Table of Contents

** **

 

** **

**United States**

**Securities and Exchange Commission**

**Washington, D. C. 20549**

 

**FORM 10-Q**

 

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

** **

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

 

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

** **

**For the transition period from            to            **

 

**Commission File Number 333-140448**

 

**MANHATTAN BANCORP**

(Exact name of registrant as specified in its charter)

 

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

 

----

 

**2141 Rosecrans Avenue, Suite 1160**

**El Segundo, California  90245**

 

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(Address of principal executive offices) (Zip Code)

 

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

 

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

 

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

 

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

 

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

 

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

 

Asof July 31, 2010, there were 3,987,631 shares of the issuer’s common stockoutstanding.

 

 

 

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Table ofContents

 

**Manhattan Bancorp**

**QUARTERLY REPORT ON FORM 10-Q**

**FOR**

**THE QUARTER ENDED JUNE 30, 2010**

 

**TABLE OF CONTENTS**

 
| ** **                               | ** ** | ** **                                                                                  | **PAGE**   |
|------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| PART I — FINANCIAL INFORMATION |       |
|                                     |       |
|                                     | Item 1.    | FINANCIAL  STATEMENTS                                                                       | ** ** |
|                                     |       |                                                                                        | ** ** |
|                                     |       | CONSOLIDATED BALANCE SHEETS                                                                 | 3          |
|                                     |       |                                                                                        |       |
|                                     |       | CONSOLIDATED STATEMENTS OF OPERATIONS                                                       | 4          |
|                                     |       |                                                                                        |       |
|                                     |       | CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY                                         | 5          |
|                                     |       |                                                                                        |       |
|                                     |       | CONSOLIDATED STATEMENTS OF CASH FLOWS                                                       | 6          |
|                                     |       |                                                                                        |       |
|                                     |       | NOTES TO FINANCIAL STATEMENTS                                                               | 7          |
|                                     |       |                                                                                        |       |
|                                     | Item 2.    | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 14         |
|                                     |       |                                                                                        |       |
|                                     | Item 3.    | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                 | 34         |
|                                     |       |                                                                                        |       |
|                                     | Item 4T.   | CONTROLS AND  PROCEDURES                                                                    | 35         |
|                                     |       |                                                                                        |       |
| PART II  - OTHER INFORMATION        |       |
|                                     |       |
|                                     | Item 1.    | LEGAL PROCEEDINGS                                                                           | 37         |
|                                     |       |                                                                                        |       |
|                                     | Item 1A.   | RISK FACTORS                                                                                | 37         |
|                                     |       |                                                                                        |       |
|                                     | Item 2.    | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                | 37         |
|                                     |       |                                                                                        |       |
|                                     | Item 3.    | DEFAULTS  UPON SENIOR SECURITIES                                                            | 37         |
|                                     |       |                                                                                        |       |
|                                     | Item 4.    | (REMOVED AND  RESERVED)                                                                     | 37         |
|                                     |       |                                                                                        |       |
|                                     | Item 5.    | OTHER INFORMATION                                                                           | 37         |
|                                     |       |                                                                                        |       |
|                                     | Item 6.    | EXHIBITS                                                                                    | 37         |
|                                     |       |                                                                                        |       |
| SIGNATURES                               | 38         |

 

2

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Table ofContents

 

***PART I —FINANCIAL INFORMATION***

 

***Item 1 —Financial Information***

*** ***

**ManhattanBancorp and Subsidiaries**

**Consolidated Balance Sheets**

 
| ** **                                                                                                                                                                      | ** ** | **(Unaudited)**   | ** **  | **(Audited)**         | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                                                                                                                                                      | ** ** | **June 30, 2010** | ** **  | **December 31, 2009** | ** ** |
| **Assets**                                                                                                                                                                      | ** ** | ** **        |        |                  |       |
| Cash and due from banks                                                                                                                                                         |       | $                 | 2,144,387   |                  | $          | 1,213,837 |   |
| Federal funds sold                                                                                                                                                              |       | 3,795,513         |        | 50,241,455            |       |
| Total cash and cash equivalents                                                                                                                                                 |       | 5,939,900         |        | 51,455,292            |       |
| Time deposits-other financial institutions                                                                                                                                      |       | 3,212,000         |        | 3,462,000             |       |
| Securities-available for sale                                                                                                                                                   |       | 20,232,258        |        | 13,360,750            |       |
| Securities-held to maturity                                                                                                                                                     |       | 495,705           |        | 493,942               |       |
|                                                                                                                                                                            |       |              |        |                  |       |
| Loans                                                                                                                                                                           |       | 86,267,471        |        | 80,116,019            |       |
| Allowance for loan losses                                                                                                                                                       |       | (1,693,000        | )           | (1,202,494            | )          |
| Net loans                                                                                                                                                                       |       | 84,574,471        |        | 78,913,525            |       |
|                                                                                                                                                                            |       |              |        |                  |       |
| Property and equipment, net                                                                                                                                                     |       | 1,138,095         |        | 1,281,940             |       |
| Stock in other financial institutions                                                                                                                                           |       | 1,630,950         |        | 1,699,650             |       |
| Accrued interest receivable and other assets                                                                                                                                    |       | 1,937,889         |        | 1,647,744             |       |
|                                                                                                                                                                            |       |              |        |                  |       |
| Total assets                                                                                                                                                                    |       | $                 | 119,161,268 |                  | $          | 152,314,843 |   |
|                                                                                                                                                                            |       |              |        |                  |       |
| **Liabilities and Stockholders’  Equity**                                                                                                                                  |       |              |        |                  |       |
| Deposits:                                                                                                                                                                       |       |              |        |                  |       |
| Non-interest-bearing demand                                                                                                                                                     |       | $                 | 29,697,167  |                  | $          | 29,647,199 |   |
| Interest-bearing:                                                                                                                                                               |       |              |        |                  |       |
| Demand                                                                                                                                                                          |       | 3,342,978         |        | 4,026,157             |       |
| Savings and money market                                                                                                                                                        |       | 19,744,772        |        | 17,899,434            |       |
| Certificates of deposit equal to or greater than  $100,000                                                                                                                      |       | 29,157,323        |        | 54,351,901            |       |
| Certificates of deposit less than $100,000                                                                                                                                      |       | 4,764,092         |        | 4,995,301             |       |
| Total deposits                                                                                                                                                                  |       | 86,706,332        |        | 110,919,992           |       |
| FHLB advances                                                                                                                                                                   |       | 4,500,000         |        | 12,000,000            |       |
| Accrued interest payable and other liabilities                                                                                                                                  |       | 1,776,201         |        | 992,648               |       |
| Total liabilities                                                                                                                                                               |       | 92,982,533        |        | 123,912,640           |       |
|                                                                                                                                                                            |       |              |        |                  |       |
| Commitments and contingencies                                                                                                                                                   |       | —            |        | —                |       |
|                                                                                                                                                                            |       |              |        |                  |       |
| Stockholders’ equity                                                                                                                                                       |       |              |        |                  |       |
| Manhattan Bancorp stockholders’ equity:                                                                                                                                    |       |              |        |                  |       |
| Serial preferred stock-no par value; 10,000,000  shares authorized: issued and outstanding, none in 2010 and 2009                                                               |       | —            |        | —                |       |
| Common stock-no par value; 10,000,000 shares  authorized at December 31, 2009 30,000,000 shares authorized at June 30, 2010  issued and outstanding, 3,987,631 in 2010 and 2009 |       | 38,977,282        |        | 38,977,282            |       |
| Additional paid in capital                                                                                                                                                      |       | 1,850,577         |        | 1,566,396             |       |
| Unrealized gain on available-for-sale securities                                                                                                                                |       | 314,424           |        | 305,152               |       |
| Accumulated deficit                                                                                                                                                             |       | (15,265,873       | )           | (12,737,537           | )          |
|                                                                                                                                                                            |       |              |        |                  |       |
| Total Manhattan Bancorp stockholders’ equity                                                                                                                               |       | 25,876,410        |        | 28,111,293            |       |
| Non-controlling interest                                                                                                                                                        |       | 302,325           |        | 290,910               |       |
|                                                                                                                                                                            |       | 26,178,735        |        | 28,402,203            |       |
|                                                                                                                                                                            |       |              |        |                  |       |
| Total liabilities and stockholders’ equity                                                                                                                                 |       | $                 | 119,161,268 |                  | $          | 152,314,843 |   |

 

The accompanying notes arean integral part of this financial statement.

 

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**Manhattan Bancorp and Subsidiary**

**ConsolidatedStatements of Operations**

**(Unaudited)**

** **
| ** **                                                         | ** ** | **For the three months** | ** ** | **For the six months** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------|------------|------------------------|------------|
| ** **                                                         | ** ** | **ended June 30,**       | ** ** | **ended June 30,**     | ** ** |
| ** **                                                         | ** ** | **2010**                 | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Interest income**                                                |       |                     |       |                   |       |   |   |   |   |
| Interest and fees on loans                                         |       | $                        | 1,306,376  |                   | $          | 943,697 |   | $ | 2,555,516 |   | $ | 1,738,873 |   |
| Interest on investment securities                                  |       | 336,766                  |       | 130,958                |       | 636,652 |   | 232,773 |   |
| Interest on federal funds sold                                     |       | 4,784                    |       | 3,332                  |       | 20,367 |   | 14,703 |   |
| Interest on time deposits-other financial  institutions            |       | 11,103                   |       | 30,773                 |       | 22,253 |   | 73,210 |   |
|                                                               |       |                     |       |                   |       |   |   |   |   |
| Total interest income                                              |       | 1,659,029                |       | 1,108,760              |       | 3,234,788 |   | 2,059,559 |   |
|                                                               |       |                     |       |                   |       |   |   |   |   |
| **Interest expense**                                               |       |                     |       |                   |       |   |   |   |   |
| NOW, money market and savings                                      |       | 50,935                   |       | 37,611                 |       | 116,340 |   | 70,866 |   |
| Time deposits                                                      |       | 141,944                  |       | 91,253                 |       | 315,838 |   | 224,845 |   |
| FHLB advances                                                      |       | 49,832                   |       | 49,844                 |       | 99,132 |   | 99,166 |   |
|                                                               |       |                     |       |                   |       |   |   |   |   |
| Total interest expense                                             |       | 242,711                  |       | 178,708                |       | 531,310 |   | 394,877 |   |
|                                                               |       |                     |       |                   |       |   |   |   |   |
| Net interest income                                                |       | 1,416,318                |       | 930,052                |       | 2,703,478 |   | 1,664,682 |   |
|                                                               |       |                     |       |                   |       |   |   |   |   |
| Provision for loan losses                                          |       | 207,506                  |       | 453,632                |       | 577,506 |   | 627,632 |   |
|                                                               |       |                     |       |                   |       |   |   |   |   |
| Net interest income after provision for loan  losses               |       | 1,208,812                |       | 476,420                |       | 2,125,972 |   | 1,037,050 |   |
|                                                               |       |                     |       |                   |       |   |   |   |   |
| **Non-interest income**                                            |       |                     |       |                   |       |   |   |   |   |
| Bank-related fees                                                  |       | 48,427                   |       | 33,699                 |       | 117,447 |   | 50,980 |   |
| Non-bank related fees                                              |       | 1,597,829                |       | —                 |       | 3,273,100 |   | — |   |
| Total Non-interest income                                          |       | 1,646,256                |       | 33,699                 |       | 3,390,547 |   | 50,980 |   |
|                                                               |       |                     |       |                   |       |   |   |   |   |
| **Non-interest expense**                                           |       |                     |       |                   |       |   |   |   |   |
| Compensation and benefits                                          |       | 2,831,023                |       | 1,112,363              |       | 5,406,168 |   | 2,127,043 |   |
| Occupancy and equipment                                            |       | 265,334                  |       | 167,073                |       | 538,724 |   | 339,466 |   |
| Technology and communication                                       |       | 344,962                  |       | 136,538                |       | 618,388 |   | 273,698 |   |
| Professional fees                                                  |       | 301,687                  |       | 303,496                |       | 784,987 |   | 643,948 |   |
| Administrative expenses                                            |       | 190,405                  |       | 116,146                |       | 351,872 |   | 159,897 |   |
| Other non-interest expenses                                        |       | 195,271                  |       | 127,196                |       | 330,101 |   | 229,829 |   |
|                                                               |       |                     |       |                   |       |   |   |   |   |
| Total non-interest expenses                                        |       | 4,128,682                |       | 1,962,812              |       | 8,030,240 |   | 3,773,881 |   |
|                                                               |       |                     |       |                   |       |   |   |   |   |
| Loss before income taxes                                           |       | (1,273,614               | )          | (1,452,693             | )          | (2,513,721 | ) | (2,685,851 | ) |
|                                                               |       |                     |       |                   |       |   |   |   |   |
| Provision for income taxes                                         |       | 2,400                    |       | 1,600                  |       | 3,200 |   | 1,600 |   |
|                                                               |       |                     |       |                   |       |   |   |   |   |
| Net loss                                                           |       | $                        | (1,276,014 | )                      | $          | (1,454,293 | ) | $ | (2,516,921 | ) | $ | (2,687,451 | ) |
| Less: Net (loss) gain attributable to the  noncontrolling interest |       | (65,673                  | )          | —                 |       | 11,415 |   | — |   |
| Net loss attributable to Manhattan Bancorp                         |       | $                        | (1,210,341 | )                      | $          | (1,454,293 | ) | $ | (2,528,336 | ) | $ | (2,687,451 | ) |
|                                                               |       |                     |       |                   |       |   |   |   |   |
| Weighted average number of shares outstanding  (basic and diluted) |       | 3,987,631                |       | 3,987,631              |       | 3,987,631 |   | 3,987,631 |   |
|                                                               |       |                     |       |                   |       |   |   |   |   |
| Basic and diluted loss per share                                   |       | $                        | (0.32      | )                      | $          | (0.36 | ) | $ | (0.63 | ) | $ | (0.67 | ) |

 

The accompanying notes are an integral partof this financial statement.

 

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**Manhattan Bancorp and Subsidiaries**

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

**June 30, 2010 and 2009**

 
| ** **                                  |       |          |       |                  |       |       |       |         |       |              |       |                   |       |              |       |                              |       |         |        |        |       |    |    |   |    |    |   |       |       |   |
|---------------------------------------------|------------|---------------|------------|-----------------------|------------|------------|------------|--------------|------------|-------------------|------------|------------------------|------------|-------------------|------------|-----------------------------------|------------|--------------|-------------|-------------|------------|---------|---------|--------|---------|---------|--------|------------|------------|--------|
| ** **                                  | ** ** | ** **    | ** ** | ** **            | ** ** | ** ** | ** ** | ** **   | ** ** | ** **        | ** ** | ** **             | ** ** | ** **        | ** ** | **Accumulated**                   | ** ** | ** **   | ** **  | ** **  | ** ** |
| ** **                                  | ** ** | ** **    | ** ** | ** **            | ** ** | ** ** | ** ** | **Common**   | ** ** | **Additional**    | ** ** | ** **             | ** ** | ** **        | ** ** | **Other**                         | ** ** | ** **   | ** **  | ** **  | ** ** |
| ** **                                  | ** ** | **Preferred** | ** ** | **Common Stock** | ** ** | **Stock**  | ** ** | **Paid-in**  | ** ** | **Comprehensive** | ** ** | **Accumulated**        | ** ** | **Comprehensive** | ** ** | **Non-**** ****controlling** | ** ** | ** **   | ** **  |
| ** **                                  | ** ** | **Stock**     | ** ** | **Shares**            | ** ** | **Amount** | ** ** | **Warrants** | ** ** | **Capital**       | ** ** | **Income (Loss)** | ** ** | **Deficit**       | ** ** | **Income (Loss)**            | ** ** | **Interest** | ** **  | **Total**   | ** ** |
| **Balance at  December 31, 2008** |       | $             | 1,558,517  |                  | 3,987,631  |       | $          | 38,977,282   |       | $                 | 120,417    |                   | $          | 957,825           |       | $                                 | —     |         | $           | (7,634,001  | )          | $       | 307,488 |   | $       | —  |   | $          | 34,287,528 |   |
| Accretion of preferred stock discount       |       | 12,042        |       |                  |       |       |       | (12,042      | )          |              |       |                   |       |              |       |                              |       |         |        | —      |       |
| Dividend on preferred stock                 |       |          |       |                  |       |       |       |         |       |              |       |                   |       | (37,777           | )          |                              |       |         |        | (37,777     | )          |
| Share-based compensation expense            |       |          |       |                  |       |       |       |         |       | 391,226           |       |                   |       |              |       |                              |       |         |        | 391,226     |       |
| Unrealized (loss) on investment securities  |       |          |       |                  |       |       |       |         |       |              |       | (54,566                | )          |              |       | (54,566                           | )          |         |        | (54,566     | )          |
| Net loss                                    |       |          |       |                  |       |       |       |         |       |              |       | (2,687,451             | )          | $                 | (2,687,451 | )                                 |       |         |        |        | (2,687,451 | )       |
| Total comprehensive loss                    |       |          |       |                  |       |       |       |         |       |              |       | $                      | (2,742,017 | )                 |       |                              |       |         |        |        |       |    |
| **Balance at June 30, 2009**           |       | $             | 1,570,559  |                  | 3,987,631  |       | $          | 38,977,282   |       | $                 | 108,375    |                   | $          | 1,349,051         |       |                              |       | $            | (10,359,229 | )           | $          | 252,922 |    | $      | —  |    | $      | 31,898,960 |       |
|                                        |       |          |       |                  |       |       |       |         |       |              |       |                   |       |              |       |                              |       |         |        |        |       |
| **Balance at December 31, 2009**       |       | $             | —     |                  | 3,987,631  |       | $          | 38,977,282   |       | $                 | —     |                   | $          | 1,566,396         |       | $                                 | —     |         | $           | (12,737,537 | )          | $       | 305,152 |   | $       | 290,910 |   | $          | 28,402,203 |   |
| Share-based compensation expense            |       |          |       |                  |       |       |       |         |       | 284,181           |       |                   |       |              |       |                              |       |         |        | 284,181     |       |
| Unrealized gain on investment securities    |       |          |       |                  |       |       |       |         |       |              |       | 9,272                  |       |              |       | 9,272                             |       |         |        | 9,272       |       |
| Net gain (loss)                             |       |          |       |                  |       |       |       |         |       |              |       | (2,528,336             | )          | (2,528,336        | )          |                              |       | 11,415       |        | (2,516,921  | )          |
| Total comprehensive loss                    |       |          |       |                  |       |       |       |         |       |              |       | $                      | (2,519,064 | )                 |       |                              |       |         |        |        |       |    |
| **Balance at June 30, 2010**           |       | $             | —     |                  | 3,987,631  |       | $          | 38,977,282   |       | $                 | —     |                   | $          | 1,850,577         |       |                              |       | $            | (15,265,873 | )           | $          | 314,424 |    | $      | 302,325 |    | $      | 26,178,735 |       |

 

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**Manhattan Bancorp and Subsidiary**

**ConsolidatedStatements of Cash Flows**

**(Unaudited)**

** **
| ** **                                                           | ** ** | **For the six months** | ** ** |
|----------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                           | ** ** | **ended June 30**      | ** ** |
| ** **                                                           | ** ** | **2010**               | ** ** | **2009** | ** ** |
| **Cash flows from operating  activities**                            |       |                   |       |   |   |
| Net loss                                                             |       | $                      | (2,516,921 | ) | $ | (2,687,451 | ) |
| Net amortization of discounts and premiums on  securities            |       | (228,777               | )          | (14,622 | ) |
| Depreciation and amortization                                        |       | 209,134                |       | 153,101 |   |
| Provision for loan losses                                            |       | 577,506                |       | 627,632 |   |
| Share-based compensation                                             |       | 284,181                |       | 391,226 |   |
| (Increase) in accrued interest receivable and  other assets          |       | (291,378               | )          | (15,533 | ) |
| Increase in accrued interest payable and other  liabilities          |       | 783,553                |       | 524,169 |   |
|                                                                 |       |                   |       |   |   |
| Net cash used in operating activities                                |       | (1,182,702             | )          | (1,021,478 | ) |
|                                                                 |       |                   |       |   |   |
| **Cash flows from investing  activities**                            |       |                   |       |   |   |
| Net (increase) in loans                                              |       | (6,252,167             | )          | (15,315,080 | ) |
| Allowance for loan and lease loss recoveries                         |       | 13,715                 |       | — |   |
| (Increase) decrease in time deposits - other  financial institutions |       | 250,000                |       | (147,000 | ) |
| Proceeds from repayment and maturities from  investment securities   |       | 7,179,576              |       | 850,286 |   |
| Purchase of investments                                              |       | (13,814,798            | )          | — |   |
| (Purchase) Redemption of stock in other financial  institutions      |       | 68,700                 |       | (281,150 | ) |
| Purchase of premises and equipment                                   |       | (64,056                | )          | (13,881 | ) |
|                                                                 |       |                   |       |   |   |
| Net cash used in investing activities                                |       | (12,619,030            | )          | (14,906,825 | ) |
|                                                                 |       |                   |       |   |   |
| **Cash flows from financing  activities**                            |       |                   |       |   |   |
| Net increase (decrease) in:                                          |       |                   |       |   |   |
| Demand deposits                                                      |       | 49,968                 |       | 4,387,290 |   |
| Interest-bearing demand deposits                                     |       | (683,179               | )          | 485,752 |   |
| Savings and money market deposits                                    |       | 1,845,338              |       | 5,775,837 |   |
| Certificates of deposit equal to or greater than  $100,000           |       | (25,194,578            | )          | 223,096 |   |
| Certificates of deposit less than $100,000                           |       | (231,209               | )          | 787,299 |   |
| Cash dividends paid on preferred stock                               |       | —                 |       | (37,777 | ) |
| Increase (decrease) from borrowings                                  |       | (7,500,000             | )          | 2,000,000 |   |
|                                                                 |       |                   |       |   |   |
| Net cash (used in)/provided by financing  activities                 |       | (31,713,660            | )          | 13,621,497 |   |
|                                                                 |       |                   |       |   |   |
| Net decrease in cash and cash equivalents                            |       | (45,515,392            | )          | (2,306,806 | ) |
|                                                                 |       |                   |       |   |   |
| **Cash and cash equivalents at  beginning of period**                |       | 51,455,292             |       | 19,710,235 |   |
|                                                                 |       |                   |       |   |   |
| **Cash and cash equivalents at end  of period**                      |       | $                      | 5,939,900  |   | $ | 17,403,429 |   |
|                                                                 |       |                   |       |   |   |
| **Supplementary information**                                        |       |                   |       |   |   |
|                                                                 |       |                   |       |   |   |
| Interest paid                                                        |       | $                      | 546,896    |   | $ | 369,149 |   |
|                                                                 |       |                   |       |   |   |
| Income taxes paid                                                    |       | $                      | 3,200      |   | $ | 1,600 |   |

 

The accompanying notes are an integral partof this financial statement.

 

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**MANHATTAN BANCORP**

**NOTES TOFINANCIAL STATEMENTS**

**JUNE 30, 2010**

 

**Note 1.   CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

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

 

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

 

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

 

**Note 2.   RECENT ACCOUNTING PRONOUNCEMENTS**

 

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

 

BUSINESS COMBINATIONS:  EffectiveJanuary 1, 2009, the Company adopted the new accounting guidance thatapplies to all transactions and other events in which one entity obtainscontrol over one or more other businesses. The guidance requires an acquirer, upon initially obtaining control ofanother

 

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entity, to recognize the assets, liabilities and any non-controllinginterest in the acquiree at fair value as of the acquisition date.  Contingent consideration is required to berecognized and measured at fair value on the date of acquisition rather than ata later date when the amount of that consideration may be determinable beyond areasonable doubt.  This fair-valueapproach replaces the cost-allocation process required under old accountingliterature whereby the cost of an acquisition was allocated to the individualassets acquired and liabilities assumed based on their estimated fairvalue.  The new guidance requiresacquirers to expense acquisition-related costs as incurred rather thanallocating such costs to the assets acquired and liabilities assumed, as waspreviously the case.  Accounting forcosts associated with exit or disposal activities would have to be met in orderto accrue for a restructuring plan in purchase accounting.  Pre-acquisition contingencies are to berecognized at fair value, unless it is a non-contractual contingency that isnot likely to materialize, in which case, nothing should be recognized inpurchase accounting and, instead, that contingency would be subject to theprobable and estimable recognition criteria delineated in the FASB statementrelated to accounting for contingencies. Subsequent accounting literature released during 2009 amends the newaccounting guidance to require that assets acquired and liabilities assumed ina business combination that arise from contingencies be recognized at fairvalue if fair value can be reasonably estimated, removes subsequent accountingguidance for assets and liabilities arising from contingencies and requiresentities to develop a systematic and rational basis for subsequently measuringand accounting for assets and liabilities arising from contingencies.  It also eliminates the requirement to disclosean estimate of the range of outcomes of recognized contingencies at theacquisition date.

 

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

 

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

 

FAIRVALUE MEASUREMENTS:  In January 2010,the FASB modified current accounting standards to add disclosure requirementsabout significant transfers into and out of Levels 1 and 2, clarified existingfair value disclosure requirements about the appropriate level ofdisaggregation, and clarified that a description of the valuation techniquesand inputs used to measure fair value was required for recurring andnonrecurring Level 2 and 3 fair value measurements.  The Company adopted these provisions inpreparing the Consolidated Financial Statements for the period ended March 31,2010.  The adoption of these provisionswhich were subsequently codified into Accounting Standards Codification Topic820, “Fair Value Measurements and Disclosures,” only affected the disclosurerequirements for fair value measurements and as a result had no impact on theCompany’s statements of income and condition.

 

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

 

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**Note 3.   INTEREST-EARNING ASSETS WITH OTHERFINANCIAL INSTITUTIONS**

 

At June 30, 2010, the Company hadinterest-earning deposits with other financial institutions of $3.2 million,with a weighted average yield of 1.44%, and an average weighted remaining lifeof approximately 10.3 months. At December 31, 2009, the Company hadinterest-earning deposits with other financial institutions of $3.5 million,with a weighted average yield of 1.81%, and an average weighted remaining lifeof approximately 3.4 months.

 

**Note 4.   INVESTMENT SECURITIES**

 

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

 
| ** **                               | ** ** | ** **         | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | **Estimated** | ** ** |
|------------------------------------------|------------|--------------------|------------|----------------|------------|----------------|------------|---------------|------------|
| ** **                               | ** ** | **Amortized**      | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**      | ** ** |
| **June 30, 2010****(unaudited)**    | ** ** | **Cost**           | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Value**     | ** ** |
| ** **                               | ** ** | **(in thousands)** | ** ** |
| **Available-for-sale securities:**       |       |               |       |           |       |           |       |          |       |
| U.S. government and agency securities    |       | $                  | 2,646      |           | $          | 18             |       | $             | —     |   | $ | 2,664 |   |
| Mortgage-backed securities               |       | 5,430              |       | 345            |       | 12             |       | 5,763         |       |
| Asset-backed securities                  |       | 11,842             |       | 204            |       | 241            |       | 11,805        |       |
| **Total available-for-sale  securities** |       | $                  | 19,918     |           | $          | 567            |       | $             | 253        |   | $ | 20,232 |   |
|                                     |       |               |       |           |       |           |       |          |       |
| **Held-to-maturity securities:**         |       |               |       |           |       |           |       |          |       |
| State and municipal securities           |       | $                  | 496        |           | $          | 12             |       | $             | —     |   | $ | 508 |   |

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

 

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

 

Therewere realized gains during the six-month period ended June 30, 2010 ofapproximately $20,000. The net unrealized loss on available-for-sale securitiesincluded in accumulated other comprehensive income was approximately $9,000 forthe six-month period ended June 30, 2010. Available-for-sale securitieswith an amortized cost of approximately $5.3 million (fair value ofapproximately $5.6 million) were pledged as collateral for Federal Home LoanBank advances as of June 30, 2010.

 

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

 

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

 
| **(unaudited)**                       | ** ** | **Less than 12 Months**  | ** ** |
|---------------------------------------|------------|--------------------------|------------|
| **(In  thousands)**                   | ** ** | **Estimated Fair Value** | ** ** | **Unrealized Losses** | ** ** |
| *Securities available for sale:*      |       |                     |       |   |   |
| U.S. Government and agency securities |       | $                        | —     |   | $ | — |   |
| Mortgage-backed securities            |       | 751                      |       | 12 |   |
| Asset-backed securities               |       | 6,551                    |       | 241 |   |
| *Securities held to maturity*         |       |                     |       |   |   |
| State and municipal securities        |       | —                   |       | — |   |
| Total imparied securities             |       | $                        | 7,302      |   | $ | 253 |   |

 

Anyintra-period decline in market values were attributable to changes in marketrates of interest rather than credit quality; and because the Company has theability and intent to hold all of its investments until a recovery of fairvalue, which may be at maturity, the Company considers none of its investmentsto be other-than-temporarily impaired at June 30, 2010.

 

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

 
| ** **                       | ** ** | **Available-for-Sale Securities** | ** ** | **Held-to Maturity Securities** | ** ** |
|----------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | ** **                        | ** ** | **Estimated**                   | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Estimated** | ** ** | **Weighted** | ** ** |
| ** **                       | ** ** | **Amortized**                     | ** ** | **Fair**                        | ** ** | **Average** | ** ** | **Amortized** | ** ** | **Fair** | ** ** | **Average** | ** ** |
| **(unaudited)**                  | ** ** | **Cost**                          | ** ** | **Value**                       | ** ** | **Yield** | ** ** | **Cost** | ** ** | **Value** | ** ** | **Yield** | ** ** |
| ** **                       | ** ** | **(dollars in thousands)**        | ** ** |
| Due in One Year or Less          |       | $                                 | 5,828      |                            | $          | 5,883 |   | 3.45 | % | $ | — |   | $ | — |   |   |   |
| Due from One Year to Five Years  |       | 6,954                             |       | 7,041                           |       | 4.39 | % | 496 |   | 508 |   | 4.55 | % |
| Due from Five Years to Ten Years |       | 4,164                             |       | 4,222                           |       | 5.87 | % |   |   |   |   |   |   |
| Due after Ten Years              |       | 2,972                             |       | 3,086                           |       | 3.98 | % |   |   |   |   |   |   |
|                             |       | $                                 | 19,918     |                            | $          | 20,232 |   | 4.53 | % | $ | 496 |   | $ | 508 |   | 4.55 | % |

 

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

 

Loans are summarized as follows:

 
| ** **                            | ** ** | **June 30, 2010 (unaudited)** | ** ** | **December 31, 2009 (audited)** | ** ** |
|---------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| ** **                            | ** ** | **Amount**                         | ** ** | **Percentage of**                    | ** ** | **Amount** | ** ** | **Percentage of** | ** ** |
| **(dollars  in thousands)**           | ** ** | **Outstanding**                    | ** ** | **Total**                            | ** ** | **Outstanding** | ** ** | **Total** | ** ** |
| Commercial loans                      |       | $                                  | 27,590     |                                 | 32.0       | % | $ | 26,531 |   | 33.1 | % |
| Real estate loans                     |       | 50,910                             |       | 59.0                                 | %          | 46,055 |   | 57.5 | % |
| Other loans                           |       | 7,767                              |       | 9.0                                  | %          | 7,530 |   | 9.4 | % |
| Total loans, including net loan costs |       | 86,267                             |       | 100.0                                | %          | 80,116 |   | 100.0 | % |
| Less : allowance for loan losses      |       | (1,693                             | )          |                                 |       | (1,202 | ) |   |   |
| Net loans                             |       | $                                  | 84,574     |                                 |       |   | $ | 78,914 |   |   |   |

 

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

 

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Thefollowing table presents an analysis of changes in the allowance for loanlosses during the periods indicated:

** **
| ** **                                    | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|-----------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                    | ** ** | **June 30,**              | ** ** | **June 30,**            | ** ** |
| **(Unaudited)**                               | ** ** | **2010**                       | ** ** | **2009**                     | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                    | ** ** | **(in thousands)**             | ** ** | **(in thousands)**           | ** ** | **(in thousands)** | ** ** | **(in thousands)** | ** ** |
| Balance at beginning of period                |       | $                              | 1,484      |                         | $          | 1,149 |   | $ | 1,202 |   | $ | 975 |   |
| Additions to the allowance charged to expense |       | 208                            |       | 454                          |       | 578 |   | 628 |   |
| Recoveries                                    |       | 1                              |       | —                       |       | 14 |   | — |   |
|                                          |       | 1,693                          |       | 1,603                        |       | 1,794 |   | 1,603 |   |
| Less loans charged-off                        |       | —                         |       | 513                          |       | 101 |   | 513 |   |
|                                          |       |                           |       |                         |       |   |   |   |   |
| Balance at end of period                      |       | $                              | 1,693      |                         | $          | 1,090 |   | $ | 1,693 |   | $ | 1,090 |   |

 

**Note 6.   SHARE-BASED COMPENSATION**

 

Asof June 30, 2010, the Company had two share-based employee compensationplans. These plans include the 2007 Stock Option Plan (“2007 Plan”) and the2010 Equity Incentive Plan (“2010 Plan”). The 2007 Plan is more fully described in Note 9 of the consolidatedfinancial statements in the Company’s Annual Report filed on Form 10-K forthe year ended December 31, 2009. The 2010 Plan is more fully described in a Current Report filed on Form 8-Kon March 15, 2010.  Upon approval ofthe 2010 Plan, the Company’s 2007 Plan was terminated with respect to the grantof new options.

 

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

 

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

 

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

 
| ** **                       | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|----------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                       | ** ** | **June 30,**              | ** ** | **June 30,**            | ** ** |
| **(unaudited)**                  | ** ** | **2010**                       | ** ** | **2009**                     | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                       | ** ** | **(in thousands)**             | ** ** | **(in thousands)**           | ** ** | **(in thousands)** | ** ** | **(in thousands)** | ** ** |
| Share-based compensation expense |       | $                              | 142        |                         | $          | 195 |   | $ | 284 |   | $ | 391 |   |
|                                  |            |                                |            |                              |            |  |  |  |  |  |  |  |  |

 
| ** **                                    | ** ** | **As of**          | ** ** |
|-----------------------------------------------|------------|--------------------|------------|
| ** **                                    | ** ** | **June 30,**  | ** ** |
| ** **                                    | ** ** | **2010**           | ** ** | **2009** | ** ** |
| ** **                                    | ** ** | **(in thousands)** | ** ** | **(in thousands)** | ** ** |
| Unrecognized share-based compensation expense |       |               |       |   |   |
| Remainder of 2009                             |       | $                  | —     |   | $ | 392 |   |
| Remainder of 2010                             |       | 301                |       | 557 |   |
| 2011                                          |       | 228                |       | 208 |   |
| 2012                                          |       | 116                |       | 5 |   |
| 2013                                          |       | 39                 |       | — |   |
| Total                                         |       | $                  | 684        |   | $ | 1,162 |   |

 

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

 

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

 
| ** **           | ** ** | **Period Ended**  | ** ** |
|----------------------|------------|-------------------|------------|
| ** **           | ** ** | **June 30,** | ** ** |
| **(unaudited)**      | ** ** | **2010**          | ** ** | **2009** | ** ** |
| Risk-free rate       |       | 2.43              | %          | 2.24 | % |
| Expected term        |       | 6 years           |       | 6 years |   |
| Expected volatility  |       | 28.15             | %          | 26.16 | % |
| Dividend yield       |       | 0.00              | %          | 0.00 | % |
| Fair value per share |       | $                 | 1.34       |   | $ | 0.74 |   |
|                      |            |                   |            |  |  |  |  |

 

The following tablesummarizes the stock option activity under the plan for the periods indicated:

 
| ** **                                | ** ** | ** ** | ** ** | ** **           | ** ** | **Weighted Average** | ** ** | **Aggregate** | ** ** |
|-------------------------------------------|------------|------------|------------|----------------------|------------|----------------------|------------|---------------|------------|
| ** **                                | ** ** | ** ** | ** ** | **Weighted Average** | ** ** | **Remaining**        | ** ** | **Intrinsic** | ** ** |
| **(unaudited)**                           | ** ** | **Shares** | ** ** | **Exercise Price**   | ** ** | **Contractual Life** | ** ** | **Value**     | ** ** |
| **2009**                                  |       |       |       |                 |       |                 |       |          |       |
| Outstanding at December 31, 2008     |       | 657,480    |       | $                    | 9.99       |                 |       |          |       |   |
| Granted                                   |       | 42,250     |       | $                    | 8.25       |                 |       |          |       |   |
| Exercised                                 |       | —     |       | —               |       |                 |       |          |       |
| Expired                                   |       | —     |       | —               |       |                 |       |          |       |
| Forfeited                                 |       | 12,438     |       | $                    | 10.00      |                 |       |          |       |   |
| Outstanding at June 30, 2009         |       | 687,292    |       | $                    | 9.42       |                 | 8.57       |          | $          | — |   |
| Options exercisable at June 30, 2009 |       | 169,434    |       | $                    | 9.83       |                 | 8.23       |          | $          | — |   |
| Options unvested at June 30, 2009    |       | 517,858    |       | $                    | 9.28       |                 | 8.62       |          | $          | — |   |
|                                      |       |       |       |                 |       |                 |       |          |       |
| **2010**                                  |       |       |       |                 |       |                 |       |          |       |
| Outstanding at December 31, 2009     |       | 686,942    |       | $                    | 9.42       |                 |       |          |       |   |
| Granted                                   |       | 233,031    |       | $                    | 6.66       |                 |       |          |       |   |
| Exercised                                 |       | —     |       | —               |       |                 |       |          |       |
| Expired                                   |       | —     |       | —               |       |                 |       |          |       |
| Forfeited                                 |       | 179,682    |       | $                    | 9.55       |                 |       |          |       |   |
| Outstanding at June 30, 2010         |       | 740,291    |       | $                    | 8.52       |                 | 8.31       |          | $          | — |   |
| Options exercisable at June 30, 2010 |       | 296,196    |       | $                    | 9.54       |                 | 7.44       |          | $          | — |   |
| Options unvested at June 30, 2010    |       | 444,095    |       | $                    | 7.83       |                 | 8.45       |          | $          | — |   |

 

**Note 7.   FAIR VALUE MEASUREMENTS**

 

Currentaccounting literature defines fair value as the exchange price that would bereceived for an asset or paid to transfer a liability (an exit price) in theprincipal or most advantageous market for the asset or liability in an orderlytransaction between market participants on the measurement date. It also establishesa fair value hierarchy, which requires an entity to maximize the use ofobservable inputs and minimize the use of unobservable inputs when measuringfair value. The literature describes three levels of inputs that may be used tomeasure fair value:

 

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

 

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

 

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

 

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

 
| ** **                           | ** ** | ** **        | ** ** | **Quoted Price in** | ** ** | **Significant** | ** ** | ** **       | ** ** |
|--------------------------------------|------------|-------------------|------------|---------------------|------------|-----------------|------------|------------------|------------|
| ** **                           | ** ** | ** **        | ** ** | **Active Markets**  | ** ** | **Other**       | ** ** | **Significant**  | ** ** |
| ** **                           | ** ** | ** **        | ** ** | **for Identical**   | ** ** | **Observable**  | ** ** | **Unobservable** | ** ** |
| **(unaudited)**                      | ** ** | **June 30,** | ** ** | **Assets**          | ** ** | **Inputs**      | ** ** | **Inputs**       | ** ** |
| **Description of Assets/Liabiltity** | ** ** | **2010**          | ** ** | **(Level 1)**       | ** ** | **(Level 2)**   | ** ** | **(Level 3)**    | ** ** |
| Available-for-sale securities        |       | $                 | 20,232     |                | $          | —          |       | $                | 20,232     |   | $ | — |   |
|                                      |            |                   |            |                     |            |                 |            |                  |            |  |  |  |  |

 

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

 

**Note 8.   OTHER BORROWINGS**

 

At June 30, 2010, the Company had a collateralizedline of credit with the Federal Home Loan Bank (“FHLB”) totaling $20.0 millionagainst which it had outstanding $4.5 million consisting of a FHLB five-yearfixed rate advance at 4.38% maturing on June 27, 2013.

 

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

 

Basicearnings (loss) per share represents income available (loss reported) to commonstock divided by the weighted average number of common shares outstandingduring the period reported on the Statement of Operations. Diluted earnings(loss) per share reflect additional common shares that would have beenoutstanding if dilutive potential common shares had been issued, as well as anyadjustment to income that would result from the assumed conversion. There wereno dilutive potential common shares outstanding for any periods reported on theStatement of Operations.  The weightedaverage number of shares for the three-month and six-month periods ended June 30,2010 and June 30, 2009 was 3,987,631.

 

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

 

***Forward-Looking Statements***

 

**The statements contained in this Quarterly Report on Form 10-Q,that are not historical facts, are forward-looking statements within themeaning of the Private Securities Litigation Reform Act of 1995, and are basedupon management’s current expectations and beliefs concerning furtherdevelopments and their potential effects on Manhattan Bancorp and itssubsidiaries.  The Company’sforward-looking statements involve risks and uncertainties, including the risksand uncertainties described herein and those enumerated in “Item 1A RiskFactors” in the Company’s Annual Report on Form 10-K for the year ended December 31,2009.  There can be no assurance thatfuture developments affecting Manhattan Bancorp will be the same as thoseanticipated by management, and actual results may differ from those projectedin the forward-looking statements. Statements regarding policies and procedures are not intended, andshould not be interpreted to mean, that such policies and procedures will notbe amended, modified, or repealed at any time in the future.**

 

***The Company***

 

Manhattan Bancorp (“Bancorp”) is a bank holdingcompany which was incorporated in August 2006, in order to acquire Bank ofManhattan, N.A. (the “Bank”), a de novo bank which it acquired on August 14,2007.  The Bank is a nationally-charteredbanking association organized under the laws of the United States, whichcommenced its banking operations on August 15, 2007.  Bancorp operates primarily through the Bank,and the investment in the Bank is its principal asset.  The Bank is located in El Segundo, Californiaand at June 30, 2010, had $117 million in assets, $85 million in net loansreceivable and $90 million in deposits.  On October 1,2009, Manhattan Bancorp, through its wholly owned subsidiary, MBFS Holdings, Inc.(“MBFS”), acquired a 70% interest in Banc of Manhattan Capital, LLC, (“BOMC”) afull-service mortgage-centric broker/dealer. The gross investment in MBFS was $1.6 million as of June 30, 2010. Unless the context requires otherwise,references in this Form 10-Q to the “Company,” “we” or “us” refers toBancorp and its consolidated subsidiaries, the Bank and MBFS and itssubsidiary.

 

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

 

***Earnings and Financial Condition Overview***

 

The Company recorded a net loss of $1,276,000 or$0.32 basic and fully-diluted loss per share of common stock for thethree-month period ended June 30, 2010, as compared with a net loss of$1,454,000 or $0.36 basic and fully-diluted loss per share of common stock forthe three-month period ended June 30, 2009.  The per-share values are based upon the lossattributable to the shareholders of the Bancorp and the related sharesoutstanding.  Comparing the Company’s2009 second quarter with the current operating quarter, reflects an approximate16.8% decrease in the reported comparable quarterly losses.

 

Similarly, the six-month recorded loss for theperiod ended June 30, 2010 was $2,517,000 or $0.63 per basic share ofcommon stock, (including a gain from the minority interest of $11,415), andreflects a 6.4%

 

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decrease in the reported comparable first half lossof $2,687,000 or $0.67 per share for the first half of 2009.

 

The continuation of Company losses reported duringthe six-month periods ended June 30, 2010 and June 30, 2009 is theresult of three primary reasons:

 

·                  The decline in the Bank’s operating loss of $1.1 million fromapproximately $2.0 million for the six-month period ended June 30, 2009 toapproximately $900,000 for the six-month period ended Jun 30, 2010 were mostlyoffset by the increase in the operating loss of the Bancorp by $900,000.  The Bancorp operating expenses are associatedprimarily with the costs of exploring potential business opportunities for theBancorp and its subsidiaries.

 

·                  The fee income generated by the Company’s non-bank subsidiary, whilesufficient to cover its operation costs, has yet to contribute significantly toa reduction in the overall Company’s operating loss.

 

·                  Increased non-interest expenses, primarily resulting from compensationand benefits and other components, including occupancy and equipment andtechnology and communications.

 

The Company’s management has invested a substantialamount of time and resources during their half of 2010 in the evaluation andexploration of additional financial products and services deemed essential tomeeting the needs of its customer base and to enhance its franchise value.

 

Due to the current condition in the general economy,the Company continues to be cautious in granting new credit extensions, anddemand for credit, in general, has been modest with gross loans outstandingincreasing approximately $1.0 million per month for the six-month period ended June 30,2010.  Despite the fact that as of both June 30,2010 and December 31, 2009 the Bank had no past due loans or loans onnon-accrual, the Bank’s management elected to increase the allowance for loanloss to 1.96% of outstanding loans as of June 30, 2010, compared to 1.50%of outstanding loans as of December 31, 2009.  The Company charged off approximately$101,000 in loans during the six-month period ended June 30, 2010, alloccurring in the first quarter of 2010. Management continuously reviews the portfolio for indication of specificweaknesses and adjusts the provision accordingly.  The provision for the three-month periodended June 30, 2010 was $208,000 compared to $454,000 for the three-monthperiod ended June 30, 2009.  Theprovision for the six-month period ended June 30, 2010 was $578,000compared to $628,000 for the six-month period ended June 30, 2009.

 

Net interest income after provision for loan lossesfor the three-month period ended June 30, 2010 was approximately$1,209,000, an increase of approximately $732,000 over the prior year’sthree-month period ended June 30, 2009. This was a 154% improvement in net interest income and was possiblebecause of an increase in interest income, up approximately $550,000 (50%) forthe comparable three-month period ended June 30, 2010 over the same periodin 2009.  Interest expense also increasedbut by a smaller percentage (36%) for the comparable three-month period ended June 30,2010 over June 30, 2009, with the actual dollar amount only increasingapproximately $64,000.

 

Net interest income after provision for loan lossesfor the six-month period ended June 30, 2010 was approximately $2,126,000,an increase of approximately $1,089,000 over the prior year’s six-month periodended June 30, 2009.  This was a105% improvement in net interest income and was possible because of an increasein interest income, up approximately $1,175,000 (57%) for the comparablesix-month period ended June 30, 2010 over the same period in 2009.  Interest expense also increased but by a

 

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smaller percentage (35%) for the comparablesix-month period ended June 30, 2010 over June 30, 2009 with theactual dollar amount only increasing approximately $136,000. A detailedanalysis of the components of net interest expense is found under *Net Interest Income*on page 17.

 

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

 

Non-interest expense for the three-month periodsended June 30, 2010 compared to June 30, 2009 increased by approximately$2.2 million.  Non-interest expense forthe six-month periods ended June 30, 2010 compared to June 30, 2009increased by approximately $4.3 million. A detailed analysis is found under *Non-Interest Expense*onpage 26.

 

As of June 30, 2010, total assets of theCompany were approximately $119.2 million. This represents a decrease of approximately $33.2 million or 21.8% fromthe amount reported as of December 31, 2009.  The significant decline in total assets canbe attributed to high balances in liquid assets as of December 31, 2009,which would have been necessary for contemplated business activities during thefirst quarter of 2010.  When theopportunity for this business transaction did not occur, the funding associatedwith this influx was no longer required. As the funding (estimated at approximately $33 million) was provisionalin nature, most was repaid within weeks following December 31, 2009.

 

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

 

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

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

 

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***RESULTS OF OPERATIONS***

 

***Net Interest Income***

 

At present, the Company’s earnings depend largelyupon our net interest income, which is the difference between the income weearn on interest-bearing assets, such as loans, and the interest we pay ondeposits and borrowed funds.  Netinterest income is related to (i) the relative amounts of interest-earningassets and liabilities and (ii) the interest rates earned and paid onthese balances.  Total interestincome can fluctuate based upon the mix of earning assets amongst loans,investments and federal funds sold and the related rates associated with theirbalances.  Some of the funding sourcesfor these assets also have an interest cost which can fluctuate based upon themix of interest-bearing liabilities and the related rates associated with theirbalances.

 

Theinterest rate spread represents the difference between the weighted averageyield on interest-earning assets and the weighted average rate paid oninterest-bearing liabilities.  Theinterest rate spread increased from 3.37% for the three-month period ended June 30,2009 to 4.23% for the three-month period ended June 30, 2010. Similarly,the interest rate spread increased from 2.91% for the six-month period ended June 30,2009 to 3.80% for the comparable six-month period ended June 30,2010.  The increases in both periods wereattributable to the large decline in effective interest rates associated withinterest-bearing liabilities coupled with increases in effective interest ratesassociated with interest-bearing assets. See the *Variance in Balances and Rates*Tablesbelow.

 

Netinterest margin is net interest income expressed as a percentage of averagetotal interest-earning assets, allowing for the sources and the relative sizeof funding to be used as factors in the calculation.   During the comparable second quarterlyperiods, while the interest rate spread increased by 86 basis points, the netinterest margin increased by just 41 basis points, from 4.42% to 4.83%,reflecting the fact that a higher percentage of the sources of the funding werefrom interest-bearing liabilities.  Thepercentage of interest-bearing funds to interest-earning assets increased from44.9% to 58.0% for the three-month periods ended June 30, 2009 and 2010,respectively.

 

Similarly,the interest rate spread for the comparable first semi-annual periods of 2010and 2009 reflects an increase of 89 basis points; the net interest marginincreased by 38 basis points, from 4.01% to 4.39%.  The noted increase in the net interest marginbetween the first semi-annual periods of 2009 and 2010 again reflects the factthat a higher percentage of the sources of funds originates frominterest-bearing liabilities. The percentage of interest-bearing funds tointerest-earning assets increased from 46.3% to 59.2% for the six-month periodsended June 30, 2009 and 2010, respectively.

 

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

 

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

 
| ** **                                            | ** ** | **Three Months Ended**     | ** ** | **Six Months Ended**       | ** ** |
|-------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                            | ** ** | **June 30,**          | ** ** | **Dollar**                 | ** ** | **Percent** | ** ** | **June 30,** | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                                            | ** ** | **2010**                   | ** ** | **2009**                   | ** ** | **Change** | ** ** | **Change** | ** ** | **2010** | ** ** | **2009** | ** ** | **Change** | ** ** | **Change** | ** ** |
| ** **                                            | ** ** | **(Unaudited)**            | ** ** | **(Unaudited)**            | ** ** |
| ** **                                            | ** ** | **(Dollars in thousands)** | ** ** | **(Dollars in thousands)** | ** ** |
| Interest income                                       |       | $                          | 1,659      |                       | $          | 1,109 |   | $ | 550 |   | 49.59 | % | $ | 3,234 |   | $ | 2,060 |   | $ | 1,174 |   | 56.99 | % |
| Interest expense                                      |       | 243                        |       | 179                        |       | 64 |   | 35.75 | % | 531 |   | 395 |   | 136 |   | 34.43 | % |
| Net interest income before provision for loan  losses |       | $                          | 1,416      |                       | $          | 930 |   | $ | 486 |   | 52.26 | % | $ | 2,703 |   | $ | 1,665 |   | $ | 1,038 |   | 62.34 | % |
| Net interest margin                                   |       | 4.83                       | %          | 4.42                       | %          |   |   | 9.47 | % | 4.39 | % | 4.01 | % |   |   | 9.46 | % |

 

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

 

**ANALYSIS OF NET INTEREST INCOME**

 
| ** **                                              | ** ** | **(Unaudited)**                      | ** ** |
|---------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                              | ** ** | **Three months ended June 30,** | ** ** |
| ** **                                              | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                                              | ** ** | ** **                           | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                              | ** ** | ** **                           | ** ** | **Interest** | ** ** | **Average** | ** ** | ** ** | ** ** | **Interest** | ** ** | **Average** | ** ** |
| ** **                                              | ** ** | **Average**                          | ** ** | **Income/** | ** ** | **Rate** | ** ** | **Average** | ** ** | **Income/** | ** ** | **Rate** | ** ** |
| ** **                                              | ** ** | **Balance**                          | ** ** | **Expense** | ** ** | **Earned/Paid** | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Earned/Paid** | ** ** |
| ** **                                              | ** ** | **(Dollars in thousands)**           | ** ** |
| **Interest-earning assets:**                            |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Federal funds sold                                      |       | $                                    | 8,203      |   | $ | 5 |   | 0.24 | % | $ | 7,029 |   | $ | 3 |   | 0.17 | % |
| Deposits with other financial institutions              |       | 3,342                                |       | 11 |   | 1.32 | % | 6,069 |   | 31 |   | 2.05 | % |
| Investments                                             |       | 22,789                               |       | 337 |   | 5.93 | % | 7,808 |   | 131 |   | 6.73 | % |
| Loans(1)                                                |       | 83,167                               |       | 1,306 |   | 6.30 | % | 63,559 |   | 944 |   | 5.96 | % |
| Total interest-earning assets                           |       | 117,501                              |       | 1,659 |   | 5.66 | % | 84,465 |   | 1,109 |   | 5.27 | % |
| Non-interest-earning assets                             |       | 12,316                               |       |   |   |   |   | 4,862 |   |   |   |   |   |
| Total assets                                            |       | $                                    | 129,817    |   |   |   |   |   | $ | 89,327 |   |   |   |   |   |
|                                                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities:**                       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Demand                                                  |       | $                                    | 2,964      |   | 1 |   | 0.10 | % | $ | 1,803 |   | 0 |   | 0.10 | % |
| Savings and money market                                |       | 22,686                               |       | 50 |   | 0.88 | % | 12,759 |   | 37 |   | 1.16 | % |
| Certificates of deposit                                 |       | 38,015                               |       | 142 |   | 1.50 | % | 18,746 |   | 92 |   | 1.97 | % |
| FHLB advances                                           |       | 4,504                                |       | 50 |   | 4.39 | % | 4,577 |   | 50 |   | 4.32 | % |
| Total interest-bearing liabilities                      |       | 68,169                               |       | 243 |   | 1.43 | % | 37,885 |   | 179 |   | 1.90 | % |
| Non-interest-bearing demand deposits                    |       | 27,297                               |       |   |   |   |   | 17,869 |   |   |   |   |   |
| Total funding sources                                   |       | 95,466                               |       |   |   | 1.02 | % | 55,754 |   |   |   | 1.29 | % |
| Non-interest-bearing liabilities                        |       | 7,418                                |       |   |   |   |   | 700 |   |   |   |   |   |
| Shareholders’ equity                               |       | 26,933                               |       |   |   |   |   | 32,873 |   |   |   |   |   |
| Total liabilities and shareholders’ equity         |       | $                                    | 129,817    |   |   |   |   |   | $ | 89,327 |   |   |   |   |   |
|                                                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Excess of interest-earning assets over funding  sources |       | $                                    | 22,035     |   |   |   |   |   | $ | 28,711 |   |   |   |   |   |
| Net interest income                                     |       |                                 |       | $ | 1,416 |   |   |   |   |   | $ | 930 |   |   |   |
| Net interest rate spread                                |       |                                 |       |   |   | 4.23 | % |   |   |   |   | 3.37 | % |
| Net interest margin                                     |       |                                 |       |   |   | 4.83 | % |   |   |   |   | 4.42 | % |

 

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

 

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

 

VARIANCE IN BALANCES AND RATES

 
| ** **                                 | ** ** | **Average Balance**                           | ** ** | ** **   | ** ** | ** **        | ** ** | **Average Yield/Rate**                        | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|----------------------------------------------------|------------|--------------|------------|-------------------|------------|----------------------------------------------------|------------|------------|------------|
| ** **                                 | ** ** | **for the three months ended** | ** ** | ** **   | ** ** | ** **        | ** ** | **for the three months ended** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **June 30,**                                  | ** ** | **Variance** | ** ** | **June 30,** | ** ** | ** **                                         | ** ** |
| **(dollars  in thousands)**                | ** ** | **2010**                                           | ** ** | **2009**     | ** ** | **dollar**        | ** ** | **percent**                                        | ** ** | **2010**   | ** ** | **2009** | ** ** | **Variance** | ** ** |
| ** **                                 | ** ** | **(Unaudited)**                                    | ** ** |
| **Interest-earning assets:**               |       |                                               |       |         |       |              |       |                                               |       |       |       |   |   |   |   |
| Federal funds sold                         |       | $                                                  | 8,203      |         | $          | 7,029             |       | $                                                  | 1,174      |       | 16.70      | % | 0.24 | % | 0.17 | % | 0.07 | % |
| Deposits with other financial institutions |       | 3,342                                              |       | 6,069        |       | (2,727            | )          | -44.93                                             | %          | 1.32       | %          | 2.05 | % | -0.73 | % |
| Investments                                |       | 22,789                                             |       | 7,808        |       | 14,981            |       | 191.87                                             | %          | 5.93       | %          | 6.73 | % | -0.80 | % |
| Loans                                      |       | 83,167                                             |       | 63,559       |       | 19,608            |       | 30.85                                              | %          | 6.30       | %          | 5.96 | % | 0.34 | % |
| Total interest-earning assets              |       | $                                                  | 117,501    |         | $          | 84,465            |       | $                                                  | 33,036     |       | 39.11      | % | 5.66 | % | 5.27 | % | 0.39 | % |
|                                       |       |                                               |       |         |       |              |       |                                               |       |       |       |   |   |   |   |
| **Interest-bearing liabilities:**          |       |                                               |       |         |       |              |       |                                               |       |       |       |   |   |   |   |
| Interest-bearing demand                    |       | $                                                  | 2,964      |         | $          | 1,803             |       | $                                                  | 1,161      |       | 64.39      | % | 0.10 | % | 0.10 | % | 0.00 | % |
| Savings and money market                   |       | 22,686                                             |       | 12,759       |       | 9,927             |       | 77.80                                              | %          | 0.88       | %          | 1.16 | % | -0.28 | % |
| Certificates of deposit                    |       | 38,015                                             |       | 18,746       |       | 19,269            |       | 102.79                                             | %          | 1.50       | %          | 1.97 | % | -0.47 | % |
| FHLB advances                              |       | 4,504                                              |       | 4,577        |       | (73               | )          | -1.59                                              | %          | 4.39       | %          | 4.32 | % | 0.07 | % |
| Total interest-bearing liabilities         |       | $                                                  | 68,169     |         | $          | 37,885            |       | $                                                  | 30,284     |       | 79.94      | % | 1.43 | % | 1.90 | % | -0.47 | % |

 

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

 

**ANALYSIS OF NET INTEREST INCOME**

 
| ** **                                              | ** ** | **(Unaudited)**                    | ** ** |
|---------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                              | ** ** | **Six months ended June 30,** | ** ** |
| ** **                                              | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| ** **                                              | ** ** | ** **                         | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                              | ** ** | ** **                         | ** ** | **Interest** | ** ** | **Average** | ** ** | ** ** | ** ** | **Interest** | ** ** | **Average** | ** ** |
| ** **                                              | ** ** | **Average**                        | ** ** | **Income/** | ** ** | **Rate** | ** ** | **Average** | ** ** | **Income/** | ** ** | **Rate** | ** ** |
| ** **                                              | ** ** | **Balance**                        | ** ** | **Expense** | ** ** | **Earned/Paid** | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Earned/Paid** | ** ** |
| ** **                                              | ** ** | **(Dollars in thousands)**         | ** ** |
| **Interest-earning assets:**                            |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| Federal funds sold                                      |       | $                                  | 17,588     |   | $ | 20 |   | 0.23 | % | $ | 8,405 |   | $ | 15 |   | 0.36 | % |
| Deposits with other financial institutions              |       | 3,110                              |       | 22 |   | 1.43 | % | 7,001 |   | 73 |   | 2.10 | % |
| Investments                                             |       | 21,505                             |       | 637 |   | 5.97 | % | 8,037 |   | 233 |   | 5.85 | % |
| Loans(1)                                                |       | 81,880                             |       | 2,555 |   | 6.29 | % | 60,187 |   | 1,739 |   | 5.83 | % |
| Total interest-earning assets                           |       | 124,083                            |       | 3,234 |   | 5.26 | % | 83,630 |   | 2,060 |   | 4.97 | % |
| Non-interest-earning assets                             |       | 9,366                              |       |   |   |   |   | 4,827 |   |   |   |   |   |
| Total assets                                            |       | $                                  | 133,449    |   |   |   |   |   | $ | 88,457 |   |   |   |   |   |
|                                                    |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities:**                       |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| Demand                                                  |       | $                                  | 2,768      |   | 1 |   | 0.10 | % | $ | 1,778 |   | 1 |   | 0.10 | % |
| Savings and money market                                |       | 23,749                             |       | 115 |   | 0.98 | % | 11,432 |   | 70 |   | 1.23 | % |
| Certificates of deposit                                 |       | 42,306                             |       | 316 |   | 1.51 | % | 20,891 |   | 225 |   | 2.17 | % |
| FHLB advances                                           |       | 4,626                              |       | 99 |   | 4.26 | % | 4,605 |   | 99 |   | 4.28 | % |
| Total interest-bearing liabilities                      |       | 73,449                             |       | 531 |   | 1.46 | % | 38,706 |   | 395 |   | 2.06 | % |
| Non-interest-bearing demand deposits                    |       | 28,269                             |       |   |   |   |   | 15,809 |   |   |   |   |   |
| Total funding sources                                   |       | 101,718                            |       |   |   | 1.05 | % | 54,515 |   |   |   | 1.46 | % |
| Non-interest-bearing liabilities                        |       | 4,301                              |       |   |   |   |   | 550 |   |   |   |   |   |
| Shareholders’ equity                               |       | 27,430                             |       |   |   |   |   | 33,392 |   |   |   |   |   |
| Total liabilities and shareholders’ equity         |       | $                                  | 133,449    |   |   |   |   |   | $ | 88,457 |   |   |   |   |   |
|                                                    |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| Excess of interest-earning assets over funding  sources |       | $                                  | 22,365     |   |   |   |   |   | $ | 29,115 |   |   |   |   |   |
| Net interest income                                     |       |                               |       | $ | 2,703 |   |   |   |   |   | $ | 1,665 |   |   |   |
| Net interest rate spread                                |       |                               |       |   |   | 3.80 | % |   |   |   |   | 2.91 | % |
| Net interest margin                                     |       |                               |       |   |   | 4.39 | % |   |   |   |   | 4.01 | % |

 

----

(1)          The average balance of loans is calculated net of deferred loanfees/cost, but would include non-accrual loans, if any, with a zero yield.   Loan fees net of amortized costs wereapproximately $52,000 for the six-month period ended June 30, 2010.   Loan costs net of amortized fees included intotal net income were approximately $9,000 for the six-month period ended June 30,2009.

 

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The table below sets forth changes for thecomparable six-month periods ended June 30, 2010 and June 30, 2009for average earning assets, average interest-bearing liabilities, and theirrespective rates:

 

VARIANCE IN BALANCES AND RATES

 
| ** **                                 | ** ** | **Average Balance**                         | ** ** | ** **   | ** ** | ** **        | ** ** | **Average Yield/Rate**                      | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------|------------|--------------|------------|-------------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                                 | ** ** | **for the six months ended** | ** ** | ** **   | ** ** | ** **        | ** ** | **for the six months ended** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **June 30,**                                | ** ** | **Variance** | ** ** | **June 30,** | ** ** | ** **                                       | ** ** |
| **(dollars  in thousands)**                | ** ** | **2010**                                         | ** ** | **2009**     | ** ** | **dollar**        | ** ** | **percent**                                      | ** ** | **2010**   | ** ** | **2009** | ** ** | **Variance** | ** ** |
| ** **                                 | ** ** | **(Unaudited)**                                  | ** ** |
| **Interest-earning assets:**               |       |                                             |       |         |       |              |       |                                             |       |       |       |   |   |   |   |
| Federal funds sold                         |       | $                                                | 17,588     |         | $          | 8,405             |       | $                                                | 9,183      |       | 109.26     | % | 0.23 | % | 0.36 | % | -0.13 | % |
| Deposits with other financial institutions |       | 3,110                                            |       | 7,001        |       | (3,891            | )          | -55.58                                           | %          | 1.43       | %          | 2.10 | % | -0.67 | % |
| Investments                                |       | 21,505                                           |       | 8,037        |       | 13,468            |       | 167.57                                           | %          | 5.97       | %          | 5.85 | % | 0.12 | % |
| Loans                                      |       | 81,880                                           |       | 60,187       |       | 21,693            |       | 36.04                                            | %          | 6.29       | %          | 5.83 | % | 0.46 | % |
| Total interest-earning assets              |       | $                                                | 124,083    |         | $          | 83,630            |       | $                                                | 40,453     |       | 48.37      | % | 5.26 | % | 4.97 | % | 0.29 | % |
|                                       |       |                                             |       |         |       |              |       |                                             |       |       |       |   |   |   |   |
| **Interest-bearing liabilities:**          |       |                                             |       |         |       |              |       |                                             |       |       |       |   |   |   |   |
| Interest-bearing demand                    |       | $                                                | 2,768      |         | $          | 1,778             |       | $                                                | 990        |       | 55.68      | % | 0.10 | % | 0.10 | % | 0.00 | % |
| Savings and money market                   |       | 23,749                                           |       | 11,432       |       | 12,317            |       | 107.74                                           | %          | 0.98       | %          | 1.23 | % | -0.25 | % |
| Certificates of deposit                    |       | 42,306                                           |       | 20,891       |       | 21,415            |       | 102.51                                           | %          | 1.51       | %          | 2.17 | % | -0.66 | % |
| FHLB advances                              |       | 4,626                                            |       | 4,605        |       | 21                |       | 0.46                                             | %          | 4.26       | %          | 4.28 | % | -0.02 | % |
| Total interest-bearing liabilities         |       | $                                                | 73,449     |         | $          | 38,706            |       | $                                                | 34,743     |       | 89.76      | % | 1.46 | % | 2.06 | % | -0.60 | % |

 

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

 
| ** **                                 | ** ** | **For the three months ended**   | ** ** | **For the six months ended**     | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **June 30, 2010 over 2009** | ** ** | **June 30, 2010 over 2009** | ** ** |
| **(in  thousands)**                        | ** ** | **Volume**                       | ** ** | **Rate**                         | ** ** | **Total** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Total** | ** ** |
| ** **                                 | ** ** | **(Unaudited)**                  | ** ** | **(Unaudited)**                  | ** ** |
| **Interest income:**                       |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Federal funds sold                         |       | $                                | 1          |                             | $          | 1 |   | $ | 2 |   | $ | 16 |   | $ | (11 | ) | $ | 5 |   |
| Deposits with other financial institutions |       | (14                              | )          | (6                               | )          | (20 | ) | (41 | ) | (10 | ) | (51 | ) |
| Investments                                |       | 251                              |       | (45                              | )          | 206 |   | 390 |   | 14 |   | 404 |   |
| Loans                                      |       | 291                              |       | 71                               |       | 362 |   | 627 |   | 189 |   | 816 |   |
| Net increase (decrease)                    |       | 529                              |       | 21                               |       | 550 |   | 992 |   | 182 |   | 1,174 |   |
|                                       |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| **Interest expense:**                      |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Interest-bearing demand                    |       | —                           |       | —                           |       | — |   | — |   | — |   | — |   |
| Savings and money market                   |       | 29                               |       | (16                              | )          | 13 |   | 75 |   | (30 | ) | 45 |   |
| Certificates of deposit                    |       | 95                               |       | (45                              | )          | 50 |   | 231 |   | (140 | ) | 91 |   |
| FHLB advances                              |       | (1                               | )          | 1                                |       | — |   | — |   | — |   | — |   |
| Net increase (decrease)                    |       | 123                              |       | (60                              | )          | 63 |   | 306 |   | (170 | ) | 136 |   |
| Total net increase (decrease)              |       | $                                | 406        |                             | $          | 81 |   | $ | 486 |   | $ | 686 |   | $ | 352 |   | $ | 1,038 |   |

 

A review of the above tables shows that the overallincrease in net interest income of approximately $486,000 between the twocomparative quarters ended at June 30, 2010 and June 30, 2009 is theresult of several factors.

 

Among the most significant factors in the increasein net interest income is the overall growth in average quarterly earningassets, up approximately $33.0 million or 39.1% between June 30, 2009 and June 30,2010.  This increase was primarily aresult of loan growth (approximately $19.6 million) accounting for 59.4% of thetotal increase.  The percentage ofaverage loan dollars outstanding, as a percentage of interest-earning assets,declined from 75.3% as of June 30, 2009 to 70.8% as of June 30,2010.  The higher outstanding volume ofloans between the second-quarter periods would have resulted in an increase ofapproximately $291,000 in interest income, but the actual amount of interestincome earned was also augmented by approximately $71,000 due to the improvementin the overall effective yield on the loan portfolio.  The overall yield on outstanding loansincreased from 5.96% for the three-month period ended June 30, 2009 to6.30% for the three-month period ended June 30, 2010.

 

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A review of the above tables shows that the overallincrease in net interest income of approximately $1,038,000 between the twocomparative semi-annual periods ended at June 30, 2010 and June 30,2009.

 

The Bank continues to have six significant depositrelationships, some of which are with related parties, which total, as of June 30,2010, approximately $18.3 million or 20.4% of the Bank’s deposits.  Included in these deposits are funds subjectto unscheduled withdrawals, mandating the Bank to hold funds in cash or cashequivalents at a higher level to provide necessary liquidity. The amount of Fedfunds sold as a percentage of all interest-earning assets has decreased from8.3% to 7.0% for the comparable three-month periods ended in June 30, 2009and June 30, 2010, with the average balance in Fed funds sold increasingby approximately $1.2 million. The levels, as noted above, were sufficient toprovide adequate liquidity for the Company.

 

The Bank, in order to improve the overall yield oninterest-earning assets, has placed additional funds into itsavailable-for-sale investment category. The higher average outstanding volume of funds invested of approximately$15.0 million between the second quarterly periods would have resulted in anincrease of approximately $251,000 in interest income. This positive effect wasreduced by the a decline in the effective yields within the investment categorybased upon acceptable duration and risks, offsetting approximately $45,000 ofthe amount of interest on investments, bringing the overall total to$206,000.  The effective yield oninvestments decreased by 80 basis points from 6.73% for the three-month periodended June 30, 2009 to 5.93% for the comparable period ended June 30,2010.

 

The change in the mix of interest-yielding assetscoupled with the overall growth resulted in the increase of interest income ofapproximately $550,000, with approximately $529,000 due to volume increases,which more than fully offset the result of the general market interest ratedecline in many of the interest-earning assets categories. While generalinterest rates have remained at historical lows since prior to the second quarterof 2009, the average effective yield on the Company’s earning assets have showna improvement by approximately 40 basis points as a result primarily of changesin loan pricing.

 

Interest expense increased by only $63,000, withincreases in balances outstanding on interest-bearing liabilities beingpartially offset by the savings available on the repricing associated with theoverall declining market rates.

 

The increase in interest expense due to the changein outstanding average interest-bearing liabilities was $123,000 with averageoutstanding interest-bearing balances up approximately 79.9% from the balancesat June 30, 2009 of approximately $37.9 million to $68.2 million at June 30,2010.

 

The increase in interest expense due to the changein overall effective interest rates resulted in a savings of approximately$60,000 with the average rates declining by 47 basis points from 1.90% for thethree-month period ended June 30, 2009 to approximately 1.43% for thethree-month period ended June 30, 2010.

 

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

 

For the comparable three-month periods ended June 30,2010 and June 30, 2009, the average balance in *Certificateof Deposits* increased by approximately $19.3 million. The higheroutstanding volume in certificates of deposits would have resulted in anincrease of expense of approximately $95,000. However the significant decline in the effective yield on this categoryby 48 basis points from an effective yield of 1.97% for the three-month periodended June 30, 2009 to 1.50% for the three-month period ended June 30,2010, offset much of the additional expense by reducing the potential interestcost by approximately $45,000.

 

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A similar result occurred in the *Savings and Money Market* category. For the comparablethree-month periods ended June 30, 2010 and June 30, 2009, theaverage balance in*Savings and Money Market*depositsincreased by approximately $9.9 million. The higher outstanding volume in thiscategory would have resulted in an increase of expense of approximately$29,000.  However the decline in theeffective yield on this category by 28 basis points from 1.16% for thethree-month period ended June 30, 2009 to 0.88% for the three-month periodended June 30, 2010, offset about one-half of the additional expense andreduced the potential interest cost by approximately $13,000.

 

Further analysis is provided for the comparablesemi-annual periods ending June 30, 2009 and June 30, 2010.

 

Among the most significant factors in the increasein net interest income is the overall growth in the year-to-date averageinterest-earning assets between 2009 and 2010, up approximately $40.5 millionor 48.4% between June 30, 2009 and June 30, 2010.  This increase was also centered in loangrowth ($21.7 million) reflecting 53.6% of the total increase.  The percentage of average loan dollarsoutstanding, as a percentage of interest-earning assets, declined fromapproximately 72.0% as of June 30, 2009 to approximately 66.0% as of June 30,2010.  The higher outstanding volume ofloans between the semi-annual periods would have resulted in an increase ofapproximately $627,000 in interest income, but the actual amount of interestincome earned was further augmented by approximately $189,000 due to theimprovement in the overall effective yield on the loan portfolio.  The overall yield on outstanding loansincreased from 5.83% for the six-month period ended June 30, 2009 to 6.29%for the six-month period ended June 30, 2010.

 

In addition, the Bank, in order to improve theoverall yield on interest-earning assets, has placed additional funds into itsavailable-for-sale investment category. The higher average outstanding volume of funds invested of approximately$13.5 million between the two semi-annual periods would have resulted in anincrease of approximately $390,000 in interest income. This positive effect wasaugmented slightly by a small increase in the effective yields within theinvestment category of approximately $14,000 bringing the overall total to$404,000.  The effective yield oninvestments increased by 12 basis points from 5.85% for the six-month periodended June 30, 2009 to 5.97% for the comparable six-month period ended June 30,2010.

 

The change in the mix of interest-yielding assetscoupled with the overall growth resulted in the increase of interest income ofapproximately $1,174,000, with approximately $992,000 due to volume increases,which more than fully offset the result of the general market interest ratedecline in many of the interest-earning assets categories. While generalinterest rates have remained at historical lows since prior to the secondquarter of 2009, the average effective yield on the Company’s earning assetshave shown an improvement by approximately 29 basis points as a resultprimarily of changes in loan pricing.

 

Interest expense increased by only $136,000, withincreases in balances outstanding on interest-bearing liabilities beingpartially offset by the savings available on the repricing associated with theoverall declining market rates.

 

The increase in interest expense due to the changein outstanding average interest-bearing liabilities was $306,000 with averageoutstanding interest-bearing balances up approximately 89.7% from the balancesat June 30, 2009 of approximately $38.7 million to $73.4 million at June 30,2010.

 

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The increase in interest expense due to the changein overall effective interest rates resulted in a savings of approximately$171,000 with the average rates declining by 59 basis points from 2.06% for thesix-month period ended June 30, 2009 to approximately 1.46% for thesix-month period ended June 30, 2010.

 

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

 

For the comparable six-month periods ended June 30,2010 and June 30, 2009, the average balance in *Certificateof Deposits* increased by approximately $21.4 million. The higheroutstanding volume in certificates of deposits would have resulted in anincrease of expense of approximately $231,000. However the significant decline in the effective yield on this categoryby 67 basis points from an effective yield of 2.17% for the six-month periodended June 30, 2009 to 1.51% for the six-month period ended June 30,2010, offset much of the additional expense by reducing the potential interestcost by approximately $91,000.

 

A similar result occurred in the *Savings and Money Market* category. For the comparablesix-month periods ended June 30, 2010 and June 30, 2009, the averagebalance in*Savings and Money Market*depositsincreased by approximately $12.3 million. The higher outstanding volume in thiscategory would have resulted in an increase of expense of approximately$75,000.  However the decline in theeffective yield on this category by 25 basis points from 1.23% for thesix-month period ended June 30, 2009 to 0.98% for the six-month periodended June 30, 2010, offset about 41% of the additional expense andreduced the potential interest cost by approximately $31,000.

 

***Provision for Loan Losses***

 

The Company made provisions for loan losses of$208,000 for the three-month period ended June 30, 2010, compared to$454,000 for the three-month period ended June 30, 2009.  For the comparable six-month periods ended June 30,2010 and June 30, 2009, the Company made provisions of $578,000 and$628,000 respectively.  These provisionswere determined based upon the periodic credit review of the loan portfolio,consideration of past loan loss experience, current and predicted economicconditions, and other pertinent factors.  As a part of that ongoing monthly analysis,the Bank recognized recent changes in the ultimate collectability of some ofits loans, even among those that were still performing as agreed.  Among those loans, the Bank charged offcertain loans totaling approximately $101,000 as of June 30, 2010 allwithin the first quarter of 2010. Forfurther analysis of the adequacy of the loan loss reserve, see *Asset Quality and Allowance for Loan Losses.*

 

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***Non-Interest Income***

 

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

 
| ** **                          | ** ** | **For the three months ended** | ** ** | ** **   | ** ** | ** **  | ** ** |
|-------------------------------------|------------|--------------------------------|------------|--------------|------------|-------------|------------|
| **(unaudited)**                     | ** ** | **June 30,**              | ** ** | **Variance** | ** ** |
| **(dollars  in thousands)**         | ** ** | **2010**                       | ** ** | **2009**     | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| Service charges on deposit accounts |       | $                              | 31         |         | $          | 17          |       | $ | 14 |   | 82.35 | % |
| Other commission and bank fees      |       | 16                             |       | 17           |       | (1          | )          | -5.88 | % |
| Riskless trading income             |       | 1,402                          |       | —       |       | 1,402       |       | 0.00 | % |
| Whole loan sales                    |       | 66                             |       | —       |       | 66          |       | 0.00 | % |
| Advisory income                     |       | 130                            |       | —       |       | 130         |       | 0.00 | % |
| Total non-interest income           |       | $                              | 1,645      |         | $          | 34          |       | $ | 1,611 |   | 4738.24 | % |

 
| ** **                          | ** ** | **For the six months ended** | ** ** | ** **   | ** ** | ** **  | ** ** |
|-------------------------------------|------------|------------------------------|------------|--------------|------------|-------------|------------|
| **(unaudited)**                     | ** ** | **June 30,**            | ** ** | **Variance** | ** ** |
| **(dollars  in thousands)**         | ** ** | **2010**                     | ** ** | **2009**     | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| Service charges on deposit accounts |       | $                            | 61         |         | $          | 27          |       | $ | 34 |   | 125.93 | % |
| Other commission and bank fees      |       | 57                           |       | 24           |       | 33          |       | 137.50 | % |
| Riskless trading income             |       | 2,389                        |       | —       |       | 2,389       |       | 0.00 | % |
| Whole loan sales                    |       | 324                          |       | —       |       | 324         |       | 0.00 | % |
| Advisory income                     |       | 560                          |       | —       |       | 560         |       | 0.00 | % |
| Total non-interest income           |       | $                            | 3,391      |         | $          | 51          |       | $ | 3,340 |   | 6549.02 | % |

 

Non-interest income for the three-month andsix-month periods ended June 30, 2010 consists of fees for two sources,the Bank and BOMC.  Bank-related feeincome increased by 44% from approximately $34,000 for the three-month periodended June 30, 2009 to approximately $49,000 for the three-month periodended June 30, 2010.   For thesix-month periods ended June 30, 2010, the reported amount ofapproximately $118,000 represents a 131% increase over the approximately$51,000 reported for the six-month period ended June 30, 2009.

 

Non-bank related income totaled approximately $1.6million and was generated by BOMC for the second quarter of 2010.  Approximately $3.3 million was generated forthe six-month period ended June 30, 2010. There are no comparable numbers for the prior periods, as BOMC was notaffiliated with the Company until October 1, 2009.

 

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

 

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***Non-Interest Expense***

 

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

 
| ** **                   | ** ** | **For the three months ended** | ** ** | ** **   | ** ** | ** **  | ** ** |
|------------------------------|------------|--------------------------------|------------|--------------|------------|-------------|------------|
| ** **                   | ** ** | **June 30,**              | ** ** | ** **   | ** ** | ** **  | ** ** |
| ** **                   | ** ** | **2010**                       | ** ** | **2009**     | ** ** | ** **  | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **(dollars in thousands)**     | ** ** | **Variance** | ** ** |
| ** **                   | ** ** | **(Unaudited)**                | ** ** | **Dollars**  | ** ** | **Percent** | ** ** |
| Compensation and benefits    |       | $                              | 2,831      |         | $          | 1,112       |       | $ | 1,719 |   | 154.6 | % |
| Occupancy and equipment      |       | 266                            |       | 167          |       | 99          |       | 59.3 | % |
| Technology and communication |       | 345                            |       | 137          |       | 208         |       | 151.8 | % |
| Professional Fees            |       | 300                            |       | 304          |       | (4          | )          | -1.3 | % |
| Administrative Expenses      |       | 190                            |       | 116          |       | 74          |       | 63.8 | % |
| Other non-interest expenses  |       | 197                            |       | 127          |       | 70          |       | 55.1 | % |
| Total non-interest expenses  |       | $                              | 4,129      |         | $          | 1,963       |       | $ | 2,166 |   | 110.3 | % |

 

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

 

·                  Compensation and benefits increases associated with approximatelyseventeen (17) employees for BOMC not present in the second quarter of 2009,which totaled approximately $1,412,000 and an average of five (5) employeesin the Bancorp also not present in the second quarter of 2009, which totaledapproximately $514,000.

 

·                  Costs associated with increase in the occupancy, furniture and equipmentcosts for both BOMC and Bancorp not present in the second quarter of 2009.  Of the overall net increase of approximately$98,000, 65% is connected with BOMC and 41% originated in Bancorp, with somecost savings associated with the Bank.

 

·                  Technology and communication costs associated with the operatingrequirements of BOMC accounted for 91% of the noted increase in technology andcommunication expenses.

 

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

 
| ** **                   | ** ** | **For the six months ended** | ** ** | ** **   | ** ** | ** **  | ** ** |
|------------------------------|------------|------------------------------|------------|--------------|------------|-------------|------------|
| ** **                   | ** ** | **June 30,**            | ** ** | ** **   | ** ** | ** **  | ** ** |
| ** **                   | ** ** | **2010**                     | ** ** | **2009**     | ** ** | ** **  | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **(dollars in thousands)**   | ** ** | **Variance** | ** ** |
| ** **                   | ** ** | **(Unaudited)**              | ** ** | **Dollars**  | ** ** | **Percent** | ** ** |
| Compensation and benefits    |       | $                            | 5,406      |         | $          | 2,127       |       | $ | 3,279 |   | 154.2 | % |
| Occupancy and equipment      |       | 539                          |       | 339          |       | 200         |       | 59.0 | % |
| Technology and communication |       | 618                          |       | 274          |       | 344         |       | 125.1 | % |
| Professional fees            |       | 781                          |       | 644          |       | 137         |       | 21.3 | % |
| Administrative expenses      |       | 352                          |       | 160          |       | 192         |       | 120.0 | % |
| Other non-interest expenses  |       | 334                          |       | 230          |       | 104         |       | 45.4 | % |
| Total non-interest expenses  |       | $                            | 8,030      |         | $          | 3,774       |       | $ | 4,256 |   | 112.8 | % |

 

The differences in expense between the six-monthperiods ended June 30, 2010 and June 30, 2009 can be primarilyattributed to the following:

 

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·                  Compensation and benefits increases associated with approximatelyseventeen (17) employees for BOMC not present in the first half of 2009, whichtotaled approximately $2,414,000 and an average of four (4) employees inthe Bancorp also not present in the first half of 2009, which totaledapproximately $1,152,000.

 

·                  Costs associated with increase in the occupancy, furniture and equipmentcosts for both BOMC and Bancorp not present in the first half of 2009.  Of the increase of approximately $200,000,69% is connected with BOMC and 17% originated from Bancorp activities.

 

·                  Costs associated with consulting and accounting services included inprofessional fees required by BOMC accounted for approximately $150,000.

 

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

 

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

 

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***FINANCIAL CONDITION***

 

The Company’s decrease in total assets level to$119.2 million as of June 30, 2010 represents a 21.8% decline, orapproximately $33.2 million, from the total assets level of $152.3 million asof December 31, 2009.  The declineis centered in overnight Federal funds sold, which were temporarily augmentedby both brokered and non-brokered non-locally generated deposits and securedovernight FHLB advances.   Asset balancesas of December 31, 2009 had been augmented to facilitate potentialbusiness opportunities and increase certain borrowing capacity levels presentlytied to quarter-end asset totals.

 

***Investments***

 

Total investments increased by approximately $6.9million from $13.9 million as of December 31, 2009 to $20.7 million as of June 30,2010.  The following schedule provides anoverview of the types of investments on the Company’s books at the date notedand at their carrying value in thousands of dollars:

 
| ** **                                            | ** ** | **June 30, 2010 (unaudited)** | ** ** | **December 31, 2009 (audited)** | ** ** |
|-------------------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| ** **                                            | ** ** | **Amount**                         | ** ** | **Percentage of**                    | ** ** | **Amount** | ** ** | **Percentage of** | ** ** |
| **(dollars  in thousands)**                           | ** ** | **Outstanding**                    | ** ** | **Total**                            | ** ** | **Outstanding** | ** ** | **Total** | ** ** |
| Municipal obligations                                 |       | $                                  | 496        |                                 | 2.4        | % | $ | 494 |   | 3.6 | % |
| Non-mortgage-backed US Government Agency  obligations |       | 2,664                              |       | 12.9                                 | %          | 2,626 |   | 18.9 | % |
| Mortgage-backed securities                            |       | 5,763                              |       | 27.8                                 | %          | 7,328 |   | 52.9 | % |
| Asset-backed securities                               |       | 11,805                             |       | 56.9                                 | %          | 3,407 |   | 24.6 | % |
| Total investments                                     |       | $                                  | 20,728     |                                 | 100.0      | % | $ | 13,855 |   | 100.0 | % |

 

The expected weighted life of the Company’sinvestment portfolio is approximately four and a half years.

Additional information regarding the composition,maturities, and yields of the security portfolio as of June 30, 2010 isfound in Note 4 of the Company’s financial statements included within thisdocument.

 

***Loans***

 

Total gross loans as of June 30, 2010 were$86.4 million, an increase of approximately $6.1 million from $80.3 million at December 31,2009. Outstanding loan balances increased in all categories, with the most monetarygrowth occurring in non-construction real estate loans, where the total grew byapproximately $4.3 million or 10.7%.

 

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

 
| ** **                       | ** ** | **June 30, 2010 (unaudited)** | ** ** | **December 31, 2009 (audited)** | ** ** |
|----------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| ** **                       | ** ** | **Amount**                         | ** ** | **Percentage of**                    | ** ** | **Amount** | ** ** | **Percentage of** | ** ** |
| **(unaudited)**                  | ** ** | **Outstanding**                    | ** ** | **Total**                            | ** ** | **Outstanding** | ** ** | **Total** | ** ** |
| ** **                       | ** ** | **(Dollars in Thousands)**         | ** ** | **(Dollars in Thousands)**           | ** ** |
| Commercial loans                 |       | $                                  | 27,562     |                                 | 31.9       | % | $ | 26,520 |   | 33.0 | % |
| Real estate loans                |       | 44,889                             |       | 52.0                                 | %          | 40,566 |   | 50.5 | % |
| Real estate - construction       |       | 6,180                              |       | 7.1                                  | %          | 5,656 |   | 7.1 | % |
| Other loans                      |       | 7,750                              |       | 9.0                                  | %          | 7,516 |   | 9.4 | % |
| Total Loans                      |       | 86,381                             |       | 100.0                                | %          | 80,258 |   | 100.0 | % |
|                             |       |                               |       |                                 |       |   |   |   |   |
| Add: Purchase Premium            |       | 25                                 |       |                                 |       | 30 |   |   |   |
| Add: Unamortized Costs           |       | 84                                 |       |                                 |       | 81 |   |   |   |
| Less: Deferred Fees              |       | (222                               | )          |                                 |       | (253 | ) |   |   |
| Less - Allowance for loan losses |       | (1,693                             | )          |                                 |       | (1,202 | ) |   |   |
| Net loans                        |       | $                                  | 84,575     |                                 |       |   | $ | 78,914 |   |   |   |

 

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Of the Bank’s total loans outstanding as of June 30,2010, 27.6% were due in one year or less, 33.8% were due in one to five years,and 38.5% were due after five years.  Asis customary in the banking industry, loans can be renewed by mutual agreementbetween the borrower and the Bank. Because we are unable to accurately estimate the extent to which ourborrowers will renew their loans, the following table is based on contractualmaturities, reflecting gross outstanding loans without consideration ofpurchase premium, deferred fees or deferred costs.

 

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

 
| ** **                               | ** ** | ** **                 | ** ** | **Maturing**    | ** ** | ** **     | ** ** | ** ** | ** ** |
|------------------------------------------|------------|----------------------------|------------|-----------------|------------|----------------|------------|------------|------------|
| ** **                               | ** ** | **Within One**             | ** ** | **One to Five** | ** ** | **After Five** | ** ** | ** ** | ** ** |
| **(unaudited)**                          | ** ** | **Year**                   | ** ** | **Years**       | ** ** | **Years**      | ** ** | **Total**  | ** ** |
|                                     |       | **(Dollars in thousands)** |       |
|                                     |       |                       |       |            |       |           |       |       |       |
| Commercial                               |       | $                          | 16,382     |            | $          | 9,180          |       | $          | 2,000      |   | $ | 27,562 |   |
| Real Estate                              |       | 594                        |       | 17,817          |       | 26,478         |       | 44,889     |       |
| Real Estate-Construction                 |       | 5,121                      |       | 1,059           |       | —         |       | 6,180      |       |
| Other Loans                              |       | 1,787                      |       | 1,153           |       | 4,810          |       | 7,750      |       |
| Total                                    |       | $                          | 23,884     |            | $          | 29,209         |       | $          | 33,288     |   | $ | 86,381 |   |
|                                     |       |                       |       |            |       |           |       |       |       |
| Loans with pre-determined interest rates |       | $                          | 406        |            | $          | 13,949         |       | $          | 4,540      |   | $ | 18,895 |   |
| Loans with floating or adjustable rates  |       | 23,478                     |       | 15,260          |       | 28,748         |       | 67,486     |       |
| Total                                    |       | $                          | 23,884     |            | $          | 29,209         |       | $          | 33,288     |   | $ | 86,381 |   |

 

Of the gross loan dollars outstanding as of June 30,2010, approximately 78.1% had adjustable rates. 61.5% of the loan dollars of these adjustable rate loans have interestrates tied to the prime rate and are subject to changes in the rate indeximmediately when the prime rate is changed.

 

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

* *

*Commercial Loans*

 

TheBank offers a variety of commercial loans, including secured and unsecured termand revolving lines of credit, equipment loans and accounts receivableloans.  As of June 30, 2010,approximately 87.4% of the commercial loans had adjustable rates.  The Bank underwrites secured term loans andrevolving lines of credit primarily on the basis of a borrower’s cash flow andthe ability to service the debt, although we rely on the liquidation of theunderlying collateral as a secondary payment source, where applicable.  Should the borrower default and the Bankforecloses on the assets, we may not be able to recover the full amount of theloan.

 

*Real Estate/ Construction Loans*

 

TheBank’s real estate loans are secured primarily by commercial property,including a significant percentage in multi-family complexes.   Approximately 70.5% of the real estate loansare adjustable during the term of the loan. Approximately 51.9% of the real estate loans have a remaining maturitybetween five and ten years.  As of June 30,2010, the weighted average ratio of the original loan extension to theunderlying value of the property was approximately 53%.  No individual loan to value ratio exceeded78%.

 

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*Other Loans*

 

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

 

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

 

Weenter into and may issue financial instruments with off-balance sheet creditrisk in the normal course of business to meet the financial needs of ourcustomers.  Since inception through June 30,2010, these had been limited to undisbursed commitments to extend credit toboth businesses and individuals. Beginning with the second quarter of 2008, the Bank issued severalletters of credit for the first time. The outstanding balance was approximately $120,000 as of June 30,2010. All commitments noted above were associated with loans and were thereforesubject to the same credit underwriting policies and practices as those usedfor the loans reflected in the financial statements.  When deemed advisable, the Bank obtainscollateral to support such commitments.

 

Commitmentsto extend credit are agreements to lend up to a specific amount to a customeras long as there is no violation of any condition in the contract.  Commitments generally have fixed expirationdates or other termination clauses, which may require payment of a fee.  Since we expect some commitments to expirewithout being drawn upon, the total commitment amounts do not necessarilyrepresent future loans. There wasapproximately $23.2 million in undisbursed loan commitments as of June 30,2010, a decrease of approximately $2.7 million or 10.3% from the December 31,2009 amount of approximately $25.8 million.

 

***Non-Performing Assets***

 

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

 

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

 

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***Deposits and Borrowed Funds***

 

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

 
| ** **                                | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | **Variance** | ** ** |
|-------------------------------------------|------------|-------------------|------------|-----------------------|------------|--------------|------------|
| **(dollars  in thousands)**               | ** ** | **2010**          | ** ** | **2009**              | ** ** | **Dollars**  | ** ** | **Percent** | ** ** |
| ** **                                | ** ** | **(unaudited)**   | ** ** | **(audited)**         | ** ** | ** **   | ** ** | ** ** | ** ** |
| **Deposit Classifications:**              |       |              |       |                  |       |         |       |   |   |
| Noninterest-bearing deposits              |       | $                 | 29,697     |                  | $          | 29,647       |       | $ | 50 |   | 0.17 | % |
| Interest-bearing demand                   |       | 3,343             |       | 4,026                 |       | (683         | )          | -16.96 | % |
| Savings and money market                  |       | 19,745            |       | 17,900                |       | 1,845        |       | 10.31 | % |
| Certificate of deposit $100,000 and over  |       | 29,157            |       | 54,352                |       | (25,195      | )          | -46.36 | % |
| Certificate of deposit less than $100,000 |       | 4,764             |       | 4,995                 |       | (231         | )          | -4.62 | % |
| Total deposits                            |       | $                 | 86,706     |                  | $          | 110,920      |       | $ | (24,214 | ) | -21.83 | % |

 

Asof June 30, 2010, 34.3% of the Company’s deposits werenon-interest-bearing demand deposits, an increase from December 31, 2009at 26.7%.  At June 30, 2010, theBank held no funds in ‘reciprocal brokered funds’ or one-way buy under theCDARS program. Most funds have been placed with the Bank by local depositors atcompetitive rates within the Bank’s marketing area.  While the goal of the Bank is to fund creditcommitments using local funding sources, it is anticipated that some of thefuture funding sources may include additional funds both brokered andnon-brokered.

 

Theoutflow of deposits in the *Certificate of Deposits of$100,000 and over*from the non-renewal of non-local non-brokereddeposits resulted in a decline in the category by approximately $15.2 millionfrom approximately $21.1 million as of December 31, 2009 to approximately$9.2 million as of June 30, 2010 coupled with the return of $16.5 millionof ‘one-way-buy’ funds from the CDARS program.

 

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

 

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

 

Thefollowing table shows the maturity of all of the Bank’s time deposits as of June 30,2010:

 
| **Maturities**                       | ** ** | **Amounts**        | ** ** |
|--------------------------------------|------------|--------------------|------------|
| **(unaudited)**                      | ** ** | **(in thousands)** | ** ** |
| Three months or less                 |       | $                  | 18,769     |   |
| Over three and through twelve months |       | 12,222             |       |
| Over twelve months                   |       | 2,930              |       |
| Total                                |       | $                  | 33,921     |   |

 

TheBank has established borrowing lines with the Federal Home Loan Bank (“FHLB”).  At December 31, 2009, the Bank hadborrowed $12.0 million from the FHLB collateralized by both loans andsecurities.  The average rate that waspaid on FHLB borrowings was 4.36% for the quarter ended December 31,2009.   At June 30, 2010, the Bankhad borrowed $4.5 million from the FHLB collateralized by securities.  The average rate that was paid on FHLBborrowings was 4.39% for the quarter ended June 30, 2010.

 

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

 

The Company maintains an allowance for loan losses (“ALLL”)to provide for potential losses in its loan portfolio.  Additions to the allowance are made bycharges to operating expense in the form of a provision for loan losses.  All loans that are judged to be uncollectiblewill be charged against the allowance, while

 

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recoveries would be credited to the allowance.  We have instituted loan policies designedprimarily for internal use, to adequately evaluate and assess the analysis ofthe risk factors associated with the Bank’s loan portfolio, to enable us toassess such risk factors prior to granting new loans and to assess thesufficiency of the allowance.  We conductan evaluation on the loan portfolio monthly.

 

The calculation of the adequacy of the ALLLnecessarily includes estimates by management applied to known loan portfolioelements.  We employ a 10-point loangrading system in an effort to more accurately track the inherent quality ofthe loan portfolio.  The 10-point systemassigns a value of “1” or “2” to loans that are substantially risk free.  Modest, average and acceptable risk loans areassigned point values of “3”, “4”, and “5”, respectively.  Loans on the watch list are assigned a pointvalue of “6.”   Point values of “7,” “8,”“9” and “10” are assigned, respectively, to loans classified as specialmention, substandard, doubtful and loss. Using these risk factors, managementcontinues the analysis of the general reserves applying quantitative factorsbased upon different risk scenarios.

 

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

 

***Regulatory Capital***

 

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

 

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

 

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

 

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

 
| ** **                            | ** ** | ** **         | ** ** | **To Be Adequately** | ** ** | **To Be Well**  | ** ** |
|---------------------------------------|------------|--------------------|------------|----------------------|------------|-----------------|------------|
| ** **                            | ** ** | **Actual**         | ** ** | **Capitalized**      | ** ** | **Capitalized** | ** ** |
| **(unaudited)**                       | ** ** | **Amount**         | ** ** | **Ratio**            | ** ** | **Amount**      | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| ** **                            |       | **(in thousands)** |       |
| **Company**                           |       |               |       |                 |       |            |       |   |   |   |   |   |   |
| Total Capital (risk-weighted assets)  |       | $                  | 27,109     |                 | 27.4       | %               | $          | 7,928 |   | 8 | % | $ | 9,910 |   | 10 | % |
| Tier 1 Capital (risk-weighted assets) |       | $                  | 25,864     |                 | 26.1       | %               | $          | 3,964 |   | 4 | % | $ | 5,946 |   | 6 | % |
| Tier 1 Capital (average assets)       |       | $                  | 25,864     |                 | 19.9       | %               | $          | 5,193 |   | 4 | % | $ | 6,491 |   | 5 | % |
|                                  |       |               |       |                 |       |            |       |   |   |   |   |   |   |
| **Bank**                              |       |               |       |                 |       |            |       |   |   |   |   |   |   |
| Total Capital (risk-weighted assets)  |       | $                  | 22,834     |                 | 23.6       | %               | $          | 7,752 |   | 8 | % | $ | 9,690 |   | 10 | % |
| Tier 1 Capital (risk-weighted assets) |       | $                  | 21,616     |                 | 22.3       | %               | $          | 3,876 |   | 4 | % | $ | 5,814 |   | 6 | % |
| Tier 1 Capital (average assets)       |       | $                  | 21,616     |                 | 17.7       | %               | $          | 4,884 |   | 4 | % | $ | 6,105 |   | 5 | % |

 

***Liquidity and Liquidity Management***

 

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

 

Wealso have had liquidity as a net seller of overnight federal funds at a levelthat would cushion in part any unexpected increase in demand for loans ordecrease in funds deposited.  During thethree-month period ended June 30, 2010, we had an average balance of $8.2million in overnight federal funds sold representing approximately 6% of ouraverage assets.   This ratio is above theminimum guideline of 3% established in the Bank’s liquidity policy.

 

Tomeet liquidity needs, the Company maintains a portion of its funds in cashdeposits in other banks, federal funds and investment securities.  As of December 31, 2009, liquid assets(including cash, federal funds sold, interest-bearing deposits in otherfinancial institutions and available-for-sale investment securities that havenot been pledged as collateral), as a percentage of the Company’s deposits,were 57%.  As of June 30, 2010,liquid assets as a percentage of the Company’s deposits, although declining,remained acceptable at 28% due primarily to the reduction in the Federal fundssold, associated with the reduction of the CDARS deposits, FLHB advances, andnon-local deposits.

 

Whileliquidity has not been a major concern in either 2010 or 2009, management hasestablished and is seeking to establish secondary sources of liquidity.  The Bank maintains a line of credit totaling$3 million with a correspondent bank for the purchase of overnight federalfunds.  The line is subject toavailability of funds and has restrictions as to the number of days used duringdefined periods of time.  Another methodthat the Bank currently has available for acquiring additional deposits is throughthe acceptance of “brokered deposits” (defined to include not only depositsacquired with deposit brokers, but also deposits bearing effective yield morethan 75 basis points above the prevailing market rates), typically attractinglarge certificates of deposits at high interest rates.  The Bank had a no “brokered deposits” as of June 30,2010 but held $16.5 million as of December 31, 2009, all of which wasreturned by the end of January 2010. The Bank has established a creditline with the Federal Home Loan Bank of San Francisco and has outstanding as ofJune 30, 2010 a five-year fixed rate advance of $4.5 million at 4.38%,which was established to stabilize the funding source of certain longer-termassets.

 

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

 

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

 

***Credit Risk***

 

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

 

***Interest Rate Risk***

 

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

 

The potential impact of interest rate risk issignificant because of the liquidity and capital adequacy consequences thatreduced earnings or losses may imply. While we recognize and accept that interest rate risk is a routine partof banking operations, the objective of interest rate risk management is tomeasure, monitor and control exposure of net interest income to excessive risksassociated with interest rate movements.

 

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

 

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

 
| **Earnings at Risk**  | ** ** |
|-----------------------|------------|
| **(unaudited)**       | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Rate**              | ** ** | **Maximum** | ** ** | **% (Loss) Gain** | ** ** |
| **Shock**             | ** ** | **Policy** | ** ** | **in Net Interest** | ** ** |
| **(in basis points)** | ** ** | **Guideline** | ** ** | **Income** | ** ** |
| -300                  |       | -15 | % | -1.9 | % |
| -200                  |       | -10 | % | -1.1 | % |
| -100                  |       | -5 | % | -0.4 | % |
| +100                  |       | -5 | % | 5.5 | % |
| +200                  |       | -10 | % | 8.8 | % |
| +300                  |       | -15 | % | 11.8 | % |

 

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

 

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

 
| **Market Value of Equity** | ** ** |
|----------------------------|------------|
| **(unaudited)**            | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Rate**                   | ** ** | **Maximum** | ** ** | **% (Loss) Gain** | ** ** |
| **Shock**                  | ** ** | **Policy** | ** ** | **in Market** | ** ** |
| **(in basis points)**      | ** ** | **Guideline** | ** ** | **Value of Equity** | ** ** |
| -300                       |       | -30 | % | 11.6 | % |
| -200                       |       | -20 | % | 3.6 | % |
| -100                       |       | -10 | % | 1.2 | % |
| +100                       |       | -10 | % | -1.3 | % |
| +200                       |       | -20 | % | -3.5 | % |
| +300                       |       | -30 | % | -3.1 | % |

 

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

 

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

 

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

 

The Company maintains disclosure controls andprocedures (as defined in the Exchange Act Rule 13a-15(e) under theSecurities Exchange Act of 1934, as amended (the Exchange Act”)) that aredesigned to ensure that information required to be disclosed in our reportsfiled or submitted under the Exchange Act is recorded, processed, summarizedand reported within the time periods specified in the Securities and ExchangeCommission’s rules and forms, and that such information is accumulated andcommunicated to management, including the Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosures.

 

In designing and evaluating the disclosure controlsand procedures, management recognizes that any controls and procedures, nomatter how well-designed and operated, can provide reasonable assurance only ofachieving the desired control objectives, and management necessarily isrequired to apply its

 

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judgment in weighing the costs and benefits ofpossible new or different controls and procedures.  Limitations are inherent in all controlsystems, so no evaluation of controls can provide absolute assurance that allcontrol issues and any fraud within the Company have been detected.

 

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

 

During the quarter ended June 30, 2010, there wereno significant changes in our internal control over financial reporting (asdefined in Exchange Act Rule 13a-15(f)) that have materially affected, orare reasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

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**PART II — OTHER INFORMATION**

 

***Item 1. — Legal Proceedings***

 

The Company is not a party to any material legalproceedings.

 

***Item 1A. — Risk Factors***

 

As a smaller reporting company, the Company is notrequired to provide the information required by this item as a part of the Form 10-Q.

 

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

 

None.

 

***Item 3 — Defaults upon Senior Securities***

 

Not Applicable.

 

***Item 4 — (Removed and Reserved)***

 

***Item 5 — Other Information***

 

***Item 6 — Exhibits***

 
| **Exhibit  Number** | ** ** | **Index to Exhibits**                                                                                                                                                           |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                |       | Form of Stock Option Agreement pursuant to  the Manhattan Bancorp 2010 Equity Incentive Plan (1)                                                                           |
| 10.2                |       | Form of Restricted Stock Agreement pursuant  to the Manhattan Bancorp 2010 Equity Incentive Plan (2)                                                                       |
| 31.1                |       | Certification of the Chief Executive Officer  pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities  Exchange Act of 1934, as amended                        |
| 31.2                |       | Certification of the Chief Financial Officer  pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities  Exchange Act of 1934, as amended                        |
| 32.1                |       | Certification of the President and Chief Executive  Officer pursuant to 18 U.S.C. Section 1350, as amended pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2                |       | Certification  of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  amended pursuant to Section 906 of the Sarbanes-Oxley Act of 2002               |

 

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(1)          The information required bythis exhibit is incorporated by reference to Exhibit 10.2 to the CurrentReport on Form 8-K of the Company filed on June 2, 2010.

 

(2)          The information required bythis exhibit is incorporated by reference to Exhibit 10.3 to the CurrentReport on Form 8-K of the Company filed on June 2, 2010.

 

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**SIGNATURES**

 

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

 
|   |                  | **MANHATTAN BANCORP**          |
|--------|-----------------------|--------------------------------|
|   |                  | ** **                     |
|   |                  |                           |
| Date:  | August 13,  2010 | /s/  Deepak Kumar              |
|   |                  | Deepak  Kumar                  |
|   |                  | President  and                 |
|   |                  | Chief  Executive Officer       |
|   |                  | (Principal  Executive Officer) |
|   |                  |                           |
|   |                  |                           |
| Date:  | August 13,  2010 | /s/  Dean Fletcher             |
|   |                  | Dean  Fletcher                 |
|   |                  | Executive  Vice President and  |
|   |                  | Chief  Financial Officer       |
|   |                  | (Principal  Financial and      |
|   |                  | Accounting  Officer)           |

 

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