Table of Contents

** **

 

** **

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

**Washington, D.C. 20549**

** **

# **FORM 10-Q**

# ** **

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

 

**For the quarterly period ended March 31, 2009**

** **

| **o** | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT** |
|-------|--------------------------------------------------------------------------------|

 

**For the transition period from           to           **

 

**Commission File Number 333-140448**

 

**MANHATTAN BANCORP**

(Exact name of smaller reporting company as specified in its charter)

 

| **California**                                      | ** ** | **20-5344927**      |
|-----------------------------------------------------|------------|---------------------|
| (State or other jurisdiction of                     |       | (I.R.S. Employer    |
| incorporation or organization)                      |       | Identification No.) |
|                                                |       |                |
| **2141 Rosecrans Avenue, Suite 1160**          |
| **El Segundo, California 90245**                    |
| (Address of principal executive offices) (Zip Code) |
|                                                |
| Issuer’s telephone number: **(310) 606-8000**  |

 

Indicate by a check mark whether the registrant (1) filed allreports required to be filed by Section 13 or 15(d) of the ExchangeAct during the past 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether or not registrant hassubmitted electronically and posted on its corporate Website, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405or Regulation S-T during the preceding 12 months (or for such shorter periodthat the registrant was required to submit and post such files).  o  Yes   o  No (not yet applicable to registrant)

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See the definition of “large accelerated filer,” “accelerated filer”and “smaller reporting 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) |   |                        |

 

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

 

Asof April 30, 2009, there were 3,987,631 shares of the issuer’s commonstock outstanding.

 

 

 

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Table ofContents

 

**Manhattan Bancorp**

**QUARTERLY REPORT ON FORM 10-Q**

**FOR**

**THE QUARTER ENDED MARCH 31, 2009**

** **

**TABLE OF CONTENTS**

 
| ** **                         | ** **                                                                                  | **PAGE** |
|------------------------------------|---------------------------------------------------------------------------------------------|----------|
|                               |                                                                                        |     |
| PART I- FINANCIAL INFORMATION |                                                                                        |
|                               |                                                                                        |
| Item 1.                            | FINANCIAL  STATEMENTS (Unaudited, except for Balance Sheet as of 12/31/2008)                |     |
|                               |                                                                                        |     |
|                               | 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 | 15       |
|                               |                                                                                        |     |
| Item  3.                           | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                 | 28       |
|                               |                                                                                        |     |
| Item  4T.                          | CONTROLS AND  PROCEDURES                                                                    | 30       |
|                               |                                                                                        |     |
| PART II  - OTHER INFORMATION  |                                                                                        |
|                               |                                                                                        |
| Item 1.                            | LEGAL PROCEEDINGS                                                                           | 31       |
|                               |                                                                                        |     |
| Item 1A.                           | RISK FACTORS                                                                                | 31       |
|                               |                                                                                        |     |
| Item  2.                           | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                | 31       |
|                               |                                                                                        |     |
| Item  3.                           | DEFAULTS ON  SENIOR SECURITIES                                                              | 31       |
|                               |                                                                                        |     |
| Item  4.                           | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                        | 31       |
|                               |                                                                                        |     |
| Item 5.                            | OTHER INFORMATION                                                                           | 31       |
|                               |                                                                                        |     |
| Item 6.                            | EXHIBITS                                                                                    | 31       |
|                               |                                                                                        |     |
| SIGNATURES                         | 32                                                                                          |

 

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***PART I –FINANCIAL INFORMATION***

 

***Item 1 –Financial Information***

 

**Manhattan Bancorp and Subsidiary**

**ConsolidatedBalance Sheets**

 
| ** **                                                                                                                 | ** ** | **(Unaudited)**         | ** ** | ** **                 | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                                                                                                 | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
| **Assets**                                                                                                                 | ** ** | ** **              | ** ** | ** **                 | ** ** |
| Cash and due from banks                                                                                                    |       | $                       | 15,848,489 |                       | $          | 19,710,235 |   |
| Federal funds sold                                                                                                         |       | —                  |       | —                     |       |
| Total cash and cash equivalents                                                                                            |       | 15,848,489              |       | 19,710,235                 |       |
| Time deposits-other financial institutions                                                                                 |       | 9,010,000               |       | 4,198,000                  |       |
| Investments securities-available for sale                                                                                  |       | 7,083,572               |       | 7,413,824                  |       |
| Investments securities-held to maturity                                                                                    |       | 991,380                 |       | 990,533                    |       |
|                                                                                                                       |       |                    |       |                       |       |
| Loans                                                                                                                      |       | 61,958,935              |       | 57,441,936                 |       |
| Allowance for loan losses                                                                                                  |       | (1,149,000              | )          | (975,000                   | )          |
| Net loans                                                                                                                  |       | 60,809,935              |       | 56,466,936                 |       |
|                                                                                                                       |       |                    |       |                       |       |
| Property and equipment, net                                                                                                |       | 1,284,730               |       | 1,357,276                  |       |
| Stock in other financial institutions                                                                                      |       | 1,726,200               |       | 1,445,050                  |       |
| Accrued interest receivable and other assets                                                                               |       | 466,604                 |       | 457,841                    |       |
|                                                                                                                       |       |                    |       |                       |       |
| Total assets                                                                                                               |       | $                       | 97,220,910 |                       | $          | 92,039,695 |   |
|                                                                                                                       |       |                    |       |                       |       |
| **Liabilities and Stockholders’ Equity**                                                                              |       |                    |       |                       |       |
| Deposits:                                                                                                                  |       |                    |       |                       |       |
| Non-interest bearing demand                                                                                                |       | $                       | 15,423,473 |                       | $          | 15,379,258 |   |
| Interest bearing:                                                                                                          |       |                    |       |                       |       |
| Demand                                                                                                                     |       | 1,413,893               |       | 1,734,425                  |       |
| Savings and money market                                                                                                   |       | 11,109,781              |       | 8,226,974                  |       |
| Certificates of deposit equal to or greater than $100,000                                                                  |       | 19,109,100              |       | 18,144,355                 |       |
| Certificates of deposit less than $100,000                                                                                 |       | 4,835,015               |       | 4,505,838                  |       |
| Total deposits                                                                                                             |       | 51,891,262              |       | 47,990,850                 |       |
| FHLB advances                                                                                                              |       | 11,500,000              |       | 9,500,000                  |       |
| Accrued interest payable and other liabilities                                                                             |       | 585,286                 |       | 261,317                    |       |
| Total liabilities                                                                                                          |       | 63,976,548              |       | 57,752,167                 |       |
|                                                                                                                       |       |                    |       |                       |       |
| Commitments and contingencies                                                                                              |       | —                  |       | —                     |       |
|                                                                                                                       |       |                    |       |                       |       |
| Stockholders’ equity                                                                                                  |       |                    |       |                       |       |
| Serial preferred stock-no par value; 10,000,000 shares authorized: issued  and outstanding, 1,700 in 2008 and none in 2007 |       | 1,564,538               |       | 1,558,517                  |       |
| Common stock-no par value; 10,000,000 shares authorized; issued and  outstanding, 3,987,631 in 2008 and 2,487,631 in 2007  |       | 38,977,282              |       | 38,977,282                 |       |
| Common stock warrant                                                                                                       |       | 114,396                 |       | 120,417                    |       |
| Additional paid in capital                                                                                                 |       | 1,153,888               |       | 957,825                    |       |
| Unrealized gain on available-for-sale securities                                                                           |       | 317,945                 |       | 307,488                    |       |
| Accumulated deficit                                                                                                        |       | (8,883,687              | )          | (7,634,001                 | )          |
|                                                                                                                       |       |                    |       |                       |       |
| Total stockholders’ equity                                                                                            |       | 33,244,362              |       | 34,287,528                 |       |
|                                                                                                                       |       |                    |       |                       |       |
| Total liabilities and stockholders’ equity                                                                            |       | $                       | 97,220,910 |                       | $          | 92,039,695 |   |

 

Theaccompanying notes are an integral part of this financial statement.

 

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**Manhattan Bancorp and Subsidiary**

**Consolidated Statements of Operations**

**(Unaudited)**

 
| ** **                                                        | ** ** | **For the three months** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                        | ** ** | **ended March 31,** | ** ** |
| ** **                                                        | ** ** | **2009**                 | ** ** | **2008** | ** ** |
| **Interest income**                                               |       |                     |       |   |   |
| Interest and fees on loans                                        |       | $                        | 795,176    |   | $ | 386,655 |   |
| Interest on investment securities                                 |       | 101,815                  |       | 89,438 |   |
| Interest on federal funds sold                                    |       | 11,371                   |       | 58,378 |   |
| Interest on time deposits-other financial institutions            |       | 42,437                   |       | 25,539 |   |
|                                                              |       |                     |       |   |   |
| Total interest income                                             |       | 950,799                  |       | 560,010 |   |
|                                                              |       |                     |       |   |   |
| **Interest expense**                                              |       |                     |       |   |   |
| NOW, money market and savings                                     |       | 33,255                   |       | 26,097 |   |
| Time deposits                                                     |       | 133,592                  |       | 103,868 |   |
| FHLB advances                                                     |       | 49,322                   |       | — |   |
|                                                              |       |                     |       |   |   |
| Total interest expense                                            |       | 216,169                  |       | 129,965 |   |
|                                                              |       |                     |       |   |   |
| Net interest income                                               |       | 734,630                  |       | 430,045 |   |
|                                                              |       |                     |       |   |   |
| Provision for loan losses                                         |       | 174,000                  |       | 166,000 |   |
|                                                              |       |                     |       |   |   |
| Net interest income after provision for loan losses               |       | 560,630                  |       | 264,045 |   |
|                                                              |       |                     |       |   |   |
| **Non-interest income**                                           |       | 17,281                   |       | 12,901 |   |
|                                                              |       |                     |       |   |   |
| **Non-interest expense**                                          |       |                     |       |   |   |
| Compensation and benefits                                         |       | 1,014,680                |       | 948,033 |   |
| Occupancy and equipment                                           |       | 172,393                  |       | 157,675 |   |
| Technology and communication                                      |       | 137,160                  |       | 124,831 |   |
| Professional and administrative expenses                          |       | 384,204                  |       | 106,033 |   |
| Other non-interest expenses                                       |       | 102,632                  |       | 107,135 |   |
|                                                              |       |                     |       |   |   |
| Total non-interest expenses                                       |       | 1,811,069                |       | 1,443,707 |   |
|                                                              |       |                     |       |   |   |
| Loss before income taxes                                          |       | (1,233,158               | )          | (1,166,761 | ) |
|                                                              |       |                     |       |   |   |
| Provision for income taxes                                        |       | —                   |       | — |   |
|                                                              |       |                     |       |   |   |
| Net loss                                                          |       | $                        | (1,233,158 | ) | $ | (1,166,761 | ) |
|                                                              |       |                     |       |   |   |
| Weighted average number of shares outstanding (basic and diluted) |       | 3,987,631                |       | 2,487,631 |   |
|                                                              |       |                     |       |   |   |
| Basic and diluted loss per share                                  |       | $                        | (0.31      | ) | $ | (0.47 | ) |

 

Theaccompanying notes are an integral part of this financial statement.

 

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**Manhattan Bancorp and Subsidiary**

**Consolidated Statement ofStockholders’ Equity (Unaudited)**

**March 31, 2009 and 2008**

 
| ** **                                | ** ** | ** **    | ** ** | ** **        | ** ** | ** ** | ** ** | ** **   | ** ** | ** **        | ** ** | ** **         | ** ** | ** **        | ** ** | **Accumulated**    | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|---------------|------------|-------------------|------------|------------|------------|--------------|------------|-------------------|------------|--------------------|------------|-------------------|------------|--------------------|------------|------------|------------|
| ** **                                | ** ** | ** **    | ** ** | ** **        | ** ** | ** ** | ** ** | **Common**   | ** ** | **Additional**    | ** ** | ** **         | ** ** | ** **        | ** ** | **Other**          | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Preferred** | ** ** | **Common  Stock** | ** ** | **Stock**  | ** ** | **Paid-in**  | ** ** | **Comprehensive** | ** ** | **Accumulated**    | ** ** | **Comprehensive** | ** ** | ** **         | ** ** |
| ** **                                | ** ** | **Stock**     | ** ** | **Shares**        | ** ** | **Amount** | ** ** | **Warrants** | ** ** | **Capital**       | ** ** | **Income  (Loss)** | ** ** | **Deficit**       | ** ** | **Income  (Loss)** | ** ** | **Total**  | ** ** |
| **Balance  at December 31, 2007**    |       | $             | —     |              | 2,487,631  |       | $          | 24,078,828   |       | $                 | —     |               | $          | 266,908           |       | $                  | —     |       | $          | (3,214,960 | ) | $ | 58,158 |   | $ | 21,188,934 |   |
| Share-based  compensation expense         |       |          |       |              |       |       |       |         |       | 173,257           |       |               |       |              |       |               |       | 173,257    |       |
| Unrealized gain  on investment securities |       |          |       |              |       |       |       |         |       |              |       | 118,176            |       |              |       | 118,176            |       | 118,176    |       |
| Net loss                                  |       |          |       |              |       |       |       |         |       |              |       | (1,166,761         | )          | (1,166,761        | )          |               |       | (1,166,761 | )          |
| Total  comprehensive loss                 |       |          |       |              |       |       |       |         |       |              |       | $                  | (1,048,585 | )                 |       |               |       |       |       |   |
| **Balance  at March 31, 2008**       |       | $             | —     |              | 2,487,631  |       | $          | 24,078,828   |       | $                 | —     |               | $          | 440,165           |       |               |       | $          | (4,381,721 | ) | $ | 176,334 |   | $ | 20,313,606 |   |
|                                      |       |          |       |              |       |       |       |         |       |              |       |               |       |              |       |               |       |       |       |
| **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    |       | 6,021         |       |              |       |       |       | (6,021       | )          |              |       |               |       |              |       |               |       | —     |       |
| Dividend on  preferred stock              |       |          |       |              |       |       |       |         |       |              |       |               |       | (16,528           | )          |               |       | (16,528    | )          |
| Share-based  compensation expense         |       |          |       |              |       |       |       |         |       | 196,063           |       |               |       |              |       |               |       | 196,063    |       |
| Unrealized gain  on investment securities |       |          |       |              |       |       |       |         |       |              |       | 10,457             |       |              |       | $                  | 10,457     |       | 10,457     |   |
| Net loss                                  |       |          |       |              |       |       |       |         |       |              |       | (1,233,158         | )          | $                 | (1,233,158 | )                  |       |       | (1,233,158 | ) |
| Total  comprehensive loss                 |       |          |       |              |       |       |       |         |       |              |       | $                  | (1,222,701 | )                 |       |               |       |       |       |   |
| **Balance  at March 31, 2009**       |       | $             | 1,564,538  |              | 3,987,631  |       | $          | 38,977,282   |       | $                 | 114,396    |               | $          | 1,153,888         |       |               |       | $          | (8,883,687 | ) | $ | 317,945 |   | $ | 33,244,362 |   |

 

Theaccompanying notes are an integral part of this financial statement.

 

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**Manhattan Bancorp and Subsidiary**

**Consolidated Statements of CashFlows**

**(Unaudited)**

 
| ** **                                                          | ** ** | **For the**             | ** ** | **For the**             | ** ** |
|---------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                          | ** ** | **three months**        | ** ** | **three months**        | ** ** |
| ** **                                                          | ** ** | **ended**               | ** ** | **ended**               | ** ** |
| ** **                                                          | ** ** | **March 31, 2009** | ** ** | **March 31, 2008** | ** ** |
| **Cash flows from operating activities**                            |       |                    |       |                    |       |
| Net loss                                                            |       | $                       | (1,249,686 | )                       | $          | (1,166,761 | ) |
| Depreciation and amortization                                       |       | 76,681                  |       | 67,195                  |       |
| Provision for loan losses                                           |       | 174,000                 |       | 166,000                 |       |
| Share-based compensation                                            |       | 196,063                 |       | 173,257                 |       |
| (Increase) in accrued interest receivable and other assets          |       | (14,330                 | )          | (62,679                 | )          |
| Increase in accrued interest payable and other liabilities          |       | 323,969                 |       | 36,300                  |       |
|                                                                |       |                    |       |                    |       |
| Net cash used in operating activities                               |       | (493,303                | )          | (786,688                | )          |
|                                                                |       |                    |       |                    |       |
| **Cash flows from investing activities**                            |       |                    |       |                    |       |
| Net (increase) in loans                                             |       | (4,516,999              | )          | (13,994,298             | )          |
| (Increase) decrease in time deposits - other financial institutions |       | (4,812,000              | )          | 1,000,000               |       |
| Proceeds from repayment and maturities from investment securities   |       | 345,429                 |       | 220,688                 |       |
| Deposit pending purchase of FHLB stock                              |       | —                  |       | (138,300                | )          |
| Purchase of stock in other financial institutions                   |       | (281,150                | )          | —                  |       |
| Purchase of premises and equipment                                  |       | (4,135                  | )          | (23,690                 | )          |
|                                                                |       |                    |       |                    |       |
| Net cash used in investing activities                               |       | (9,268,855              | )          | (12,935,600             | )          |
|                                                                |       |                    |       |                    |       |
| **Cash flows from financing activities**                            |       |                    |       |                    |       |
| Net increase (decrease) in:                                         |       |                    |       |                    |       |
| Demand deposits                                                     |       | 44,215                  |       | 3,186,961               |       |
| Interest bearing demand deposits                                    |       | (320,532                | )          | 328,732                 |       |
| Savings and money market deposits                                   |       | 2,882,807               |       | (901,590                | )          |
| Certificates of deposit equal to or greater than $100,000           |       | 964,745                 |       | 5,245,610               |       |
| Certificates of deposit less than $100,000                          |       | 329,177                 |       | 2,138,645               |       |
| Increase from borrowings                                            |       | 2,000,000               |       | —                  |       |
|                                                                |       |                    |       |                    |       |
| Net cash provided by financing activities                           |       | 5,900,412               |       | 9,998,358               |       |
|                                                                |       |                    |       |                    |       |
| Net decrease in cash and cash equivalents                           |       | (3,861,746              | )          | (3,723,930              | )          |
|                                                                |       |                    |       |                    |       |
| **Cash and cash equivalents at beginning of period**                |       | 19,710,235              |       | 8,963,333               |       |
|                                                                |       |                    |       |                    |       |
| **Cash and cash equivalents at end of period**                      |       | $                       | 15,848,489 |                    | $          | 5,239,403 |   |
|                                                                |       |                    |       |                    |       |
| **Supplementary information**                                       |       |                    |       |                    |       |
|                                                                |       |                    |       |                    |       |
| Interest paid on deposits                                           |       | $                       | 166,938    |                    | $          | 120,039 |   |
|                                                                |       |                    |       |                    |       |
| Income taxes paid                                                   |       | $                       | —     |                    | $          | — |   |

 

Theaccompanying notes are an integral part of this financial statement.

 

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**MANHATTAN BANCORP**

**NOTES TOFINANCIAL STATEMENTS**

**MARCH 31, 2009**

 

**Note 1.****                           ****CONSOLIDATED FINANCIAL STATEMENTS**

 

The accompanying unaudited condensed consolidatedfinancial statements of Manhattan Bancorp (the “Bancorp”) and its wholly-ownedsubsidiary, Bank of Manhattan, N.A. (the “Bank”), together referred to as the “Company”have been prepared in accordance with the instructions to Form 10-Q and Article 8of Regulation S-X.  Accordingly, certaininformation and notes required by accounting principles generally accepted inthe United States of America for annual financial statements are not includedherein.  In the opinion of Management,all adjustments considered necessary for a fair presentation of results for theinterim periods presented have been included. These interim condensed consolidated financial statements should be readin conjunction with the financial statements and related notes contained in theCompany’s 2008 Annual Report on Form 10-K.

 

The preparation of condensed consolidated financialstatements in conformity with the accounting principles generally accepted inthe United States of America requires Management to make estimates andassumptions.  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**

 

FAIR VALUE MEASUREMENTS: In September 2006,the FASB issued Statement of Financial Standards No. 157*, “Fair Value Measurements.” *SFAS No. 157 definesfair value, establishes a framework for measuring fair value under accountingprinciples generally accepted in the United States of America, and expandsdisclosures about fair value measurements. The Company adopted SFAS No. 157as of January 1, 2008 and it did not have a significant impact on theCompany’s financial statements.

 

InFebruary 2007, the FASB issued SFAS No. 159, “*The FairValue Option for Financial Assets and Financial Liabilities-Including anAmendment of SFAS 115.” *SFAS No. 159permits**an entity to choose to measurefinancial instruments and certain other items at fair value.  Most of the provisions of SFAS No. 159are elective; however the amendment of SFAS No. 115, “*Accountingfor Certain Investments in Debt and Equity Securities,”*applies toall entities with available for sale or trading securities.  For financial instruments elected to beaccounted for at fair value, an entity will report the unrealized gains andlosses in earnings.  SFAS No. 159 iseffective as of the beginning of an entity’s first fiscal year that beginsafter November 15, 2007.  TheCompany did not apply SFAS No. 159 to any financial instruments other thanon investment securities available for sale.

 

InFebruary 2008, the FASB issued FASB Staff Position FAS No. 157-1, “*Application of FASB Statement No. 17 and Other AccountingPronouncements That Address Fair Value Measurements for Purposes of LeaseClassification or Measurement Under Statement 13,*” and FSP SFAS No. 157-2,“*Effective Date of FASB Statement No. 157.”*  FSP FAS 157-1 removes leasing from the scopeof SFAS No. 157, “*Fair Value Measurements*.”FSP FAS 157-2 delays the effective date of SFAS No. 157 from 2008 to 2009for all non-financial assets and liabilities, except those that are recognizedor disclosed at fair value in the

 

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financialstatements on a recurring basis (at least annually).  Additionally, in accordance with FSP FAS157-2 the Company delayed the application of SFAS No. 157 fornon-financial assets and non-financial liabilities until January 1,2009.  The application had no effect onthe Company’s financial position, results of operations, or cash flows.

 

InOctober 2008, the FASB issued FSP FAS 157-3, *“Determiningthe Fair Value of a Financial Asset When the Market for That Asset is NotActive.” *FSP FAS 157-3clarifies the application of SFAS No. 157 in a market that is not activeand provides an example to illustrate certain key considerations in thedetermination of fair value of a financial asset when the market for that assetis not active.  This FSP become effectiveimmediately upon issuance.  The adoptionof FSP FAS 157-3 did not impact the Company’s financial statements.

 

In April 2009, the FASBissued FSP FAS 157-4, *“Determining Whether aMarket Is Not Active and a Transaction Is Not Distressed,”*FSP FAS157-4 provides guidelines for making fair value measurements more consistentwith the principles presented in SFAS No. 157. FSP FAS 157-4 providesadditional authoritative guidance in determining whether a market is active orinactive, and whether a transaction is distressed, is applicable to all assetsand liabilities (i.e. financial and nonfinancial) and will require enhanceddisclosures. The standard is effective for periods ending after June 15,2009. The Company is currently determining the impact the standard will have ontheir financial statements.

 

In April 2009, the FASBissued FSP FAS 115-2, FAS 124-2, and EITF 99-20-2, *“Recognition and Presentation of Other-Than-Temporary Impairments,”*TheseFSPs amend FASB Statements No. 115, *Accountingfor Certain Investments in Debt and Equity Securities*, No. 124,*Accounting for Certain Investments Held byNot-for-Profit Organizations*, and EITF Issue No. 99-20, *“Recognition of Interest Income and Impairment onPurchased Beneficial Interests and Beneficial Interests That Continue to BeHeld by a Transferor in Securitized Financial Assets,”*to make theother-than-temporary impairment guidance more operational and to improve thepresentation of other-than-temporary impairments in the financial statements.This statement applies to other-than-temporary impairments of debt and equitysecurities and requires a company to assert that (a) it does not have theintent to sell the security in question and (b) it is more likely than notthat it will not have to sell the security in question before recovery of itscost basis to avoid an impairment being considered other-than-temporary. ThisFSP also changes the amount of impairment losses recognized in earnings. Underthis FSP impairments are separated into two components: (i) the amount ofimpairments related to credit losses and (ii) and the amount related toother factors. The amount of impairment related to credit losses is reflectedas a charge to earnings, while the amount deemed to be related to other factorsis reflected as an adjustment to shareholders’ equity through other comprehensiveincome. The Company is currently determining the impact the standard will haveon their financial statements.

 

In April 2009 the FASBissued FSP FAS 107-1/Accounting Principles Board (“APB”) 28-1, *“Interim Disclosures about Fair Value of FinancialInstrument.*”  FSP FAS107-1/APB 28-1, amends FASB Statement No. 107, *“Disclosures about Fair Value of Financial Instruments,”*torequire disclosures about fair value of financial instruments in interim aswell as in annual financial statements. This FSP also amends APB Opinion No. 28,*“Interim Financial Reporting,”*torequire those disclosures in all interim financial statements. The Company iscurrently determining the impact the standard will have on their financialstatements.

 

BUSINESSCOMBINATIONS:  In December 2007, theFASB issued SFAS No. 141(R), *“Business Combinations”*(“SFASNo. 141 (R)”) and SFAS No. 160, “*Accounting and Reportingof Noncontrolliing Interest in Consolidated Statements, an Amendment of ARB No. 51”*(“SFAS No. 160”).  SFAS No. 141(R) isrequired to be adopted concurrently with SFAS No. 160 and is effective forbusiness combination transactions for which the acquisition date is on or afterthe beginning of the first annual

 

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reportingperiod beginning on or after December 31, 2008.  This will be effective for the Company forthe calendar year beginning January 1, 2009.  SFAS No. 141(R) and SFAS No. 160are effective prospectively; however, the reporting provisions of SFAS No. 160are effective retroactively.  The Companydoes not currently have any business combinations scheduled and the Company’sonly consolidated subsidiary is wholly owned by the Company.  Management therefore does not anticipate thatthere will be a material impact on the Company’s financial condition or resultsof operations from adoption of these accounting pronouncements.

 

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES:  In May 2008, the FASB issued SFAS No. 162,“*The Hierarchy of Generally AcceptedAccounting Principles.” *SFAS No. 162**identifies the sources of accountingprinciples and the framework for selecting the principals to be used in thepreparation of the financial statements of nongovernmental entities that arepresented in conformity with accounting principles generally accepted (“GAAP”)in the United States.  The FASB issuedSFAS No. 162, because the current GAAP hierarchy, as set forth in theAmerican Institute of Certified Public Accountants (“AICPA”) Statement ofAuditing Standards No. 69, “*The Meaningof Present Fairly in Conformity With Generally Accepted Accounting Principles,”*is directed to the auditor and not the entity, it is complex, and itranks FASB Statements of Financial Concepts below industry practices that arewidely recognized as generally accepted but that are not subject to dueprocess.  This statement is effective 60days following the SEC’s approval of the Public Company Accounting OversightBoard (“PCAOB”) amendment to AU Section 411, “*The Meaning of Present Fairly in Conformity With Generally AcceptedAccounting Principles.”* TheCompany does not anticipate the adoption of SFAS No. 162 to have amaterial impact on its financial position, results of operations, or cashflows.

 

**Note 3.****                           ****INTEREST-EARNING ASSETS WITH OTHER FINANCIAL INSTITUTIONS**

 

At March 31, 2009, the Company hadinterest-earning deposits with other financial institutions of $9.0 million,with a weighted average yield of 1.97%, and an average weighted remaining lifeof approximately three and one-half 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 March 31, 2009 and December 31,2008.

 

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| ** **                              | ** ** | ** **    | ** ** | **Gross**          | ** ** | **Gross**      | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|---------------|------------|--------------------|------------|----------------|------------|------------|------------|
| ** **                              | ** ** | **Amortized** | ** ** | **Unrealized**     | ** ** | **Unrealized** | ** ** | **Fair**   | ** ** |
| **March 31, 2009 (unaudited)**          | ** ** | **Cost**      | ** ** | **Gains**          | ** ** | **Losses**     | ** ** | **Value**  | ** ** |
| ** **                              | ** ** | ** **    | ** ** | **(in thousands)** | ** ** | ** **     | ** ** | ** ** | ** ** |
| **Available-for-sale securities:**      |       |          |       |               |       |           |       |       |       |
| U.S. government and agency securities   |       | $             | 980        |               | $          | 20             |       | $          | —     |   | $ | 1,000 |   |
| Mortgage-backed securities              |       | 5,786         |       | 298                |       | —         |       | 6,084      |       |
| **Total available-for-sale securities** |       | $             | 6,766      |               | $          | 318            |       | $          | —     |   | $ | 7,084 |   |
|                                    |       |          |       |               |       |           |       |       |       |
| **Held-to-maturity securities:**        |       |          |       |               |       |           |       |       |       |
| State and municipal securities          |       | $             | 991        |               | $          | —         |       | $          | 11         |   | $ | 980 |   |

 
| ** **                              | ** ** | ** **    | ** ** | **Gross**          | ** ** | **Gross**      | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|---------------|------------|--------------------|------------|----------------|------------|------------|------------|
| ** **                              | ** ** | **Amortized** | ** ** | **Unrealized**     | ** ** | **Unrealized** | ** ** | **Fair**   | ** ** |
| **December 31, 2008 (audited)**         | ** ** | **Cost**      | ** ** | **Gains**          | ** ** | **Losses**     | ** ** | **Value**  | ** ** |
| ** **                              | ** ** | ** **    | ** ** | **(in thousands)** | ** ** | ** **     | ** ** | ** ** | ** ** |
| **Available-for-sale securities:**      |       |          |       |               |       |           |       |       |       |
| U.S. government and agency securities   |       | $             | 980        |               | $          | 28             |       | $          | —     |   | $ | 1,008 |   |
| Mortgage-backed securities              |       | 6,127         |       | 279                |       | —         |       | 6,406      |       |
| **Total available-for-sale securities** |       | $             | 7,107      |               | $          | 307            |       | $          | —     |   | $ | 7,414 |   |
|                                    |       |          |       |               |       |           |       |       |       |
| **Held-to-maturity securities:**        |       |          |       |               |       |           |       |       |       |
| State and municipal securities          |       | $             | 991        |               | $          | 1              |       | $          | 5          |   | $ | 987 |   |

 

The fair value of these securities is based uponquoted market prices unless otherwise indicated in Note 7, “*Fair Value – Adoption of SFAS No. 157”.*  There were no realized gains or losses forthe three-month period ended March 31, 2009.   The net unrealized gain on available-for-salesecurities included in accumulated other comprehensive income was approximately$10,000 for the three-month period ended March 31, 2009. The comparablefigure for the three-month period ended March 31, 2008 was approximately$118,000. Available-for-sale securities with an amortized cost of approximately5.6 million (fair value of approximately $5.9 million) were pledged ascollateral for Federal Home Loan Bank advances as of March 31, 2009.

 

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

 

At March 31, 2009, the Company had nosecurities with unrealized losses that were in a continual loss position forover a twelve-month period.  Thefollowing table reflects unrealized losses for securities that were in acontinual loss position for less than a twelve-month period as of March 31,2009.

 

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| **(unaudited)**                       | ** ** | **Less than 12 Months** | ** ** |
|---------------------------------------|------------|-------------------------|------------|
| **(In thousands)**                    | ** ** | **Fair Value**          | ** ** | **Unrealized Losses** | ** ** |
| *Securities available for sale:*      |       |                    |       |   |   |
| U.S. Government and agency securities |       | $                       | —     |   | $ | — |   |
| Mortgage-backed securities            |       | —                  |       | — |   |
| *Securities held to maturity*         |       |                    |       |   |   |
| State and municipal securities        |       | 491                     |       | 3 |   |
| Total imparied securities             |       | $                       | 491        |   | $ | 3 |   |

 

Any intra-period decline in market values wereattributable to changes in market rates of interest rather than credit quality;and because the Company has the ability and intent to hold all of itsinvestments until a recovery of fair value, which may be at maturity, theCompany considers none of its investments to be temporarily impaired at March 31,2009.

 

The amortized cost, estimated fair value and averageyield of debt securities at March 31, 2009 are shown below.  In the case of available-for-sale securities,the average yields are based on effective rates of book balances at yearend.  Yields are derived by dividinginterest income, adjusted for amortization of premiums and accretion ofdiscounts, by total amortized cost. Mortgage-backed 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** | ** ** |
|----------------------------------|------------|-----------------------------------|-------------|---------------------------------|------------|
| ** **                       | ** ** | ** **                        | ** **  | ** **                      | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                       | ** ** | **Amortized**                     | ** **  | **Fair**                        | ** ** | **Average** | ** ** | **Amortized** | ** ** | **Fair** | ** ** | **Average** | ** ** |
| **(unaudited)**                  | ** ** | **Cost**                          | ** **  | **Value**                       | ** ** | **Yield** | ** ** | **Cost** | ** ** | **Value** | ** ** | **Yield** | ** ** |
| ** **                       | ** ** | **(dollars in thousands)**        | ** **  |
| Due in One Year or Less          |       | $                                 | 1,187       |                            | $          | 1,248 |   | 5.16 | % | $ | — |   | $ | — |   |   |   |
| Due from One Year to Five Years  |       | 3,104                             |        | 3,255                           |       | 5.16 | % | 991 |   | 980 |   | 4.86 | % |
| Due from Five Years to Ten Years |       | 2,199                             |        | 2,290                           |       | 5.66 | % |   |   |   |   |   |   |
| Due after Ten Years              |       | 276                               |        | 291                             |       | 5.22 | % |   |   |   |   |   |   |
|                             |       | $                                 |  6,766 |                            | $          | 7,084 |   | 5.36 | % | $ | 991 |   | $ | 980 |   | 4.86 | % |

 

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

 

Loans are summarized as follows:

 
| ** **                            | ** ** | **March 31, 2009 (unaudited)** | ** ** | **December 31, 2008 (audited)** | ** ** |
|---------------------------------------|------------|-------------------------------------|------------|--------------------------------------|------------|
| ** **                            | ** ** | **Amount**                          | ** ** | **Percentage of**                    | ** ** | **Amount** | ** ** | **Percentage of** | ** ** |
| **(dollars in thousands)**            | ** ** | **Outstanding**                     | ** ** | **Total**                            | ** ** | **Outstanding** | ** ** | **Total** | ** ** |
| Commercial loans                      |       | $                                   | 21,289     |                                 | 34.4       | % | $ | 18,319 |   | 31.9 | % |
| Real estate loans                     |       | 33,163                              |       | 53.5                                 | %          | 32,956 |   | 57.4 | % |
| Other loans                           |       | 7,507                               |       | 12.1                                 | %          | 6,167 |   | 10.7 | % |
| Total loans, including net loan costs |       | 61,959                              |       | 100.0                                | %          | 57,442 |   | 100.0 | % |
| Less : allowance for loan losses      |       | (1,149                              | )          |                                 |       | (975 | ) |   |   |
| Net loans                             |       | $                                   | 60,810     |                                 |       |   | $ | 56,467 |   |   |   |

 

The Company has had no impaired or non-accrual loanssince it commenced business.  There wereno loans past due 90 days or more in either interest or principal as of March 31,2009 and December 31, 2008.

 

The following table presents an analysis of changesin the allowance for loan losses during the periods indicated:

 

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| ** **                                    | ** ** | **For the Three Months** | ** ** |
|-----------------------------------------------|------------|--------------------------|------------|
| ** **                                    | ** ** | **Ended March 31,** | ** ** |
| **(Unaudited)**                               | ** ** | **2009**                 | ** ** | **2008** | ** ** |
| ** **                                    | ** ** | **(in thousands)**       | ** ** | **(in thousands)** | ** ** |
| Balance at beginning of period                |       | $                        | 975        |   | $ | 269 |   |
| Additions to the allowance charged to expense |       | 174                      |       | 166 |   |
| Recoveries                                    |       | —                   |       | — |   |
|                                          |       | 1,149                    |       | 435 |   |
| Less loans charged-off                        |       | —                   |       | — |   |
|                                          |       |                     |       |   |   |
| Balance at end of period                      |       | $                        | 1,149      |   | $ | 435 |   |

 

**Note 6.****                           ****SHARE-BASED COMPENSATION**

 

Duringthe three-month period ended March 31, 2009, the Company recordedapproximately $196,000 of stock-based compensation expense.  At March 31, 2009, unrecordedcompensation expense related to non-vested stock option grants totaledapproximately $1.3 million and is expected to be recognized as follows:

 
| ** **        | ** ** | **Share-Based**    | ** ** |
|-------------------|------------|--------------------|------------|
| ** **        | ** ** | **Compensation**   | ** ** |
| ** **        | ** ** | **Expense**        | ** ** |
| **(unaudited)**   | ** ** | **(in thousands)** | ** ** |
| Remainder of 2009 |       | $                  | 584        |   |
| 2010              |       | 552                |       |
| 2011              |       | 203                |       |
| 2012              |       | 3                  |       |
| Total             |       | $                  | 1,342      |   |

 

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.  Ifgrants were to occur, the Company would estimate the life of the options bycalculating the average 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 period presented:

 
| ** **           | ** ** | **Period Ended**   | ** ** |
|----------------------|------------|--------------------|------------|
| ** **           | ** ** | **March 31,** | ** ** |
| **(unaudited)**      | ** ** | **2009**           | ** ** | **2008** | ** ** |
| Risk-free rate       |       | 2.04               | %          | 2.74 | % |
| Expected term        |       | 6  years           |       | 6  years |   |
| Expected volatility  |       | 25.98              | %          | 32.81 | % |
| Dividend yield       |       | 0.00               | %          | 0.00 | % |
| Fair value per share |       | $                  | 0.52       |   | $ | 3.57 |   |
|                      |            |                    |            |  |  |  |  |

 

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Thefollowing table summarizes the stock option activity under the plan for theperiods indicated:

 
| ** **                                 | ** ** | ** ** | ** ** | ** **           | ** ** | **Weighted Average** | ** ** | **Aggregate** | ** ** |
|--------------------------------------------|------------|------------|------------|----------------------|------------|----------------------|------------|---------------|------------|
| **(unaudited)**                            | ** ** | ** ** | ** ** | **Weighted Average** | ** ** | **Remaining**        | ** ** | **Intrinsic** | ** ** |
| **2008**                                   | ** ** | **Shares** | ** ** | **Exercise Price**   | ** ** | **Contractual Life** | ** ** | **Value**     | ** ** |
| ** **                                 |       |       |       |                 |       |                 |       |          |       |
| Outstanding at December 31, 2007      |       | 531,770    |       | $                    | 9.99       |                 |       |          |       |   |
| Granted                                    |       | 7,800      |       | $                    | 9.73       |                 |       |          |       |   |
| Exercised                                  |       | —     |       | —               |       |                 |       |          |       |
| Expired                                    |       | —     |       | —               |       |                 |       |          |       |
| Forfeited                                  |       | 1,000      |       | $                    | 10.00      |                 |       |          |       |   |
| Outstanding at March 31, 2008         |       | 538,570    |       | $                    | 9.73       |                 | 9.40       |          | $          | 9,165 |   |
| Options exercisable at March 31, 2008 |       | —     |       | $                    | —     |                 | —     |          | $          | — |   |
|                                       |       |       |       |                 |       |                 |       |          |       |
| **2009**                                   |       |       |       |                 |       |                 |       |          |       |
| Outstanding at December 31, 2008      |       | 657,480    |       | $                    | 9.99       |                 |       |          |       |   |
| Granted                                    |       | 30,250     |       | $                    | 8.43       |                 |       |          |       |   |
| Exercised                                  |       | —     |       | —               |       |                 |       |          |       |
| Expired                                    |       | —     |       | —               |       |                 |       |          |       |
| Forfeited                                  |       | 12,438     |       | $                    | 10.00      |                 |       |          |       |   |
| Outstanding at March 31, 2009         |       | 675,292    |       | $                    | 9.45       |                 | 8.79       |          | $          | — |   |
| Options exercisable at March 31, 2009 |       | 154,433    |       | $                    | 9.96       |                 | 8.41       |          | $          | — |   |
| Options unvested at March 31, 2009    |       | 520,859    |       | $                    | 9.29       |                 | 8.85       |          | $          | — |   |

 

**Note 7.     FAIR VALUE MEASUREMENTS**

 

EffectiveJanuary 1, 2008, the Company adopted SFAS No. 157, “Fair ValueMeasurements”.  SFAS No. 157clarifies the definition of fair value, describes methods used to appropriatelymeasure fair value in accordance with generally accepted accounting principlesin the United States of America, and expands fair value disclosurerequirements.  This statement applieswhenever other accounting pronouncements require or permit fair valuemeasurements.  The fair value hierarchyunder SFAS No. 157 prioritizes the inputs to valuation techniques used tomeasure fair value into three broad levels (Level 1, Level 2, and Level3).  Level 1 inputs are unadjusted quotedprices in active markets (as defined) for identical assets or liabilities thatthe reporting entity has the ability to access at the measurement date.  Level 2 inputs are inputs, other than quotedprices included within Level 1, which are observable for the asset orliability, either directly or indirectly. Level 3 inputs are observable inputs for the asset or liability, andreflect the reporting entity’s own assumptions about the assumptions thatmarket participants would use in pricingthe asset or liability (including assumptions about risk).

 

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

 

The following table summarizes the Company’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)**                      | ** ** | **March 31,** | ** ** | **Assets**          | ** ** | **Inputs**      | ** ** | **Inputs**       | ** ** |
| **Description of Assets/Liabiltity** | ** ** | **2009**           | ** ** | **(Level 1)**       | ** ** | **(Level 2)**   | ** ** | **(Level 3)**    | ** ** |
| Available-for-sale securities        |       | $                  | 7,084      |                | $          | —          |       | $                | 7,084      |   | $ | — |   |
|                                      |            |                    |            |                     |            |                 |            |                  |            |  |  |  |  |

 

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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.     OTHERBORROWINGS**

 

At March 31, 2009, the Company had acollateralized line of credit with the Federal Home Loan Bank (“FHLB”) totaling$13.8 million against which it had outstanding $4.5 million consisting of aFHLB five-year fixed rate advance at 4.38% maturing on June 27, 2013 and$7.0 million consisting of a FHLB overnight variable rate advance at .21%maturing on April 1, 2009.

 

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

 

TheCompany follows SFAS No. 128, “*Earnings per Share”*.  Basic earnings (loss) per share representsincome available (loss reported) to common stock divided by the weightedaverage number of common shares outstanding during the period reported on theStatement of Operations. Diluted earnings (loss) per share reflect additionalcommon shares that would have been outstanding if dilutive potential commonshares had been issued, as well as any adjustment to income that would resultfrom the assumed conversion. There were no dilutive potential common sharesoutstanding for any periods reported on the Statement of Operations.

 

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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 QuarterlyReport on Form 10-Q, that are not historical facts, are forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995, and are based upon management’s current expectations and beliefsconcerning further developments and their potential effects on ManhattanBancorp and its subsidiary.  The Company’sforward-looking statements involve risks and uncertainties, including the risksand uncertainties described under the caption “Factors Which May AffectFuture Operating Results” found in the Company’s December 31, 2008 10-KITEM 1A. Risk Factors.  There can be noassurance that future developments affecting Manhattan Bancorp will be the sameas those anticipated by management, and actual results may differ from thoseprojected in 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 bankholding company, which was incorporated in August 2006 in order to acquireBank of Manhattan, N.A. (the “Bank”), a de novo bank which was acquired on August 14,2007.  The Bank is a nationally-charteredbanking association which was organized under the laws of the United States on August 15,2007.  The Bancorp operates exclusivelythrough the Bank, and the capital stock of the Bank is its principalasset.  The Bank is located in ElSegundo, California and as of March 31, 2009 had $97.2 million in assets,$60.8 million in net loans receivable and $60.6 million in deposits.  Unless the context requires otherwise,references in this Form 10-Q to the “Company,” “we” or “us” refer to theBancorp and its consolidated subsidiary, the Bank.

 

Management’s discussion and analysis offinancial condition 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***

 

For the three-months ended March 31, 2009, theCompany recorded a loss of $1,233,000 or $0.31 per basic share of commonstock.   Comparing the Company’s 2008first quarter loss of $1,167,000 or $0.47 per basic share of common stock withthe current operating quarter reflects an approximate 5.7% increase in thereported comparable quarterly loss for 2009. Loan growth continued but at aslower pace.  Due to the deterioration inthe general economy, the Company continues to be cautious in granting newcredit extensions. A reduction in the net growth in loans would permit theCompany to reserve fewer dollars in order to maintain the allowance for loanlosses at acceptable levels.  Despite thefact that as of March 31, 2009, the Bank had no past due loans nor loanson non-accrual and that quarterly loan growth was modest in comparison to theprevious operating quarters, the Bank’s management elected to increase theallowance for loan loss percentage to 1.85% of outstanding loans as of March 31,2009 compared to 1.70% allowance for loan loss percentage to outstanding loansas of December 31, 2008.  Aware ofthe deterioration in the general economy and its potential effects on the Bank’sloan portfolio, Management   reviewed theportfolio for indication of specific weaknesses and adjusted the provisionaccordingly.  The 

 

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provision for the three month period ended March 31,2009 was $174,000 compared to $166,000 for the similar three-month period endedMarch 31, 2008.

 

Net interest income after provision for loan lossesfor the three-month period ended March 31, 2009 was approximately$561,000, an increase of approximately $297,000 over the prior year’s three-monthperiod ended March 31, 2008.  This112% improvement in net interest income was primarily due to an increase ininterest income, up approximately $391,000 (70%) for the comparable three-monthperiod ended March 31, 2009 over 2008.  While interest expense also increased by a similar percentage (66%) forthe comparable three-month period ended March 31, 2009 over March 31,2008, the actual dollar increase was only $86,000.

 

Non-interest expense for the three-month periodsended March 31, 2009 compared to March 31, 2008 increased byapproximately $367,000 and an analysis is found under *Non-InterestExpense*on page 22.

 

As of March 31, 2009, total assets of theCompany were approximately $97.2 million. This represents an increase of approximately $5.2 million or 5.6% overthe amount reported as of December 31, 2008.  The growth in total assets can be attributedto an increase of approximately $4.5 million in gross loan balances or 7.9%from the approximately $57.4 million reported as of December 31, 2008.  A similar increase occurred in time depositsplaced with other financial institutions which grew by approximately $4.8million to approximately $9.0 million as of March 31, 2009.

 

Funding for the loan and investment growth wasobtained primarily from deposit growth and advances from the Federal Home LoanBank, coupled with reductions in cash and cash equivalent balances.  At March 31, 2009, total deposits wereapproximately $51.9 million compared with the balance of approximately $48.0million as of December 31, 2008. This represents an approximately $3.9 million increase or 8.1%.  A net increase of $2.0 million in overnightFederal Home Loan Bank advances also provided another source of funding.

 

Aspreviously reported, the Company issued 1,700 shares of Series A PreferredStock to the United States Department of Treasury for a total price of$1,700,000.  The Company is continuing to explore the usage of thesefunds, including the possibility of returning the funds to the TreasuryDepartment.

 

The following table provides selected financial datathat highlights the Company’s financial performance for each of the six fullquarters that it has been in operation:

 

16

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| ** **                                             | ** ** | **For the three months ended** | ** ** |
|--------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                             | ** ** | **3/31/2009**                  | ** ** | **12/31/2008** | ** ** | **9/30/2008** | ** ** | **6/30/2008** | ** ** | **3/31/2008** | ** ** | **12/31/2007** | ** ** |
| ** **                                             | ** ** | **(Unaudited)**                | ** ** | **(Audited)** | ** ** | **(Unaudited)** | ** ** | **(Unaudited)** | ** ** | **(Unaudited)** | ** ** | **(Audited)** | ** ** |
| **Statements of Operations:**                          |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Interest income                                        |       | $                              | 951        |   | $ | 909 |   | $ | 909 |   | $ | 696 |   | $ | 560 |   | $ | 453 |   |
| Interest expense                                       |       | 216                            |       | 248 |   | 310 |   | 140 |   | 130 |   | 86 |   |
|                                                   |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Net interest income                                    |       | 735                            |       | 661 |   | 599 |   | 556 |   | 430 |   | 367 |   |
| Provision for loan losses                              |       | 174                            |       | 275 |   | 102 |   | 163 |   | 166 |   | 167 |   |
|                                                   |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Net interest income after provision                    |       | 561                            |       | 386 |   | 497 |   | 393 |   | 264 |   | 200 |   |
|                                                   |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest income                                    |       | 17                             |       | 11 |   | 18 |   | 11 |   | 13 |   | 1 |   |
| Non-interest expense                                   |       | 1,811                          |       | 1,498 |   | 1,513 |   | 1,557 |   | 1,444 |   | 1,484 |   |
|                                                   |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Net loss from operations                               |       | $                              | (1,233     | ) | $ | (1,101 | ) | $ | (998 | ) | $ | (1,153 | ) | $ | (1,167 | ) | $ | (1,283 | ) |
|                                                   |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| **Per Share and Other Data:**                          |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Basic and diluted loss per share                       |       | $                              | (0.31      | ) | $ | (0.42 | ) | $ | (0.38 | ) | $ | (0.46 | ) | $ | (0.47 | ) | $ | (0.52 | ) |
| Book value per common share- period end                |       | $                              | 7.94       |   | $ | 8.21 |   | $ | 7.52 |   | $ | 7.80 |   | $ | 8.17 |   | $ | 8.52 |   |
| Weighted average shares outstanding basic  and diluted |       | 3,988                          |       | 2,646 |   | 2,616 |   | 2,517 |   | 2,487 |   | 2,487 |   |
|                                                   |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| **Balance Sheet Data:**                                |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Investments and fed funds sold                         |       | $                              | 17,085     |   | $ | 12,603 |   | $ | 19,898 |   | $ | 13,760 |   | $ | 12,915 |   | $ | 18,087 |   |
| Loans, net                                             |       | $                              | 60,810     |   | $ | 56,467 |   | $ | 47,994 |   | $ | 41,769 |   | $ | 31,758 |   | $ | 17,930 |   |
| Assets                                                 |       | $                              | 97,221     |   | $ | 92,040 |   | $ | 71,806 |   | $ | 60,067 |   | $ | 48,526 |   | $ | 39,367 |   |
| Deposits                                               |       | $                              | 51,891     |   | $ | 47,991 |   | $ | 47,074 |   | $ | 34,727 |   | $ | 27,861 |   | $ | 17,862 |   |
| Shareholders’ equity                              |       | $                              | 33,244     |   | $ | 34,288 |   | $ | 19,667 |   | $ | 20,393 |   | $ | 20,314 |   | $ | 21,189 |   |
|                                                   |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| **Selected Financial Ratios**                          |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Net loss as a percentage of average assets             |       | -5.71                          | %          | -5.98 | % | -5.07 | % | -8.92 | % | -10.73 | % | -14.46 | % |
| Net loss as a percentage of average equity             |       | -14.75                         | %          | -21.73 | % | -19.85 | % | -22.84 | % | -22.54 | % | -23.39 | % |
| Dividend payout ratio                                  |       | —                         |       | — |   | — |   | — |   | — |   | — |   |
| Equity to asset ratio                                  |       | 34.19                          | %          | 37.25 | % | 27.39 | % | 33.95 | % | 41.86 | % | 53.82 | % |
| Net interest margin                                    |       | 3.60                           | %          | 3.82 | % | 3.21 | % | 4.71 | % | 4.34 | % | 4.56 | % |
|                                                   |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| **Credit Quality**                                     |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Allowance for loan losses                              |       | $                              | 1,149      |   | $ | 975 |   | $ | 700 |   | $ | 598 |   | $ | 435 |   | $ | 269 |   |
| Allowance /total loans                                 |       | 1.85                           | %          | 1.70 | % | 1.44 | % | 1.41 | % | 1.35 | % | 1.48 | % |
| Non-performing loans                                   |       | $                              | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Net (recoveries)/ charge-offs                          |       | $                              | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |

 

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***RESULTS OF OPERATIONS***

 

***Net Interest Income***

 

The Company’s earningsdepend largely upon our net interest income, which is the difference betweenthe income we earn on interest-bearing assets, such as loans, and the interestwe pay on deposits and borrowed funds. Net interest income is related to (i) the relative amounts ofinterest earning assets and liabilities and (ii) the interest rates earnedand paid upon these balances.  Total interest income can fluctuate basedupon the mix of earning assets between loans, investments and federal fundssold and the related rates associated with their balances.  Some of the funding sources for these assetsalso have an interest cost which can fluctuate based upon the mix ofinterest-bearing liabilities and the related rates associated with theirbalances.

 

The interest rate spread represents the differencebetween the weighted average yield on interest earning assets and the weightedaverage rate paid on interest bearing liabilities.   The interest rate spread increased from2.08% for the three-month period ended March 31, 2008 to 2.44% for thethree-month period ended March 31, 2009, due to the large decline ineffective interest rates associated with interest-bearing liabilities overinterest-bearing assets.

 

Net interest margin is net interest income expressedas a percentage of average total interest earning assets, allowing the sourcesof funding as factors in the calculation. While the interest rate spreadincreased by 36 basis points, net interest margin declined by 74 basis points,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 from36.8% to 47.8% for the three-month periods ended March 31, 2008 and 2009,respectively.

 

Net interest margin is affected by changes in theyields earned on assets and rates paid on liabilities, referred to as ratechanges, and changes in the relative amounts of interest earning assets andinterest bearing liabilities, referred to as volume changes.  Interest rates earned and paid are affectedprincipally by our competition, general economic conditions and other factorsbeyond the Company’s control, such as federal economic policies, the generalsupply of money in the economy, legislative tax policies, governmentalbudgetary matters and the actions of the Federal Reserve Board.

 

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

 
| ** **                                            | ** ** | **Three Months Ended**     | ** ** |
|-------------------------------------------------------|------------|----------------------------|------------|
| ** **                                            | ** ** | **March 31,**         | ** ** | **Percent** | ** ** |
| ** **                                            | ** ** | **2009**                   | ** ** | **2008** | ** ** | **Change** | ** ** |
| ** **                                            | ** ** | **(Unaudited)**            | ** ** |
| ** **                                            | ** ** | **(Dollars in thousands)** | ** ** |
| Interest income                                       |       | $                          | 951        |   | $ | 560 |   | 69.82 | % |
| Interest expense                                      |       | 216                        |       | 130 |   | 66.15 | % |
| Net interest income before provision for  loan losses |       | $                          | 735        |   | $ | 430 |   | 70.93 | % |
| Net interest margin                                   |       | 3.60                       | %          | 4.34 | % | -17.05 | % |

 

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

 

**ANALYSIS OF NET INTEREST INCOME**

 
| ** **                                              | ** ** | **(Unaudited)**                            | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                              | ** ** | **Three months ended March 31, 2008** | ** ** |
| ** **                                              | ** ** | **2009**                                   | ** ** | **2008** | ** ** |
| ** **                                              | ** ** | ** **                                 | ** ** | ** ** | ** ** | **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                                      |       | $                                          | 9,796      |   | $ | 11 |   | 0.46 | % | $ | 7,208 |   | $ | 58 |   | 3.24 | % |
| Deposits with other financial institutions              |       | 7,943                                      |       | 43 |   | 2.20 | % | 2,177 |   | 26 |   | 4.80 | % |
| Investments                                             |       | 8,268                                      |       | 102 |   | 5.00 | % | 7,115 |   | 89 |   | 5.03 | % |
| Loans(1)                                                |       | 56,778                                     |       | 795 |   | 5.68 | % | 23,364 |   | 387 |   | 6.66 | % |
| Total interest-earning assets                           |       | 82,785                                     |       | 951 |   | 4.66 | % | 39,864 |   | 560 |   | 5.65 | % |
| Non-interest-earning assets                             |       | 4,792                                      |       |   |   |   |   | 3,856 |   |   |   |   |   |
| Total assets                                            |       | $                                          | 87,577     |   |   |   |   |   | $ | 43,720 |   |   |   |   |   |
|                                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities:**                       |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Demand                                                  |       | $                                          | 1,753      |   | 0 |   | 0.10 | % | $ | 430 |   | 0 |   | 0.25 | % |
| Savings and money market                                |       | 10,091                                     |       | 33 |   | 1.33 | % | 3,525 |   | 26 |   | 2.97 | % |
| Certificates of deposit                                 |       | 23,060                                     |       | 134 |   | 2.36 | % | 10,703 |   | 104 |   | 3.91 | % |
| FHLB advances                                           |       | 4,633                                      |       | 49 |   | 4.23 | % | — |   | — |   | — |   |
| Total interest-bearing liabilities                      |       | 39,537                                     |       | 216 |   | 2.22 | % | 14,658 |   | 130 |   | 3.57 | % |
| Non-interest-bearing demand deposits                    |       | 13,726                                     |       |   |   |   |   | 7,957 |   |   |   |   |   |
| Total funding sources                                   |       | 53,263                                     |       |   |   | 1.65 | % | 22,615 |   |   |   | 2.32 | % |
| Non-interest-bearing liabilities                        |       | 397                                        |       |   |   |   |   | 285 |   |   |   |   |   |
| Shareholders’ equity                               |       | 33,917                                     |       |   |   |   |   | 20,820 |   |   |   |   |   |
| Total liabilities and shareholders’ equity         |       | $                                          | 87,577     |   |   |   |   |   | $ | 43,720 |   |   |   |   |   |
|                                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Excess of interest-earning assets over  funding sources |       | $                                          | 29,522     |   |   |   |   |   | $ | 17,249 |   |   |   |   |   |
| Net interest income                                     |       |                                       |       | $ | 735 |   |   |   |   |   | $ | 430 |   |   |   |
| Net interest rate spread                                |       |                                       |       |   |   | 2.44 | % |   |   |   |   | 2.08 | % |
| Net interest margin                                     |       |                                       |       |   |   | 3.60 | % |   |   |   |   | 4.34 | % |

 

----

(1)          The average balanceof loans is calculated net of deferred loan fees/cost, but would includenon-accrual loans, if any, with a zero yield.  Loan fees net of amortized costs wereapproximately $6,000 for the three-month period ended March 31, 2009.  Loan costs net of amortized fees included intotal net income were approximately $10,000 for the three-month period ended March 31,2008.

 

The table below sets forth changes for thecomparable three-month periods ended March 31, 2009 and March 31,2008 for average 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** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **March 31,**                 | ** ** | **Variance** | ** ** | **March 31,** | ** ** | ** ** | ** ** |
| **(dollars in thousands)**                 | ** ** | **2009**                           | ** ** | **2008**     | ** ** | **dollar**         | ** ** | **percent** | ** ** | **2009** | ** ** | **2008** | ** ** | **Variance** | ** ** |
| ** **                                 | ** ** | **(Unaudited)**                    | ** ** |
| **Interest-earning assets:**               |       |                               |       |         |       |               |       |   |   |   |   |   |   |   |   |
| Federal funds sold                         |       | $                                  | 9,796      |         | $          | 7,208              |       | $ | 2,588 |   | 35.90 | % | 0.46 | % | 3.24 | % | -2.78 | % |
| Deposits with other financial institutions |       | 7,943                              |       | 2,177        |       | 5,766              |       | 264.86 | % | 2.20 | % | 4.80 | % | -2.60 | % |
| Investments                                |       | 8,268                              |       | 7,115        |       | 1,153              |       | 16.21 | % | 5.00 | % | 5.03 | % | -0.03 | % |
| Loans                                      |       | 56,778                             |       | 23,364       |       | 33,414             |       | 143.01 | % | 5.68 | % | 6.66 | % | -0.98 | % |
| Total interest-earning assets              |       | $                                  | 82,785     |         | $          | 39,864             |       | $ | 42,921 |   | 107.67 | % | 4.66 | % | 5.65 | % | -0.99 | % |
|                                       |       |                               |       |         |       |               |       |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities:**          |       |                               |       |         |       |               |       |   |   |   |   |   |   |   |   |
| Interest-bearing demand                    |       | $                                  | 1,753      |         | $          | 430                |       | $ | 1,323 |   | 307.67 | % | 0.10 | % | 0.25 | % | -0.15 | % |
| Savings and money market                   |       | 10,091                             |       | 3,525        |       | 6,566              |       | 186.27 | % | 1.33 | % | 2.97 | % | -1.64 | % |
| Certificates of deposit                    |       | 23,060                             |       | 10,703       |       | 12,357             |       | 115.45 | % | 2.36 | % | 3.91 | % | -1.55 | % |
| FHLB advances                              |       | 4,633                              |       | —       |       | 4,633              |       | 0.00 | % | 4.23 | % | 0.00 | % | 4.23 | % |
| Total interest-bearing liabilities         |       | $                                  | 39,537     |         | $          | 14,658             |       | $ | 24,879 |   | 169.73 | % | 2.22 | % | 3.57 | % | -1.35 | % |

 

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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 three-month periods ended March 31, 2009 and March 31,2008 in thousands:

 
| ** **                                 | ** ** | **For the three months ended**    | ** ** |
|--------------------------------------------|------------|-----------------------------------|------------|
| ** **                                 | ** ** | **March 31, 2009 over 2008** | ** ** |
| ** **                                 | ** ** | **Volume**                        | ** ** | **Rate** | ** ** | **Total** | ** ** |
| ** **                                 | ** ** | **(Unaudited)**                   | ** ** |
| **Interest income:**                       |       |                              |       |   |   |   |   |
| Federal funds sold                         |       | $                                 | 21         |   | $ | (68 | ) | $ | (47 | ) |
| Deposits with other financial institutions |       | 69                                |       | (52 | ) | 17 |   |
| Investments                                |       | 14                                |       | (1 | ) | 13 |   |
| Loans                                      |       | 553                               |       | (145 | ) | 408 |   |
| Net increase (decrease)                    |       | 657                               |       | (266 | ) | 391 |   |
|                                       |       |                              |       |   |   |   |   |
| **Interest expense:**                      |       |                              |       |   |   |   |   |
| Interest bearing demand                    |       | 1                                 |       | (1 | ) | — |   |
| Savings and money market                   |       | 49                                |       | (42 | ) | 7 |   |
| Certificates of deposit                    |       | 120                               |       | (90 | ) | 30 |   |
| FHLB advances                              |       | —                            |       | 49 |   | 49 |   |
| Net increase (decrease)                    |       | 170                               |       | (84 | ) | 86 |   |
| Total net  increase (decrease)             |       | $                                 | 487        |   | $ | (182 | ) | $ | 305 |   |

 

A review of the above tables shows that the overallincrease in net interest income of approximately $305,000 between the twocomparative quarters ended at March 31, 2009 and March 31, 2008 isthe result of several factors.

 

Among the most significant factors in the increasein net interest income is the overall growth in earning assets, upapproximately $42.9 million or 107.7% between March 31, 2009 and March 31,2008.  This increase was primarily aresult of loan growth ($33.4 million) reflecting 77.9% of the total.  The percentage of average loan dollarsoutstanding, as a percentage of interest-earning assets has grown from 58.6% asof March 31, 2008 to 68.6% as of March 31, 2009.  The higher outstanding volume of loansbetween the first quarter periods would have resulted in an increase ofapproximately $553,000 in interest income, but the actual amount of interestincome earned was reduced by approximately $145,000 due to the decline in theoverall effective yield on the loan portfolio. The overall yield on outstanding loans declined from 6.66% for thethree-month period ended March 31, 2008 to 5.68% for the three-monthperiod ended March 31, 2009.

 

The Bank continues to have five significant depositrelationships, some of which are with related parties, which total, as of March 31,2009, approximately $21.2 million or 35.0% 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 high level to provide necessary liquidity.  While the amount of Fed funds sold as apercentage of all interest-earning assets has declined from 18.1% to 11.8% forthe comparable three-month periods ended in March 31, 2009 and March 31,2008, the average balance in Fed funds sold increased by approximately $2.6million.  This higher outstanding volumewould have resulted in an increase of approximately $21,000.  However the dramatic decline in the effectiveyield on this category by 278 basis points from an effective yield of 3.24% forthe three-month period ended March 31, 2008 to .46% for the three-monthperiod ended March 31, 2009 completely offset any positive benefit byreducing the potential interest income by approximately $68,000.

 

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The Bank, in order to improve the overall yield oninterest-earning assets but somewhat limited due to the potential volatility ofthe significant deposits noted above, elected to increase its effective yieldby placing additional funds in interest-bearing certificates of deposits inother financial institutions  The higheroutstanding volume of funds invested in certificate of deposits in otherfinancial institutions between the first quarter periods would have resulted inan increase of approximately $69,000 in interest income, but the amount wasoffset by the decline in the overall effective yield on this category reducingthe increase by approximately $52,000. The overall yield on the funds placed with other financial institutionsdeclined from 4.80% for the three-month period ended March 31, 2008 to2.20% for the three-month period ended March 31, 2009.

 

The change in the mix of interest-yielding assetscoupled with the overall growth resulted in the increase of interest income ofapproximately $391,000, with approximately $657,000 due to volume increases,which more than fully offset the result of the general market interest ratedecline of approximately $266,000.  Whilegeneral interest rates declined by 400 basis points between the beginning offirst quarter of 2008 and the end of the first quarter of 2009, the averageeffective yield on the Company’s earning assets declined by approximately 99basis points.

 

Interest expense increased by $86,000, 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 $170,000.  The establishment of the Federal Home LoanBank advance by the Bank occurred on June 30, 2008, so was not present inthe three-month period ended March 31, 2008.  The overall effective rate on the FederalHome Loan Bank advances is heavily weighted towards the $4.5 million long-termfixed advance at a stated rate of 4.38%. Variances associated equally with both volume and rate have been categorizedas rate variance, resulting in the entire increase of approximately $49,000appearing as under the rate heading.

 

For the comparable three-month periods ended in March 31,2009 and March 31, 2008, the average balance in *Certificateof Deposits* increased by approximately $12.4 million. The higheroutstanding volume in certificates of deposits would have resulted in anincrease of expense of approximately $120,000. However the significant decline in the effective yield on this categoryby 155 basis points from an effective yield of 3.91% for the three-month periodended March 31, 2008 to 2.36% for the three-month period ended March 31,2009 offset much of the additional expense by reducing the potential interestcost by approximately $90,000.

 

A similar result occurred in the *Savings and Money Market* category. For the comparablethree-month periods ended in March 31, 2009 and March 31, 2008, theaverage balance in*Savings and Money Market*depositsincreased by approximately $6.6 million. The higher outstanding volume incertificates of deposits would have resulted in an increase of expense ofapproximately $49,000.  However thesignificant decline in the effective yield on this category by 164 basis pointsfrom an effective yield of 2.97% for the three-month period ended March 31,2008 to 1.33% for the three-month period ended March 31, 2009 offset mostof the additional expense by reducing the potential interest cost byapproximately $42,000.

 

Discounting the effects of the Federal Home Loanadvances, the costs associated with the increases in outstandinginterest-bearing deposit dollars were almost entirely offset by the reducing inthe effective rates associated with these funding sources.

 

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***Provision for Loan Losses***

 

The Company made provisions for loan losses of$174,000 for the three-month period ended March 31, 2009, compared to$166,000 for the comparable three-month period ended March 31, 2008.  These provisions were determined based uponthe periodic credit review of the loan portfolio, consideration of past loanloss experience, current and predicted economic conditions, and other pertinentfactors.  For further analysis of theadequacy of the loan loss reserve, see *Asset Quality andAllowance for Loan Losses.*

 

***Non-Interest Income***

 

Non-interest income for the three-month periodsended March 31, 2009 and March 31, 2008 was negligible.

 

***Non-Interest Expense***

 

The following table sets forth changes for the twocomparable three-month periods ending March 31, 2009 and March 31,2008, allowing comparisons between these two quarters:

 
| ** **                               | ** ** | **For the three months ended** | ** ** | ** **   | ** ** | ** **  | ** ** |
|------------------------------------------|------------|--------------------------------|------------|--------------|------------|-------------|------------|
| ** **                               | ** ** | **March, 31,**                 | ** ** | ** **   | ** ** | ** **  | ** ** |
| ** **                               | ** ** | **2009**                       | ** ** | **2008**     | ** ** | ** **  | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **(dollars in thousands)**     | ** ** | **Variance** | ** ** |
| ** **                               | ** ** | **(Unaudited)**                | ** ** | **Dollars**  | ** ** | **Percent** | ** ** |
| Compensation and benefits                |       | $                              | 1,015      |         | $          | 948         |       | $ | 67 |   | 7.1 | % |
| Occupancy and equipment                  |       | 172                            |       | 158          |       | 14          |       | 8.9 | % |
| Technology and communication             |       | 137                            |       | 125          |       | 12          |       | 9.6 | % |
| Professional and administrative expenses |       | 384                            |       | 106          |       | 278         |       | 262.3 | % |
| Other non-interest expenses              |       | 103                            |       | 107          |       | (4          | )          | -3.7 | % |
| Total non-interest expenses              |       | $                              | 1,811      |         | $          | 1,444       |       | $ | 367 |   | 25.4 | % |

 

The differences in expense between the firstquarters of 2009 and 2008 can be primarily attributed to the following:

 

·                  Compensation andbenefits increased as the result on a slight increase in the number ofemployees between the two periods along with moderate salary increases forCompany staff.

 

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

 

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

 

·                  Increased costsassociated with the exploration of new business opportunities, including legaland consulting services.

 

The most significant increase was related toprofessional and legal fees associated with the exploration of new business andcapital raising opportunities.  Thesecosts were approximately $232,000 more in the three-month period ended March 31,2009 than in the prior year’s comparable quarter.

 

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***FINANCIAL CONDITION***

 

The Company’s increase in total assets level to$97.2 million as of March 31, 2009 represents a 5.6% increase, orapproximately $5.2 million, from the total assets level of $92.0 million as of December 31,2008.  The growth is centered in loans,which were funded primarily by locally generated deposits.

 

***Loans***

 

Total gross loansas of March 31, 2009 increased by approximately $4.5 million over December 31,2008. Outstanding loan balances increased in all categories except real estateloans, with the most monetary growth occurring in commercial loans, where thetotal grew by approximately $ 3.0 million or 16.3%.

 

Real estate loans, the Company’s largest loancategory, remained substantially unchanged from December 31, 2008 to March 31,2009 due primarily to the Company’s increased caution in granting real estateloans, which include loans secured by commercial and multi-family properties,due to the decline of real estate prices in Southern California.

 

The table below sets forth the changes from December 31,2008 to March 31, 2009 in the composition of the loan portfolio:

 
| ** **                       | ** ** | **March 31, 2009 (unaudited)** | ** ** | **December 31, 2008 (audited)** | ** ** |
|----------------------------------|------------|-------------------------------------|------------|--------------------------------------|------------|
| ** **                       | ** ** | **Amount**                          | ** ** | **Percentage of**                    | ** ** | **Amount** | ** ** | **Percentage of** | ** ** |
| **(unaudited)**                  | ** ** | **Outstanding**                     | ** ** | **Total**                            | ** ** | **Outstanding** | ** ** | **Total** | ** ** |
| ** **                       | ** ** | **(Dollars in Thousands)**          | ** ** | **(Dollars in Thousands)**           | ** ** |
| Commercial loans                 |       | $                                   | 21,283     |                                 | 34.3       | % | $ | 18,305 |   | 31.8 | % |
| Real estate loans                |       | 31,538                              |       | 50.9                                 | %          | 31,842 |   | 55.4 | % |
| Real estate - construction       |       | 1,700                               |       | 2.7                                  | %          | 1,194 |   | 2.1 | % |
| Other loans                      |       | 7,496                               |       | 12.1                                 | %          | 6,152 |   | 10.7 | % |
| Total Loans                      |       | 62,017                              |       | 100.0                                | %          | 57,493 |   | 100.0 | % |
|                             |       |                                |       |                                 |       |   |   |   |   |
| Add: Purchase Premium            |       | 37                                  |       |                                 |       | 40 |   |   |   |
| Add: Unamortized Costs           |       | 62                                  |       |                                 |       | 61 |   |   |   |
| Less: Deferred Fees              |       | (157                                | )          |                                 |       | (152 | ) |   |   |
| Less - Allowance for loan losses |       | (1,149                              | )          |                                 |       | (975 | ) |   |   |
| Net loans                        |       | 60,810                              |       |                                 |       | 56,467 |   |   |   |
|                                  |            |                                     |            |                                      |            |  |  |  |  |  |  |

 

Of the Bank’s total loans outstanding as of March 31,2009, 25.2% were due in one year or less, 34.5% were due in one to five years,and 40.3% were due after five years.  Asis customary in the banking industry, loans can be renewed by mutual agreementbetween the borrower and the Bank. Because we are unable to accurately estimate the extent to which ourborrowers will renew their loans, the following table is based on contractualmaturities, reflecting gross outstanding loans without consideration ofpurchase premium, deferred fees or deferred costs.

 

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**Loan Maturity Schedule as of March 31, 2009**

 
| ** **                               | ** ** | ** **                 | ** ** | **Maturing**    | ** ** | ** **     | ** ** | ** ** | ** ** |
|------------------------------------------|------------|----------------------------|------------|-----------------|------------|----------------|------------|------------|------------|
| ** **                               | ** ** | **Within One**             | ** ** | **One to Five** | ** ** | **After Five** | ** ** | ** ** | ** ** |
| **(unaudited)**                          | ** ** | **Year**                   | ** ** | **Years**       | ** ** | **Year**       | ** ** | **Total**  | ** ** |
| ** **                               | ** ** | **(Dollars in thousands)** | ** ** |
| Commercial                               |       | $                          | 11,376     |            | $          | 7,907          |       | $          | 2,000      |   | $ | 21,283 |   |
| Real Estate                              |       | 1,700                      |       | 12,518          |       | 17,320         |       | 31,538     |       |
| Real Estate-Construction                 |       | 1,700                      |       | —          |       | —         |       | 1,700      |       |
| Other Loans                              |       | 854                        |       | 975             |       | 5,667          |       | 7,496      |       |
| Total                                    |       | $                          | 15,630     |            | $          | 21,400         |       | $          | 24,987     |   | $ | 62,017 |   |
|                                     |       |                       |       |            |       |           |       |       |       |
| Loans with pre-determined interest rates |       | $                          | 396        |            | $          | 9,507          |       | $          | 2,446      |   | $ | 12,349 |   |
| Loans with floating or adjustable rates  |       | 15,234                     |       | 11,893          |       | 22,541         |       | 49,668     |       |
| Total                                    |       | $                          | 15,630     |            | $          | 21,400         |       | $          | 24,987     |   | $ | 62,017 |   |

 

Of the gross loan dollars outstanding as of March 31,2009, approximately 80.0% had adjustable rates. Most of the adjustable rate loans generally have interest rates tied tothe prime rate, 66.0% of the total adjustable rate loan dollars outstanding andwill adjust with changes in the rate index on a daily basis.

 

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

 

*Commercial Loans*

 

The Bank offers a variety of commercial loans,including secured and unsecured term and revolving lines of credit, equipmentloans and accounts receivable loans.  Asof March 31, 2009, approximately 95.8% of the commercial loans hadadjustable rates.  The Bank underwritessecured term loans and revolving lines of credit primarily on the basis of aborrower’s cash flow and the ability to service the debt, although we rely onthe liquidation of the underlying collateral as a secondary payment source,where applicable.  Should the borrowerdefault and the Bank forecloses on the assets, we may not be able to recoverthe full amount of the loan.

 

*Real Estate/ Construction Loans*

 

The Bank’s real estate loans are secured primarilyby commercial property, including a significant percentage in multi-familycomplexes.   Approximately 67.5% of thereal estate loans are adjustable during the term of the loan.  Approximately 52.1% of the real estate loanshave a remaining maturity between five and ten years.  As of March 31, 2009, the weightedaverage ratio of the original loan extension to the underlying value of theproperty was approximately 48% with weighted average debt service coverage of1.75.  No individual loan to value ratioexceeded 73%.

 

*Other Loans*

 

The Bank offers other types of loans, including homeequity lines of credit.  Home equitylines of credit have adjustable rates and provide the borrower with a line ofcredit in an amount which does not exceed 80% of the appraised value of theborrower’s property at the time of origination.

 

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

 

We enter into and may issue financial instrumentswith off-balance sheet credit risk in the normal course of business to meet thefinancial needs of our customers.  Sinceinception through March 31, 2009, these had been limited to undisbursedcommitments to extend credit to both businesses and individuals.  Beginning with the second quarter of 2008,the Bank issued several letters of credit for the first time.  The 

 

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outstanding balance of approximately $370,000 as of March 31,2009 has not changed since December 31, 2008.  All commitments noted above were associatedwith loans and were therefore subject to the same credit underwriting policiesand practices as those used for the loans reflected in the financialstatements.  When deemed advisable, theBank obtains collateral 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 $19.3 million in undisbursed loan commitments as of March 31,2009, an increase of $4.0 million or 26.1% from the December 31, 2008amount of approximately $15.3 million.

 

***Non-Performing Assets***

 

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

 

The Bank had no non-performing assets as of March 31,2009 and December 31, 2008.

 

***Deposits and Borrowed Funds***

 

Deposits are the Bank’s primary source offunds.  The following table sets forththe amount of deposits outstanding by category at March 31, 2009 and December 31,2008, and the net changes between the two periods.

 
| ** **                                | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **Variance** | ** ** |
|-------------------------------------------|------------|--------------------|------------|-----------------------|------------|--------------|------------|
| **(dollars in thousands)**                | ** ** | **2009**           | ** ** | **2008**              | ** ** | **Dollars**  | ** ** | **Percent** | ** ** |
| ** **                                | ** ** | **(unaudited)**    | ** ** | **(audited)**         | ** ** | ** **   | ** ** | ** ** | ** ** |
| **Deposit  Classifications:**             |       |               |       |                  |       |         |       |   |   |
| Noninterest bearing deposits              |       | $                  | 15,423     |                  | $          | 15,379       |       | $ | 44 |   | 0.29 | % |
| Interest bearing demand                   |       | 1,414              |       | 1,734                 |       | (320         | )          | -18.45 | % |
| Savings and money market                  |       | 11,110             |       | 8,227                 |       | 2,883        |       | 35.04 | % |
| Certificate of deposit $100,000 and over  |       | 19,109             |       | 18,144                |       | 965          |       | 5.32 | % |
| Certificate of deposit less than $100,000 |       | 4,835              |       | 4,506                 |       | 329          |       | 7.30 | % |
| Total deposits                            |       | $                  | 51,891     |                  | $          | 47,990       |       | $ | 3,901 |   | 8.13 | % |

 

As of March 31, 2009, 29.7% of the Company’sdeposits were non-interest-bearing demand deposits, a decrease from December 31,2008 at 32.1%.  At March 31, 2009 andat December 31, 2008, the Bank held a limited amount (less than 2%) in ‘reciprocalbrokered funds’ under the CDARS program. All other funds have been placed withthe Bank by local depositors at competitive rates within the Bank’s marketingarea.  While the goal of the Bank is tofund credit commitments using local funding sources, it is anticipated thatsome of the future funding sources may include additional brokered funds.

 

The *Analysis of Net InterestIncome,*found within this document, summarizes the distribution ofthe average deposit balances and the average rates paid on deposits during theBank’s two comparative quarters ended March 31, 2009 and 2008.

 

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The following table shows the maturity of all of theBank’s time deposits as of March 31, 2009:

 
| **Maturities**                       | ** ** | **Amounts**        | ** ** |
|--------------------------------------|------------|--------------------|------------|
| **(unaudited)**                      | ** ** | **(in thousands)** | ** ** |
| Three months or less                 |       | $                  | 14,761     |   |
| Over three and through twelve months |       | 8,855              |       |
| Over twelve months                   |       | 328                |       |
| Total                                |       | $                  | 23,944     |   |

 

The Bank has established borrowing lines with theFederal Home Loan Bank (“FHLB”) during 2008. At December 31, 2008, the Bank had borrowed $9.5 million from theFHLB collateralized by both loans and securities.  The average rate that was paid on FHLBborrowings was 4.30% for the quarter ended December 31, 2008.   At March 31, 2009, the Bank hadborrowed $11,500,000 from the FHLB again collateralized by both loans andsecurities.  The average rate that waspaid on FHLB borrowings was 4.23% for the quarter ended March 31, 2009.

 

***Asset Quality and Allowance forLoan Losses***

 

The Company maintains an allowance for loan losses (“ALL”)to provide for potential losses in its loan portfolio.  Additions to the allowance are made 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 recoveries would be credited tothe allowance.  We have instituted loanpolicies designed primarily for internal use, to adequately evaluate and assessthe analysis of the risk factors associated with the Bank’s loan portfolio, toenable us to assess such risk factors prior to granting new loans and to assessthe sufficiency of the allowance.  Weconduct an evaluation on the loan portfolio monthly.

 

The calculation of the adequacy of the ALLnecessarily 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 risk ratingof the loan portfolios as discussed above, amounts and trends in non-performingassets 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 

 

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regulatory accepted accounting practices.  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 March 31, 2009, the Company and the Bank exceeded allapplicable capital adequacy requirements.

 

Under the Federal Reserve Board’s guidelines, ManhattanBancorp 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 stillmaintains levels of capital on a consolidated basis which qualifies it as “wellcapitalized.”

 

The following table sets forth the Company’s and theBank’s regulatory capital ratios as of March 31, 2009:

 
| ** **                            | ** ** | ** **         | ** ** | ** **      | ** ** | **To Be Adequately** | ** ** | **To Be Well** | ** ** |
|---------------------------------------|------------|--------------------|------------|-----------------|------------|----------------------|------------|----------------|------------|
| ** **                            | ** ** | **Actual**         | ** ** | **Capitalized** | ** ** | **Capitalized**      | ** ** |
| **(unaudited)**                       | ** ** | **Amount**         | ** ** | **Ratio**       | ** ** | **Amount**           | ** ** | **Ratio**      | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| ** **                            | ** ** | **(in thousands)** | ** ** |
| **Company**                           |       |               |       |            |       |                 |       |           |       |   |   |   |   |
| Total Capital (risk-weighted assets)  |       | $                  | 33,781     |            | 49.6       | %                    | $          | 5,444          |       | 8 | % | $ | 6,805 |   | 10 | % |
| Tier 1 Capital (risk-weighted assets) |       | $                  | 32,926     |            | 48.4       | %                    | $          | 2,722          |       | 4 | % | $ | 4,083 |   | 6 | % |
| Tier 1 Capital (average assets)       |       | $                  | 32,926     |            | 37.6       | %                    | $          | 3,503          |       | 4 | % | $ | 4,378 |   | 5 | % |
|                                  |       |               |       |            |       |                 |       |           |       |   |   |   |   |
| **Bank**                              |       |               |       |            |       |                 |       |           |       |   |   |   |   |
| Total Capital (risk-weighted assets)  |       | $                  | 25,208     |            | 37.0       | %                    | $          | 5,444          |       | 8 | % | $ | 6,805 |   | 10 | % |
| Tier 1 Capital (risk-weighted assets) |       | $                  | 24,353     |            | 35.8       | %                    | $          | 2,722          |       | 4 | % | $ | 4,083 |   | 6 | % |
| Tier 1 Capital (average assets)       |       | $                  | 24,353     |            | 27.8       | %                    | $          | 3,503          |       | 4 | % | $ | 4,378 |   | 5 | % |

 

***Liquidity and Liquidity Management***

 

Liquidity management for banks requires that fundsalways be available to pay anticipated deposit withdrawals, fund loancommitments, and meet other commitments on a timely and cost effectivebasis.  The acquisition of deposits isour primary source of funds.  Thisrelatively stable and low-cost source of funds has, along with the balances instockholder’s equity, provided substantially all of the funding since the Bank’sinception.

 

We also have liquidity as a net seller of overnightfederal funds at a level that would cushion in part any unexpected increase indemand for loans or decrease in funds deposited.  During the three-month period ended March 31,2009, we had an average balance of $9.8 million in overnight federal funds soldrepresenting approximately 11% of our average assets.   This ratio is far above the minimumguideline of 3% established in the Bank’s liquidity policy.

 

To meet liquidity needs, the Company maintains aportion of its funds in cash deposits in other banks, federal funds andinvestment securities.  As of December 31,2008, liquid assets (including cash, federal funds sold, interest-bearingdeposits in other financial institutions and available-for-sale investmentsecurities that have not been pledged as collateral), as a percentage of theCompany’s deposits, were 53%.  As of March 31,2009, liquid assets as a percentage of the Company’s deposits, althoughdeclining, remain acceptable at 50%.

 

While liquidity was not a major concern in 2008 or2009, management has established and is seeking to

 

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establish secondary sources of liquidity.   The Bank maintains lines of credit totaling$6 million with two correspondent banks for the purchase of overnight federalfunds.  The lines are subject toavailability of funds and have restrictions as to the number of days usedduring defined periods of time.  Anothermethod that the Bank currently has available for acquiring additional depositsis through the acceptance of “brokered deposits” (defined to include not onlydeposits acquired with deposit brokers, but also deposits bearing interestrates far above the local market rates), typically attracting largecertificates of deposits at high interest rates.  The Bank had a nominal amount of “brokereddeposits” as of March 31, 2009 of approximately $903,000 and $902,000 asof December 31, 2008 or less than 2% of total Company deposits at the endof each of these periods.

 

The Bank has established a credit line with the FederalHome Loan Bank of San Francisco and has outstanding as of March 31, 2009 afive-year fixed rate advance of $4.5 million at 4.38% and an overnight variableadvance of $7.0 million at .21%.

 

***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***

 

Credit risk generally arises as a result of the Bank’slending activities, but may also be present in the Bank’s investmentfunctions.  To manage the credit riskinherent in our lending activities, we rely on the adherence to underwritingstandards and loan policies 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 ALL methodology are expected to be examined on a regular basis by bothregulatory agencies and independent loan review professionals.

 

***Interest Rate Risk***

 

Interest rate risk is the exposure of a bank’sfinancial condition and the results of operations to adverse movements ininterest rates.  Movements in interestrates affect both the generation of earnings as well as the market value ofassets and liabilities.   Interest raterisk results from more than just the differences in the maturity or repricingopportunities of interest-earning assets and interest-bearing liabilities.Other factors that affect the interest 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, andprepayments, as well as callable investment securities and early withdrawal oftime deposits.

 

The potential impact of interest rate risk issignificant because of the liquidity and capital adequacy consequences thatreduced earnings or losses may imply. While we recognize and accept that interest rate risk is a routine partof banking operations, the objective of interest rate risk management is tomeasure, 

 

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monitor and control exposure of net interest incometo excessive risks associated 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.

 

The results of the model’s simulations on thepotential loss of net interest income as of March 31, 2009 reflect thefollowing:

 
| **Earnings at Risk**  | ** ** |
|-----------------------|------------|
| **(unaudited)**       | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Rate**              | ** ** | **Maximum** | ** ** | **% (Loss) Gain** | ** ** |
| **Shock**             | ** ** | **Policy** | ** ** | **in Net Interest** | ** ** |
| **(in basis points)** | ** ** | **Guideline** | ** ** | **Income** | ** ** |
| -300                  |       | -15 | % | -12.5 | % |
| -200                  |       | -10 | % | -8.0 | % |
| -100                  |       | -5 | % | -3.6 | % |
| +100                  |       | -5 | % | 3.3 | % |
| +200                  |       | -10 | % | 6.5 | % |
| +300                  |       | -15 | % | 9.8 | % |

 

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 March 31, 2009, 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 March 31, 2009 reflect thefollowing:

 
| **Market Value of Equity** | ** ** |
|----------------------------|------------|
| **(unaudited)**            | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Rate**                   | ** ** | **Maximum** | ** ** | **% (Loss) Gain** | ** ** |
| **Shock**                  | ** ** | **Policy** | ** ** | **in Market** | ** ** |
| **(in basis points)**      | ** ** | **Guideline** | ** ** | **Value of Equity** | ** ** |
| -300                       |       | -30 | % | -0.4 | % |
| -200                       |       | -20 | % | -1.9 | % |
| -100                       |       | -10 | % | -1.0 | % |
| +100                       |       | -10 | % | -1.9 | % |
| +200                       |       | -20 | % | -3.3 | % |
| +300                       |       | -30 | % | -3.9 | % |

 

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 March 31,2009, the Bank interest rate exposure as measured by rate movement on themarket value of the Bank’s equity is within policy guidelines.

 

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

 

The Company maintains disclosure controls andprocedures (as defined in the Exchange Act Rule 13a-15(e)) that aredesigned to assure that information required to be disclosed in our SecuritiesExchange Act of 1934 reports is recorded, processed, summarized and reportedwithin the time periods specified in the Securities and Exchange Commission’s rules andforms, and that such information is accumulated and communicated to management,including the Chief Executive Officer and Chief Financial Officer, asappropriate, to allow timely decisions regarding required disclosures.

 

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 judgment in weighing the costs and benefits of possiblenew or different controls and procedures. Limitations are inherent in all control systems, so no evaluation ofcontrols can provide absolute assurance that all control issues and any fraudwithin 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 March 31, 2009, therewere no significant changes in our internal controls over financial reporting(as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934,as amended) that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial 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 – Submission of Matters to the Voteof Security Holders***

 

None

 

***Item 5 – Other Information***

 

None

 

***Item 6 – Exhibits***

 
| **Exhibit  Number** | ** ** | **Index to  Exhibits**                                                                                                                                                          |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 11                  |       | Statement Regarding Computation of Net  Income (Loss) per Share (1)                                                                                                             |
| 31.1                |       | Certification of the Chief Executive  Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the  Securities Exchange Act of 1934, as amended                        |
| 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)      Theinformation required by this exhibit is incorporated by reference from Note 9to the Company’s financial statements included herein.

 

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Table ofContents

 

### **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:  | May 13,  2009 | /s/  Jeffrey M. Watson         |
|   |               | Jeffrey  M. Watson             |
|   |               | President  and                 |
|   |               | Chief  Executive Officer       |
|   |               | (Principal  Executive Officer) |
|   |               |                           |
|   |               |                           |
| Date:  | May 13,  2009 | /s/  Dean Fletcher             |
|   |               | Dean  Fletcher                 |
|   |               | Executive  Vice President and  |
|   |               | Chief  Financial Officer       |
|   |               | (Principal  Financial and      |
|   |               | Accounting  Officer)           |

 

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