 million for the year ended December 31, 2010 compared to a net loss of $5.0 million for the year ended December 31, 2009. The Company's net loss for the year ended December 31, 2010 was primarily due to costs associated with the expansion of Company's infrastructure to better position itself to expand its products and services, coupled with costs associated with the executive management transitions. Since its inception, the Company's earnings have been largely dependent on net interest income, although the benefits from the Company's diversification into fee-based non-interest income was evident in 2010 and is discussed in detail in the Non-Interest Income section below. Certain costs associated with the generation of the fee income have initial fixed components that must be bridged by levels of production before the benefit from the fee income has a positive effect on the Company's net income. Please see "Business Segment Results" in this Management's Discussion and Analysis of Financial Condition and Results of Operation.

        In addition to the initial challenge of building the Company's interest-bearing assets to a level which would support ongoing profitability, the financial industry in general, and the Bank specifically, was negatively affected by the decline in credit-worthy customers, reducing the traditional primary source of income for a community bank, the loan portfolio. The alternatives in the investment area were also negatively impacted with historically low returns on interest-bearing assets. The cost of funding assets has decreased since the Bank's inception but the fluctuations in both asset and liability mixes have resulted in an inconsistent pattern in net interest margins over the eight (8) quarters covered by this discussion.

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Net Interest Income

        The Company's ability to produce earnings is directly tied to the net interest income, which is the difference between what we earn on loans and other interest-earning assets and the interest we pay on deposits and borrowed funds. Total interest income can fluctuate based upon the mix of earning assets among loans, investments and Federal funds sold and the related rates associated with their balances. Some of the funding sources for these assets also have an interest cost which can fluctuate based upon the mix of interest-bearing and non-interest bearing liabilities and the related rates associated with their balances. The net number between the interest income and the interest expense is called net interest income and is often expressed as interest rate spread and net interest margin.

        The interest rate spread represents the difference between the weighted average yield on interest earning assets and the weighted average rate paid on interest-bearing liabilities.

        Net interest margin is net interest income expressed as a percentage of average total interest-earning assets. Net interest margin is affected by changes in the yields earned on assets and rates paid on liabilities, referred to as rate changes, and changes in the relative amounts of interest-earning assets and interest-bearing liabilities, referred to as volume changes. Interest rates earned and paid are affected principally by our competition, general economic conditions and other factors beyond the Company's control such as Federal economic policies, the general supply of money in the economy, legislative tax policies, governmental budgetary matters and the actions of the FRB.

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

        The reported net interest margin for each of the annual periods ended December 31, 2010 and December 31, 2009 was 4.46% and 4.00% respectively. However, the quarterly net interest margin during 2009 and 2010 has fluctuated between a low of 3.60% in the first quarter of 2009 and a high of 4.84% for the second quarter of 2010. The significant quarterly fluctuations were primarily the result of the rapid changes in the asset and liability mix.

        The following table presents the weighted average yield on each specific category of interest-earning assets, the weighted average rate paid on each specific category of interest-bearing liabilities, and the resulting interest rate spread and net interest margin for the period indicated.

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ANALYSIS OF NET INTEREST INCOME

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        The table below sets forth changes for the comparable annual periods ended December 31, 2010 and December 31, 2009 for average earning assets, average interest-bearing liabilities, and their respective rates:

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

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