Table of Contents

 

 

 

**UnitedStates**

**Securitiesand Exchange Commission**

**Washington, D.C. 20549**

 

# **FORM 10-Q**

 

**x****                    QUARTERLYREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For thequarterly period ended June 30, 2009**

 

**o****                       TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT**

 

**For the transition period from                to                 **

 

**Commission File Number 333-140448**

 

**MANHATTANBANCORP**

(Exactname 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.) |

 

**2141Rosecrans Avenue, Suite 1160**

**ElSegundo, California  90245**

(Addressof principal executive offices) (Zip Code)

 

Issuer’stelephone number: **(310) 606-8000**

 

Indicateby a check mark whether the registrant (1) filed all reports required tobe filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.   Yes x  No o

 

Indicateby check mark whether or not registrant has submitted electronically and postedon its corporate Website, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 or Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). o  Yes   o  No (not yet applicable to registrant)

 

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

 

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

 

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

 

Asof July 31, 2009, there were 3,987,631 shares of the issuer’s common stockoutstanding.

 

 

 

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Table of Contents

 

**ManhattanBancorp**

**QUARTERLYREPORT ON FORM 10-Q**

**FOR**

**THEQUARTER ENDED JUNE 30, 2009**

 

**TABLEOF 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 |       | 17         |
|                                 |       |                                                                                        |       |       |
| Item  3.                             |       | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                 |       | 34         |
|                                 |       |                                                                                        |       |       |
| Item  4T.                            |       | CONTROLS AND  PROCEDURES                                                                    |       | 36         |
|                                 |       |                                                                                        |       |       |
| PART II - OTHER  INFORMATION    |       |                                                                                        |
|                                 |       |                                                                                        |       |       |
| Item 1.                              |       | LEGAL PROCEEDINGS                                                                           |       | 37         |
|                                 |       |                                                                                        |       |       |
| Item 1A.                             |       | RISK FACTORS                                                                                |       | 37         |
|                                 |       |                                                                                        |       |       |
| Item  2.                             |       | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                |       | 37         |
|                                 |       |                                                                                        |       |       |
| Item  3.                             |       | DEFAULTS ON  SENIOR SECURITIES                                                              |       | 37         |
|                                 |       |                                                                                        |       |       |
| Item  4.                             |       | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                        |       | 37         |
|                                 |       |                                                                                        |       |       |
| Item 5.                              |       | OTHER INFORMATION                                                                           |       | 38         |
|                                 |       |                                                                                        |       |       |
| Item 6.                              |       | EXHIBITS                                                                                    |       | 38         |
|                                 |       |                                                                                        |       |       |
| SIGNATURES                           |       | 39                                                                                          |

 

2

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Table of Contents

 

***PART I – FINANCIAL INFORMATION***

 

***Item 1 – Financial Information***

 

**Manhattan Bancorp and Subsidiary**

**Consolidated Balance Sheets**

 
| ** **                                                                                                                                             | ** ** | **(Unaudited)**         | ** **  | ** **                  | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|-------------|-----------------------------|------------|
| ** **                                                                                                                                             | ** ** | **June 30,  2009** | ** **  | **December 31,  2008** | ** ** |
| **Assets**                                                                                                                                             | ** ** | ** **              | ** **  | ** **                  | ** ** |
| Cash and due from banks                                                                                                                                |       | $                       | 2,148,429   |                        | $          | 19,710,235 |   |
| Federal funds sold                                                                                                                                     |       | 15,255,000              |        | —                      |       |
| Total cash and cash  equivalents                                                                                                                       |       | 17,403,429              |        | 19,710,235                  |       |
| Time deposits-other  financial institutions                                                                                                            |       | 4,345,000               |        | 4,198,000                   |       |
| Investments  securities-available for sale                                                                                                             |       | 6,521,908               |        | 7,413,824                   |       |
| Investments  securities-held to maturity                                                                                                               |       | 992,219                 |        | 990,533                     |       |
|                                                                                                                                                   |       |                    |        |                        |       |
| Loans                                                                                                                                                  |       | 72,244,384              |        | 57,441,936                  |       |
| Allowance for loan losses                                                                                                                              |       | (1,090,000              | )           | (975,000                    | )          |
| Net loans                                                                                                                                              |       | 71,154,384              |        | 56,466,936                  |       |
|                                                                                                                                                   |       |                    |        |                        |       |
| Property and equipment,  net                                                                                                                           |       | 1,218,056               |        | 1,357,276                   |       |
| Stock in other financial  institutions                                                                                                                 |       | 1,726,200               |        | 1,445,050                   |       |
| Accrued interest  receivable and other assets                                                                                                          |       | 473,374                 |        | 457,841                     |       |
|                                                                                                                                                   |       |                    |        |                        |       |
| Total assets                                                                                                                                           |       | $                       | 103,834,570 |                        | $          | 92,039,695 |   |
|                                                                                                                                                   |       |                    |        |                        |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                         |       |                    |        |                        |       |
| Deposits:                                                                                                                                              |       |                    |        |                        |       |
| Non-interest bearing  demand                                                                                                                           |       | $                       | 19,766,548  |                        | $          | 15,379,258 |   |
| Interest bearing:                                                                                                                                      |       |                    |        |                        |       |
| Demand                                                                                                                                                 |       | 2,220,177               |        | 1,734,425                   |       |
| Savings and money market                                                                                                                               |       | 14,002,811              |        | 8,226,974                   |       |
| Certificates of deposit  equal to or greater than $100,000                                                                                             |       | 18,367,451              |        | 18,144,355                  |       |
| Certificates of deposit  less than $100,000                                                                                                            |       | 5,293,137               |        | 4,505,838                   |       |
| Total deposits                                                                                                                                         |       | 59,650,124              |        | 47,990,850                  |       |
| FHLB advances                                                                                                                                          |       | 11,500,000              |        | 9,500,000                   |       |
| Accrued interest payable  and other liabilities                                                                                                        |       | 785,486                 |        | 261,317                     |       |
| Total liabilities                                                                                                                                      |       | 71,935,610              |        | 57,752,167                  |       |
|                                                                                                                                                   |       |                    |        |                        |       |
| Commitments and  contingencies                                                                                                                         |       | —                  |        | —                      |       |
|                                                                                                                                                   |       |                    |        |                        |       |
| Stockholders’ equity                                                                                                                              |       |                    |        |                        |       |
| Serial preferred stock-no  par value; 10,000,000 shares authorized: issued and outstanding, 1,700 as of  June 30, 2009 and December 31, 2008 |       | 1,570,559               |        | 1,558,517                   |       |
| Common stock-no par value;  10,000,000 shares authorized; issued and outstanding, 3,987,631 as of  June 30, 2009 and December 31, 2008       |       | 38,977,282              |        | 38,977,282                  |       |
| Common stock warrant                                                                                                                                   |       | 108,375                 |        | 120,417                     |       |
| Additional paid in capital                                                                                                                             |       | 1,349,051               |        | 957,825                     |       |
| Unrealized gain on  available-for-sale securities                                                                                                      |       | 252,922                 |        | 307,488                     |       |
| Accumulated deficit                                                                                                                                    |       | (10,359,229             | )           | (7,634,001                  | )          |
|                                                                                                                                                   |       |                    |        |                        |       |
| Total stockholders’ equity                                                                                                                        |       | 31,898,960              |        | 34,287,528                  |       |
|                                                                                                                                                   |       |                    |        |                        |       |
| Total liabilities and  stockholders’ equity                                                                                                       |       | $                       | 103,834,570 |                        | $          | 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** | ** ** | **For the six  months**  | ** ** |
|--------------------------------------------------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                                                         | ** ** | **ended  June 30,**  | ** ** | **ended  June 30,** | ** ** |
| ** **                                                         | ** ** | **2009**                  | ** ** | **2008**                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Interest  income**                                               |       |                      |       |                     |       |   |   |   |   |
| Interest and fees on loans                                         |       | $                         | 943,697    |                     | $          | 543,551 |   | $ | 1,738,873 |   | $ | 930,206 |   |
| Interest on investment  securities                                 |       | 130,958                   |       | 120,485                  |       | 232,773 |   | 209,923 |   |
| Interest on federal funds  sold                                    |       | 3,332                     |       | 20,319                   |       | 14,703 |   | 78,697 |   |
| Interest on time  deposits-other financial institutions            |       | 30,773                    |       | 11,544                   |       | 73,210 |   | 37,083 |   |
|                                                               |       |                      |       |                     |       |   |   |   |   |
| Total interest income                                              |       | 1,108,760                 |       | 695,899                  |       | 2,059,559 |   | 1,255,909 |   |
|                                                               |       |                      |       |                     |       |   |   |   |   |
| **Interest  expense**                                              |       |                      |       |                     |       |   |   |   |   |
| NOW, money market and  savings                                     |       | 37,611                    |       | 24,212                   |       | 70,866 |   | 50,309 |   |
| Time deposits                                                      |       | 91,253                    |       | 113,246                  |       | 224,845 |   | 217,114 |   |
| FHLB advances                                                      |       | 49,844                    |       | 2,190                    |       | 99,166 |   | 2,190 |   |
|                                                               |       |                      |       |                     |       |   |   |   |   |
| Total interest expense                                             |       | 178,708                   |       | 139,648                  |       | 394,877 |   | 269,613 |   |
|                                                               |       |                      |       |                     |       |   |   |   |   |
| Net interest income                                                |       | 930,052                   |       | 556,251                  |       | 1,664,682 |   | 986,296 |   |
|                                                               |       |                      |       |                     |       |   |   |   |   |
| Provision for loan losses                                          |       | 453,632                   |       | 163,000                  |       | 627,632 |   | 329,000 |   |
|                                                               |       |                      |       |                     |       |   |   |   |   |
| Net interest income after  provision for loan losses               |       | 476,420                   |       | 393,251                  |       | 1,037,050 |   | 657,296 |   |
|                                                               |       |                      |       |                     |       |   |   |   |   |
| **Non-interest  income**                                           |       | 33,699                    |       | 10,648                   |       | 50,980 |   | 23,549 |   |
|                                                               |       |                      |       |                     |       |   |   |   |   |
| **Non-interest  expense**                                          |       |                      |       |                     |       |   |   |   |   |
| Compensation and benefits                                          |       | 1,112,363                 |       | 969,914                  |       | 2,127,043 |   | 1,917,947 |   |
| Occupancy and equipment                                            |       | 167,073                   |       | 163,491                  |       | 339,466 |   | 321,165 |   |
| Technology and  communication                                      |       | 136,538                   |       | 125,111                  |       | 273,698 |   | 249,943 |   |
| Professional and  administrative expenses                          |       | 419,642                   |       | 158,172                  |       | 803,846 |   | 264,205 |   |
| Other non-interest  expenses                                       |       | 127,196                   |       | 138,573                  |       | 229,828 |   | 245,708 |   |
|                                                               |       |                      |       |                     |       |   |   |   |   |
| Total non-interest  expenses                                       |       | 1,962,812                 |       | 1,555,261                |       | 3,773,881 |   | 2,998,968 |   |
|                                                               |       |                      |       |                     |       |   |   |   |   |
| Loss before income taxes                                           |       | (1,452,693                | )          | (1,151,362               | )          | (2,685,851 | ) | (2,318,123 | ) |
|                                                               |       |                      |       |                     |       |   |   |   |   |
| Provision for income taxes                                         |       | 1,600                     |       | 1,600                    |       | 1,600 |   | 1,600 |   |
|                                                               |       |                      |       |                     |       |   |   |   |   |
| Net loss                                                           |       | $                         | (1,454,293 | )                        | $          | (1,152,962 | ) | $ | (2,687,451 | ) | $ | (2,319,723 | ) |
|                                                               |       |                      |       |                     |       |   |   |   |   |
| Weighted average number of  shares outstanding (basic and diluted) |       | 3,987,631                 |       | 2,517,210                |       | 3,987,631 |   | 2,502,420 |   |
|                                                               |       |                      |       |                     |       |   |   |   |   |
| Basic and diluted loss per  share                                  |       | $                         | (0.36      | )                        | $          | (0.46 | ) | $ | (0.67 | ) | $ | (0.93 | ) |

 

Theaccompanying notes are an integral part of this financial statement.

 

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**Manhattan Bancorp and Subsidiary**

**Consolidated Statement of Stockholders’ Equity (Unaudited)**

**June 30, 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 |   |
| Issuance of common stock  in private placement |       |          |       | 128,175           |       | 1,268,375  |       |         |       |              |       |               |       |              |       |               |       | 1,268,375  |        |
| Share-based compensation  expense              |       |          |       |              |       |       |       |         |       | 335,741           |       |               |       |              |       |               |       | 335,741    |        |
| Unrealized loss on  investment securities      |       |          |       |              |       |       |       |         |       |              |       | (80,498            | )          |              |       | (80,498            | )          | (80,498    | )           |
| Net loss                                       |       |          |       |              |       |       |       |         |       |              |       | (2,319,723         | )          | (2,319,723        | )          |               |       | (2,319,723 | )           |
| Total comprehensive loss                       |       |          |       |              |       |       |       |         |       |              |       | $                  | (2,400,221 | )                 |       |               |       |       |        |   |
| **Balance  at June 30, 2008**             |       | $             | —     |              | 2,615,806  |       | $          | 25,347,203   |       | $                 | —     |               | $          | 602,649           |       |               |       | $          | (5,534,683  | ) | $ | (22,340 | ) | $ | 20,392,829 |   |
|                                           |       |          |       |              |       |       |       |         |       |              |       |               |       |              |       |               |       |       |        |
| **Balance  at December 31, 2008**         |       | $             | 1,558,517  |              | 3,987,631  |       | $          | 38,977,282   |       | $                 | 120,417    |               | $          | 957,825           |       | $                  | —     |       | $           | (7,634,001 | ) | $ | 307,488 |   | $ | 34,287,528 |   |
| Accretion of preferred  stock discount         |       | 12,042        |       |              |       |       |       | (12,042      | )          |              |       |               |       |              |       |               |       | —     |        |
| Dividend on preferred  stock                   |       |          |       |              |       |       |       |         |       |              |       |               |       | (37,777           | )          |               |       | (37,777    | )           |
| Share-based compensation  expense              |       |          |       |              |       |       |       |         |       | 391,226           |       |               |       |              |       |               |       | 391,226    |        |
| Unrealized loss on  investment securities      |       |          |       |              |       |       |       |         |       |              |       | (54,566            | )          |              |       | (54,566            | )          | (54,566    | )           |
| Net loss                                       |       |          |       |              |       |       |       |         |       |              |       | (2,687,451         | )          | $                 | (2,687,451 | )                  |       |       | (2,687,451  | ) |
| Total comprehensive loss                       |       |          |       |              |       |       |       |         |       |              |       | $                  | (2,742,017 | )                 |       |               |       |       |        |   |
| **Balance  at June 30, 2009**             |       | $             | 1,570,559  |              | 3,987,631  |       | $          | 38,977,282   |       | $                 | 108,375    |               | $          | 1,349,051         |       |               |       | $          | (10,359,229 | ) | $ | 252,922 |   | $ | 31,898,960 |   |

 

Theaccompanying notes are an integral part of this financial statement.

 

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**Manhattan Bancorp and Subsidiary**

**ConsolidatedStatements of Cash Flows**

**(Unaudited)**

 
| ** **                                                           | ** ** | **For the six month period** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                           | ** ** | **ended June 30,**      | ** ** |
| ** **                                                           | ** ** | **2009**                     | ** ** | **2008** | ** ** |
| **Cash flows from operating activities**                             |       |                         |       |   |   |
| Net  loss                                                            |       | $                            | (2,687,451 | ) | $ | (2,319,723 | ) |
| Depreciation  and amortization                                       |       | 153,101                      |       | 145,731 |   |
| Provision  for loan losses                                           |       | 627,632                      |       | 329,000 |   |
| Share-based  compensation                                            |       | 391,226                      |       | 335,741 |   |
| (Increase)  in accrued interest receivable and other assets          |       | (30,155                      | )          | (81,942 | ) |
| Increase  in accrued interest payable and other liabilities          |       | 524,169                      |       | 132,130 |   |
|                                                                 |       |                         |       |   |   |
| Net  cash used in operating activities                               |       | (1,021,478                   | )          | (1,459,063 | ) |
|                                                                 |       |                         |       |   |   |
| **Cash flows from investing activities**                             |       |                         |       |   |   |
| Net  (increase) in loans                                             |       | (15,315,080                  | )          | (24,168,788 | ) |
| (Increase)  decrease in time deposits - other financial institutions |       | (147,000                     | )          | 1,594,000 |   |
| Proceeds  from repayment and maturities from investment securities   |       | 850,286                      |       | 412,263 |   |
| Deposit  pending purchase of FHLB stock                              |       | —                       |       | (182,650 | ) |
| Purchase  of stock in other financial institutions                   |       | (281,150                     | )          | — |   |
| Purchase  of premises and equipment                                  |       | (13,881                      | )          | (45,172 | ) |
|                                                                 |       |                         |       |   |   |
| Net  cash used in investing activities                               |       | (14,906,825                  | )          | (22,390,347 | ) |
|                                                                 |       |                         |       |   |   |
| **Cash flows from financing activities**                             |       |                         |       |   |   |
| Net  increase in:                                                    |       |                         |       |   |   |
| Demand  deposits                                                     |       | 4,387,290                    |       | 6,895,059 |   |
| Interest  bearing demand deposits                                    |       | 485,752                      |       | 251,241 |   |
| Savings  and money market deposits                                   |       | 5,775,837                    |       | 1,899,509 |   |
| Certificates  of deposit equal to or greater than $100,000           |       | 787,299                      |       | 3,209,512 |   |
| Certificates  of deposit less than $100,000                          |       | 223,096                      |       | 4,609,208 |   |
| Increase  from borrowings                                            |       | 2,000,000                    |       | 4,500,000 |   |
| Net  proceeds from issuance of common stock                          |       | —                       |       | 1,268,375 |   |
| Cash  dividend paid                                                  |       | (37,777                      | )          | — |   |
|                                                                 |       |                         |       |   |   |
| Net  cash provided by financing activities                           |       | 13,621,497                   |       | 22,632,904 |   |
|                                                                 |       |                         |       |   |   |
| Net  decrease in cash and cash equivalents                           |       | (2,306,806                   | )          | (1,216,506 | ) |
|                                                                 |       |                         |       |   |   |
| **Cash and cash equivalents at beginning of period**                 |       | 19,710,235                   |       | 8,963,333 |   |
|                                                                 |       |                         |       |   |   |
| **Cash and cash equivalents at end of period**                       |       | $                            | 17,403,429 |   | $ | 7,746,827 |   |
|                                                                 |       |                         |       |   |   |
| **Supplementary information**                                        |       |                         |       |   |   |
|                                                                 |       |                         |       |   |   |
| Interest  paid on deposits                                           |       | $                            | 369,149    |   | $ | 260,127 |   |
|                                                                 |       |                         |       |   |   |
| Income  taxes paid                                                   |       | $                            | 1,600      |   | $ | 1,600 |   |

 

The accompanying notes arean integral part of this financial statement.

 

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**MANHATTAN BANCORP**

**NOTES TOFINANCIAL STATEMENTS**

**JUNE 30, 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.      RECENTACCOUNTING PRONOUNCEMENTS**

 

FAIR VALUE MEASUREMENTS: In February 2008,the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”)FAS No. 157-1, “*Application of FASBStatement No. 17 and Other Accounting Pronouncements That Address FairValue Measurements for Purposes of Lease Classification or Measurement UnderStatement 13,*” and FSP SFAS No. 157-2, “*EffectiveDate of FASB Statement No. 157.”*  FSP FAS No. 157-1 removes leasing fromthe scope of SFAS No. 157, “*Fair Value Measurements*.”FSP FAS No. 157-2 delays the effective date of SFAS No. 157 from 2008to 2009 for all non-financial assets and liabilities, except those that arerecognized or disclosed at fair value in the financial statements on arecurring basis (at least annually). Additionally, in accordance with FSP FAS No. 157-2 the Companydelayed the application of SFAS No. 157 for non-financial assets andnon-financial liabilities until January 1, 2009.  The application had no effect on the Company’sfinancial position, results of operations, or cash flows.

 

InOctober 2008, the FASB issued FSP FAS No. 157-3, *“Determiningthe Fair Value of a Financial Asset When the Market for That Asset is NotActive.” *FSP FAS No. 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 No. 157-3 did not impact the Company’s financial statements.

 

InApril 2009, the FASB issued FSP FAS No. 157-4, *“Determining Whether a Market Is Not Active and aTransaction Is Not Distressed,”*FSP FAS No. 157-4 providesguidelines for making fair value

 

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measurementsmore consistent with the principles presented in SFAS No. 157. FSP FAS No. 157-4provides additional authoritative guidance in determining whether a market isactive or inactive, and whether a transaction is distressed, is applicable toall assets and liabilities (i.e., financial and nonfinancial), and will requireenhanced disclosures. The standard is effective for periods ending after June 15,2009. The adoption of FSP FAS 157-4 did not impact the Company’s financialstatements.

 

InApril 2009, the FASB issued FSP FAS No. 115-2, FAS No. 124-2,and EITF No. 99-20-2, *“Recognition andPresentation of Other-Than-Temporary Impairments,”*These FSPs amendFASB Statement No. 115, *Accounting forCertain 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 thannot that it will not have to sell the security in question before recovery ofits cost basis to avoid an impairment being considered other-than-temporary.This FSP also changes the amount of impairment losses recognized in earnings.Under this FSP, impairments are separated into two components: (i) theamount of impairments related to credit losses and (ii) and the amountrelated to other factors. The amount of impairment related to credit losses isreflected as a charge to earnings, while the amount deemed to be related toother factors is reflected as an adjustment to shareholders’ equity throughother comprehensive income. The adoption of FSP FAS No. 115-2, FAS No. 124-2,and EITF No.99-20-2 did not impact the Company’s financial statements.

 

In April 2009 the FASBissued FSP FAS No. 107-1/Accounting Principles Board (“APB”) No. 28-1,*“Interim Disclosures about Fair Value ofFinancial Instrument.*”  FSPFAS 107-1/APB 28-1, amends FASB Statement No. 107, *“Disclosures about Fair Value of FinancialInstruments,”*to require disclosures about fair value of financialinstruments in interim as well as in annual financial statements. This FSP alsoamends APB Opinion No. 28, *“InterimFinancial Reporting,”*to require those disclosures in all interimfinancial statements for periods ended after June 15, 2009.

 

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 reporting period beginning on or after December 31,2008.  These statements are effective forthe Company for the calendar year beginning January 1, 2009.

 

SFASNo. 160 amends Accounting Research Bulletin (ARB) No. 51, “ConsolidatedFinancial Statements,” to establish accounting and reporting standards for thenon-controlling interest in a subsidiary and for the deconsolidation of asubsidiary. SFAS No. 160 clarifies that a non-controlling interest in asubsidiary, which is sometimes referred to as minority interest, is anownership interest in the consolidated entity that should be reported as acomponent of equity in the consolidated financial statements. Among otherrequirements, SFAS No. 160 requires consolidated net income to be reportedat amounts that include the amounts attributable to both the parent and thenon-controlling interest. It also requires disclosure, on the face of theconsolidated income statement, of the amounts of consolidated net incomeattributable to the parent and to the non-controlling interest.

 

TheCompany does not currently have any business combinations which have beenapproved by the applicable regulatory body. The Company’s only consolidatedsubsidiary is the Bank, which is wholly

 

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ownedby the Company.  Management thereforedoes not anticipate that there will be a material impact on the Company’sfinancial condition or results of operations from adoption of these accountingpronouncements.

 

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES:  In June 2009, the FASBissued SFAS No. 168,*“The FASB Accounting Standards Codification and theHierarchy of Generally Accepted Accounting Principles, a Replacement of FASBStatement No. 162.”*SFAS No. 168 replaces SFAS No. 162,“The Hierarchy of Generally Accepted Accounting Principles” and establishes theFASB Accounting Standards Codification (the “Codification”) as the source ofauthoritative accounting principles recognized by the FASB to be applied bynon-governmental entities in the preparation of financial statements inconformity with generally accepted accounting principles. Rules andinterpretive releases of the SEC under authority of federal securities laws arealso sources of authoritative guidance for SEC registrants. All guidancecontained in the Codification carries an equal level of authority. Allnon-grandfathered, non-SEC accounting literature not included in theCodification is superseded and deemed non-authoritative. SFAS No. 168 willbe effective for the Company’s financial statements for periods ending after September 15,2009. SFAS No. 168 is not expected to have a significant impact on theCompany’s financial statements.

 

Followingthe issuance of SFAS No. 168, the FASB announced that it will no longerissue new standards in the form of Statements, FASB Staff Positions, orEmerging Issues Task Force Abstracts. Instead, it is FASB’s intent to issue Accounting Standards Updates (“ASU”).  The FASB does not consider ASU’s asauthoritative in their own rights.  ASU’swill serve only to update the Codification, provide background informationabout the guidance, and provide the bases for conclusions on the change(s) inthe Codification.

 

TheFASB issued two ASU’s on June 30, 2009. ASU No. 2009-01, *“Topic 105 — GenerallyAccepted Accounting Principles- amendments based on Statement of FinancialAccounting Standards Codification and the Hierarchy of General AcceptedAccounting Principles*” has an effective date applied to both interimand annual reporting periods ended after September 15, 2009.  ASU No. 2009-02, “*OmnibusUpdate-Amendments to various Topics for Technical Corrections”*hasan effective date of July 1, 2009. The Company is currently determining the impact these updates will haveon its financial statements.

 

SUBSEQUENT EVENTS: In May 2009, the FASB issued SFAS No. 165, “*Subsequent Events.”*SFAS No. 165establishes general standards of accounting for and disclosure of events thatoccur after the balance sheet date but before financial statements are issuedor available to be issued. SFAS No. 165 defines (i) the period afterthe balance sheet date during which a reporting entity’s management shouldevaluate events or transactions that may occur for potential recognition ordisclosure in the financial statements (ii) the circumstances under whichan entity should recognize events or transactions occurring after the balancesheet date in its financial statements, and (iii) the disclosures anentity should make about events or transactions that occurred after the balancesheet date. SFAS No. 165 became effective for the Company’s financialstatements for periods ending after June 15, 2009. SFAS No. 165 didnot have a significant impact on the Company’s financial statements.

 

**Note 3.    INTEREST-EARNINGASSETS WITH OTHER FINANCIAL INSTITUTIONS**

 

At June 30, 2009, the Company hadinterest-earning deposits with other financial institutions of $4.3 million,with a weighted average yield of 2.26%, and an average weighted remaining lifeof approximately three and one-half months.

 

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**Note 4.    INVESTMENTSECURITIES**

 

Investment securities have been classified in thebalance sheet according to management’s intent. The following table sets forththe investment securities at their amortized cost and estimated fair value withgross unrealized gains and losses as of June 30, 2009 and December 31,2008.

 
| ** **                              | ** ** | ** **          | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|---------------------|------------|----------------|------------|----------------|------------|------------|------------|
| ** **                              | ** ** | **Amortized**       | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**   | ** ** |
| **June 30, 2009****(unaudited)**   | ** ** | **Cost**            | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Value**  | ** ** |
| ** **                              | ** ** | **(in  thousands)** | ** ** |
| **Available-for-sale securities:**      |       |                |       |           |       |           |       |       |       |
| U.S.  government and agency securities  |       | $                   | 980        |           | $          | 14             |       | $          | —     |   | $ | 994 |   |
| Mortgage-backed  securities             |       | 5,289               |       | 239            |       | —         |       | 5,528      |       |
| **Total available-for-sale securities** |       | $                   | 6,269      |           | $          | 253            |       | $          | —     |   | $ | 6,522 |   |
|                                    |       |                |       |           |       |           |       |       |       |
| **Held-to-maturity securities:**        |       |                |       |           |       |           |       |       |       |
| State  and municipal securities         |       | $                   | 992        |           | $          | 4              |       | $          | —     |   | $ | 996 |   |

 
| ** **                              | ** ** | ** **          | ** ** | **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 |   |

 

Thefair value of these securities is based upon quoted market prices unlessotherwise indicated in Note 7, “*Fair Value — Adoption ofSFAS No. 157”.*  Therewere no realized gains or losses for the six-month period ended June 30,2009.   The change in net unrealized losson available-for-sale securities included in accumulated other comprehensiveincome was approximately $55,000 for the six-month period ended June 30,2009. The comparable figure for the six-month period ended June 30, 2008was a loss of approximately $80,000. Available-for-sale securities with anamortized cost of approximately $5.1 million (fair value of approximately $5.4million) were pledged as collateral for Federal Home Loan Bank advances as of June 30,2009.

 

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

 

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AtJune 30, 2009, the Company had no securities with unrealized losses.  Accordingly there were no securities in acontinual loss position for any of the required reporting period at June 30,2009.

 

Anyintra-period declines in market values were attributable to changes in marketrates of interest rather than credit quality. Moreover, because the Company has the ability and intent to hold all ofits investments until a recovery of fair value, which may be at maturity, theCompany considers none of its investments to be temporarily impaired at June 30,2009.

 

Theamortized cost, estimated fair value and average yield of debt securities at June 30,2009 are shown below.  In the case ofavailable-for-sale securities, the average yields are based on effective ratesof book balances at year end.  Yields arederived by dividing interest income, adjusted for amortization of premiums andaccretion of discounts, by total amortized cost.  Mortgage-backed securities are classified inaccordance with estimated lives. Expected maturities may differ from contractual maturities becauseborrowers have the right to prepay obligations.

 
| ** **                                | ** ** | **Available-for-Sale  Securities** | ** ** | **Held-to-Maturity  Securities** | ** ** |
|-------------------------------------------|------------|------------------------------------|------------|----------------------------------|------------|
| ** **                                | ** ** | ** **                         | ** ** | ** **                       | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                | ** ** | **Amortized**                      | ** ** | **Fair**                         | ** ** | **Average** | ** ** | **Amortized** | ** ** | **Fair** | ** ** | **Average** | ** ** |
| **(dollars in thousands)****(unaudited)** | ** ** | **Cost**                           | ** ** | **Value**                        | ** ** | **Yield** | ** ** | **Cost** | ** ** | **Value** | ** ** | **Yield** | ** ** |
| Due  in One Year or Less                  |       | $                                  | 1,565      |                             | $          | 1,638 |   | 5.07 | % | $ | 500 |   | $ | 500 |   | 5.17 | % |
| Due  from One Year to Five Years          |       | 3,013                              |       | 3,142                            |       | 5.38 | % | 492 |   | 496 |   | 4.55 | % |
| Due  from Five Years to Ten Years         |       | 1,563                              |       | 1,609                            |       | 5.16 | % |   |   |   |   |   |   |
| Due  after Ten Years                      |       | 128                                |       | 133                              |       | 4.89 | % |   |   |   |   |   |   |
|                                      |       | $                                  | 6,269      |                             | $          | 6,522 |   | 5.24 | % | $ | 992 |   | $ | 996 |   | 4.86 | % |

 

**Note 5.     LOANS ANDALLOWANCE FOR LOAN LOSSES**

 

Loans are summarized as follows:

 
| ** **                             | ** ** | **June 30,  2009 (unaudited)** | ** ** | **December 31,  2008 (audited)** | ** ** |
|----------------------------------------|------------|-------------------------------------|------------|---------------------------------------|------------|
| ** **                             | ** ** | **Amount**                          | ** ** | **Percentage  of**                    | ** ** | **Amount** | ** ** | **Percentage  of** | ** ** |
| **(dollars  in thousands)**            | ** ** | **Outstanding**                     | ** ** | **Total**                             | ** ** | **Outstanding** | ** ** | **Total** | ** ** |
| Commercial  loans                      |       | $                                   | 28,003     |                                  | 38.8       | % | $ | 18,319 |   | 31.9 | % |
| Real  estate loans                     |       | 36,049                              |       | 49.9                                  | %          | 32,956 |   | 57.4 | % |
| Other  loans                           |       | 8,192                               |       | 11.3                                  | %          | 6,167 |   | 10.7 | % |
| Total  loans, including net loan costs |       | 72,244                              |       | 100.0                                 | %          | 57,442 |   | 100.0 | % |
| Less  : allowance for loan losses      |       | (1,090                              | )          |                                  |       | (975 | ) |   |   |
| Net  loans                             |       | $                                   | 71,154     |                                  |       |   | $ | 56,467 |   |   |   |

 

AtJune 30, 2009, the Company had no impaired or non-accrual loans.  There were no loans past due 90 days or morein either interest or principal as of June 30, 2009 and December 31,2008.

 

Inthe Bank’s period review of the loan portfolio, The Bank recognizes that creditlosses will be experienced and the risk of loss will vary with, among otherthings, general economic conditions, the types of loans being made, thecreditworthiness of the borrower over the term of the loan and, in the case ofa collateralized loan, the quality of the collateral of that loan.  The allowance for loan losses represents theBank’s estimate of the potential losses in that portfolio.  In making that determination, the Bankanalyzes the ultimate ability to collect the loans in its portfolio within thecontracted time and at the contracted amounts. Feedback is provided by internal loan staff, independent loan reviewsand examinations performed by regulatory agencies.  As a part of that ongoing monthly analysis,the Bank

 

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recognizedrecent changes in the ultimate collectability of some of its loans, even amongthose that were still performing as agreed. Among those loans, the Bank charged off certain loans totaling approximately$513,000 as of June 30, 2009.

 

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

 
| ** **                                     | ** ** | **For  the three months ended** | ** ** | **For  the six months ended** | ** ** |
|------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                     | ** ** | **June 30,**               | ** ** | **June 30,**             | ** ** |
| **(Unaudited)**                                | ** ** | **2009**                        | ** ** | **2008**                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                     | ** ** | **(in  thousands)**             | ** ** | **(in  thousands)**           | ** ** | **(in  thousands)** | ** ** | **(in  thousands)** | ** ** |
| Balance  at beginning of period                |       | $                               | 1,149      |                          | $          | 435 |   | $ | 975 |   | $ | 269 |   |
| Additions  to the allowance charged to expense |       | 454                             |       | 163                           |       | 628 |   | 329 |   |
| Recoveries                                     |       | —                          |       | —                        |       | — |   | — |   |
|                                           |       | 1,603                           |       | 598                           |       | 1,603 |   | 598 |   |
| Less  loans charged-off                        |       | 513                             |       | —                        |       | 513 |   | — |   |
|                                           |       |                            |       |                          |       |   |   |   |   |
| Balance  at end of period                      |       | $                               | 1,090      |                          | $          | 598 |   | $ | 1,090 |   | $ | 598 |   |

 

**Note 6.     SHARE-BASEDCOMPENSATION**

 

The following table presents the recorded andunrecognized share-based compensation expenses for the periods indicated:

 
| ** **                        | ** ** | **For  the three months ended** | ** ** | **For  the six months ended** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                        | ** ** | **June 30,**               | ** ** | **June 30,**             | ** ** |
| **(unaudited)**                   | ** ** | **2009**                        | ** ** | **2008**                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                        | ** ** | **(in  thousands)**             | ** ** | **(in  thousands)**           | ** ** | **(in  thousands)** | ** ** | **(in  thousands)** | ** ** |
| Share-based  compensation expense |       | $                               | 195        |                          | $          | 192 |   | $ | 391 |   | $ | 336 |   |
|                                   |            |                                 |            |                               |            |  |  |  |  |  |  |  |  |

 
| ** **                                     | ** ** | **As of**           | ** ** |
|------------------------------------------------|------------|---------------------|------------|
| ** **                                     | ** ** | **June 30,**   | ** ** |
| ** **                                     | ** ** | **2009**            | ** ** | **2008** | ** ** |
| ** **                                     | ** ** | **(in  thousands)** | ** ** | **(in  thousands)** | ** ** |
| Unrecognized  share-based compensation expense |       |                |       |   |   |
| Remainder  of 2008                             |       | $                   | —     |   | $ | 346 |   |
| Remainder  of 2009                             |       | 392                 |       | 692 |   |
| 2010                                           |       | 557                 |       | 445 |   |
| 2011                                           |       | 208                 |       | 22 |   |
| 2012                                           |       | 5                   |       | — |   |
| Total                                          |       | $                   | 1,162      |   | $ | 1,505 |   |

 

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.

 

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Thefollowing table summarizes the weighted average assumptions utilized for stockoptions granted for the period presented:

 
| ** **           | ** ** | **Period  Ended** | ** ** |
|----------------------|------------|-------------------|------------|
| ** **           | ** ** | **June 30,** | ** ** |
| **(unaudited)**      | ** ** | **2009**          | ** ** | **2008** | ** ** |
| Risk-free rate       |       | 2.24              | %          | 3.32 | % |
| Expected term        |       | 6  years          |       | 6  years |   |
| Expected volatility  |       | 26.16             | %          | 36.26 | % |
| Dividend yield       |       | 0.00              | %          | 0.00 | % |
| Fair value per share |       | $                 | 0.74       |   | $ | 3.54 |   |
|                      |            |                   |            |  |  |  |  |

 

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

 
| ** **                                 | ** ** | ** ** | ** ** | ** **            | ** ** | **Weighted  Average** | ** ** | **Aggregate** | ** ** |
|--------------------------------------------|------------|------------|------------|-----------------------|------------|-----------------------|------------|---------------|------------|
| ** **                                 | ** ** | ** ** | ** ** | **Weighted  Average** | ** ** | **Remaining**         | ** ** | **Intrinsic** | ** ** |
| **(unaudited)**                            | ** ** | **Shares** | ** ** | **Exercise  Price**   | ** ** | **Contractual  Life** | ** ** | **Value**     | ** ** |
| **2008**                                   |       |       |       |                  |       |                  |       |          |       |
| Outstanding  at December 31, 2007     |       | 531,770    |       | $                     | 9.99       |                  |       |          |       |   |
| Granted                                    |       | 53,300     |       | $                     | 8.68       |                  |       |          |       |   |
| Exercised                                  |       | —     |       | —                |       |                  |       |          |       |
| Expired                                    |       | —     |       | —                |       |                  |       |          |       |
| Forfeited                                  |       | 38,314     |       | $                     | 10.00      |                  |       |          |       |   |
| Outstanding  at June 30, 2008         |       | 546,756    |       | $                     | 9.85       |                  | 9.23       |          | $          | — |   |
| Options  exercisable at June 30, 2008 |       | —     |       | $                     | —     |                  | —     |          | $          | — |   |
|                                       |       |       |       |                  |       |                  |       |          |       |
| **2009**                                   |       |       |       |                  |       |                  |       |          |       |
| Outstanding  at December 31, 2008     |       | 657,480    |       | $                     | 9.99       |                  |       |          |       |   |
| Granted                                    |       | 42,250     |       | $                     | 8.25       |                  |       |          |       |   |
| Exercised                                  |       | —     |       | —                |       |                  |       |          |       |
| Expired                                    |       | —     |       | —                |       |                  |       |          |       |
| Forfeited                                  |       | 12,438     |       | $                     | 10.00      |                  |       |          |       |   |
| Outstanding  at June 30, 2009         |       | 687,292    |       | $                     | 9.42       |                  | 8.57       |          | $          | — |   |
| Options  exercisable at June 30, 2009 |       | 169,434    |       | $                     | 9.83       |                  | 8.23       |          | $          | — |   |
| Options  unvested at June 30, 2009    |       | 517,858    |       | $                     | 9.28       |                  | 8.62       |          | $          | — |   |

 

**Note 7.      FAIR VALUEMEASUREMENTS**

 

SFASStatement No. 107, “*Disclosures about FairValue of Financial Instruments,”*defines the fair value of afinancial instrument as the amount at which the asset or obligation could beexchanged in a current transaction between willing parties, other than in aforced or liquidation sale.   Fair valueestimates are made at a specific point in time based upon relevant marketinformation and information about the financial instrument.  These estimates do not reflect any premium ordiscount that could result from offering for sale at one time the entireholdings of a particular financial instrument. Because no market value exists for a significant portion of thefinancial instruments, fair value estimates are based on judgments regardingfuture expected loss experience, current economic conditions, riskcharacteristics of various financial instruments, and other factors.  These estimates are subjective in nature,involve uncertainties and matters of judgment and, therefore cannot bedetermined with precision.  Changes inassumptions could significantly affect the estimates.

 

Fairvalue estimates are based on financial instruments both on and off the balancesheet without attempting to estimate the value of anticipated future businessand the value of assets andliabilities that are notconsidered financial instruments. Additionally, tax consequences related to the realization of theunrealized gains and losses can have a potential effect on fair value estimatesand have not been

 

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consideredin many of the estimates. The following methods and assumptions were used toestimate the fair value of significant financial instruments:

 

*FinancialAssets*

 

Thecarrying amount of cash and short-term investments is considered to approximatefair value.  Short-term investmentsinclude federal funds sold and interest bearing deposits with other financialinstitutions.  The fair value ofinvestment securities is generally based upon quoted market prices.  The fair value of loans is estimated using acombination of techniques, including discounting estimated future cash flowsand quoted market prices of similar instruments where available.

 

*FinancialLiabilities*

 

Thecarrying amount of deposit liabilities payable on demand is considered toapproximate fair value.  For fixedmaturity deposits, fair value is estimated by discounting estimated future cashflows using currently offered rates for deposits of similar remainingmaturities.  The fair value of long-termdebt is based upon rates currently available to the Company for debt withsimilar terms and remaining maturities.

 

*Off-BalanceSheet Financial Instruments*

 

Thefair value of commitments to extend credit and standby letters of credit isestimated using the fees currently charged to enter into similaragreements.  The fair value of thesefinancial instruments is not material.

 

Theestimated fair value of financial instruments at June 30, 2009 and December 31,2008 is summarized as follows (dollar amount in thousands):

 
| ** **                                  | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                  | ** ** | **Carrying**            | ** ** | **Estimated  Fair**         | ** ** | **Carrying** | ** ** | **Estimated  Fair** | ** ** |
| **(unaudited)**                             | ** ** | **Value**               | ** ** | **Value**                   | ** ** | **Value** | ** ** | **Value** | ** ** |
| **Financial Assets:**                       |       |                    |       |                        |       |   |   |   |   |
| Cash  and due from banks                    |       | $                       | 2,148      |                        | $          | 2,148 |   | $ | 19,710 |   | $ | 19,710 |   |
| Federal  funds sold                         |       | 15,255                  |       | 15,255                      |       | — |   | — |   |
| Time  deposits-other financial institutions |       | 4,345                   |       | 4,345                       |       | 4,198 |   | 4,198 |   |
| Investment  Securities                      |       | 7,514                   |       | 7,654                       |       | 8,404 |   | 8,400 |   |
| Loans,  net                                 |       | 71,154                  |       | 75,808                      |       | 56,467 |   | 62,133 |   |
| Non-marketable  stocks                      |       | 1,776                   |       | 1,776                       |       | 1,445 |   | 1,445 |   |
| Accrued  interest receivable                |       | 316                     |       | 316                         |       | 284 |   | 284 |   |
| **Financial Liabilities:**                  |       |                    |       |                        |       |   |   |   |   |
| Non-interest  bearing deposits              |       | 19,766                  |       | 19,766                      |       | 15,379 |   | 15,379 |   |
| Interest-bearing  deposits                  |       | 39,884                  |       | 39,589                      |       | 32,612 |   | 32,594 |   |
| Accrued  interest payable                   |       | 27                      |       | 27                          |       | 37 |   | 37 |   |
| FHLB  advances                              |       | 11,500                  |       | 11,468                      |       | 9,500 |   | 9,462 |   |
|                                             |            |                         |            |                             |            |  |  |  |  |  |  |  |  |

 

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

 

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inputs,other than quoted prices included within Level 1, which are observable for theasset or liability, either directly or indirectly.  Level 3 inputs are observable inputs for theasset or liability, and reflect the reporting entity’s own assumptions aboutthe assumptions that market participants would use in pricing the 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)**                       | ** ** | **June 30,** | ** ** | **Assets**           | ** ** | **Inputs**      | ** ** | **Inputs**       | ** ** |
| **Description  of Assets/Liabiltity** | ** ** | **2009**          | ** ** | **(Level  1)**       | ** ** | **(Level  2)**  | ** ** | **(Level  3)**   | ** ** |
| Available-for-sale  securities        |       | $                 | 6,522      |                 | $          | —          |       | $                | 6,522      |   | $ | — |   |
|                                       |            |                   |            |                      |            |                 |            |                  |            |  |  |  |  |

 

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 June 30, 2009, the Company had acollateralized line of credit with the Federal Home Loan Bank (“FHLB”) totaling$14.6 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 .11%maturing on July 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.

 

**Note 10.     SUBSEQUENTEVENTS**

 

Subsequentevents* *are events ortransactions that occur after the balance sheet date but before financialstatements are issued. Recognized subsequent events are events or transactionsthat provide additional evidence about conditions that existed at the date ofthe balance sheet, including the estimates inherent in the process of preparingfinancial statements.  Nonrecognized subsequent events are eventsthat provide evidence about conditions that did not exist at the date of thebalance sheet but arose after that date.  Management has reviewed eventsoccurring through August 12, 2009, the date the financial statements wereissued.  There were no recognizedsubsequent events requiring accrual.  However, a nonrecognized

 

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subsequentevent occurred as of August 10, 2009 when the Board of Directorsauthorized the Company’s management to complete the process necessary to redeemits outstanding preferred stock.

 

In December 2008, the Company issued1,700 shares of its Series A Preferred Stock and a warrant to purchase29,480 shares of the Company’s common stock to the United States Department ofthe Treasury (“Treasury”) in connection with Treasury’s TARP Capital PurchaseProgram for a total price of $1,700,000. The Board has authorized the Company to redeem the preferred stock for$1,700,000 plus all accrued and unpaid dividends on the preferred stock throughSeptember 15, 2009, the date set for the redemption.  The redemption of the preferred stock issubject to the approval of both Treasury and the Federal Reserve Board, theCompany’s primary federal banking regulator. Further, the warrants will be repurchased by the Company following theredemption of the preferred stock at a purchase price to be agreed upon by theCompany and Treasury.

 

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

 

***Forward-Looking Statements***

 

**The statements contained in this Quarterly Report on Form 10-Q,that are not historical facts, are forward-looking statements within themeaning of the Private Securities Litigation Reform Act of 1995, and are basedupon management’s current expectations and beliefs concerning furtherdevelopments and their potential effects on Manhattan Bancorp and itssubsidiary.  The Company’sforward-looking statements involve risks and uncertainties, including the risksand uncertainties described in the Company’s December 31, 2008 10-K ITEM1A. 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 bank holdingcompany, which was incorporated in August 2006 in order to acquire Bank ofManhattan, 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 June 30, 2009 had $103.8 million in assets,$71.1 million in net loans receivable and $68.0 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 of financialcondition and results of operation is intended to provide a betterunderstanding of the significant changes in trends relating to the Company’sfinancial condition, results of operation, liquidity and interest ratesensitivity.  The following discussionand analysis should be read in conjunction with the unaudited financialstatements contained within this report including the notes thereto.

 

***Earnings and Financial Condition Overview***

 

For the three-months ended June 30, 2009, theCompany recorded a loss of $1,454,000 or $0.36 per basic share of commonstock.   Comparing the Company’s 2008second quarter loss of $1,153,000 or $0.46 per basic share of common stock withthe current operating quarter, reflects an approximate 26.1% increase in thereported comparable quarterly loss for 2008. Similarly, the six-month recorded loss for the period ended June 30,2009 was $2,687,000 or $0.67 per basic share of common stock reflecting a 15.9%increase in the reported comparable first half loss of $2,320,000 or $0.93 pershare for the first half of 2008.   Loangrowth improved in the second quarter of 2009 over the limited growthexperienced in the preceding quarter. The Company reports positive status in its loan portfolio as of June 30,2009, which contained no delinquent loans in excess of thirty days or loans onnon-accrual.  The reduction in the dollarsize of loans with recognized credit concerns has allowed the Company tomaintain the allowance for loan losses at acceptable levels, although thepercentage of the allowance has decreased from 1.70% as of December 31,2008 to 1.51% as of June 30, 2009. The allowance for loan losses percentage as reported in both December 31,2008 and March 31, 2009 reflected the potential deficiency associated withcertain credits, where specific reserves were set aside to acknowledge thepossible shortfall.  The recognition of 

 

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the loss, even though the credits were technicallystill performing, removed the need for a specific reserve, thus allowing theallowance to return to the level noted above.

 

The provision for loan losses for the three-monthperiod ended June 30, 2009 was $454,000 compared to only $163,000 for thesame three-month period ended June 30, 2008.  Similarly, the provision for the six-monthperiod ended June 30, 2009 was $628,000 compared to only $329,000 for thefirst half ended June 30, 2008.  Therecognition of the loss of approximately $513,000 is reflected in the higher2009 provisions.

 

Net interest income after provision for loan lossesfor the three-month period ended June 30, 2009 was approximately $476,000,an increase of approximately $83,000 over the prior year’s three-month periodended June 30, 2008.  This was a 21%improvement in net interest income, despite the recognition of the secondquarter loss and was possible because of an increase in interest income, upapproximately $413,000 (59%) for the comparable three-month period ended June 30,2009 over the same period in 2008.  Interest expense also increased but by a smaller percentage (28%) forthe comparable three-month period ended June 30, 2009 over June 30,2008, with the actual dollar amount only increasing approximately $39,000.

 

Net interest income after provision for loan lossesfor the six-month period ended June 30, 2009 was approximately $1,037,000,an increase of approximately $380,000 over the prior year’s six-month periodended June 30, 2008.  This was a 58%improvement in net interest income, despite the recognition of the secondquarter loss and was possible because of an increase in interest income, upapproximately $804,000 (64%) for the comparable six-month period ended June 30,2009 over the same period in 2008.  Interest expense also increased but by a smaller percentage (46%) forthe comparable six-month period ended June 30, 2009 over June 30,2008 with the actual dollar amount only increasing approximately $125,000.

 

Non-interest expense for the three-month periodsended June 30, 2009 compared to June 30, 2008 increased byapproximately $408,000.  Non-interestexpense for the six-month periods ended June 30, 2009 compared to June 30,2008 increased by approximately $775,000. A detailed analysis is found under *Non-Interest Expense*onpage 26.

 

As of June 30, 2009, total assets of theCompany were approximately $103.8 million. This represents an increase of approximately $11.8 million or 12.8% overthe amount reported as of December 31, 2008.  The growth in total assets can be attributedto an increase of approximately $14.8 million in gross loan balances or 25.8%from the approximately $57.4 million reported as of December 31, 2008.

 

Funding for the loan growth was obtained primarilyfrom deposit growth and advances from the Federal Home Loan Bank, coupled withreductions in cash and cash equivalent balances.  At June 30, 2009, total deposits wereapproximately $59.7 million compared with the balance of approximately $48.0million as of December 31, 2008. This represents an approximately $11.7 million increase or 24.3%.  A net increase of $2.0 million in overnightFederal Home Loan Bank advances provided another source of funding.

 

In December 2008, the Company issued1,700 shares of its Series A Preferred Stock and a warrant to purchase29,480 shares of the Company’s common stock to the United States Department ofthe Treasury (“Treasury”) in connection with Treasury’s TARP Capital PurchaseProgram for a total price of $1,700,000. The Board has authorized the Company to redeem the preferred stock for$1,700,000 plus all accrued and unpaid dividends on the preferred stock throughSeptember 15, 2009, the date set for the redemption.  The redemption of the preferred stock issubject to the approval of both Treasury and the Federal Reserve Board, theCompany’s primary federal banking regulator. Further, the warrant will be 

 

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repurchased by the Company following theredemption of the preferred stock at a purchase price to be agreed upon by theCompany and Treasury.

 

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

 
| ** **                                             | ** ** | **For the three months ended** | ** **    |
|--------------------------------------------------------|------------|--------------------------------|---------------|
| ** **                                             | ** ** | **6/30/2009**                  | ** **    | **3/31/2009** | ** ** | **12/31/2008** | ** ** | **9/30/2008** | ** ** | **6/30/2008** | ** ** | **3/31/2008** | ** ** | **12/31/2007** | ** ** |
| ** **                                             | ** ** | **(Unaudited)**                | ** **    | **(Unaudited)** | ** ** | **(Audited)** | ** ** | **(Unaudited)** | ** ** | **(Unaudited)** | ** ** | **(Unaudited)** | ** ** | **(Audited)** | ** ** |
| **Statements of Operations:**                          |       |                           |          |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  income                                       |       | $                              |  1,109   |   | $ |  951 |   | $ |  909 |   | $ |  909 |   | $ |  696 |   | $ |  560 |   | $ |  453 |   |
| Interest  expense                                      |       | 179                            |          | 216 |   | 248 |   | 310 |   | 140 |   | 130 |   | 86 |   |
|                                                   |       |                           |          |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  interest income                                   |       | 930                            |          | 735 |   | 661 |   | 599 |   | 556 |   | 430 |   | 367 |   |
| Provision  for loan losses                             |       | 454                            |          | 174 |   | 275 |   | 102 |   | 163 |   | 166 |   | 167 |   |
|                                                   |       |                           |          |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  interest income after provision                   |       | 476                            |          | 561 |   | 386 |   | 497 |   | 393 |   | 264 |   | 200 |   |
|                                                   |       |                           |          |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest  income                                   |       | 34                             |          | 17 |   | 11 |   | 18 |   | 11 |   | 13 |   | 1 |   |
| Non-interest  expense                                  |       | 1,964                          |          | 1,811 |   | 1,498 |   | 1,513 |   | 1,557 |   | 1,444 |   | 1,484 |   |
|                                                   |       |                           |          |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  loss from operations                              |       | $                              |  (1,454  | ) | $ |  (1,233 | ) | $ |  (1,101 | ) | $ |  (998 | ) | $ |  (1,153 | ) | $ |  (1,167 | ) | $ |  (1,283 | ) |
|                                                   |       |                           |          |   |   |   |   |   |   |   |   |   |   |   |   |
| **Per Share and Other Data:**                          |       |                           |          |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic  and diluted loss per share                      |       | $                              |  (0.36   | ) | $ |  (0.31 | ) | $ |  (0.42 | ) | $ |  (0.38 | ) | $ |  (0.46 | ) | $ |  (0.47 | ) | $ |  (0.52 | ) |
| Book  value per common share- period end               |       | $                              |  7.61    |   | $ |  7.94 |   | $ |  8.21 |   | $ |  7.52 |   | $ |  7.80 |   | $ |  8.17 |   | $ |  8.52 |   |
| Weighted  average shares outstanding basic and diluted |       | 3,988                          |          | 3,988 |   | 2,646 |   | 2,616 |   | 2,517 |   | 2,487 |   | 2,487 |   |
|                                                   |       |                           |          |   |   |   |   |   |   |   |   |   |   |   |   |
| **Balance Sheet Data:**                                |       |                           |          |   |   |   |   |   |   |   |   |   |   |   |   |
| Investments  and fed funds sold                        |       | $                              |  27,114  |   | $ |  17,085 |   | $ |  12,603 |   | $ |  19,898 |   | $ |  13,760 |   | $ |  12,915 |   | $ |  18,087 |   |
| Loans,  net                                            |       | $                              |  71,154  |   | $ |  60,810 |   | $ |  56,467 |   | $ |  47,994 |   | $ |  41,769 |   | $ |  31,758 |   | $ |  17,930 |   |
| Assets                                                 |       | $                              |  103,835 |   | $ |  97,221 |   | $ |  92,040 |   | $ |  71,806 |   | $ |  60,067 |   | $ |  48,526 |   | $ |  39,367 |   |
| Deposits                                               |       | $                              |  59,650  |   | $ |  51,891 |   | $ |  47,991 |   | $ |  47,074 |   | $ |  34,727 |   | $ |  27,861 |   | $ |  17,862 |   |
| Shareholders’  equity                             |       | $                              |  31,899  |   | $ |  33,244 |   | $ |  34,288 |   | $ |  19,667 |   | $ |  20,393 |   | $ |  20,314 |   | $ |  21,189 |   |
|                                                   |       |                           |          |   |   |   |   |   |   |   |   |   |   |   |   |
| **Selected Financial Ratios**                          |       |                           |          |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  loss as a percentage of average assets            |       | -6.53                          | %             | -5.71 | % | -5.98 | % | -5.07 | % | -8.92 | % | -10.73 | % | -14.46 | % |
| Net  loss as a percentage of average equity            |       | -17.75                         | %             | -14.75 | % | -21.73 | % | -19.85 | % | -22.84 | % | -22.54 | % | -23.39 | % |
| Dividend  payout ratio                                 |       | —                         |          | — |   | — |   | — |   | — |   | — |   | — |   |
| Equity  to asset ratio                                 |       | 30.72                          | %             | 34.19 | % | 37.25 | % | 27.39 | % | 33.95 | % | 41.86 | % | 53.82 | % |
| Net  interest margin                                   |       | 4.42                           | %             | 3.60 | % | 3.82 | % | 3.21 | % | 4.71 | % | 4.34 | % | 4.56 | % |
|                                                   |       |                           |          |   |   |   |   |   |   |   |   |   |   |   |   |
| **Credit Quality**                                     |       |                           |          |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance  for loan losses                             |       | $                              |  1,090   |   | $ |  1,149 |   | $ |  975 |   | $ |  700 |   | $ |  598 |   | $ |  435 |   | $ |  269 |   |
| Allowance  /total loans                                |       | 1.51                           | %             | 1.85 | % | 1.70 | % | 1.44 | % | 1.41 | % | 1.35 | % | 1.48 | % |
| Non-performing  loans                                  |       | $                              |  —  |   | $ |  — |   | $ |  — |   | $ |  — |   | $ |  — |   | $ |  — |   | $ |  — |   |
| Net  (recoveries)/ charge-offs                         |       | $                              |  513     |   | $ |  — |   | $ |  — |   | $ |  — |   | $ |  — |   | $ |  — |   | $ |  — |   |

 

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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 interest-bearing liabilities and (ii) theinterest rates earned and paid upon these balances.  Total interest income canfluctuate based upon the mix of earning assets among loans, investments andfederal funds sold 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 from 3.16%for the three-month period ended June 30, 2008 to 3.37% for thethree-month period ended June 30, 2009. Similarly, the interest ratespread increased from 2.70% for the six-month period ended June 30, 2009to 2.91% for the six-month period ended June 30, 2009.  The increases in both periods wereattributable to the larger decline in effective interest rates associated withinterest-bearing liabilities over interest-bearing assets.

 

Net interest margin is net interest income expressedas a percentage of average total interest-earning assets, allowing for thesources and the relative size of funding to be used as factors in thecalculation.   During the comparablesecond quarterly period, while the interest rate spread increased by 21 basispoints, the net interest margin declined by 29 basis points, from 4.71% to4.42%, reflecting the fact that a higher percentage of the sources of thefunding were from interest-bearing liabilities. The percentage of interest-bearing funds to interest-earning assetsdecreased from 44.9% to 43.2% for the three-month periods ended June 30,2008 and 2009, respectively.  Similarly,the interest rate spread for the comparable first semi-annual periods of 2009and 2008 reflects an increase of 21 basis points; the net interest margindeclined by 53 basis points, from 4.54% to 4.01%.  The noted decline in the net interest marginbetween both the second quarters and the first semi-annual periods of 2009 and2008 reflects the fact that a higher percentage of the sources of fundsoriginates from interest-bearing liabilities.

 

Net interest margin is affected by changes in theyields earned on assets and rates paid on liabilities, referred to as rate changes,and changes in the relative amounts of interest-earning assets and interest-bearing liabilities, referred to as volume changes.  Interest rates earned and paid are 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:

 

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| ** **                                            | ** ** | **Three  Months Ended**     | ** **  | **Six  Months Ended**       | ** ** |
|-------------------------------------------------------|------------|-----------------------------|-------------|-----------------------------|------------|
| ** **                                            | ** ** | **June 30,**           | ** **  | **Dollar**                  | ** ** | **Percent** | ** ** | **June 30,** | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                                            | ** ** | **2009**                    | ** **  | **2008**                    | ** ** | **Change** | ** ** | **Change** | ** ** | **2009** | ** ** | **2008** | ** ** | **Change** | ** ** | **Change** | ** ** |
| ** **                                            | ** ** | **(Unaudited)**             | ** **  | **(Unaudited)**             | ** ** |
| ** **                                            | ** ** | **(Dollars  in thousands)** | ** **  | **(Dollars  in thousands)** | ** ** |
| Interest  income                                      |       | $                           |  1,109 |                        | $          |  696 |   | $ |  413 |   | 59.34 | % | $ |  2,060 |   | $ |  1,256 |   | $ |  804 |   | 64.01 | % |
| Interest  expense                                     |       | 179                         |        | 140                         |       | 39 |   | 27.86 | % | 395 |   | 270 |   | 125 |   | 46.30 | % |
| Net  interest income before provision for loan losses |       | $                           |  930   |                        | $          |  556 |   | $ |  374 |   | 67.27 | % | $ |  1,665 |   | $ |  986 |   | $ |  679 |   | 68.86 | % |
| Net  interest margin                                  |       | 4.42                        | %           | 4.71                        | %          |   |   | -6.20 | % | 4.01 | % | 4.54 | % |   |   | -11.58 | % |

 

The following tables present the weighted averageyield on each specified category of interest-earning assets, the weightedaverage rate paid on each specified category of interest-bearing liabilities,the resulting interest rate spread, and the net interest margin for thecomparable second quarter periods indicated:

 
| ** **                                              | ** ** | **(Unaudited)**                      | ** **   |
|---------------------------------------------------------|------------|--------------------------------------|--------------|
| ** **                                              | ** ** | **Three months ended June 30,** | ** **   |
| ** **                                              | ** ** | **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                                     |       | $                                    |  7,029  |   | $ |  3 |   | 0.17 | % | $ |  4,013 |   | $ |  20 |   | 2.00 | % |
| Deposits  with other financial institutions             |       | 6,069                                |         | 31 |   | 2.05 | % | 868 |   | 12 |   | 5.56 | % |
| Investments                                             |       | 7,808                                |         | 131 |   | 6.73 | % | 6,888 |   | 120 |   | 7.01 | % |
| Loans(1)                                                |       | 63,559                               |         | 944 |   | 5.96 | % | 35,745 |   | 544 |   | 6.12 | % |
| Total  interest-earning assets                          |       | 84,465                               |         | 1,109 |   | 5.27 | % | 47,514 |   | 696 |   | 5.89 | % |
| Non-interest-earning  assets                            |       | 4,862                                |         |   |   |   |   | 3,892 |   |   |   |   |   |
| Total  assets                                           |       | $                                    |  89,327 |   |   |   |   |   | $ |  51,406 |   |   |   |   |   |
|                                                    |       |                                 |         |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities:**                       |       |                                 |         |   |   |   |   |   |   |   |   |   |   |
| Demand                                                  |       | $                                    |  1,803  |   | 0 |   | 0.10 | % | $ |  1,499 |   | 0 |   | 0.10 | % |
| Savings  and money market                               |       | 12,759                               |         | 37 |   | 1.16 | % | 5,154 |   | 24 |   | 1.87 | % |
| Certificates  of deposit                                |       | 18,746                               |         | 92 |   | 1.97 | % | 13,679 |   | 113 |   | 3.32 | % |
| FHLB  advances                                          |       | 4,577                                |         | 50 |   | 4.32 | % | 198 |   | 2 |   | 4.38 | % |
| Total  interest-bearing liabilities                     |       | 37,885                               |         | 179 |   | 1.90 | % | 20,530 |   | 140 |   | 2.73 | % |
| Non-interest-bearing  demand deposits                   |       | 17,869                               |         |   |   |   |   | 10,394 |   |   |   |   |   |
| Total  funding sources                                  |       | 55,754                               |         |   |   | 1.29 | % | 30,924 |   |   |   | 1.82 | % |
| Non-interest-bearing  liabilities                       |       | 700                                  |         |   |   |   |   | 400 |   |   |   |   |   |
| Shareholders’  equity                              |       | 32,873                               |         |   |   |   |   | 20,082 |   |   |   |   |   |
| Total  liabilities and shareholders’ equity        |       | $                                    |  89,327 |   |   |   |   |   | $ |  51,406 |   |   |   |   |   |
|                                                    |       |                                 |         |   |   |   |   |   |   |   |   |   |   |
| Excess  of interest-earning assets over funding sources |       | $                                    |  28,711 |   |   |   |   |   | $ |  16,590 |   |   |   |   |   |
| Net  interest income                                    |       |                                 |         | $ |  930 |   |   |   |   |   | $ |  556 |   |   |   |
| Net  interest rate spread                               |       |                                 |         |   |   | 3.37 | % |   |   |   |   | 3.16 | % |
| Net  interest margin                                    |       |                                 |         |   |   | 4.42 | % |   |   |   |   | 4.71 | % |

 

----

(1)         Theaverage balance of loans is calculated net of deferred loan fees/cost, butwould include non-accrual loans, if any, with a zero yield.   Loan fees net of amortized costs wereapproximately $4,000 for the three-month period ended June 30, 2009.   Loan costs net of amortized fees included intotal net income were approximately $15,000 for the three-month period ended June 30,2008.

 

The table below sets forth changes for thecomparable three-month periods ended June 30, 2009 and June 30, 2008for average earning assets, average interest-bearing liabilities, and theirrespective rates:

 

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| ** **                                  | ** ** | **VARIANCE IN BALANCES AND RATES** | ** ** | ** **   | ** ** | ** **                                         | ** ** |
|---------------------------------------------|------------|--------------------------------------------------------|------------|--------------|------------|----------------------------------------------------|------------|
| ** **                                  | ** ** | **Average Balance**                               | ** ** | ** **   | ** ** | **Average Yield/Rate**                        | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | **for the three months ended**     | ** ** | ** **   | ** ** | **for the three months ended** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | **June 30,**                                      | ** ** | **Variance** | ** ** | **June 30,**                                  | ** ** | ** ** | ** ** |
| **(dollars in thousands)**        | ** ** | **2009**                                               | ** ** | **2008**     | ** ** | **dollar**                                         | ** ** | **percent** | ** ** | **2009** | ** ** | **2008** | ** ** | **Variance** | ** ** |
| ** **                                  | ** ** | **(Unaudited)**                                        | ** ** |
| **Interest-earning assets:**                |       |                                                   |       |         |       |                                               |       |   |   |   |   |   |   |   |   |
| Federal  funds sold                         |       | $                                                      | 7,029      |         | $          | 4,013                                              |       | $ | 3,016 |   | 75.16 | % | 0.17 | % | 2.00 | % | -1.83 | % |
| Deposits  with other financial institutions |       | 6,069                                                  |       | 868          |       | 5,201                                              |       | 599.19 | % | 2.05 | % | 5.56 | % | -3.51 | % |
| Investments                                 |       | 7,808                                                  |       | 6,888        |       | 920                                                |       | 13.36 | % | 6.73 | % | 7.01 | % | -0.28 | % |
| Loans                                       |       | 63,559                                                 |       | 35,745       |       | 27,814                                             |       | 77.81 | % | 5.96 | % | 6.12 | % | -0.16 | % |
| Total  interest-earning assets              |       | $                                                      | 84,465     |         | $          | 47,514                                             |       | $ | 36,951 |   | 77.77 | % | 5.27 | % | 5.89 | % | -0.62 | % |
|                                        |       |                                                   |       |         |       |                                               |       |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities:**           |       |                                                   |       |         |       |                                               |       |   |   |   |   |   |   |   |   |
| Interest-bearing  demand                    |       | $                                                      | 1,803      |         | $          | 1,499                                              |       | $ | 304 |   | 20.28 | % | 0.10 | % | 0.10 | % | 0.00 | % |
| Savings  and money market                   |       | 12,759                                                 |       | 5,154        |       | 7,605                                              |       | 147.56 | % | 1.16 | % | 1.87 | % | 0.71 | % |
| Certificates  of deposit                    |       | 18,746                                                 |       | 13,679       |       | 5,067                                              |       | 37.04 | % | 1.97 | % | 3.32 | % | -1.35 | % |
| FHLB  advances                              |       | 4,577                                                  |       | 198          |       | 4,379                                              |       | 2211.62 | % | 4.32 | % | 4.38 | % | 0.06 | % |
| Total  interest-bearing liabilities         |       | $                                                      | 37,885     |         | $          | 20,530                                             |       | $ | 17,355 |   | 84.53 | % | 1.90 | % | 2.73 | % | -0.83 | % |

 

The following table presents the weighted average yieldon each specified category of interest-earning assets, the weighted averagerate paid on each specified category of interest-bearing liabilities, theresulting interest rate spread, and the net interest margin for the comparablefirst-half periods indicated:

 

**ANALYSIS OF NET INTEREST INCOME**

 
| ** **                                              | ** ** | **(Unaudited)**                                   | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                              | ** ** | **Six months ended June 30,** | ** ** |
| ** **                                              | ** ** | **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                                     |       | $                                                 | 8,405      |   | $ | 15 |   | 0.36 | % | $ | 5,611 |   | $ | 79 |   | 2.83 | % |
| Deposits  with other financial institutions             |       | 7,001                                             |       | 73 |   | 2.10 | % | 1,523 |   | 37 |   | 4.89 | % |
| Investments                                             |       | 8,037                                             |       | 233 |   | 5.85 | % | 7,001 |   | 210 |   | 6.03 | % |
| Loans(1)                                                |       | 60,187                                            |       | 1,739 |   | 5.83 | % | 29,554 |   | 930 |   | 6.33 | % |
| Total  interest-earning assets                          |       | 83,630                                            |       | 2,060 |   | 4.97 | % | 43,689 |   | 1,256 |   | 5.78 | % |
| Non-interest-earning  assets                            |       | 4,827                                             |       |   |   |   |   | 3,874 |   |   |   |   |   |
| Total  assets                                           |       | $                                                 | 88,457     |   |   |   |   |   | $ | 47,563 |   |   |   |   |   |
|                                                    |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities:**                       |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Demand                                                  |       | $                                                 | 1,778      |   | 1 |   | 0.10 | % | $ | 965 |   | 1 |   | 0.13 | % |
| Savings  and money market                               |       | 11,432                                            |       | 70 |   | 1.23 | % | 4,339 |   | 50 |   | 2.32 | % |
| Certificates  of deposit                                |       | 20,891                                            |       | 225 |   | 2.17 | % | 12,191 |   | 217 |   | 3.58 | % |
| FHLB  advances                                          |       | 4,605                                             |       | 99 |   | 4.34 | % | 99 |   | 2 |   | 4.38 | % |
| Total  interest-bearing liabilities                     |       | 38,706                                            |       | 395 |   | 2.06 | % | 17,594 |   | 270 |   | 3.08 | % |
| Non-interest-bearing  demand deposits                   |       | 15,809                                            |       |   |   |   |   | 9,175 |   |   |   |   |   |
| Total  funding sources                                  |       | 54,515                                            |       |   |   | 1.46 | % | 26,769 |   |   |   | 2.03 | % |
| Non-interest-bearing  liabilities                       |       | 550                                               |       |   |   |   |   | 343 |   |   |   |   |   |
| Shareholders’  equity                              |       | 33,392                                            |       |   |   |   |   | 20,451 |   |   |   |   |   |
| Total  liabilities and shareholders’ equity        |       | $                                                 | 88,457     |   |   |   |   |   | $ | 47,563 |   |   |   |   |   |
|                                                    |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Excess  of interest-earning assets over funding sources |       | $                                                 | 29,115     |   |   |   |   |   | $ | 16,920 |   |   |   |   |   |
| Net  interest income                                    |       |                                              |       | $ | 1,665 |   |   |   |   |   | $ | 986 |   |   |   |
| Net  interest rate spread                               |       |                                              |       |   |   | 2.91 | % |   |   |   |   | 2.70 | % |
| Net  interest margin                                    |       |                                              |       |   |   | 4.01 | % |   |   |   |   | 4.54 | % |

 

----

(1)   Theaverage balance of loans is calculated net of deferred loan fees/cost, butwould include non-accrual loans, if any, with a zero yield.   Loan fees net of amortized costs wereapproximately $9,000 for the six-month period ended June 30, 2009.  Loan costs net of amortized fees included intotal net income were approximately $25,000 for the six-month period ended June 30,2008.

 

The table below sets forth changes for thecomparable six-month periods ended June 30, 2009 and June 30, 2008for average earning assets, average interest-bearing liabilities, and theirrespective rates:

 

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| ** **                                  | ** ** | **VARIANCE IN BALANCES AND RATES** | ** ** | ** **   | ** ** |
|---------------------------------------------|------------|--------------------------------------------------------|------------|--------------|------------|
| ** **                                  | ** ** | **Average Balance**                               | ** ** | ** **   | ** ** | ** ** | ** ** | **Average Yield/Rate** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | **for the six months ended**       | ** ** | ** **   | ** ** | ** ** | ** ** | **for the six months ended** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | **June 30,**                                      | ** ** | **Variance** | ** ** | **June 30,** | ** ** | ** ** | ** ** |
| **(dollars in thousands)**        | ** ** | **2009**                                               | ** ** | **2008**     | ** ** | **dollar** | ** ** | **percent** | ** ** | **2009** | ** ** | **2008** | ** ** | **Variance** | ** ** |
| ** **                                  | ** ** | **(Unaudited)**                                        | ** ** |
| **Interest-earning assets:**                |       |                                                   |       |         |       |   |   |   |   |   |   |   |   |   |   |
| Federal  funds sold                         |       | $                                                      | 8,405      |         | $          | 5,611 |   | $ | 2,794 |   | 49.80 | % | 0.36 | % | 2.83 | % | -2.47 | % |
| Deposits  with other financial institutions |       | 7,001                                                  |       | 1,523        |       | 5,478 |   | 359.68 | % | 2.10 | % | 4.89 | % | -2.79 | % |
| Investments                                 |       | 8,037                                                  |       | 7,001        |       | 1,036 |   | 14.80 | % | 5.85 | % | 6.03 | % | -0.18 | % |
| Loans                                       |       | 60,187                                                 |       | 29,554       |       | 30,633 |   | 103.65 | % | 5.83 | % | 6.33 | % | -0.50 | % |
| Total  interest-earning assets              |       | $                                                      | 83,630     |         | $          | 43,689 |   | $ | 39,941 |   | 91.42 | % | 4.97 | % | 5.78 | % | -0.81 | % |
|                                        |       |                                                   |       |         |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities:**           |       |                                                   |       |         |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  demand                    |       | $                                                      | 1,778      |         | $          | 965 |   | $ | 813 |   | 84.25 | % | 0.10 | % | 0.13 | % | -0.03 | % |
| Savings  and money market                   |       | 11,432                                                 |       | 4,339        |       | 7,093 |   | 163.47 | % | 1.23 | % | 2.32 | % | -1.09 | % |
| Certificates  of deposit                    |       | 20,891                                                 |       | 12,191       |       | 8,700 |   | 71.36 | % | 2.17 | % | 3.58 | % | -1.41 | % |
| FHLB  advances                              |       | 4,605                                                  |       | 99           |       | 4,506 |   | 4551.52 | % | 4.34 | % | 4.38 | % | -0.04 | % |
| Total  interest-bearing liabilities         |       | $                                                      | 38,706     |         | $          | 17,594 |   | $ | 21,112 |   | 120.00 | % | 2.06 | % | 3.08 | % | -1.02 | % |

 

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

 
| ** **                                  | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                  | ** ** | **June 30, 2009 over 2008**    | ** ** | **June 30, 2009 over 2008**  | ** ** |
| **(in thousands)**                     | ** ** | **Volume**                                         | ** ** | **Rate**                                         | ** ** | **Total** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Total** | ** ** |
| ** **                                  | ** ** | **(Unaudited)**                                    | ** ** | **(Unaudited)**                                  | ** ** |
| **Interest income:**                        |       |                                               |       |                                             |       |   |   |   |   |   |   |   |   |
| Federal  funds sold                         |       | $                                                  | 15         |                                             | $          | (32 | ) | $ | (17 | ) | $ | 39 |   | $ | (103 | ) | $ | (64 | ) |
| Deposits  with other financial institutions |       | 72                                                 |       | (53                                              | )          | 19 |   | 133 |   | (97 | ) | 36 |   |
| Investments                                 |       | 16                                                 |       | (5                                               | )          | 11 |   | 31 |   | (8 | ) | 23 |   |
| Loans                                       |       | 427                                                |       | (27                                              | )          | 400 |   | 961 |   | (152 | ) | 809 |   |
| Net  increase (decrease)                    |       | 530                                                |       | (117                                             | )          | 413 |   | 1,164 |   | (360 | ) | 804 |   |
|                                        |       |                                               |       |                                             |       |   |   |   |   |   |   |   |   |
| **Interest expense:**                       |       |                                               |       |                                             |       |   |   |   |   |   |   |   |   |
| Interest-bearing  demand                    |       | —                                             |       | —                                           |       | — |   | — |   | — |   | — |   |
| Savings  and money market                   |       | 36                                                 |       | (23                                              | )          | 13 |   | 82 |   | (62 | ) | 20 |   |
| Certificates  of deposit                    |       | 42                                                 |       | (63                                              | )          | (21 | ) | 154 |   | (146 | ) | 8 |   |
| FHLB  advances                              |       | 48                                                 |       | —                                           |       | 48 |   | 98 |   | (1 | ) | 97 |   |
| Net  increase (decrease)                    |       | 126                                                |       | (86                                              | )          | 40 |   | 334 |   | (209 | ) | 125 |   |
| Total  net increase (decrease)              |       | $                                                  | 404        |                                             | $          | (31 | ) | $ | 373 |   | $ | 830 |   | $ | (151 | ) | $ | 679 |   |

 

A review of the above tables shows that the overallincrease in net interest income of approximately $373,000 between the twocomparative quarters ended at June 30, 2009 and June 30, 2008 is theresult of several factors.

 

Among the most significant factors in the increasein net interest income is the overall growth in average quarterly earningassets, up approximately $37.0 million or 77.8% between June 30, 2008 and June 30,2009.  This increase was primarily aresult of loan growth ($27.8 million) reflecting 75.3% of the totalincrease.  The percentage of average loandollars outstanding, as a percentage of interest-earning assets, remainedessentially constant at approximately 75.3% as of June 30, 2008 and June 30,2009.  The higher outstanding volume ofloans between the second-quarter periods would have resulted in an increase ofapproximately $427,000 in interest income, but the actual amount of interestincome earned was reduced by approximately $27,000 due to the decline in theoverall effective yield on the loan portfolio. The overall yield on outstanding loans declined from 6.12% for thethree-month period ended June 30, 2008 to 5.96% for the three-month periodended June 30, 2009.

 

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Similarly, among the most significant factors in theincrease in net interest income is the overall growth in the year-to-dateaverage interest-earning assets between 2008 and 2009, up approximately $39.9million or 91.4% between June 30, 2008 and June 30, 2009.  This increase was also centered in loangrowth ($30.6 million) reflecting 76.7% of the total increase.  The percentage of average loan dollarsoutstanding, as a percentage of interest-earning assets, grew fromapproximately 67.7% as of June 30, 2008 to approximately 72.0% as of June 30,2009.  The higher outstanding volume ofloans between the semi-annual periods would have resulted in an increase ofapproximately $961,000 in interest income, but the actual amount of interestincome earned was reduced by approximately $152,000 due to the decline in theoverall effective yield on the loan portfolio. The overall yield on outstanding loans declined from 6.33% for thesix-month period ended June 30, 2008 to 5.83% for the six-month periodended June 30, 2009.

 

The Bank continues to have five significant depositrelationships, some of which are with related parties, which totaled, as of June 30,2009, approximately $15.4 million or 22.7% 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. Two of thesesignificant deposit relationships, which total $9.9 million at June 30,2009, were with related parties. While the amount of Fed funds sold as apercentage of all interest-earning assets held steady at approximately 8.3% forthe comparable three-month periods ended June 30, 2009 and June 30,2008, the average balance in Fed funds sold increased by approximately $3.0million.  This higher outstanding volumewould have resulted in an increase of approximately $15,000 in interestincome.  However, the dramatic decline inthe effective yield on this category by 183 basis points (from an effectiveyield of 2.00% for the three-month period ended June 30, 2008 to 0.17% forthe three-month period ended June 30, 2009) completely offset any positivebenefit by reducing the potential interest income by approximately$32,000.  Similarly, the amount of Fedfunds sold as a percentage of all interest-earning assets declined from 12.8%to 10.1% for the comparable six-month periods ended June 30, 2008 and June 30,2009, with the average balance in Fed funds sold increasing by approximately$2.8 million.  This higher outstandingvolume would have resulted in an increase of approximately $39,000 in interestincome.  However, the dramatic decline inthe effective yield on this category by 247 basis points completely offset anypositive benefit by reducing the potential interest income by approximately $103,000.

 

The Bank, in order to improve the overall yield oninterest-earning assets, elected to increase its effective yield by placingadditional funds in interest-bearing certificates of deposits in otherfinancial institutions. The higher outstanding volume of funds invested incertificate of deposits in other financial institutions between thesecond-quarter periods would have resulted in an increase of approximately$72,000 in interest income, but this amount was offset by the decline in theoverall effective yield on this category reducing the amount by approximately$53,000.  The overall yield on the fundsplaced with other financial institutions declined from 5.56% for thethree-month period ended June 30, 2008 to 2.05% for the three-month periodended June 30, 2009.  Similarly,when comparing the average outstanding balances during the six-month periodended June 30, 2009 versus the same period ended June 30, 2008, theincreased volume would have resulted in an increase in interest income ofapproximately $133,000, but this amount was offset by the decline in theoverall effective yield on interest-bearing certificates of deposit in otherfinancial institutions, which fell by 277 basis points to 2.10% for thesix-month period ended June 30, 2009 compared to 4.89% for the comparablesix-month period ended June 30, 2008.

 

For the comparable second quarter periods of 2008and 2009, the change in the mix of interest-yielding assets, coupled with theoverall growth, resulted in the increase of interest income of approximately$413,000, with approximately $530,000 due to volume increases, which more thanfully offset the result of the general market interest rate decline ofapproximately $117,000.  While generalinterest rates declined by 225 basis points between the beginning of secondquarter of 2008 and the end of the second quarter of 2009, the averageeffective yield on the Company’s earning assets declined by only approximately62 basis points.

 

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Total interest expense for the comparable secondquarter periods ended June 30, 2008 and 2009 increased by approximately$40,000, with increases in balances outstanding on interest-bearing liabilitiesbeing partially offset by the savings available on the repricing associatedwith the overall declining market rates. The increase in interest expense dueto the change in outstanding average interest-bearing liabilities wasapproximately $126,000.  The savings whichresulted from the decline in effective rates was

approximately $86,000.

 

For the comparable three-month periods ended in June 30,2009 and June 30, 2008, the average balance in *Interest-BearingDemand* deposits increased by approximately $304,000.  As the rate during both periods wasessentially at its floor of 10 basis points, any variance in interest expensewould be volume-related.  However, thevolume variance is less than $1,000 and, therefore, is not reflected in thetable.

 

For the comparable three-month periods ended June 30,2009 and June 30, 2008, the average balance in*Savings andMoney Market*deposits increased by approximately $7.6 million. Thehigher outstanding volume in certificates of deposits would have resulted in anincrease of expense of approximately $36,000. However the significant decline in the effective yield on this categoryby 71 basis points, from an effective yield of 1.87% for the three-month periodended June 30, 2008 to 1.16% for the three-month period ended June 30,2009, offset most of the additional expense by reducing the potential interestcost by approximately $23,000.

 

A similar result occurred in the*Certificateof Deposits* category. For the comparable three-month periods ended June 30,2009 and June 30, 2008, the average balance increased by approximately$5.1 million. The higher outstanding volume in certificates of deposits wouldhave resulted in an increase of expense of approximately $42,000.  However the significant decline in theeffective yield on this category by 135 basis points, from an effective yieldof 3.32% for the three-month period ended June 30, 2008 to 1.97% for thethree-month period ended June 30, 2009, offset all of the additionalexpense by reducing the potential interest cost by approximately $63,000.

 

The establishment of the Federal Home Loan Bankadvance by the Bank occurred on June 30, 2008 and was present in thethree-month period ended June 30, 2008 for only one day.  The overall effective rate and the averageoutstanding balance on the Federal Home Loan Bank advances is heavily weightedtowards the $4.5 million long-term fixed advance at a stated rate of4.38%.   With insignificant changes inthe effective rate, the total variance is reflected as a volume variance,resulting in the entire increase of approximately $48,000 appearing under thevolume heading.

 

Total interest expense for the comparablesemi-annual periods ended June 30, 2008 and 2009 increased by $125,000,again with the increases in balances outstanding on interest-bearing liabilitiesbeing partially offset by the savings available on the repricing associatedwith the overall declining market rates. The increase in interest expense due to the change in outstandingaverage interest-bearing liabilities was approximately $334,000. The savingswhich resulted from the decline in effective rates was approximately $209,000.

 

 For thecomparable six-month periods ended June 30, 2009 and June 30, 2008,the average balance in *Interest-Bearing Demand*deposits increased by approximately $304,000. As the rate during both periods was essentially at its floor of 10 basispoints, any variance in interest expense would be volume-related.  However, the volume variance is less than$1,000 and therefore, is not reflected in the table.

 

For the comparable six-month periods ended in June 30,2009 and June 30, 2008, the average balance in*Savings andMoney Market*deposits increased by approximately $7.1 million. Thehigher outstanding volume in this category would have resulted in an increaseof expense of approximately $82,000.

 

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However, the decline in the effective yield on thiscategory by approximately 108 basis points, from an effective yield of 2.32%for the six-month period ended June 30, 2008 to 1.23% for the six-monthperiod ended June 30, 2009, offset most of the additional expense byreducing the potential interest cost by approximately $62,000.

 

A similar result occurred in the*Certificateof Deposits* category. For the comparable six-month periods ended June 30,2009 and June 30, 2008, the average balance increased by approximately$8.7 million. The higher outstanding volume in certificates of deposits wouldhave resulted in an increase of expense of approximately $154,000.  However the decline in the effective yield onthis category by 141 basis points, from an effective yield of 3.58% for thesix-month period ended June 30, 2008 to 2.17% for the six-month periodended June 30, 2009, offset most of the additional expense by reducing thepotential interest cost by approximately $146,000.

 

The establishment of the Federal Home Loan Bankadvance by the Bank occurred on June 30, 2008, so was present in thethree-month period ended June 30, 2008 for only one day.  The overall effective rate and the averageoutstanding balance on the Federal Home Loan Bank advances is heavily weightedtowards the $4.5 million long-term fixed advance at a stated rate of 4.38%.   With insignificant changes in the effectiverate, the total variance is reflected as a volume variance, resulting in theentire increase of approximately $48,000 appearing as under the volume heading.  For the comparable six-month periods ended June 30,2008 and June 30, 2009, the total reported variance of approximately $97million appears primarily under the volume variance heading.

 

Discounting the effects of the Federal Home Loanadvances, the costs associated with the increases in outstanding interest-bearingdeposit dollars were almost entirely offset by the reduction in the effectiverates associated with these funding sources in the periods under analysis.

 

***Provision for Loan Losses***

 

The Company madeprovisions for loan losses of $454,000 for the three-month period ended June 30,2009, compared to $163,000 for the three-month period ended June 30,2008.  For the comparable six-monthperiods ended June 30, 2009 and June 30, 2008, the Company madeprovisions of $628,000 and $329,000 respectively.  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. .  As a part of that ongoingmonthly analysis, the Bank recognized recent changes in the ultimatecollectability of some of its loans, even among those that were stillperforming as agreed.  Among those loans,the Bank charged off certain loans totaling approximately $513,000 as of June 30,2009. The Company had previously provided a specific reserve for these loansbeginning in the first quarter of 2009 and thus the provision needed to thesecond quarter reflects the incremental amount needed to reflect the chargeoff, while maintaining an acceptable allowance level in the loan loss reserve. For further analysis of the adequacy of theloan loss reserve, see *Asset Quality andAllowance for Loan Losses.*

 

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***Non-Interest Income***

 

Non-interest income for both the three-month andsix-month periods ended June 30, 2009 and June 30, 2008 wasnegligible.

 

***Non-Interest Expense***

 

The following tables set forth changes for the twocomparable three-month and six-month periods ending June 30, 2009 and June 30,2008, allowing comparisons between these operating periods:

 
|                                      |   | **For  the three months ended** |       |         |       |        |   |
|-------------------------------------------|--------|---------------------------------|------------|--------------|------------|-------------|--------|
|                                      |   | **June 30,**               |       |         |       |        |   |
|                                      |   | **2009**                        | ** ** | **2008**     |       |        |   |   |   |
|                                      |   | **(dollars  in thousands)**     |       | **Variance** |       |
|                                      |   | **(Unaudited)**                 |       | **Dollars**  | ** ** | **Percent** |   |
| Compensation  and benefits                |   | $                               | 1,112      |         | $          | 970         |   | $ | 142 |   | 14.6 | % |
| Occupancy  and equipment                  |   | 167                             |       | 163          |       | 4           |   | 2.5 | % |
| Technology  and communication             |   | 137                             |       | 125          |       | 12          |   | 9.6 | % |
| Professional  and administrative expenses |   | 420                             |       | 158          |       | 262         |   | 165.8 | % |
| Other  non-interest expenses              |   | 127                             |       | 139          |       | (12         | )      | -8.6 | % |
| Total  non-interest expenses              |   | $                               | 1,963      |         | $          | 1,555       |   | $ | 408 |   | 26.2 | % |

 

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

 

·                  Compensation and benefits increased as the result on a slight increase inthe number of employees between the two periods along with moderate salaryincreases for Company staff.

 

·                  Increased data processing costs associated with increasing customer baseand contractual obligations.

 

·                  Increased costs associated with the exploration of new businessopportunities, including legal and 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 $162,000 more in the three-month period ended June 30,2009 than in the prior year’s comparable quarter.

 
|                                      |   | **For  the six months ended** |       |         |       |        |   |
|-------------------------------------------|--------|-------------------------------|------------|--------------|------------|-------------|--------|
|                                      |   | **June 30,**             |       |         |       |        |   |
|                                      |   | **2009**                      | ** ** | **2008**     |       |        |   |   |   |
|                                      |   | **(dollars  in thousands)**   |       | **Variance** |       |
|                                      |   | **(Unaudited)**               |       | **Dollars**  | ** ** | **Percent** |   |
| Compensation  and benefits                |   | $                             | 2,127      |         | $          | 1,918       |   | $ | 209 |   | 10.9 | % |
| Occupancy  and equipment                  |   | 339                           |       | 321          |       | 18          |   | 5.6 | % |
| Technology  and communication             |   | 274                           |       | 250          |       | 24          |   | 9.6 | % |
| Professional  and administrative expenses |   | 804                           |       | 264          |       | 540         |   | 204.5 | % |
| Other  non-interest expenses              |   | 230                           |       | 246          |       | (16         | )      | -6.5 | % |
| Total  non-interest expenses              |   | $                             | 3,774      |         | $          | 2,999       |   | $ | 775 |   | 25.8 | % |

 

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·                  Compensation and benefits increased as the result on a slight increase inthe number of employees between the two periods along with moderate salaryincreases for Company staff.

 

·                  Increased data processing costs associated with increasing customer base andcontractual obligations.

 

·                  Increased costs associated with the exploration of new businessopportunities, including legal and 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 $357,000 more in the six-month period ended June 30,2009 than in the prior year’s comparable period.

 

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***FINANCIAL CONDITION***

 

The Company’s increase in total assets level to$103.8 million as of June 30, 2009 represents a 12.8% increase, orapproximately $11.8 million, from the total assets level of $92.0 million as ofDecember 31, 2008.  The growth iscentered in loans, which were funded primarily by locally generated deposits.

 

***Loans***

 

Total gross loansas of June 30, 2009 increased by approximately $14.8 million over December 31,2008. Outstanding loan balances increased in all categories with the mostmonetary growth occurring in commercial loans, where the total grew byapproximately $9.7 million or 52.9%.  Theincrease in commercial loans was the direct result of intentional planning.  With the goal of greater diversification inthe loan portfolio, an increased emphasis was placed on originating commercialloans during the second quarter of 2009. The addition of individuals with expertise in commercial lending helpedfacilitate this change in the loan mix.

 

Real estate loans, the Company’s largest loancategory, also reflect growth during the second quarter, increasing byapproximately $3.1 million. As a percentage of total loan dollars outstanding,this category declined to less than 50%, due to the recent larger increase incommercial loans.

 

The table below sets forth the changes from December 31,2008 to June 30, 2009 in the composition of the loan portfolio:

 
| ** **                        | ** ** | **June 30,  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                 |       | $                                   | 28,023     |                                  | 38.7       | % | $ | 18,305 |   | 31.8 | % |
| Real  estate loans                |       | 34,488                              |       | 47.7                                  | %          | 31,842 |   | 55.4 | % |
| Real  estate - construction       |       | 1,657                               |       | 2.3                                   | %          | 1,194 |   | 2.1 | % |
| Other  loans                      |       | 8,179                               |       | 11.3                                  | %          | 6,152 |   | 10.7 | % |
| Total  Loans                      |       | 72,347                              |       | 100.0                                 | %          | 57,493 |   | 100.0 | % |
|                              |       |                                |       |                                  |       |   |   |   |   |
| Add:  Purchase Premium            |       | 35                                  |       |                                  |       | 40 |   |   |   |
| Add:  Unamortized Costs           |       | 65                                  |       |                                  |       | 61 |   |   |   |
| Less:  Deferred Fees              |       | (203                                | )          |                                  |       | (152 | ) |   |   |
| Less  - Allowance for loan losses |       | (1,090                              | )          |                                  |       | (975 | ) |   |   |
| Net  loans                        |       | $                                   | 71,154     |                                  |       |   | $ | 56,467 |   |   |   |

 

Of the Bank’s total loans outstanding as of June 30,2009, 25.9% were due in one year or less, 36.0% were due in one to five years,and 38.1% 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 June 30, 2009**

 
|                                      |   | ** **                  | ** ** | **Maturing**    | ** ** | ** **     | ** ** | ** ** |   |
|-------------------------------------------|--------|-----------------------------|------------|-----------------|------------|----------------|------------|------------|--------|
|                                      |   | **Within One**              | ** ** | **One to Five** | ** ** | **After Five** | ** ** | ** ** |   |
| **(unaudited)**                           |   | **Year**                    | ** ** | **Years**       | ** ** | **Years**      | ** ** | **Total**  |   |
|                                      |   | **(Dollars  in thousands)** |       |
| Commercial                                |   | $                           | 15,165     |            | $          | 10,858         |       | $          | 2,000  |   | $ | 28,023 |   |
| Real  Estate                              |   | 1,700                       |       | 13,742          |       | 19,046         |       | 34,488     |   |
| Real  Estate-Construction                 |   | 1,328                       |       | 329             |       | —         |       | 1,657      |   |
| Other  Loans                              |   | 550                         |       | 1,134           |       | 6,495          |       | 8,179      |   |
| Total                                     |   | $                           | 18,743     |            | $          | 26,063         |       | $          | 27,541 |   | $ | 72,347 |   |
|                                      |   |                        |       |            |       |           |       |       |   |
| Loans  with pre-determined interest rates |   | $                           | 685        |            | $          | 10,470         |       | $          | 2,434  |   | $ | 13,589 |   |
| Loans  with floating or adjustable rates  |   | 18,058                      |       | 15,593          |       | 25,107         |       | 58,758     |   |
| Total                                     |   | $                           | 18,743     |            | $          | 26,063         |       | $          | 27,541 |   | $ | 72,347 |   |

 

Of the gross loan dollars outstanding as of June 30,2009, approximately 81.2% had adjustable rates. Most of the adjustable rate loans generally have interest rates tied tothe prime rate; 66.8% of the total adjustable rate loan dollars outstandingwill 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 June 30, 2009, approximately 92.1% 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 foreclose on the assets, we may not be able to recover thefull 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 70.8% of thereal estate loans are adjustable during the term of the loan.  Approximately 52.7% of the real estate loanshave a remaining maturity between five and ten years.  As of June 30, 2009, the weightedaverage ratio of the original loan extension to the underlying value of theproperty was approximately 38%, with weighted average debt service coverage of1.92.  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 June 30, 2009, these 

 

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had been limited to undisbursed commitments toextend 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 outstanding balance of approximately$370,000 as of June 30, 2009 has not changed since December 31,2008.  All commitments noted below wereassociated with loans and were therefore subject to the same creditunderwriting policies and practices as those used for the loans reflected inthe financial statements.  When deemedadvisable, the Bank obtains collateral to support such commitments.

 
| **Loan  Commitments**        | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                   | ** ** | **(In thousands)**      | ** ** | **(In thousands)**          | ** ** |
|                         |       |                    |       |                        |       |
| Commitment  to extend credit |       | $                       | 20,854     |                        | $          | 14,914 |   |
| Standby  letters of credit   |       | 370                     |       | 370                         |       |
|                         |       | $                       | 21,224     |                        | $          | 15,284 |   |

 

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.

 

***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.

 

As a part of that ongoing monthly analysis, the Bankrecognized recent changes in the ultimate collectability of some of its loans,even among those that were still performing as agreed.  Among those loans, the Bank charged offcertain loans totaling approximately $513,000 as of June 30, 2009.

 

The Bank had no non-performing assets as of June 30,2009 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 June 30, 2009 and December 31,2008, and the net changes between the two periods.

 
| ** **                                 | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | **Variance** | ** ** | **% of  Deposits** | ** ** |
|--------------------------------------------|------------|-------------------|------------|-----------------------|------------|--------------|------------|--------------------|------------|
| **(dollars  in thousands)**                | ** ** | **2009**          | ** ** | **2008**              | ** ** | **Dollars**  | ** ** | **Percent**        | ** ** | **June** | ** ** | **December** | ** ** |
| ** **                                 | ** ** | **(unaudited)**   | ** ** | **(audited)**         | ** ** | ** **   | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Deposit Classifications:**               |       |              |       |                  |       |         |       |               |       |   |   |   |   |
| Noninterest  bearing deposits              |       | $                 | 19,767     |                  | $          | 15,379       |       | $                  | 4,388      |   | 28.53 | % | 33.14 | % | 32.05 | % |
| Interest  bearing demand                   |       | 2,220             |       | 1,734                 |       | 486          |       | 28.03              | %          | 3.72 | % | 3.61 | % |
| Savings  and money market                  |       | 14,003            |       | 8,227                 |       | 5,776        |       | 70.21              | %          | 23.48 | % | 17.14 | % |
| Certificate  of deposit $100,000 and over  |       | 18,367            |       | 18,144                |       | 223          |       | 1.23               | %          | 30.79 | % | 37.81 | % |
| Certificate  of deposit less than $100,000 |       | 5,293             |       | 4,506                 |       | 787          |       | 17.47              | %          | 8.87 | % | 9.39 | % |
| Total  deposits                            |       | $                 | 59,650     |                  | $          | 47,990       |       | $                  | 11,660     |   | 24.30 | % | 100.00 | % | 100.00 | % |

 

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As of June 30, 2009, 33.1% of the Company’sdeposits were non-interest-bearing demand deposits, an increase from December 31,2008 at 32.1%.  At December 31,2008, the Company held a limited amount (less than 2%) in ‘reciprocal brokeredfunds’ under the CDARS program.  At June 30,2009, the Company continued to hold a limited amount in ‘reciprocal brokeredfunds’ under the CDARS program, again less than 2%.  However, to bridge a temporary shortfall indeposits necessary to fund increasing loan demand at the end of June 2009,the Bank acquired $5,000,000 from the CDARS program for a 26 week period endingDecember 24, 2009 at .95%.  Brokered funds from all sources were $5.8 million or 9.7% of totalCompany deposits. All other depository funds have been placed with the Bank bylocal customers at competitive rates within the Bank’s marketing area.  While the goal of the Bank is to fund creditcommitments using local funding sources, it is anticipated that some of thefuture funding sources may include additional 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 June 30, 2009 and 2008 and for thetwo comparative semi-annual periods ended June 30, 2009 and 2008.

 

The following table shows the maturity of all of theBank’s time deposits as of June 30, 2009:

 
| **Maturities**                        | ** ** | **Amounts**         | ** ** |
|---------------------------------------|------------|---------------------|------------|
| **(unaudited)**                       | ** ** | **(in  thousands)** | ** ** |
| Three  months or less                 |       | $                   | 9,144      |   |
| Over  three and through twelve months |       | 14,425              |       |
| Over  twelve months                   |       | 92                  |       |
| Total                                 |       | $                   | 23,661     |   |

 

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 June 30, 2009, the Bank had borrowed$11,500,000 from the FHLB again collateralized by both loans andsecurities.  The average rate that waspaid on FHLB borrowings was 4.32% for the quarter ended June 30, 2009, and4.34% for the semi-annual period ended June 30, 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, 

 

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substandard, doubtful and loss. Using these riskfactors, management continues the analysis of the general reserves applyingquantitative factors based upon different risk scenarios.

 

In addition, management considers other trends thatare qualitative relative to our marketplace, demographic trends, the riskrating of the loan portfolios as discussed above, amounts and trends innon-performing assets and concentration factors.  Theallowance for loan losses percentage as reported in both December 31, 2008and March 31, 2009 reflected the potential deficiency associated withcertain credits, for which specific reserves were set aside toacknowledge the portion estimated to be uncollectible.  As previouslydiscussed, the Bank charged off these loans as of June 20, 2009.  Theallowance continues to be set at a level reflecting our analysis of the riskswithin the portfolio as of June 30, 2009.

 

***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 the regulatorsthat, if undertaken, could have a material effect on the Bank’s financialstatements and operations.  Under capitaladequacy guidelines and regulatory framework for prompt corrective action, theBank must meet specific capital guidelines that involve quantitative measuresof the Bank’s assets, liabilities, and certain off-balance sheet items ascalculated under 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 June 30, 2009, the Company and the Bank exceeded allapplicable capital adequacy requirements.

 

Under the Federal Reserve Board’s guidelines,Manhattan Bancorp is a “small bank holding company,” and thus qualifies for anexemption from the consolidated risk-based and leverage capital adequacyguidelines applicable to bank holding companies with assets of $500 million ormore.  However, while not required to doso under the Federal Reserve Board’s capital adequacy guidelines, the Companystill maintains levels of capital on a consolidated basis which qualifies it as“well-capitalized.”

 

The following table sets forth the Company’s and theBank’s regulatory capital ratios as of June 30, 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)  |       | $                   | 32,662     |            | 40.2       | %                     | $          | 6,501           |       | 8 | % | $ | 8,126 |   | 10 | % |
| Tier  1 Capital (risk-weighted assets) |       | $                   | 31,645     |            | 38.9       | %                     | $          | 3,250           |       | 4 | % | $ | 4,875 |   | 6 | % |
| Tier  1 Capital (average assets)       |       | $                   | 31,645     |            | 35.4       | %                     | $          | 3,573           |       | 4 | % | $ | 4,466 |   | 5 | % |
|                                   |       |                |       |            |       |                  |       |            |       |   |   |   |   |
| **Bank**                               |       |                |       |            |       |                  |       |            |       |   |   |   |   |
| Total  Capital (risk-weighted assets)  |       | $                   | 24,452     |            | 30.1       | %                     | $          | 6,501           |       | 8 | % | $ | 8,126 |   | 10 | % |
| Tier  1 Capital (risk-weighted assets) |       | $                   | 23,435     |            | 28.8       | %                     | $          | 3,250           |       | 4 | % | $ | 4,875 |   | 6 | % |
| Tier  1 Capital (average assets)       |       | $                   | 23,435     |            | 26.2       | %                     | $          | 3,573           |       | 4 | % | $ | 4,466 |   | 5 | % |

 

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***Liquidity and LiquidityManagement***

 

Liquidity management for banks requires that fundsalways be available to pay anticipated deposit withdrawals, fund loan commitments,and meet other commitments on a timely and cost effective basis.  The acquisition of deposits is our primarysource of funds.  This relatively stableand low-cost source of funds has, along with the balances in stockholder’sequity, provided substantially all of the funding since the Bank’s inception.

 

We also have liquidity as a net seller of overnightfederal funds at a level that would cushion, in part, any unexpected increasein demand 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. During the three-monthperiod ended June 30, 2009, we had an average balance of $7.0 million inovernight federal funds representing approximately 8% of our averageassets.  These ratios are far above theminimum guideline 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 June 30,2009, liquid assets as a percentage of the Company’s deposits, althoughdeclining, remain acceptable at 39%.

 

While liquidity has not been a major concern in 2008or 2009, management has established 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.   As noted, the Company had $5.8 million in “brokereddeposits” as of June 30, 2009 or less than 9.7% of total Company depositsat the end of this period and $902,000 as of December 31, 2008 or lessthan 2% of total Company deposits at the end of this period.   The Company’s policy restricts the relianceon brokered funds to no more than 40% of total deposits.

 

The Bank has established a credit line with theFederal Home Loan Bank of San Francisco and has outstanding as of June 30,2009 a five-year fixed rate advance of $4.5 million at 4.38% and an overnightvariable advance of $7.0 million at 0.11%.

 

The Bank has also been approved for advances fromthe Federal Reserve Bank Discount Window. All advances are subject to pledged collateral sufficient to cover eachadvance.

 

***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

 

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approves loans in excess of management’s lendingauthority.  This committee is alsoresponsible for the review of any problem credits and assessing the adequacy ofour allowance for loan losses.  TheAsset/Liability Committee reviews investments made by management and monitorscompliance with investment, 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, monitor and control exposure of net interest income to excessive risksassociated with interest rate movements.

 

Understanding the inherent weakness in traditionalgap analysis to properly measure interest rate risk, the Bank employs modelingtechniques which measure the effect 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 June 30, 2009 reflect thefollowing:

 
| **Earnings at Risk**  | ** ** |
|-----------------------|------------|
| **(unaudited)**       | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Rate**              | ** ** | **Maximum** | ** ** | **% (Loss) Gain** | ** ** |
| **Shock**             | ** ** | **Policy** | ** ** | **in Net Interest** | ** ** |
| **(in basis points)** | ** ** | **Guideline** | ** ** | **Income** | ** ** |
| -300                  |       | -15 | % | -13.3 | % |
| -200                  |       | -10 | % | -8.7 | % |
| -100                  |       | -5 | % | -4.1 | % |
| +100                  |       | -5 | % | 5.1 | % |
| +200                  |       | -10 | % | 10.2 | % |
| +300                  |       | -15 | % | 15.3 | % |

 

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The method employed in rate shocking the earnings atrisk was “ramping”, (i.e., changing the indicated rate movement gradually overa twelve-month horizon).  Based upon themodel simulation as of June 30, 2009, the Bank’s interest rate riskexposure as measured by rate movement on net interest income is within policyguidelines.

 

The results of the model’s simulations on thepotential loss of the Company’s equity as of June 30, 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 | % | -4.1 | % |
| -200                            |       | -20 | % | -3.5 | % |
| -100                            |       | -10 | % | -1.5 | % |
| +100                            |       | -10 | % | -1.6 | % |
| +200                            |       | -20 | % | -2.8 | % |
| +300                            |       | -30 | % | -3.0 | % |

 

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

 

Based upon the model simulation as of June 30,2009, the Bank interest rate exposure as measured by rate movement on themarket value of the Bank’s equity is within policy guidelines.

 

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

 

The Company maintains disclosure controls andprocedures (as defined in the Exchange Act Rule 13a-15(e)) 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 of controlscan provide absolute assurance that all control issues and any fraud within theCompany have been detected.

 

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

 

During the quarter ended June 30, 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***

 

The following items were submitted to the securityholders for approval at the annual meeting held May 28, 2009:

 

1.     **Election ofDirectors. **The election of eight (8) persons to the Board of Directors to serveuntil the 2010 Annual Meeting of Shareholders and until their successors are electedor have qualified.  The following personswere elected on the following votes:

** **
| **Name of Director**     | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** | **% Voted For** | ** ** |
|--------------------------|------------|---------------|------------|--------------------|------------|-----------------|------------|
| Chris W. Caras, Jr. |       | 2,895,082     |       | 13,000             |       | 99.55           | %          |
| Harry W. Chenoweth       |       | 2,895,082     |       | 13,000             |       | 99.55           | %          |
| John D. Flemming         |       | 2,895,082     |       | 13,000             |       | 99.55           | %          |
| Patrick E. Greene        |       | 2,895,082     |       | 13,000             |       | 99.55           | %          |
| Christopher J. Growney   |       | 2,895,082     |       | 13,000             |       | 99.55           | %          |
| Larry S. Murphy          |       | 2,895,082     |       | 13,000             |       | 99.55           | %          |
| Kyle A. Ransford         |       | 2,895,082     |       | 13,000             |       | 99.55           | %          |
| Jeffrey M. Watson        |       | 2,895,082     |       | 13,000             |       | 99.55           | %          |
| Stephen P. Yost          |       | 2,895,082     |       | 13,000             |       | 99.55           | %          |

 

2.     **AdvisoryVote on Executive Compensation.**Thenon-binding advisory vote approving the compensation paid to the namedexecutive officers of Manhattan Bancorp:

 
| **Votes For** | ** ** | **Votes Against** | ** ** | **Votes Abstaining** | ** ** | **% Voted For** | ** ** | **Broker Non-Votes** | ** ** |
|---------------|------------|-------------------|------------|----------------------|------------|-----------------|------------|----------------------|------------|
| 2,797,046     |       | 100,784           |       | 10,252               |       | 96.18           | %          | 0                    |       |

 

3.     **Ratificationof Independent Accountant. **The ratification of Vavrinek, Trine, Day & Co. LLP as theCompany’s independent accountants for the 2009 fiscal year:

 
| **Votes For** | ** ** | **Votes Against** | ** ** | **Votes Abstaining** | ** ** | **% Voted For** | ** ** | **Broker Non-Votes** | ** ** |
|---------------|------------|-------------------|------------|----------------------|------------|-----------------|------------|----------------------|------------|
| 2,900,082     |       | 3,000             |       | 5,000                |       | 99.75           | %          | 0                    |       |

 

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***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)      The information required by this exhibit is incorporated by reference from Note9 to the Company’s financial statements included herein.

 

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### **SIGNATURES**

 

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

 
|   |                  |                           | **MANHATTAN BANCORP**  |
|--------|-----------------------|--------------------------------|------------------------|
|   |                  |                           |                   |
| Date:  | August 12,  2009 |                           | /s/  Jeffrey M. Watson |
|   |                  | Jeffrey  M. Watson             |
|   |                  | President  and                 |
|   |                  | Chief  Executive Officer       |
|   |                  | (Principal  Executive Officer) |
|   |                  |                           |
|   |                  |                           |
| Date:  | August 12,  2009 |                           | /s/  Dean Fletcher     |
|   |                  | Dean  Fletcher                 |
|   |                  | Executive  Vice President and  |
|   |                  | Chief  Financial Officer       |
|   |                  | (Principal  Financial and      |
|   |                  | Accounting  Officer)           |

 

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