Table of Contents

 

 

 

**United States**

**Securities and Exchange Commission**

**Washington, D.C. 20549**

** **

# **FORM 10-Q**

 
| **x**                                                   | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|---------------------------------------------------------|---------------------------------------------------------------------------------------------------|
| ** **                                              | ** **                                                                                        |
| **For the quarterly period ended March 31,  2010** |
| ** **                                              | ** **                                                                                        |
| **o**                                                   | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT**                    |

 

**For the transition period from                   to                    **

 

**Commission File Number 333-140448**

 

**MANHATTANBANCORP**

(Exact name of registrant as specified in its charter)

 

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

 

**2141 Rosecrans Avenue, Suite 1160**

**El Segundo, California 90245**

(Address of principal executive offices) (Zip Code)

 

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

 

Indicate by a check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWebsite, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 or Regulation S-T during the preceding 12months (or for such shorter period that the registrant was required to submitand post such files).  o Yes  o No

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See the definition of “large accelerated filer,” “accelerated filer”and “smaller reporting company” in Rule 12b-2 of the Exchange Act

 

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

 

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

 

As of April 30, 2010, there were 3,987,631 shares of the issuer’scommon stock outstanding.

 

 

 

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Table of Contents

 

**Manhattan Bancorp**

**QUARTERLY REPORT ON FORM 10-Q**

**FOR**

**THE QUARTER ENDED MARCH 31, 2010**

 

**TABLE OF CONTENTS**

 
|                                 | **PAGE**                                                                                    |
|--------------------------------------|---------------------------------------------------------------------------------------------|
| PART I -  FINANCIAL INFORMATION |                                                                                        |
|                                 |                                                                                        |   |
| Item  1.                             | FINANCIAL STATEMENTS                                                                        |   |
|                                 |                                                                                        |   |
|                                 | CONSOLIDATED BALANCE SHEETS                                                                 | 3 |
|                                 |                                                                                        |   |
|                                 | CONSOLIDATED STATEMENTS OF OPERATIONS                                                       | 4 |
|                                 |                                                                                        |   |
|                                 | CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY                                         | 5 |
|                                 |                                                                                        |   |
|                                 | CONSOLIDATED STATEMENTS OF CASH FLOWS                                                       | 6 |
|                                 |                                                                                        |   |
|                                 | NOTES TO FINANCIAL STATEMENTS                                                               | 7 |
|                                 |                                                                                        |   |
| Item 2.                              | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 14 |
|                                 |                                                                                        |   |
| Item 3.                              | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                 | 28 |
|                                 |                                                                                        |   |
| Item 4T.                             | CONTROLS AND  PROCEDURES                                                                    | 29 |
|                                 |                                                                                        |   |
| PART II  - OTHER INFORMATION    |                                                                                        |
|                                 |                                                                                        |   |
| Item 1.                              | LEGAL PROCEEDINGS                                                                           | 31 |
|                                 |                                                                                        |   |
| Item 1A.                             | RISK FACTORS                                                                                | 31 |
|                                 |                                                                                        |   |
| Item 2.                              | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                | 31 |
|                                 |                                                                                        |   |
| Item 3.                              | DEFAULTS  UPON SENIOR SECURITIES                                                            | 31 |
|                                 |                                                                                        |   |
| Item 4.                              | (REMOVED AND RESERVED)                                                                      | 31 |
|                                 |                                                                                        |   |
| Item 5.                              | OTHER INFORMATION                                                                           | 31 |
|                                 |                                                                                        |   |
| Item  6.                             | EXHIBITS                                                                                    | 31 |
|                                 |                                                                                        |   |
| SIGNATURES                           | 32                                                                                          |

 

2

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Table of Contents

 

***PART I —FINANCIAL INFORMATION***

 

***Item 1 —Financial Information***

 

**Manhattan Bancorp and Subsidiaries**

**Consolidated Balance Sheets**

 
| ** **                                                                                                         | ** ** | **(Unaudited)**              | ** **  | ** **                      | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|------------------------------|-------------|---------------------------------|------------|
| ** **                                                                                                         | ** ** | **March 31, 2010** | ** **  | **December 31, 2009** | ** ** |
| **Assets**                                                                                                         | ** ** | ** **                   | ** **  | ** **                      | ** ** |
| Cash  and due from banks                                                                                           |       | $                            | 2,051,916   |                            | $          | 1,213,837 |   |
| Federal  funds sold                                                                                                |       | 16,476,776                   |        | 50,241,455                      |       |
| Total  cash and cash equivalents                                                                                   |       | 18,528,692                   |        | 51,455,292                      |       |
| Time  deposits-other financial institutions                                                                        |       | 3,066,000                    |        | 3,462,000                       |       |
| Investments  securities-available for sale                                                                         |       | 23,250,218                   |        | 13,360,750                      |       |
| Investments  securities-held to maturity                                                                           |       | 494,828                      |        | 493,942                         |       |
|                                                                                                               |       |                         |        |                            |       |
| Loans                                                                                                              |       | 85,354,662                   |        | 80,116,019                      |       |
| Allowance  for loan losses                                                                                         |       | (1,484,304                   | )           | (1,202,494                      | )          |
| Net  loans                                                                                                         |       | 83,870,358                   |        | 78,913,525                      |       |
|                                                                                                               |       |                         |        |                            |       |
| Property  and equipment, net                                                                                       |       | 1,197,393                    |        | 1,281,940                       |       |
| Stock  in other financial institutions                                                                             |       | 1,668,500                    |        | 1,699,650                       |       |
| Accrued  interest receivable and other assets                                                                      |       | 2,284,134                    |        | 1,647,744                       |       |
|                                                                                                               |       |                         |        |                            |       |
| Total  assets                                                                                                      |       | $                            | 134,360,123 |                            | $          | 152,314,843 |   |
|                                                                                                               |       |                         |        |                            |       |
| **Liabilities and Stockholders’ Equity**                                                                      |       |                         |        |                            |       |
| Deposits:                                                                                                          |       |                         |        |                            |       |
| Non-interest  bearing demand                                                                                       |       | $                            | 30,810,152  |                            | $          | 29,647,199 |   |
| Interest  bearing:                                                                                                 |       |                         |        |                            |       |
| Demand                                                                                                             |       | 2,610,090                    |        | 4,026,157                       |       |
| Savings  and money market                                                                                          |       | 25,530,063                   |        | 17,899,434                      |       |
| Certificates  of deposit equal to or greater than $100,000                                                         |       | 37,105,286                   |        | 54,351,901                      |       |
| Certificates  of deposit less than $100,000                                                                        |       | 4,965,384                    |        | 4,995,301                       |       |
| Total  deposits                                                                                                    |       | 101,020,975                  |        | 110,919,992                     |       |
| FHLB  advances                                                                                                     |       | 4,500,000                    |        | 12,000,000                      |       |
| Accrued  interest payable and other liabilities                                                                    |       | 1,555,058                    |        | 992,648                         |       |
| Total  liabilities                                                                                                 |       | 107,076,033                  |        | 123,912,640                     |       |
|                                                                                                               |       |                         |        |                            |       |
| Commitments  and contingencies                                                                                     |       | —                       |        | —                          |       |
|                                                                                                               |       |                         |        |                            |       |
| Stockholders’  equity                                                                                         |       |                         |        |                            |       |
| Manhattan  Bancorp stockholders’ equity:                                                                      |       |                         |        |                            |       |
| Serial  preferred stock-no par value; 10,000,000 shares authorized: issued and  outstanding, none in 2010 and 2009 |       | —                       |        | —                          |       |
| Common  stock-no par value; 10,000,000 shares authorized; issued and outstanding,  3,987,631 in 2010 and 2009      |       | 38,977,282                   |        | 38,977,282                      |       |
| Additional  paid in capital                                                                                        |       | 1,708,093                    |        | 1,566,396                       |       |
| Unrealized  gain on available-for-sale securities                                                                  |       | 286,249                      |        | 305,152                         |       |
| Accumulated  deficit                                                                                               |       | (14,055,532                  | )           | (12,737,537                     | )          |
|                                                                                                               |       |                         |        |                            |       |
| Total  Manhattan Bancorp stockholders’ equity                                                                 |       | 26,916,092                   |        | 28,111,293                      |       |
| Noncontrolling  interest                                                                                           |       | 367,998                      |        | 290,910                         |       |
|                                                                                                               |       | 27,284,090                   |        | 28,402,203                      |       |
|                                                                                                               |       |                         |        |                            |       |
| Total  liabilities and stockholders’ equity                                                                   |       | $                            | 134,360,123 |                            | $          | 152,314,843 |   |

 

Theaccompanying notes are an integral part of this financial statement.

 

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**Manhattan Bancorp and Subsidiaries**

**Consolidated Statements of Operations**

**(Unaudited)**

 
| ** **                                                         | ** ** | **For the three months** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                         | ** ** | **ended March 31,**           | ** ** |
| ** **                                                         | ** ** | **2010**                                | ** ** | **2009** | ** ** |
| **Interest income**                                                |       |                                    |       |   |   |
| Interest  and fees on loans                                        |       | $                                       | 1,249,140  |   | $ | 795,176 |   |
| Interest  on investment securities                                 |       | 299,886                                 |       | 101,815 |   |
| Interest  on federal funds sold                                    |       | 15,583                                  |       | 11,371 |   |
| Interest  on time deposits-other financial institutions            |       | 11,150                                  |       | 42,437 |   |
|                                                               |       |                                    |       |   |   |
| Total  interest income                                             |       | 1,575,759                               |       | 950,799 |   |
|                                                               |       |                                    |       |   |   |
| **Interest expense**                                               |       |                                    |       |   |   |
| NOW,  money market and savings                                     |       | 65,405                                  |       | 33,255 |   |
| Time  deposits                                                     |       | 173,894                                 |       | 133,592 |   |
| FHLB  advances                                                     |       | 49,300                                  |       | 49,322 |   |
|                                                               |       |                                    |       |   |   |
| Total  interest expense                                            |       | 288,599                                 |       | 216,169 |   |
|                                                               |       |                                    |       |   |   |
| Net  interest income                                               |       | 1,287,160                               |       | 734,630 |   |
|                                                               |       |                                    |       |   |   |
| Provision  for loan losses                                         |       | 370,000                                 |       | 174,000 |   |
|                                                               |       |                                    |       |   |   |
| Net  interest income after provision for loan losses               |       | 917,160                                 |       | 560,630 |   |
|                                                               |       |                                    |       |   |   |
| **Non-interest income**                                            |       |                                    |       |   |   |
| Bank-related  fees                                                 |       | 69,200                                  |       | 17,281 |   |
| Non-bank  related income                                           |       | 1,675,091                               |       | — |   |
| **Non-interest income**                                            |       | 1,744,291                               |       | 17,281 |   |
|                                                               |       |                                    |       |   |   |
| **Non-interest expense**                                           |       |                                    |       |   |   |
| Compensation  and benefits                                         |       | 2,575,145                               |       | 1,014,680 |   |
| Professional  and administrative expenses                          |       | 644,767                                 |       | 384,204 |   |
| Occupancy  and equipment                                           |       | 273,390                                 |       | 172,393 |   |
| Technology  and communication                                      |       | 273,426                                 |       | 137,160 |   |
| Other  non-interest expenses                                       |       | 134,830                                 |       | 102,632 |   |
|                                                               |       |                                    |       |   |   |
| Total  non-interest expenses                                       |       | 3,901,558                               |       | 1,811,069 |   |
|                                                               |       |                                    |       |   |   |
| Loss  before income taxes                                          |       | (1,240,107                              | )          | (1,233,158 | ) |
|                                                               |       |                                    |       |   |   |
| Provision  for income taxes                                        |       | 800                                     |       | — |   |
|                                                               |       |                                    |       |   |   |
| Net  loss                                                          |       | (1,240,907                              | )          | (1,233,158 | ) |
| Less:  Net gain attributable to the noncontrolling interest        |       | 77,088                                  |       | — |   |
| Net  loss attributable to Manhattan Bancorp                        |       | $                                       | (1,317,995 | ) | $ | (1,233,158 | ) |
|                                                               |       |                                    |       |   |   |
| Weighted  average number of shares outstanding (basic and diluted) |       | 3,987,631                               |       | 3,987,631 |   |
|                                                               |       |                                    |       |   |   |
| Basic  and diluted loss per share                                  |       | $                                       | (0.33      | ) | $ | (0.31 | ) |

 

Theaccompanying notes are an integral part of this financial statement.

 

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**Manhattan Bancorp and Subsidiaries**

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

**March 31, 2010 and 2009**

 
| ** **                                | ** ** | ** **    | ** ** | ** **            | ** ** | ** ** | ** ** | ** **   | ** ** | ** **        | ** ** | ** **             | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** **   | ** **  | ** **  | ** ** |
|-------------------------------------------|------------|---------------|------------|-----------------------|------------|------------|------------|--------------|------------|-------------------|------------|------------------------|------------|-------------------|------------|------------------------|------------|--------------|-------------|-------------|------------|
| ** **                                | ** ** | ** **    | ** ** | ** **            | ** ** | ** ** | ** ** | **Common**   | ** ** | **Additional**    | ** ** | ** **             | ** ** | ** **        | ** ** | **Other**              | ** ** | ** **   | ** **  | ** **  | ** ** |
| ** **                                | ** ** | **Preferred** | ** ** | **Common Stock** | ** ** | **Stock**  | ** ** | **Paid-in**  | ** ** | **Comprehensive** | ** ** | **Accumulated**        | ** ** | **Comprehensive** | ** ** | **Noncontrolling**     | ** ** | ** **   | ** **  |
| ** **                                | ** ** | **Stock**     | ** ** | **Shares**            | ** ** | **Amount** | ** ** | **Warrants** | ** ** | **Capital**       | ** ** | **Income (Loss)** | ** ** | **Deficit**       | ** ** | **Income (Loss)** | ** ** | **Interest** | ** **  | **Total**   | ** ** |
| **Balance  at December 31, 2008**    |       | $             | 1,558,517  |                  | 3,987,631  |       | $          | 38,977,282   |       | $                 | 120,417    |                   | $          | 957,825           |       | $                      | —     |         | $           | (7,634,001  | )          | $ | 307,488 |   | $ | — |   | $ | 34,287,528 |   |
| Accretion of preferred  stock discount    |       | 6,021         |       |                  |       |       |       | (6,021       | )          |              |       |                   |       |              |       |                   |       |         |        | —      |       |
| Dividend on preferred  stock              |       |          |       |                  |       |       |       |         |       |              |       |                   |       | (16,528           | )          |                   |       |         |        | (16,528     | )          |
| Share-based compensation  expense         |       |          |       |                  |       |       |       |         |       | 196,063           |       |                   |       |              |       |                   |       |         |        | 196,063     |       |
| Unrealized gain on  investment securities |       |          |       |                  |       |       |       |         |       |              |       | 10,457                 |       |              |       | 10,457                 |       |         |        | 10,457      |       |
| Net loss                                  |       |          |       |                  |       |       |       |         |       |              |       | (1,233,158             | )          | $                 | (1,233,158 | )                      |       |         |        |        | (1,233,158 | ) |
| Total comprehensive loss                  |       |          |       |                  |       |       |       |         |       |              |       | $                      | (1,222,701 | )                 |       |                   |       |         |        |        |       |   |
| **Balance  at March 31, 2009**       |       | $             | 1,564,538  |                  | 3,987,631  |       | $          | 38,977,282   |       | $                 | 114,396    |                   | $          | 1,153,888         |       |                   |       | $            | (8,883,687  | )           | $          | 317,945 |   | $ | — |   | $ | 33,244,362 |   |
|                                      |       |          |       |                  |       |       |       |         |       |              |       |                   |       |              |       |                   |       |         |        |        |       |
| **Balance  at December 31, 2009**    |       | $             | —     |                  | 3,987,631  |       | $          | 38,977,282   |       | $                 | —     |                   | $          | 1,566,396         |       | $                      | —     |         | $           | (12,737,537 | )          | $ | 305,152 |   | $ | 290,910 |   | $ | 28,402,203 |   |
| Share-based compensation  expense         |       |          |       |                  |       |       |       |         |       | 141,697           |       |                   |       |              |       |                   |       |         |        | 141,697     |       |
| Unrealized loss on  investment securities |       |          |       |                  |       |       |       |         |       |              |       | (18,903                | )          |              |       | (18,903                | )          |         |        | (18,903     | )          |
| Net gain (loss)                           |       |          |       |                  |       |       |       |         |       |              |       | (1,317,995             | )          | (1,317,995        | )          |                   |       | 77,088       |        | (1,240,907  | )          |
| Total comprehensive loss                  |       |          |       |                  |       |       |       |         |       |              |       | $                      | (1,336,898 | )                 |       |                   |       |         |        |        |       |   |
| **Balance  at March 31, 2010**       |       | $             | —     |                  | 3,987,631  |       | $          | 38,977,282   |       | $                 | —     |                   | $          | 1,708,093         |       |                   |       | $            | (14,055,532 | )           | $          | 286,249 |   | $ | 367,998 |   | $ | 27,284,090 |   |

 

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**Manhattan Bancorp and Subsidiary**

**Consolidated Statements of Cash Flows**

**(Unaudited)**

 
| ** **                                                           | ** ** | **For the thee months** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                           | ** ** | **ended March 31**           | ** ** |
| ** **                                                           | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| **Cash flows from operating activities**                             |       |                                   |       |   |   |
| Net  loss                                                            |       | $                                      | (1,240,907 | ) | $ | (1,249,686 | ) |
| Net  amortization of discounts and premiums on securities            |       | (108,710                               | )          | $ | (5,567 | ) |
| Depreciation  and amortization                                       |       | 108,294                                |       | 76,681 |   |
| Provision  for loan losses                                           |       | 370,000                                |       | 174,000 |   |
| Share-based  compensation                                            |       | 141,697                                |       | 196,063 |   |
| (Increase)  in accrued interest receivable and other assets          |       | (636,390                               | )          | (8,763 | ) |
| Increase  in accrued interest payable and other liabilities          |       | 562,410                                |       | 323,969 |   |
|                                                                 |       |                                   |       |   |   |
| Net  cash used in operating activities                               |       | (803,606                               | )          | (493,303 | ) |
|                                                                 |       |                                   |       |   |   |
| **Cash flows from investing activities**                             |       |                                   |       |   |   |
| Net  (increase) in loans                                             |       | (5,339,358                             | )          | (4,516,999 | ) |
| Allowance  for loan and less loss recoveries                         |       | 12,525                                 |       | — |   |
| (Increase)  decrease in time deposits - other financial institutions |       | 396,000                                |       | (4,812,000 | ) |
| Proceeds  from repayment and maturities from investment securities   |       | 4,014,236                              |       | 345,429 |   |
| Purchase  of investments                                             |       | (13,814,783                            | )          | — |   |
| (Purchase)  Redemption of stock in other financial institutions      |       | 31,150                                 |       | (281,150 | ) |
| Purchase  of premises and equipment                                  |       | (23,747                                | )          | (4,135 | ) |
|                                                                 |       |                                   |       |   |   |
| Net  cash used in investing activities                               |       | (14,723,977                            | )          | (9,268,855 | ) |
|                                                                 |       |                                   |       |   |   |
| **Cash flows from financing activities**                             |       |                                   |       |   |   |
| Net  increase (decrease) in:                                         |       |                                   |       |   |   |
| Demand  deposits                                                     |       | 1,162,953                              |       | 44,215 |   |
| Interest  bearing demand deposits                                    |       | (1,416,067                             | )          | (320,532 | ) |
| Savings  and money market deposits                                   |       | 7,630,629                              |       | 2,882,807 |   |
| Certificates  of deposit equal to or greater than $100,000           |       | (17,246,615                            | )          | 964,745 |   |
| Certificates  of deposit less than $100,000                          |       | (29,917                                | )          | 329,177 |   |
| Increase  (decrease) from borrowings                                 |       | (7,500,000                             | )          | 2,000,000 |   |
|                                                                 |       |                                   |       |   |   |
| Net  cash (used in)/provided by financing activities                 |       | (17,399,017                            | )          | 5,900,412 |   |
|                                                                 |       |                                   |       |   |   |
| Net  decrease in cash and cash equivalents                           |       | (32,926,600                            | )          | (3,861,746 | ) |
|                                                                 |       |                                   |       |   |   |
| **Cash and cash equivalents at beginning of period**                 |       | 51,455,292                             |       | 19,710,235 |   |
|                                                                 |       |                                   |       |   |   |
| **Cash and cash equivalents at end of period**                       |       | $                                      | 18,528,692 |   | $ | 15,848,489 |   |
|                                                                 |       |                                   |       |   |   |
| **Supplementary information**                                        |       |                                   |       |   |   |
|                                                                 |       |                                   |       |   |   |
| Interest  paid on deposits                                           |       | $                                      | 240,876    |   | $ | 166,938 |   |
|                                                                 |       |                                   |       |   |   |
| Income  taxes paid                                                   |       | $                                      | 800        |   | $ | — |   |

 

Theaccompanying notes are an integral part of this financial statement.

 

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**MANHATTAN BANCORP**

**NOTES TOFINANCIAL STATEMENTS**

**MARCH 31, 2010**

 

**Note 1.           CONSOLIDATEDFINANCIAL STATEMENTS**

 

The accompanying unaudited condensed consolidatedfinancial statements of Manhattan Bancorp (the “Bancorp”) and its wholly-ownedsubsidiaries, Bank of Manhattan, N.A. (the “Bank”) and MBFS Holdings, Inc.(“MBFS”), together referred to as the “Company” have been prepared inaccordance with the instructions to Form 10-Q and Article 8 ofRegulation S-X.  On October 1, 2009,the Bancorp, through its wholly-owned subsidiary MBFS, acquired a 70% interestin Banc of Manhattan Capital, LLC, (“BOMC”). As this is a condensed interim presentation, certain information andnotes required by accounting principles generally accepted in the United Statesof America (“U.S. GAAP”) 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 2009 Annual Report on Form 10-K.

 

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

 

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

 

**Note 2.           RECENTACCOUNTING PRONOUNCEMENTS**

 

GENERALLYACCEPTED ACCOUNTING PRINCIPLES:  In June 2009,accounting standards were revised to establish the FASB Accounting StandardsCodification (the “Codification”) as the source of authoritative accounting principlesrecognized by the Financial Accounting Standard Board (“FASB”) to be applied bynongovernmental entities in the preparation of financial statements inconformity with United States Generally Accepted Accounting Principles (U.S.GAAP).  The Codification does not changecurrent U.S. GAAP but is intended to simplify user access to all authoritativeU.S. GAAP by providing all the authoritative literature related to a particulartopic in one place.  The Codification iseffective for interim and annual periods ending after September 15, 2009,and as of the effective date, all existing accounting standard documents weresuperseded.  The Company adopted theCodification for the year ended December 31, 2009 and all subsequentstatements will reference the Codification as the sole source of authoritativeliterature.

 

BUSINESS COMBINATIONS:  Effective January 1, 2009, the Companyadopted the new accounting guidance that applies to all transactions and otherevents in which one entity obtains control over one or more otherbusinesses.  The guidance requires anacquirer, upon initially obtaining control of another entity, to recognize theassets, liabilities and any non-controlling interest in the acquiree at fairvalue as of the acquisition date. Contingent consideration is required to be recognized and measured atfair value on the date of acquisition rather than at a later date when theamount of that consideration may be determinable beyond a reasonabledoubt.  This fair value approach replacesthe cost-allocation process required under old accounting literature wherebythe cost of an acquisition was allocated to the individual

 

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assets acquired andliabilities assumed based on their estimated fair value.  The new guidance requires acquirers toexpense acquisition-related costs as incurred rather than allocating such coststo the assets acquired and liabilities assumed, as was previously thecase.  Accounting for costs associatedwith exit or disposal activities would have to be met in order to accrue for arestructuring plan in purchase accounting. Pre-acquisition contingencies are to be recognized at fair value, unlessit is a non-contractual contingency that is not likely to materialize, in whichcase, nothing should be recognized in purchase accounting and, instead, thatcontingency would be subject to the probable and estimable recognition criteriadelineated in the FASB statement related to accounting for contingencies.  Subsequent accounting literature releasedduring 2009 amends the new accounting guidance to require that assets acquiredand liabilities assumed in a business combination that arise from contingenciesbe recognized at fair value if fair value can be reasonably estimated, removessubsequent accounting guidance for assets and liabilities arising fromcontingencies and requires entities to develop a systematic and rational basisfor subsequently measuring and accounting for assets and liabilities arisingfrom contingencies.  It also eliminatesthe requirement to disclose an estimate of the range of outcomes of recognizedcontingencies at the acquisition date.

 

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

 

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

 

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

 

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

 

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

 

At March 31, 2010, the Company had interest-earningdeposits with other financial institutions of $3.1 million, with a weightedaverage yield of 1.44%, and an average weighted remaining life of approximately11.2 months. At December 31, 2009, the Company had interest-earningdeposits with other

 

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financial institutions of $3.5 million, with aweighted average yield of 1.81%, and an average weighted remaining life ofapproximately 3.3 months.

 

**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 March 31, 2010, and December 31,2009.

 
| ** **                              | ** ** | ** **          | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | **Estimated** | ** ** |
|-----------------------------------------|------------|---------------------|------------|----------------|------------|----------------|------------|---------------|------------|
| ** **                              | ** ** | **Amortized**       | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**      | ** ** |
| **March 31,  2010****(unaudited)** | ** ** | **Cost**            | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Value**     | ** ** |
| ** **                              | ** ** | **(in  thousands)** | ** ** |
| **Available-for-sale securities:**      |       |                |       |           |       |           |       |          |       |
| U.S.  government and agency securities  |       | $                   | 2,647      |           | $          | 12             |       | $             | 1          |   | $ | 2,658 |   |
| Mortgage-backed  securities             |       | 6,114               |       | 314            |       | 12             |       | 6,416         |       |
| Other  securities                       |       | 14,203              |       | 128            |       | 155            |       | 14,176        |       |
| **Total available-for-sale securities** |       | $                   | 22,964     |           | $          | 454            |       | $             | 168        |   | $ | 23,250 |   |
|                                    |       |                |       |           |       |           |       |          |       |
| **Held-to-maturity securities:**        |       |                |       |           |       |           |       |          |       |
| State  and municipal securities         |       | $                   | 495        |           | $          | 12             |       | $             | —     |   | $ | 507 |   |

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

 

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

 

Therewere realized gains during the three-month period ended March 31, 2010 ofapproximately $20,000. The net unrealized loss on available-for-sale securitiesincluded in accumulated other comprehensive income was approximately $19,000for the three-month period ended March 31, 2010. Available-for-salesecurities with an amortized cost of approximately $4.6 million (fair value ofapproximately $4.9 million) were pledged as collateral for Federal Home LoanBank advances as of March 31, 2010.

 

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

 

AtMarch 31, 2010, the Company had no securities with unrealized losses thatwere in a continual loss position for over a twelve-month period.  The following table reflects unrealizedlosses for securities that were in a continual loss position for less than atwelve-month period as of March 31, 2010.

 

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| **(unaudited)**                        | ** ** | **Less  than 12 Months** | ** ** |
|----------------------------------------|------------|--------------------------|------------|
| **(In thousands)**                     | ** ** | **Fair  Value**          | ** ** | **Unrealized  Losses** | ** ** |
| *Securities available for sale:*       |       |                     |       |   |   |
| U.S.  Government and agency securities |       | $                        | 699        |   | $ | 1 |   |
| Mortgage-backed  securities            |       | 591                      |       | 12 |   |
| Other  securities                      |       | 8,177                    |       | 155 |   |
| *Securities held to maturity*          |       |                     |       |   |   |
| State  and municipal securities        |       | —                   |       | — |   |
| Total  imparied securities             |       | $                        | 9,467      |   | $ | 168 |   |

 

Anyintra-period decline in market values was attributable to changes in marketrates of interest rather than credit quality; and because the Company has theability and intent to hold all of its investments until a recovery of fairvalue, which may be at maturity, the Company considers none of its investmentsto be temporarily impaired at March 31, 2010.

 

Theamortized cost, estimated fair value and average yield of debt securities at March 31,2010 are shown below.  In the case ofavailable-for-sale securities, the average yields are based on effective ratesof book balances at year end.  Yields arederived by dividing interest income, adjusted for amortization of premiums andaccretion of discounts, by total amortized cost.  Mortgage-backed securities are classified in accordancewith estimated lives.  Expectedmaturities may differ from contractual maturities because borrowers have theright to prepay obligations.

 
| ** **                        | ** ** | **Available-for-Sale  Securities** | ** ** | **Held-to  Maturity Securities** | ** ** |
|-----------------------------------|------------|------------------------------------|------------|----------------------------------|------------|
| ** **                        | ** ** | ** **                         | ** ** | **Estimated**                    | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Estimated** | ** ** | **Weighted** | ** ** |
| ** **                        | ** ** | **Amortized**                      | ** ** | **Fair**                         | ** ** | **Average** | ** ** | **Amortized** | ** ** | **Fair** | ** ** | **Average** | ** ** |
| **(unaudited)**                   | ** ** | **Cost**                           | ** ** | **Value**                        | ** ** | **Yield** | ** ** | **Cost** | ** ** | **Value** | ** ** | **Yield** | ** ** |
| ** **                        | ** ** | **(dollars  in thousands)**        | ** ** |
| Due  in One Year or Less          |       | $                                  | 6,931      |                             | $          | 7,001 |   | 3.91 | % | $ | — |   | $ | — |   |   |   |
| Due  from One Year to Five Years  |       | 8,280                              |       | 8,409                            |       | 4.77 | % | 495 |   | 507 |   | 4.55 | % |
| Due  from Five Years to Ten Years |       | 4,192                              |       | 4,162                            |       | 5.96 | % |   |   |   |   |   |   |
| Due  after Ten Years              |       | 3,561                              |       | 3,678                            |       | 3.48 | % |   |   |   |   |   |   |
|                              |       | $                                  | 22,964     |                             | $          | 23,250 |   | 4.53 | % | $ | 495 |   | $ | 507 |   | 4.55 | % |

 

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

 

Loans are summarized as follows:

 
| ** **                             | ** ** | **March 31,  2010 (unaudited)** | ** ** | **December 31,  2009 (audited)** | ** ** |
|----------------------------------------|------------|--------------------------------------|------------|---------------------------------------|------------|
| ** **                             | ** ** | **Amount**                           | ** ** | **Percentage  of**                    | ** ** | **Amount** | ** ** | **Percentage  of** | ** ** |
| **(dollars in thousands)**             | ** ** | **Outstanding**                      | ** ** | **Total**                             | ** ** | **Outstanding** | ** ** | **Total** | ** ** |
| Commercial  loans                      |       | $                                    | 27,925     |                                  | 32.7       | % | $ | 26,531 |   | 33.1 | % |
| Real  estate loans                     |       | 49,580                               |       | 58.1                                  | %          | 46,055 |   | 57.5 | % |
| Other  loans                           |       | 7,849                                |       | 9.2                                   | %          | 7,530 |   | 9.3 | % |
| Total  loans, including net loan costs |       | 85,354                               |       | 100.0                                 | %          | 80,116 |   | 100.0 | % |
| Less  : allowance for loan losses      |       | (1,484                               | )          |                                  |       | (1,202 | ) |   |   |
| Net  loans                             |       | $                                    | 83,870     |                                  |       |   | $ | 78,914 |   |   |   |

 

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

 

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

** **
| ** **                                     | ** ** | **For  the Three Months** | ** ** |
|------------------------------------------------|------------|---------------------------|------------|
| ** **                                     | ** ** | **Ended  March 31,** | ** ** |
| **(Unaudited)**                                | ** ** | **2010**                  | ** ** | **2009** | ** ** |
| ** **                                     | ** ** | **(in  thousands)**       | ** ** | **(in  thousands)** | ** ** |
| Balance  at beginning of period                |       | $                         | 1,202      |   | $ | 975 |   |
| Additions  to the allowance charged to expense |       | 370                       |       | 174 |   |
| Recoveries                                     |       | 13                        |       | — |   |
|                                           |       | 1,585                     |       | 1,149 |   |
| Less  loans charged-off                        |       | (101                      | )          | — |   |
|                                           |       |                      |       |   |   |
| Balance  at end of period                      |       | $                         | 1,484      |   | $ | 1,149 |   |

 

**Note 6.     SHARE-BASEDCOMPENSATION**

 

Duringthe three-month period ended March 31, 2010, the Company recordedapproximately $142,000 of stock-based compensation expense.  At March 31, 2010, unrecordedcompensation expense related to non-vested stock option grants totaledapproximately $700,000 and is expected to be recognized as follows:

 
| ** **         | ** ** | **Share-Based**     | ** ** |
|--------------------|------------|---------------------|------------|
| ** **         | ** ** | **Compensation**    | ** ** |
| **(unaudited)**    | ** ** | **Expense**         | ** ** |
| ** **         | ** ** | **(in  thousands)** | ** ** |
| Remainder  of 2010 |       | $                   | 440        |   |
| 2011               |       | 238                 |       |
| 2012               |       | 35                  |       |
| 2013               |       | 5                   |       |
| Total              |       | $                   | 718        |   |

 

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

 

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

 
| ** **            | ** ** | **Period  Ended**  | ** ** |
|-----------------------|------------|--------------------|------------|
| ** **            | ** ** | **March 31,** | ** ** |
| **(unaudited)**       | ** ** | **2010**           | ** ** | **2009** | ** ** |
| Risk-free  rate       |       | 2.90               | %          | 2.04 | % |
| Expected  term        |       | 6  years           |       | 6  years |   |
| Expected  volatility  |       | 28.12              | %          | 25.98 | % |
| Dividend  yield       |       | 0.00               | %          | 0.00 | % |
| Fair  value per share |       | $                  | 2.25       |   | $ | 0.52 |   |
|                       |            |                    |            |  |  |  |  |

 

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Thefollowing table summarizes the stock option activity under the plan for the periodsindicated:

 
| ** **                                  | ** ** | ** ** | ** ** | ** **            | ** ** | **Weighted  Average** | ** ** | **Aggregate** | ** ** |
|---------------------------------------------|------------|------------|------------|-----------------------|------------|-----------------------|------------|---------------|------------|
| ** **                                  | ** ** | ** ** | ** ** | **Weighted  Average** | ** ** | **Remaining**         | ** ** | **Intrinsic** | ** ** |
| **(unaudited)**                             | ** ** | **Shares** | ** ** | **Exercise  Price**   | ** ** | **Contractual  Life** | ** ** | **Value**     | ** ** |
| **2009**                                    | ** ** | ** ** | ** ** | ** **            | ** ** | ** **            | ** ** | ** **    | ** ** |
| Outstanding  at December 31, 2008      |       | 657,480    |       | $                     | 9.99       |                  |       |          |       |   |
| Granted                                     |       | 30,250     |       | $                     | 8.43       |                  |       |          |       |   |
| Exercised                                   |       | —     |       | —                |       |                  |       |          |       |
| Expired                                     |       | —     |       | —                |       |                  |       |          |       |
| Forfeited                                   |       | 12,438     |       | $                     | 10.00      |                  |       |          |       |   |
| Outstanding  at March 31, 2009         |       | 675,292    |       | $                     | 9.45       |                  | 8.79       |          | $          | — |   |
| Options  exercisable at March 31, 2009 |       | 154,433    |       | $                     | 9.96       |                  | 8.41       |          | $          | — |   |
| Options  unvested at March 31, 2009    |       | 520,859    |       | $                     | 9.29       |                  | 8.85       |          | $          | — |   |
|                                        |       |       |       |                  |       |                  |       |          |       |
| **2010**                                    |       |       |       |                  |       |                  |       |          |       |
| Outstanding  at December 31, 2009      |       | 686,942    |       | $                     | 9.42       |                  |       |          |       |   |
| Granted                                     |       | 40,000     |       | $                     | 6.79       |                  |       |          |       |   |
| Exercised                                   |       | —     |       | $                     | —     |                  |       |          |       |   |
| Expired                                     |       | —     |       | $                     | —     |                  |       |          |       |   |
| Forfeited                                   |       | —     |       | $                     | —     |                  |       |          |       |   |
| Outstanding  at March 31, 2010         |       | 726,942    |       | $                     | 9.27       |                  | 7.93       |          | $          | — |   |
| Options  exercisable at March 31, 2010 |       | 379,481    |       | $                     | 9.66       |                  | 7.63       |          | $          | — |   |
| Options  unvested at March 31, 2010    |       | 347,461    |       | $                     | 8.85       |                  | 8.23       |          | $          | — |   |

 

**Note 7.     FAIR VALUEMEASUREMENTS**

 

Currentaccounting literature defines fair value as the exchange price that would bereceived for an asset or paid to transfer a liability (an exit price) in theprincipal or most advantageous market for the asset or liability in an orderlytransaction between market participants on the measurement date. It alsoestablishes a fair value hierarchy, which requires an entity to maximize theuse of observable inputs and minimize the use of unobservable inputs whenmeasuring fair value. The literature describes three levels of inputs that maybe used to measure fair value:

 

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

 

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

 

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

 

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

 

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| ** **                           | ** ** | ** **         | ** ** | ** **           | ** ** | ** **      | ** ** | ** **       | ** ** |
|--------------------------------------|------------|--------------------|------------|----------------------|------------|-----------------|------------|------------------|------------|
| ** **                           | ** ** | ** **         | ** ** | **Quoted  Price in** | ** ** | **Significant** | ** ** | ** **       | ** ** |
| ** **                           | ** ** | ** **         | ** ** | **Active  Markets**  | ** ** | **Other**       | ** ** | **Significant**  | ** ** |
| ** **                           | ** ** | ** **         | ** ** | **for  Identical**   | ** ** | **Observable**  | ** ** | **Unobservable** | ** ** |
| **(unaudited)**                      | ** ** | **March 31,** | ** ** | **Assets**           | ** ** | **Inputs**      | ** ** | **Inputs**       | ** ** |
| **Description  of Assets/Liability** | ** ** | **2010**           | ** ** | **(Level  1)**       | ** ** | **(Level  2)**  | ** ** | **(Level  3)**   | ** ** |
| Available-for-sale  securities       |       | $                  | 23,250     |                 | $          | —          |       | $                | 23,250     |   | $ | — |   |
|                                      |            |                    |            |                      |            |                 |            |                  |            |  |  |  |  |

 

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

 

**Note 8.     OTHERBORROWINGS**

 

At March 31, 2010, the Company had acollateralized line of credit with the Federal Home Loan Bank (“FHLB”) totaling$20.0 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.

 

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

 

Basicearnings (loss) per share represents income available (loss reported) to commonstock divided by the weighted average number of common shares outstandingduring the period reported on the Statement of Operations. Diluted earnings(loss) per share reflect additional common shares that would have beenoutstanding if dilutive potential common shares had been issued, as well as anyadjustment to income that would result from the assumed conversion. There wereno dilutive potential common shares outstanding for any periods reported on theStatement of Operations.  The weightedaverage number of shares for the three-month periods ended March 31, 2010and March 31, 2009 was 3,987,631.

 

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***Item 2 — Management’s Discussion and Analysis ofFinancial 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 further developmentsand their potential effects on Manhattan Bancorp and its subsidiaries.  The Company’s forward-looking statementsinvolve risks and uncertainties, including the risks and uncertaintiesdescribed herein and those enumerated in “Item 1A Risk Factors” in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2010.  There can be no assurance that futuredevelopments affecting Manhattan Bancorp will be the same as those anticipatedby management, and actual results may differ from those projected in theforward-looking statements.  Statementsregarding policies and procedures are not intended, and should not beinterpreted to mean, that such policies and procedures will not be amended,modified, or repealed at any time in the future.**

 

***The Company***

 

Manhattan Bancorp (“Bancorp”) is a bank holdingcompany which was incorporated in August 2006, in order to acquire Bank ofManhattan, N.A. (the “Bank”), a de novo bank which it acquired on August 14,2007.  The Bank is a nationally-charteredbanking association organized under the laws of the United States, whichcommenced its banking operations on August 15, 2007.  Bancorp operates primarily through the Bank,and the investment in the Bank is its principal asset.  The Bank is located in El Segundo, California,and at March 31, 2010, had $133 million in assets, $84 million in netloans receivable and $106 million in deposits. On October 1, 2009, Manhattan Bancorp, through its wholly ownedsubsidiary, MBFS Holdings, Inc. (“MBFS”), acquired a 70% interest in Bancof Manhattan Capital, LLC, (“BOMC”) a full-service mortgage-centricbroker/dealer.  The gross investment inMBFS was $1.7 million as of March 31, 2010. Unlessthe context requires otherwise, references in this Form 10-Q to the “Company,”“we” or “us” refers to Bancorp and its consolidated subsidiaries, the Bank andMBFS and its subsidiary.

 

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

 

***Earnings and Financial Condition Overview***

 

The Company recorded a net loss of $1,240,907(including the gain from the minority interest of $77,088) or $0.33 basic andfully-diluted loss per share of common stock for the shareholders of theCompany for the three-month period ended March 31, 2010, as compared witha net loss of $1,233,000 or $0.31 basic and fully-diluted loss per share ofcommon stock for the three-month period ended March 31, 2009.  The per-share values are based upon the lossattributable to the shareholders of the Bancorp and the related sharesoutstanding.   Comparing the Company’sprior year’s first quarter loss with the current operating quarter reflects anapproximate increase of less than 1% in the reported comparable quarterlylosses.  The continuation of firstquarter losses is the result of three primary reasons:

 

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·                  Increased loan provisions to cover charge-offs and to recognize potentialweakness in the loan portfolio due to the general deterioration in the economy.

 

·                  The exploration of potential business opportunities by the Bancorp.

 

·                  Increased non-interest expenses, primarily resulting from compensationand benefits and other components, including legal and professional fees.

 

Due to the current condition in the general economy,the Company continues to be cautious in granting new credit extensions, anddemand for credit, in general, has been modest. Despite the fact that as of both December 31, 2009 and March 31,2010, the Bank had no past due loans or loans on non-accrual, Bank’s managementelected to increase the allowance for loan loss to 1.74% of outstanding loansas of March 31, 2010, compared to 1.50% of outstanding loans as of December 31,2009.  The Company charged offapproximately $101,000 in loans during the quarter ended March 31,2010.  Management continuously reviewsthe portfolio for indication of specific weaknesses and adjusts the provisionaccordingly.  The provision for thethree-month period ended March 31, 2010 was $370,000 compared to $174,000for the three-month period ended March 31, 2009.

 

The Company’s management has invested time and resourcesin the evaluation and exploration of additional financial products and servicesdeemed essential to meeting the needs of its customer base and to enhance itsfranchise value.  Much of that effort hasoccurred during the first quarter of 2010 with returns anticipated during thelatter half of the year.

 

During the first quarter of 2010, changes in theCompany’s management and structure resulted in one-time expenses ofapproximately $200,000.

 

The Company benefited from pre-tax income ofapproximately $105,000 from BOMC for the three-month period ended March 31,2010.

 

Net interest income after provision for loan lossesfor the three-month period ended March 31, 2010 was approximately$917,000, an increase of approximately $356,000 over the three-month periodended March 31, 2009.  This 64%improvement in net interest income was primarily due to an increase in interestincome, up approximately $625,000 (66%) for the comparable three-month periodended March 31, 2010 over 2009.  Interest expense also increased by a reduced percentage (34%) for thecomparable three-month period ended March 31, 2010 over March 31,2009, with the actual dollar increase only $72,000.

 

With the addition of non-bank related income fromBOMC, total non-interest income increased significantly from approximately$17,000 for the three-month period ended March 31, 2009 to $1,744,000 forthe comparable period ended March 31, 2010.

 

Non-interest expense for the three-month periodended March 31, 2010 compared to March 31, 2009 increased byapproximately $2.1 million, and an analysis is found under *Non-InterestExpense*on page 21.

 

As of March 31, 2010, total assets of theCompany were approximately $134.4 million. This represents a decrease of approximately $18.0 million or 11.8% fromthe amount reported as of December 31, 2009.  The decline in total assets can be attributedto a modification in the source of the Bank’s funding, which reduced the excessbalances in assets with minimal interest-bearing yields. The excess was theresult of temporary funding, much of which was paid off within the weeksfollowing December 31, 2009.  Therewere increases in investments of approximately $9.9 million, representing a 74%increase from $13.9

 

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million as of December 31, 2009 to $23.7million as of March 31, 2010.  Grossloan balances also increased over the three-month period ended March 31,2010 to approximately $85.4 million, representing a 6.5% increase from theapproximately $80.1 million reported as of December 31, 2009 to $85.4million as of March 31, 2010. Funding for the loan and investment growth was obtained primarily fromreductions in cash and cash equivalent balances.

 

At March 31, 2010, total deposits wereapproximately $101.0 million compared with approximately $110.9 million as of December 31,2009.  This represents an approximately$9.9 million decrease or 8.9%.  Theoutflow of deposits was the result of the planned non-renewal of non-localnon-brokered deposits but was partially offset by the influx of money-marketfunds from local sources.  A net decreaseof $7.5 million in overnight Federal Home Loan Bank (“FHLB”) advances alsoreduced funding.

 

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

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

 

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 2.44%for the three-month period ended March 31, 2009 to 3.40% for thethree-month period ended March 31, 2010, due to the significant decline ineffective interest rates associated with interest-bearing liabilities coupledwith a moderate increase in the effective interest rates on interest-bearingassets.

 

Net interest margin is net interest income expressedas a percentage of average total interest-earning assets, allowing the sourcesof funding as factors in the calculation. While the interest rate spreadincreased by 96 basis points, net interest margin increased by only 39 basispoints, reflecting an improved mix in interest-bearing assets with a higherpercentage in categories with better returns coupled with the fact that ahigher percentage of the sources of the funding were from interest-bearingliabilities.  The percentage ofinterest-bearing funds to interest-earning assets increased from 47.8% to 60.3%for the three-month periods ended March 31, 2009 and 2010, respectively.

 

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

 

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

 
| ** **                                            | ** ** | **Three  Months Ended**     | ** ** | ** **  | ** ** |
|-------------------------------------------------------|------------|-----------------------------|------------|-------------|------------|
| ** **                                            | ** ** | **March 31,**          | ** ** | **Percent** | ** ** |
| ** **                                            | ** ** | **2010**                    | ** ** | **2009**    | ** ** | **Change** | ** ** |
| ** **                                            | ** ** | **(Unaudited)**             | ** ** |
| ** **                                            | ** ** | **(Dollars  in thousands)** | ** ** |
| Interest  income                                      |       | $                           | 1,576      |        | $          | 951 |   | 65.72 | % |
| Interest  expense                                     |       | 289                         |       | 216         |       | 33.36 | % |
| Net  interest income before provision for loan losses |       | $                           | 1,287      |        | $          | 735 |   | 75.25 | % |
| Net  interest margin                                  |       | 3.99                        | %          | 3.60        | %          | 10.95 | % |

 

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

 

**ANALYSIS OF NET INTEREST INCOME**

 
| ** **                                              | ** ** | **(Unaudited)**                        | ** ** |
|---------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                              | ** ** | **Three  months ended March 31,** | ** ** |
| ** **                                              | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| ** **                                              | ** ** | ** **                             | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                              | ** ** | ** **                             | ** ** | **Interest** | ** ** | **Average** | ** ** | ** ** | ** ** | **Interest** | ** ** | **Average** | ** ** |
| ** **                                              | ** ** | **Average**                            | ** ** | **Income/** | ** ** | **Rate** | ** ** | **Average** | ** ** | **Income/** | ** ** | **Rate** | ** ** |
| ** **                                              | ** ** | **Balance**                            | ** ** | **Expense** | ** ** | **Earned/Paid** | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Earned/Paid** | ** ** |
| ** **                                              | ** ** | **(Dollars  in thousands)**            | ** ** |
| **Interest-earning assets:**                            |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Federal funds sold                                      |       | $                                      | 27,077     |   | $ | 16 |   | 0.24 | % | $ | 9,796 |   | $ | 11 |   | 0.46 | % |
| Deposits with other  financial institutions             |       | 2,876                                  |       | 11 |   | 1.55 | % | 7,943 |   | 43 |   | 2.20 | % |
| Investments                                             |       | 20,207                                 |       | 300 |   | 6.02 | % | 8,268 |   | 102 |   | 5.00 | % |
| Loans(1)                                                |       | 80,579                                 |       | 1,249 |   | 6.29 | % | 56,778 |   | 795 |   | 5.68 | % |
| Total interest-earning  assets                          |       | 130,739                                |       | 1,576 |   | 4.89 | % | 82,785 |   | 951 |   | 4.66 | % |
| Non-interest-earning  assets                            |       | 6,353                                  |       |   |   |   |   | 4,792 |   |   |   |   |   |
| Total assets                                            |       | $                                      | 137,092    |   |   |   |   |   | $ | 87,577 |   |   |   |   |   |
|                                                    |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities:**                       |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Demand                                                  |       | $                                      | 2,570      |   | 1 |   | 0.10 | % | $ | 1,753 |   | 0 |   | 0.10 | % |
| Savings and money market                                |       | 24,825                                 |       | 65 |   | 1.06 | % | 10,091 |   | 33 |   | 1.33 | % |
| Certificates of deposit                                 |       | 46,643                                 |       | 174 |   | 1.51 | % | 23,060 |   | 134 |   | 2.36 | % |
| FHLB advances                                           |       | 4,750                                  |       | 49 |   | 4.13 | % | 4,633 |   | 49 |   | 4.23 | % |
| Total interest-bearing  liabilities                     |       | 78,788                                 |       | 289 |   | 1.49 | % | 39,537 |   | 216 |   | 2.22 | % |
| Non-interest-bearing  demand deposits                   |       | 29,252                                 |       |   |   |   |   | 13,726 |   |   |   |   |   |
| Total funding sources                                   |       | 108,040                                |       |   |   | 1.08 | % | 53,263 |   |   |   | 1.65 | % |
| Non-interest-bearing  liabilities                       |       | 1,154                                  |       |   |   |   |   | 397 |   |   |   |   |   |
| Shareholders’ equity                               |       | 27,898                                 |       |   |   |   |   | 33,917 |   |   |   |   |   |
| Total liabilities and  shareholders’ equity        |       | $                                      | 137,092    |   |   |   |   |   | $ | 87,577 |   |   |   |   |   |
|                                                    |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Excess of interest-earning assets over funding  sources |       | $                                      | 22,699     |   |   |   |   |   | $ | 29,522 |   |   |   |   |   |
| Net interest income                                     |       |                                   |       | $ | 1,287 |   |   |   |   |   | $ | 735 |   |   |   |
| Net interest rate spread                                |       |                                   |       |   |   | 3.40 | % |   |   |   |   | 2.44 | % |
| Net interest margin                                     |       |                                   |       |   |   | 3.99 | % |   |   |   |   | 3.60 | % |

 

----

(1)          The average balance of loans is calculated net of deferred loan fees/costbut would include non-accrual loans, if any, with a zero yield.   Loan fees net of amortized costs included intotal net income were approximately $21,000 for the three-month period ended March 31,2010.   Loan fees net of amortized costsincluded in total net income were approximately $6,000 for the three-monthperiod ended March 31, 2009.

 

The table below sets forth changes for thecomparable three-month periods ended March 31, 2010 and March 31,2009 for average interest-earning assets, average interest-bearing liabilities,and their respective rates:

 

**VARIANCE IN BALANCES AND RATES**

 
| ** **                                  | ** ** | **Average  Balance**            | ** ** | ** **   | ** ** | **Average  Yield/Rate**         | ** ** | ** **  | ** ** |
|---------------------------------------------|------------|---------------------------------|------------|--------------|------------|---------------------------------|------------|-------------|------------|
| ** **                                  | ** ** | **for  the three months ended** | ** ** | ** **   | ** ** | **for  the three months ended** | ** ** | ** **  | ** ** |
| ** **                                  | ** ** | **March 31,**              | ** ** | **Variance** | ** ** | **March 31,**              | ** ** | ** **  | ** ** |
| **(dollars in thousands)**                  | ** ** | **2010**                        | ** ** | **2009**     | ** ** | **dollar**                      | ** ** | **percent** | ** ** | **2010** | ** ** | **2009** | ** ** | **Variance** | ** ** |
| ** **                                  | ** ** | **(Unaudited)**                 | ** ** |
| **Interest-earning assets:**                |       |                            |       |         |       |                            |       |        |       |   |   |   |   |   |   |
| Federal  funds sold                         |       | $                               | 27,077     |         | $          | 9,796                           |       | $           | 17,281     |   | 176.41 | % | 0.24 | % | 0.46 | % | -0.22 | % |
| Deposits  with other financial institutions |       | 2,876                           |       | 7,943        |       | (5,067                          | )          | -63.79      | %          | 1.55 | % | 2.20 | % | -0.65 | % |
| Investments                                 |       | 20,207                          |       | 8,268        |       | 11,939                          |       | 144.40      | %          | 6.02 | % | 5.00 | % | 1.02 | % |
| Loans                                       |       | 80,579                          |       | 56,778       |       | 23,801                          |       | 41.92       | %          | 6.29 | % | 5.68 | % | 0.61 | % |
| Total  interest-earning assets              |       | $                               | 130,739    |         | $          | 82,785                          |       | $           | 47,954     |   | 57.93 | % | 4.89 | % | 4.66 | % | 0.23 | % |
|                                        |       |                            |       |         |       |                            |       |        |       |   |   |   |   |   |   |
| **Interest-bearing liabilities:**           |       |                            |       |         |       |                            |       |        |       |   |   |   |   |   |   |
| Interest-bearing  demand                    |       | $                               | 2,570      |         | $          | 1,753                           |       | $           | 817        |   | 46.61 | % | 0.10 | % | 0.10 | % | 0.00 | % |
| Savings  and money market                   |       | 24,825                          |       | 10,091       |       | 14,734                          |       | 146.01      | %          | 1.06 | % | 1.33 | % | -0.27 | % |
| Certificates  of deposit                    |       | 46,643                          |       | 23,060       |       | 23,583                          |       | 102.27      | %          | 1.51 | % | 2.36 | % | -0.85 | % |
| FHLB  advances                              |       | 4,750                           |       | 4,633        |       | 117                             |       | 0.00        | %          | 4.13 | % | 4.23 | % | -0.10 | % |
| Total  interest-bearing liabilities         |       | $                               | 78,788     |         | $          | 39,537                          |       | $           | 39,251     |   | 99.28 | % | 1.49 | % | 2.22 | % | -0.73 | % |

 

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A volume and rate variance table is provided belowwhich sets forth the dollar differences in interest earned and paid for eachmajor category of interest-earning assets and interest-bearing liabilities forthe comparable three-month periods ended March 31, 2010 and March 31,2009:

 
| ** **                                  | ** ** | **For  the three months ended**    | ** ** |
|---------------------------------------------|------------|------------------------------------|------------|
| ** **                                  | ** ** | **March 31,  2010 over 2009** | ** ** |
| **(dollars in thousands)**                  | ** ** | **Volume**                         | ** ** | **Rate** | ** ** | **Total** | ** ** |
| ** **                                  | ** ** | **(Unaudited)**                    | ** ** |
| **Interest income:**                        |       |                               |       |   |   |   |   |
| Federal  funds sold                         |       | $                                  | 19         |   | $ | (14 | ) | $ | 5 |   |
| Deposits  with other financial institutions |       | (27                                | )          | (5 | ) | (32 | ) |
| Investments                                 |       | 147                                |       | 51 |   | 198 |   |
| Loans                                       |       | 333                                |       | 121 |   | 454 |   |
| Net  increase (decrease)                    |       | 472                                |       | 153 |   | 625 |   |
|                                        |       |                               |       |   |   |   |   |
| **Interest expense:**                       |       |                               |       |   |   |   |   |
| Interest-bearing  demand                    |       | —                             |       | — |   | — |   |
| Savings  and money market                   |       | 48                                 |       | (16 | ) | 32 |   |
| Certificates  of deposit                    |       | 138                                |       | (98 | ) | 40 |   |
| FHLB  advances                              |       | 1                                  |       | (1 | ) | — |   |
| Net  increase (decrease)                    |       | 187                                |       | (115 | ) | 72 |   |
| Total  net increase (decrease)              |       | $                                  | 285        |   | $ | 268 |   | $ | 553 |   |

 

A review of the above tables shows that the overallincrease in net interest income of approximately $553,000 between the twocomparative quarters ended at March 31, 2010 and March 31, 2009 isthe result of several factors.

 

Among the most significant factors in the increasein net interest income is the overall growth in earning assets, upapproximately $48.0 million or 58.0% between March 31, 2010 and March 31,2009.

 

This increase was primarily a result of loan growth($23.8 million) reflecting 49.6% of the total. The percentage of average loan dollars outstanding, as a percentage ofinterest-earning assets, has softened slightly from 68.6% as of March 31,2009 to 61.6% as of March 31, 2010. The higher outstanding volume of loans between the first quarter periodswould have resulted in an increase of approximately $333,000 in interestincome.  However, the actual amount ofinterest income earned was augmented by approximately $121,000 due to theincrease in the overall effective yield on the loan portfolio.  The overall yield on outstanding loansincreased from 5.68% for the three-month period ended March 31, 2009 to6.29% for the three-month period ended March 31, 2010.

 

The Bank continues to have seven significant depositrelationships, some of which are with related parties, which total, as of March 31,2010, approximately $36.1 million or 34.2% of the Bank’s deposits.  Included in these deposits are funds subjectto unscheduled withdrawals, mandating the Bank to hold funds in cash or cashequivalents at a higher level to provide necessary liquidity. The amount of Fedfunds sold as a percentage of all interest-earning assets has increased from11.8% to 20.7% for the comparable three-month periods ended in March 31,2009 and March 31, 2010, with the average balance in Fed funds sold increasingby approximately $17.3 million.  Thishigher outstanding volume would have resulted in an increase in interest incomeof approximately $19,000.  However thehistorically low effective yield on this category, which declined by anadditional 22 basis points from an effective yield of just 0.46% for thethree-month period ended March 31, 2009 to 0.24% for the three-monthperiod ended March 31, 2010 almost completely offset any positive benefitby reducing the potential interest income by approximately $14,000.

 

The Bank, in order to improve the overall yield oninterest-earning assets, has placed additional funds into itsavailable-for-sale investment category. The higher average outstanding volume of funds invested of

 

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approximately $11.9 million between the firstquarterly periods would have resulted in an increase of approximately $147,000in interest income. This, coupled with improved yields within the investmentcategory, added approximately $51,000 to the amount of interest on investments,bringing the total to $198,000.  Theeffective yield on investments increased by 102 basis points from 5.00% for thethree-month period ended March 31, 2009 to 6.02% for the comparablethree-month period ended March 31, 2010.

 

The change in the mix of interest-yielding assetscoupled with the overall growth resulted in the increase of interest income ofapproximately $625,000, with approximately $472,000 due to volume increases,which more than fully offset the result of the general market interest ratedecline.  More aggressive pricing onloans in addition to the aforementioned improvement in investment yields augmentthe interest income increase related to the volume variance, addingapproximately $153,000 to interest income during the three-month period ended March 31,2010 over the comparable three-month period ended March 31, 2009.  While general interest rates have remained athistorical lows since the first quarter of 2009, the average effective yield onthe Company’s earning assets have shown a modest improvement by approximately23 basis points as a result primarily of the aforementioned change in loanpricing.

 

Interest expense increased by only $72,000, withincreases in balances outstanding on interest-bearing liabilities beingpartially offset by the savings available on the repricing associated with theoverall declining market rates.

 

The increase in interest expense due to the changein outstanding average interest-bearing liabilities was $187,000 with averageoutstanding interest-bearing balances almost doubling from the balance for thethree-month period ended March 31, 2009 of approximately $39.5 million to$78.8 million.

 

The increase in interest expense due to the changein overall effective interest rates resulted in a savings of approximately$115,000 with the average rates declining by 73 basis points, from 2.22% forthe three-month period ended March 31, 2009 to approximately 1.49%.

 

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

 

For the comparable three-month periods ended March 31,2010 and March 31, 2009, the average balance in *Certificateof Deposits* increased by approximately $23.6 million. The higheroutstanding volume in certificates of deposits would have resulted in anincrease of expense of approximately $138,000. However the significant decline in the effective yield on this categoryby 85 basis points, from an effective yield of 2.36% for the three-month periodended March 31, 2009 to 1.51% for the three-month period ended March 31,2010, offset much of the additional expense by reducing the potential interestcost by approximately $98,000.

 

A similar result occurred in the *Savings and Money Market* category. For the comparablethree-month periods ended March 31, 2010 and March 31, 2009, theaverage balance in*Savings and Money Market*depositsincreased by approximately $14.7 million. The higher outstanding volume in thiscategory would have resulted in an increase of expense of approximately$48,000.  However the decline in theeffective yield on this category by 27 basis points from 1.33% for thethree-month period ended March 31, 2009 to 1.06% for the three-monthperiod ended March 31, 2010, offset about one-third of the additionalexpense and reduced the potential interest cost by approximately $16,000.

 

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***Provision for Loan Losses***

 

The Company made provisions for loan losses of$370,000 for the three-month period ended March 31, 2010, compared to$174,000 for the comparable three-month period ended March 31, 2009.  These provisions were determined based uponthe periodic credit review of the loan portfolio, consideration of past loanloss experience, current and predicted economic conditions, and other pertinentfactors.  For further analysis of theadequacy of the loan loss reserve, see *Asset Quality andAllowance for Loan Losses.*

 

***Non-Interest Income***

 

Non-interest income for the three-month period endedMarch 31, 2010 consists of fees for two sources, the Bank and BOMC.  Bank-related fee income increased by 300%from approximately $17,000 for the three-month period ended March 31, 2009to $69,000 for the three-month period ended March 31, 2010.

 

Non-bank related income totaled approximately $1.7million and was generated by BOMC for the first quarter of 2010. There are nocomparable numbers for the first quarter of 2009, as BOMC was not affiliatedwith the Company until October 1, 2009.

 

The revenue from BOMC came from three primarysources.  The largest of the sources isfrom riskless institutional trading in bonds and totaled approximately $987,000during the first quarter of 2010.  BOMCalso generated income from facilitating trades in whole loans betweeninstitutional clients.  The firmgenerated approximately $259,000 during the first quarter of 2010 associatedwith that aspect of the business.  Athird source of revenue came from consulting services regarding evaluation andpackaging of other institutions’ bond portfolios.  During the first quarter of 2010, BOMC earnedapproximately $429,000 in this activity.

 

***Non-Interest Expense***

 

The following table sets forth changes for the twocomparable three-month periods ending March 31, 2010 and March 31,2009, allowing comparisons between these two quarters:

 
| ** **                    | ** ** | **For the three months ended** | ** ** | ** **   | ** ** | ** **  | ** ** |
|-------------------------------|------------|----------------------------------------------------|------------|--------------|------------|-------------|------------|
| ** **                    | ** ** | **March, 31,**                                | ** ** | ** **   | ** ** |
| ** **                    | ** ** | **2010**                                           | ** ** | **2009**     | ** ** | ** **  | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **(dollars in thousands)**               | ** ** | **Variance** | ** ** |
| ** **                    | ** ** | **(Unaudited)**                                    | ** ** | **Dollars**  | ** ** | **Percent** | ** ** |
| Compensation and benefits     |       | $                                                  | 2,575      |         | $          | 1,015       |       | $ | 1,560 |   | 153.7 | % |
| Professional expenses         |       | 483                                                |       | 340          |       | 143         |       | 42.1 | % |
| Occupancy and equipment       |       | 273                                                |       | 172          |       | 101         |       | 58.7 | % |
| Technology and  communication |       | 273                                                |       | 137          |       | 136         |       | 99.3 | % |
| Other non-interest  expenses  |       | 298                                                |       | 147          |       | 151         |       | 102.7 | % |
| Total  non-interest expenses  |       | $                                                  | 3,902      |         | $          | 1,811       |       | $ | 2,091 |   | 115.5 | % |

 

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

 

·                  Compensationand benefits increases associated with approximately 15 employees for BOMC notpresent in the first quarter of 2009, which totaled approximately $1,002,000and five (5) employees in the Bancorp also not present in the firstquarter of 2009, which totaled approximately $556,000.

 

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·                  Costsfor professional services associated with the transition in managementincluding recruiting and legal fees of approximately $140,000.

 

·                  Costsassociated with consulting and accounting services required by BOMC accountedfor approximately $150,000.

 

·                  Costsassociated with increase in the occupancy, furniture and equipment costs forboth BOMC and Bancorp not present in the first quarter of 2009.  Of the increase of approximately $101,000,72% is connected with BOMC and 21% originated in Bancorp.

 

·                  Dataprocessing costs associated with the BOMC operating requirements accounted for100% of the noted increase in technology and communication expenses.

 

·                  Includedwith the increased expense noted in the other category are increased FDICinsurance assessments, the payment of fees to Company directors and other costsassociated with the activation of activities at the holding company level andentrance into business by BOMC.

 

***FINANCIAL CONDITION***

 

The Company’s decrease in total assets level to$134.4 million as of March 31, 2010 represents an 11.8% decline, orapproximately $18.0 million, from the total assets level of $152.3 million asof December 31, 2009.  The decline iscentered in overnight Federal funds sold, which were temporarily augmented byboth brokered and non-brokered non-locally generated deposits and securedovernight FHLB advances.   Asset balancesas of December 31, 2009 had been augmented to facilitate potentialacquisition opportunities and increase certain borrowing levels presently tiedto quarter-end asset totals.

 

***Investments***

 

Total investments increased by approximately $9.9million from $13.9 million as of December 31, 2009 to $23.7 million as of March 31,2010.  The following schedule provides anoverview of the types of investments on the Company’s books at the date notedand at their carrying value in thousands of dollars:

 
| ** **                                            | ** ** | **March 31,  2010 (unaudited)** | ** ** | **December 31,  2009 (audited)** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------|------------|---------------------------------------|------------|
| ** **                                            | ** ** | **Amount**                           | ** ** | **Percentage  of**                    | ** ** | **Amount** | ** ** | **Percentage  of** | ** ** |
| **(dollars in thousands)**                            | ** ** | **Outstanding**                      | ** ** | **Total**                             | ** ** | **Outstanding** | ** ** | **Total** | ** ** |
| Municipal  obligations                                |       | $                                    | 495        |                                  | 2.1        | % | $ | 494 |   | 3.6 | % |
| Non-mortgage-backed  US Government Agency obligations |       | 2,647                                |       | 11.1                                  | %          | 2,626 |   | 19.0 | % |
| Mortgage-backed  securities                           |       | 6,428                                |       | 27.1                                  | %          | 7,328 |   | 52.9 | % |
| Asset-backed  securities                              |       | 14,175                               |       | 59.7                                  | %          | 3,407 |   | 24.6 | % |
| Total  investments                                    |       | $                                    | 23,745     |                                  | 100.0      | % | $ | 13,855 |   | 100.0 | % |

 

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

 

Additional information regarding the composition,maturities, and yields of the security portfolio as of March 31, 2010 isfound in Note 4 of the Company’s financial statements included within thisdocument.

 

***Loans***

 

Total gross loansas of March 31, 2010 were $85.4 million, an increase of approximately $5.2million  from $80.1 million at December 31,2009. Outstanding loan balances increased in all categories, with the mostmonetary growth occurring in real estate construction loans, where the totalgrew by approximately $2.0 million or 35.6%.

 

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

 
| ** **                             | ** ** | **March 31, 2010 (unaudited)** | ** ** | **December 31, 2009 (audited)** | ** ** |
|----------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------|------------|
| ** **                             | ** ** | **Amount**                                    | ** ** | **Percentage of**                         | ** ** | **Amount** | ** ** | **Percentage of** | ** ** |
| **(unaudited)**                        | ** ** | **Outstanding**                               | ** ** | **Total**                                      | ** ** | **Outstanding** | ** ** | **Total** | ** ** |
| ** **                             | ** ** | **(Dollars in Thousands)**          | ** ** | **(Dollars in Thousands)**           | ** ** |
| Commercial loans                       |       | $                                             | 27,908     |                                           | 32.6       | % | $ | 26,520 |   | 33.0 | % |
| Real estate loans                      |       | 42,106                                        |       | 49.2                                           | %          | 40,566 |   | 50.5 | % |
| Real estate - construction             |       | 7,668                                         |       | 9.0                                            | %          | 5,656 |   | 7.0 | % |
| Other loans                            |       | 7,838                                         |       | 9.2                                            | %          | 7,516 |   | 9.4 | % |
| Total Loans                            |       | 85,520                                        |       | 100.0                                          | %          | 80,258 |   | 100.0 | % |
|                                   |       |                                          |       |                                           |       |   |   |   |   |
| Add: Purchase Premium                  |       | 27                                            |       |                                           |       | 30 |   |   |   |
| Add: Unamortized Costs                 |       | 78                                            |       |                                           |       | 81 |   |   |   |
| Less: Deferred Fees                    |       | (271                                          | )          |                                           |       | (253 | ) |   |   |
| Less – Allowance for loan  losses |       | (1,484                                        | )          |                                           |       | (1,202 | ) |   |   |
| Net loans                              |       | $                                             | 83,870     |                                           |       |   | $ | 78,914 |   |   |   |

 

Of the Bank’s total loans outstanding as of March 31,2010, 27.0% were due in one year or less, 35.4% were due in one to five years,and 37.6% 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.

 

**LoanMaturity Schedule as of March 31, 2010**

 
| ** **                                | ** ** | ** **                  | ** ** | **Maturing**    | ** ** | ** **     | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|-----------------|------------|----------------|------------|------------|------------|
| ** **                                | ** ** | **Within One**              | ** ** | **One to Five** | ** ** | **After Five** | ** ** | ** ** | ** ** |
| **(unaudited)**                           | ** ** | **Year**                    | ** ** | **Years**       | ** ** | **Years**      | ** ** | **Total**  | ** ** |
| ** **                                | ** ** | **(Dollars  in thousands)** | ** ** |
| ** **                                | ** ** | ** **                  | ** ** | ** **      | ** ** | ** **     | ** ** | ** ** | ** ** |
| Commercial                                |       | $                           | 14,150     |            | $          | 11,758         |       | $          | 2,000      |   | $ | 27,908 |   |
| Real  Estate                              |       | —                      |       | 16,631          |       | 25,475         |       | 42,106     |       |
| Real  Estate-Construction                 |       | 6,796                       |       | 872             |       | —         |       | 7,668      |       |
| Other  Loans                              |       | 2,150                       |       | 1,006           |       | 4,682          |       | 7,838      |       |
| Total                                     |       | $                           | 23,096     |            | $          | 30,267         |       | $          | 32,157     |   | $ | 85,520 |   |
|                                      |       |                        |       |            |       |           |       |       |       |
| Loans  with pre-determined interest rates |       | $                           | 459        |            | $          | 13,320         |       | $          | 2,397      |   | $ | 16,176 |   |
| Loans  with floating or adjustable rates  |       | 22,637                      |       | 16,947          |       | 29,760         |       | 69,344     |       |
| Total                                     |       | $                           | 23,096     |            | $          | 30,267         |       | $          | 32,157     |   | $ | 85,520 |   |

 

Of the gross loan dollars outstanding as of March 31,2010, approximately 81.1% had adjustable rates. 62.3% of the loan dollars of these adjustable rate loans have interestrates tied to the prime rate and are subject to changes in the rate indeximmediately when the prime rate is changed.

 

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

 

*Commercial Loans*

 

The Bank offers a variety of commercial loans,including secured and unsecured term and revolving lines of credit, equipmentloans and accounts receivable loans.  Asof March 31, 2010, approximately 86.8% of 

 

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the commercial loans had adjustable rates.  The Bank underwrites secured term loans andrevolving lines of credit primarily on the basis of a borrower’s cash flow andthe ability to service the debt, although we rely on the liquidation of theunderlying collateral as a secondary payment source, where applicable.  Should the borrower default and the Bankforecloses on the assets, we may not be able to recover the full amount of theloan.

 

*Real Estate/ Construction Loans*

 

The Bank’s real estate loans are secured primarilyby commercial property, including a significant percentage in multi-familycomplexes.   Approximately 75.7% of thereal estate loans are adjustable during the term of the loan.  Approximately 51.2% of the real estate loanshave a remaining maturity between five and ten years.  As of March 31, 2010, the weighted averageratio of the original loan extension to the underlying value of the propertywas approximately 47% with weighted average debt service coverage of 1.97.  No individual loan to value ratio exceeded75%.

 

*Other Loans*

 

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

 

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

 

We enter into and may issue financial instrumentswith off-balance sheet credit risk in the normal course of business to meet thefinancial needs of our customers.  Sinceinception through March 31, 2010, these had been limited to undisbursedcommitments to extend credit to both businesses and individuals.  Beginning with the second quarter of 2008,the Bank issued several letters of credit for the first time.  The outstanding balance was approximately$120,000 as of March 31, 2010. All commitments noted above were associatedwith loans and were therefore subject to the same credit underwriting policiesand practices as those used for the loans reflected in the financialstatements.  When deemed advisable, theBank obtains collateral to support such commitments.

 

Commitmentsto extend credit are agreements to lend up to a specific amount to a customeras long as there is no violation of any condition in the contract.  Commitments generally have fixed expirationdates or other termination clauses, which may require payment of a fee.  Since we expect some commitments to expirewithout being drawn upon, the total commitment amounts do not necessarilyrepresent future loans. There wasapproximately $26.2 million in undisbursed loan commitments as of March 31,2010, an increase of approximately $321,000 or 1.2% from the December 31,2009 amount of approximately $25.8 million.

 

***Non-Performing Assets***

 

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

 

The Bank had no non-performing assets as of March 31,2010 and December 31, 2009.

 

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***Deposits and Borrowed Funds***

 

Deposits are the Bank’s primary source offunds.  The following table sets forththe amount of deposits outstanding by category at March 31, 2010 and December 31,2009, and the net changes between the two periods.

 
| ** **                                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **Variance** | ** ** |
|--------------------------------------------|------------|--------------------|------------|-----------------------|------------|--------------|------------|
| **(dollars in thousands)**                 | ** ** | **2010**           | ** ** | **2009**              | ** ** | **Dollars**  | ** ** | **Percent** | ** ** |
| ** **                                 | ** ** | **(unaudited)**    | ** ** | **(audited)**         | ** ** | ** **   | ** ** | ** ** | ** ** |
| **Deposit Classifications:**               |       |               |       |                  |       |         |       |   |   |
| Non-interest-bearing  deposits             |       | $                  | 30,810     |                  | $          | 29,647       |       | $ | 1,163 |   | 3.92 | % |
| Interest-bearing  demand                   |       | 2,610              |       | 4,026                 |       | (1,416       | )          | -35.17 | % |
| Savings  and money market                  |       | 25,530             |       | 17,900                |       | 7,630        |       | 42.63 | % |
| Certificate  of deposit $100,000 and over  |       | 37,105             |       | 54,352                |       | (17,247      | )          | -31.73 | % |
| Certificate  of deposit less than $100,000 |       | 4,966              |       | 4,995                 |       | (29          | )          | -0.58 | % |
| Total  deposits                            |       | $                  | 101,021    |                  | $          | 110,920      |       | $ | (9,899 | ) | -8.92 | % |

 

As of March 31, 2010, 30.5% of the Company’sdeposits were non-interest-bearing demand deposits, an increase from December 31,2009 at 26.7%.  At March 31, 2010,the Bank held no funds in ‘reciprocal brokered funds’ or one-way-buy under theCDARS program. Most funds have been placed with the Bank by local depositors atcompetitive rates within the Bank’s marketing area.  While the goal of the Bank is to fund creditcommitments using local funding sources, it is anticipated that some of thefuture funding sources may include additional funds both brokered andnon-brokered.

 

The outflow of deposits in the *Certificateof Deposits of $100,000 and over*from the aforementioned plannednon-renewal of non-local, non-brokered deposits resulting in a decline in thecategory by approximately $2.8 million from approximately $21.1 million as of December 31,2010 to approximately $18.3 million as of March 31, 2010 coupled with thereturned of $16.5 million of ‘one-way-buy’ funds from the CDARS program.

 

The growth in *Savings and Money-Markets*depositsstems primarily from significant deposits from a single customer whose balancesfluctuate with business needs.

 

The *Analysis of Net InterestIncome,*found within this document, summarizes the distribution ofthe average deposit balances and the average rates paid on deposits during theBank’s two comparative quarters ended March 31, 2010 and 2009.

 

The following table shows the maturity of all of theBank’s time deposits as of March 31, 2010:

 
| **Maturities**                        | ** ** | **Amounts**         | ** ** |
|---------------------------------------|------------|---------------------|------------|
| **(unaudited)**                       | ** ** | **(in  thousands)** | ** ** |
| Three  months or less                 |       | $                   | 21,184     |   |
| Over  three and through twelve months |       | 18,054              |       |
| Over  twelve months                   |       | 2,833               |       |
| Total                                 |       | $                   | 42,071     |   |

 

The Bank has established borrowing lines with theFederal Home Loan Bank (“FHLB”).  At December 31,2009, the Bank had borrowed $12.0 million from the FHLB collateralized by bothloans and securities.  The average ratethat was paid on FHLB borrowings was 4.36% for the quarter ended December 31,2009.   At March 31, 2010, the Bankhad borrowed $4.5 million from the FHLB collateralized by securities.  The average rate that was paid on FHLBborrowings was 4.21% for the 

 

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quarter ended March 31, 2010.

 

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

 

The Company maintains an allowance for loan losses (“ALLL”)to provide for potential losses in its loan portfolio.  Additions to the allowance are made bycharges to operating expense in the form of a provision for loan losses.  All loans that are judged to be uncollectiblewill be charged against the allowance, while 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 ALLLnecessarily includes estimates by management applied to known loan portfolioelements.  We employ a 10-point loangrading system in an effort to more accurately track the inherent quality ofthe loan portfolio.  The 10-point systemassigns a value of “1” or “2” to loans that are substantially risk free.  Modest, average and acceptable risk loans areassigned point values of “3”, “4”, and “5”, respectively.  Loans on the watch list are assigned a pointvalue of “6.”   Point values of “7,” “8,”“9” and “10” are assigned, respectively, to loans classified as specialmention, substandard, doubtful and loss. Using these risk factors, managementcontinues the analysis of the general reserves applying quantitative factorsbased upon different risk scenarios.

 

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

 

***Regulatory Capital***

 

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

 

Quantitative measures established by regulation toensure capital adequacy require both the Company and the Bank to maintain thefollowing minimum amounts and ratios (set forth in the table below) of totaland Tier 1 Capital to risk-weighted assets and Tier 1 Capital to averageassets. As of March 31, 2010, the Company and the Bank exceeded allapplicable capital adequacy requirements.

 

Under the Federal Reserve Board’s guidelines,Bancorp is a “small bank holding company,” and thus qualifies for an exemptionfrom the consolidated risk-based and leverage capital adequacy guidelinesapplicable to bank holding companies with assets of $500 million or more.  However, while not required to do so underthe Federal Reserve Board’s capital adequacy guidelines, the Company stillmaintained levels of capital on a consolidated basis required to be considered “wellcapitalized” under generally applicable regulatory guidelines as of March 31,2010.

 

The following table sets forth the Company’s and theBank’s regulatory capital ratios as of March 31, 2010:

 

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| ** **                             | ** ** | ** **              | ** ** | ** **      | ** ** | **To Be  Adequately** | ** ** | **To Be  Well** | ** ** |
|----------------------------------------|------------|-------------------------|------------|-----------------|------------|-----------------------|------------|-----------------|------------|
| ** **                             | ** ** | **Actual**              | ** ** | **Capitalized** | ** ** | **Capitalized**       | ** ** |
| **(unaudited)**                        | ** ** | **Amount**              | ** ** | **Ratio**       | ** ** | **Amount**            | ** ** | **Ratio**       | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| ** **                             |       | **(in thousands)** |       |
| **Company**                            |       |                    |       |            |       |                  |       |            |       |   |   |   |   |
| Total  Capital (risk-weighted assets)  |       | $                       | 28,194     |            | 29.6       | %                     | $          | 7,628           |       | 8 | % | $ | 9,535 |   | 10 | % |
| Tier  1 Capital (risk-weighted assets) |       | $                       | 26,998     |            | 28.3       | %                     | $          | 3,814           |       | 4 | % | $ | 5,721 |   | 6 | % |
| Tier  1 Capital (average assets)       |       | $                       | 26,998     |            | 19.7       | %                     | $          | 5,484           |       | 4 | % | $ | 6,855 |   | 5 | % |
|                                   |       |                    |       |            |       |                  |       |            |       |   |   |   |   |
| **Bank**                               |       |                    |       |            |       |                  |       |            |       |   |   |   |   |
| Total  Capital (risk-weighted assets)  |       | $                       | 22,986     |            | 24.5       | %                     | $          | 7,514           |       | 8 | % | $ | 9,392 |   | 10 | % |
| Tier  1 Capital (risk-weighted assets) |       | $                       | 21,808     |            | 23.2       | %                     | $          | 3,757           |       | 4 | % | $ | 5,635 |   | 6 | % |
| Tier  1 Capital (average assets)       |       | $                       | 21,808     |            | 16.0       | %                     | $          | 5,442           |       | 4 | % | $ | 6,803 |   | 5 | % |

 

***Liquidity and LiquidityManagement***

 

Liquidity management for banks requires that fundsalways be available to pay anticipated deposit withdrawals, fund loancommitments, and meet other commitments on a timely and cost-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 increase indemand for loans or decrease in funds deposited.  During the three-month period ended March 31,2010, we had an average balance of $27.1 million in overnight federal fundssold representing approximately 20% of our average assets.   This ratio is far above the minimumguideline of 3% established in the Bank’s liquidity policy.

 

To meet liquidity needs, the Company maintains aportion of its funds in cash deposits in other banks, federal funds andinvestment securities.  As of December 31,2009, 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 57%.  As of March 31,2010, liquid assets as a percentage of the Company’s deposits, althoughdeclining, remained acceptable at 40% due primarily to the reduction in theFederal funds sold.

 

While liquidity was not a major concern in either2010 or 2009, management has established and is seeking to establish secondarysources of liquidity.  The Bank maintainslines of credit totaling $6 million with two correspondent banks for thepurchase of overnight federal funds.  Thelines are subject to availability of funds and have restrictions as to thenumber of days used during defined periods of time.  Another method that the Bank currently hasavailable for acquiring additional deposits is through the acceptance of “brokereddeposits” (defined to include not only deposits acquired with deposit brokers,but also deposits bearing effective yield more than 75 basis points above theprevailing market rates), typically attracting large certificates of depositsat high interest rates.  The Bank had ano “brokered deposits” as of March 31, 2010 but held $16.5 million as of December 31,2009, all of which was returned by the end of January 2010. The Bank hasestablished a credit line with the Federal Home Loan Bank of San Francisco andhas outstanding, as of March 31, 2010, a five-year fixed rate advance of$4.5 million at 4.38%, which was established to stabilize the funding source ofcertain longer-term assets.

 

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*** ***

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

 

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

 

***Credit Risk***

 

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 ALLL methodology are expected to be examined on a regular basis by bothregulatory agencies and independent loan review professionals.

 

***Interest Rate Risk***

 

Interest rate risk is the exposure of a bank’sfinancial condition and the results of operations to adverse movements ininterest rates.  Movements in interest ratesaffect both the generation of earnings as well as the market value of assetsand liabilities.   Interest rate riskresults 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 affect of interest rate shocks on the net interestincome and the market value of equity on the Bank’s existing mix of assets andliabilities.

 

The results of the model’s simulations on thepotential loss of net interest income as of March 31, 2010 reflect thefollowing:

 

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

 

The method employed in rate shocking the earnings atrisk was “ramping” (i.e., changing the indicated rate movement gradually over a12-month horizon).  Based upon the modelsimulation as of March 31, 2010, the Bank’s interest rate risk exposure asmeasured by rate movement on net interest income is within policy guidelines.

 

The results of the model’s simulations on thepotential loss of the Company’s equity as of March 31, 2010 reflect thefollowing:

 

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

 

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

 

Based upon the model simulation as of March 31,2010, the Bank interest rate exposure as measured by rate movement on themarket value of the Bank’s equity is within policy guidelines.

 

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

 

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

 

In designing and evaluating the disclosure controlsand procedures, management recognizes that any controls and procedures, nomatter how well-designed and operated, can provide reasonable assurance

 

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only of achieving the desired control objectives, andmanagement necessarily is required to apply its judgment in weighing the costsand benefits of possible new or different controls and procedures.  Limitations are inherent in all controlsystems, so no evaluation of controls can provide absolute assurance that allcontrol issues and any fraud within the Company have been detected.

 

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

 

During the quarter ended March 31, 2010, therewere no significant changes in our internal control over financial reporting(as defined in Exchange Act Rule 13a-15(f)) that have materially affected,or are reasonably likely to materially affect, the Company’s internal controlover 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 — (Removed and Reserved)***

 

***Item 5 — Other Information***

 

***Item 6 — Exhibits***

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

 

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(1)      Theinformation required by this exhibit is incorporated by reference to Exhibit 10.1to the Current Report on Form 8-K of the Company filed on March 30,2010.

(2)      Theinformation required by this exhibit is incorporated by reference to Exhibit10.11 to the Current Report on Form 8-K of the Company filed onMarch 30, 2010.

 

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### **Table of Contents**

 

### **SIGNATURES**

### ** **

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

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

 

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