** **

**UnitedStates**

**Securitiesand Exchange Commission**

**Washington, D. C. 20549**

** **

# **FORM 10-Q**

# ** **

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

 

**Forthe quarterly period ended March 31, 2008**

** **

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

 

**For the transition period from             to             **

 

**Commission File Number 333-140448**

 

**MANHATTANBANCORP**

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

 

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

 

**2141 Rosecrans Avenue, Suite 1160**

**El Segundo, California  90245**

(Address of principal executive offices) (Zip Code)

 

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

 

Indicate by a check markwhether the registrant (1) filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.   Yes x  No o

 

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

 

| 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 markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).    o Yes  x  No

 

As of May 9, 2008,there were 2,487,631 shares of the issuer’s common stock outstanding.

 

 

----

 

**Manhattan Bancorp**

**QUARTERLYREPORT ON FORM 10-Q**

**FOR**

**THEQUARTER ENDED MARCH 31, 2008**

 

**TABLE OFCONTENTS**

 
| ** **                          | ** **                                                                                  | **PAGE** |
|-------------------------------------|---------------------------------------------------------------------------------------------|----------|
| PART I - FINANCIAL INFORMATION |                                                                                        |     |
|                                |                                                                                        |     |   |
| Item 1.                             | FINANCIAL STATEMENTS (Unaudited,  except for Balance Sheet as of 12/31/2007)                |     |   |
|                                |                                                                                        |     |   |
|                                | CONSOLIDATED  BALANCE SHEETS                                                                |     | 3 |
|                                |                                                                                        |     |   |
|                                | CONSOLIDATED  STATEMENTS OF OPERATIONS                                                      |     | 4 |
|                                |                                                                                        |     |   |
|                                | CONSOLIDATED  STATEMENTS 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 |     | 13 |
|                                |                                                                                        |     |   |
| Item  3.                            | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                 |     | 23 |
|                                |                                                                                        |     |   |
| Item  4T.                           | CONTROLS AND  PROCEDURES                                                                    |     | 24 |
|                                |                                                                                        |     |   |
| PART II - OTHER  INFORMATION   |                                                                                        |     |
|                                |                                                                                        |     |   |
| Item 1.                             | LEGAL PROCEEDINGS                                                                           |     | 26 |
|                                |                                                                                        |     |   |
| Item 1A.                            | RISK FACTORS                                                                                |     | 26 |
|                                |                                                                                        |     |   |
| Item  2.                            | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                |     | 26 |
|                                |                                                                                        |     |   |
| Item  3.                            | DEFAULTS ON  SENIOR SECURITIES                                                              |     | 26 |
|                                |                                                                                        |     |   |
| Item  4.                            | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                        |     | 26 |
|                                |                                                                                        |     |   |
| Item 5.                             | OTHER INFORMATION                                                                           |     | 26 |
|                                |                                                                                        |     |   |
| Item 6.                             | EXHIBITS                                                                                    |     | 26 |
|                                |                                                                                        |     |   |
| SIGNATURES                          |                                                                                        |     | 27 |

 

2

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**PART I - FINANCIAL INFORMATION**

 

***Item 1 – Financial Information***

 

**Manhattan Bancorp and Subsidiary**

**Consolidated Balance Sheets**

 
| ** **                                                                                                                                     | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                     | ** ** | **(Unaudited)**              | ** ** | ** **                      | ** ** |
| **Assets**                                                                                                                                     |       |                         |       |                            |       |
| Cash and due  from banks                                                                                                                       |       | $                            | 749,403    |                            | $          | 398,333 |   |
| Federal funds  sold                                                                                                                            |       | 4,490,000                    |       | 8,565,000                       |       |
| Total cash and  cash equivalents                                                                                                               |       | 5,239,403                    |       | 8,963,333                       |       |
| Time  deposits-other financial institutions                                                                                                    |       | 1,386,000                    |       | 2,386,000                       |       |
| Investments  securities-available for sale                                                                                                     |       | 6,050,518                    |       | 6,148,695                       |       |
| Investments  securities-held to maturity                                                                                                       |       | 988,085                      |       | 987,275                         |       |
|                                                                                                                                           |       |                         |       |                            |       |
| Loans                                                                                                                                          |       | 32,192,868                   |       | 18,198,570                      |       |
| Allowance for  loan losses                                                                                                                     |       | (435,000                     | )          | (269,000                        | )          |
| Net loans                                                                                                                                      |       | 31,757,868                   |       | 17,929,570                      |       |
|                                                                                                                                           |       |                         |       |                            |       |
| Property and  equipment, net                                                                                                                   |       | 1,538,306                    |       | 1,581,811                       |       |
| Stock in other  financial institutions                                                                                                         |       | 1,048,500                    |       | 1,048,500                       |       |
| Accrued interest  receivable and other assets                                                                                                  |       | 517,384                      |       | 321,550                         |       |
|                                                                                                                                           |       |                         |       |                            |       |
| Total assets                                                                                                                                   |       | $                            | 48,526,064 |                            | $          | 39,366,734 |   |
|                                                                                                                                           |       |                         |       |                            |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                 |       |                         |       |                            |       |
| Deposits:                                                                                                                                      |       |                         |       |                            |       |
| Non-interest  bearing demand                                                                                                                   |       | $                            | 8,581,989  |                            | $          | 5,395,028 |   |
| Interest  bearing:                                                                                                                             |       |                         |       |                            |       |
| Demand                                                                                                                                         |       | 1,472,001                    |       | 1,143,269                       |       |
| Savings and  money market                                                                                                                      |       | 3,342,803                    |       | 4,244,393                       |       |
| Certificates of  deposit equal to or greater than $100,000                                                                                     |       | 11,435,810                   |       | 6,190,200                       |       |
| Certificates of  deposit less than $100,000                                                                                                    |       | 3,028,074                    |       | 889,429                         |       |
| Total deposits                                                                                                                                 |       | 27,860,677                   |       | 17,862,319                      |       |
| Accrued interest  payable and other liabilities                                                                                                |       | 351,781                      |       | 315,481                         |       |
| Total  liabilities                                                                                                                             |       | 28,212,458                   |       | 18,177,800                      |       |
|                                                                                                                                           |       |                         |       |                            |       |
| Commitments and  contingencies                                                                                                                 |       | —                       |       | —                          |       |
|                                                                                                                                           |       |                         |       |                            |       |
| Stockholders’  equity                                                                                                                     |       |                         |       |                            |       |
| Serial preferred  stock-no par value; 10,000,000 shares authorized; none outstanding in 2008 or  2007                                          |       | —                       |       | —                          |       |
| Common stock-no  par value; 10,000,000 shares authorized; issued and outstanding, 2,487,631 at  March 31, 2008 and December 31, 2007 |       | 24,078,828                   |       | 24,078,828                      |       |
| Additional paid  in capital                                                                                                                    |       | 440,165                      |       | 266,908                         |       |
| Unrealized gain  on available-for-sale securities                                                                                              |       | 176,334                      |       | 58,158                          |       |
| Accumulated  deficit                                                                                                                           |       | (4,381,721                   | )          | (3,214,960                      | )          |
|                                                                                                                                           |       |                         |       |                            |       |
| Total  stockholders’ equity                                                                                                               |       | 20,313,606                   |       | 21,188,934                      |       |
|                                                                                                                                           |       |                         |       |                            |       |
| Total  liabilities and stockholders’ equity                                                                                               |       | $                            | 48,526,064 |                            | $          | 39,366,734 |   |

 

The accompanyingnotes are an integral part of this financial statement.

 

3

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**Manhattan Bancorp andSubsidiary**

**ConsolidatedStatements of Operations**

**(Unaudited)**

 
| ** **                                                         | ** ** | ** **                   | ** ** | **(Development**                   | ** ** |
|--------------------------------------------------------------------|------------|------------------------------|------------|------------------------------------|------------|
| ** **                                                         | ** ** | ** **                   | ** ** | **Stage Company)**            | ** ** |
| ** **                                                         | ** ** | ** **                   | ** ** | **The period**                | ** ** |
| ** **                                                         | ** ** | **For the**             | ** ** | **June 19, 2006**        | ** ** |
| ** **                                                         | ** ** | **three-month**              | ** ** | **(Date of Inception)**  | ** ** |
| ** **                                                         | ** ** | **period ended**        | ** ** | **through**                        | ** ** |
| ** **                                                         | ** ** | **March 31, 2008** | ** ** | **March 31, 2007**       | ** ** |
| ** **                                                         | ** ** | ** **                   | ** ** | **(organizational expenses)** | ** ** |
| **Interest income**                                           |       |                         |       |                               |       |
| Interest and  fees on loans                                        |       | $                            | 386,655    |                               |       |   |
| Interest on  investment securities                                 |       | 89,438                       |       |                               |       |
| Interest on  federal funds sold                                    |       | 58,378                       |       |                               |       |
| Interest on time  deposits-other financial institutions            |       | 25,539                       |       |                               |       |
|                                                               |       |                         |       |                               |       |
| Total interest  income                                             |       | 560,010                      |       |                               |       |
|                                                               |       |                         |       |                               |       |
| **Interest  expense**                                              |       |                         |       |                               |       |
| NOW, money  market and savings                                     |       | 26,097                       |       |                               |       |
| Time deposits                                                      |       | 103,868                      |       |                               |       |
|                                                               |       |                         |       |                               |       |
| Total interest  expense                                            |       | 129,965                      |       |                               |       |
|                                                               |       |                         |       |                               |       |
| Net interest  income                                               |       | 430,045                      |       |                               |       |
|                                                               |       |                         |       |                               |       |
| Provision for  loan losses                                         |       | 166,000                      |       |                               |       |
|                                                               |       |                         |       |                               |       |
| Net interest  income after provision for loan losses               |       | 264,045                      |       |                               |       |
|                                                               |       |                         |       |                               |       |
| **Non-interest  income**                                           |       | 12,901                       |       |                               |       |
|                                                               |       |                         |       |                               |       |
| **Non-interest  expense**                                          |       |                         |       |                               |       |
| Compensation and  benefits                                         |       | 948,033                      |       | $                                  | 179,752    |   |
| Occupancy and  equipment                                           |       | 157,675                      |       | 25,266                             |       |
| Technology and  communication                                      |       | 124,831                      |       | —                             |       |
| Professional and  administrative expenses                          |       | 106,033                      |       | 314,347                            |       |
| Other  non-interest expenses                                       |       | 107,135                      |       | —                             |       |
|                                                               |       |                         |       |                               |       |
| Total  non-interest expenses                                       |       | 1,443,707                    |       | 519,365                            |       |
|                                                               |       |                         |       |                               |       |
| Loss before  income taxes                                          |       | (1,166,761                   | )          | (519,365                           | )          |
|                                                               |       |                         |       |                               |       |
| Provision for  income taxes                                        |       | —                       |       | —                             |       |
|                                                               |       |                         |       |                               |       |
| Net loss                                                           |       | $                            | (1,166,761 | )                                  | $          | (519,365 | ) |
|                                                               |       |                         |       |                               |       |
| Weighted average  number of shares outstanding (basic and diluted) |       | 2,487,631                    |       | N/A                                |       |
|                                                               |       |                         |       |                               |       |
| Basic and  diluted loss per share                                  |       | $                            | (0.47      | )                                  | N/A        |   |

 

The accompanyingnotes are an integral part of this financial statement.

 

4

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**Manhattan Bancorp and Subsidiary**

**Consolidated Statements of Stockholders’ Equity**

**March 31,2008 and 2007**

**(Unaudited)**

 
| ** **                                | ** ** | ** **            | ** ** | ** **     | ** ** | ** **  | ** ** | ** **        | ** ** | ** **      | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|----------------|------------|-------------|------------|-------------------|------------|-----------------|------------|-------------------|------------|------------|------------|
| ** **                                | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | ** **  | ** ** | ** **        | ** ** | **Other**       | ** ** | ** **        | ** ** |
| ** **                                | ** ** | **Number of**    | ** ** | ** **     | ** ** | **Paid-in** | ** ** | **Comprehensive** | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| **(Unaudited)**                           | ** ** | **Shares**            | ** ** | **Amount**     | ** ** | **Capital** | ** ** | **Loss**          | ** ** | **Deficit**     | ** ** | **Loss**          | ** ** | **Total**  | ** ** |
| **Balance  at June 19, 2006 (Inception)** |       | —                |       | $              | —     |        | $          | —            |       | $               | —     |              | $          | —     |       | $ | — |   | $ | — |   |
| Issuance of  common stock to founders     |       | 42,500                |       | 425,000        |       |        |       |              |       |            |       |              |       | 425,000    |       |
|                                      |       |                  |       |           |       |        |       |              |       |            |       |              |       |       |       |
| Organizational  expenses                  |       |                  |       |           |       |        |       |              |       | (269,392        | )          |              |       | (269,392   | )          |
| Balance ,  December 31, 2006              |       | 42,500                |       | 425,000        |       | —      |       |              |       | (269,392        | )          | —            |       | 155,608    |       |
| Issuance of  common stock to founders     |       | 2,500                 |       | 25,000         |       |        |       |              |       |            |       |              |       | 25,000     |       |
| Organizational  expenses                  |       |                  |       |           |       |        |       | —            |       | (249,973        | )          |              |       | (249,973   | )          |
| Net loss                                  |       |                  |       | —         |       |        |       | —            |       |            |       |              |       | —     |       |
| Total  comprehensive loss                 |       |                  |       |           |       |        |       | $                 | —     |            |       |              |       |       |       |   |
| **Balance  at March 31, 2007**            |       | 45,000                |       | $              | 450,000    |        | $          | —            |       |            |       | $                 | (519,365   | )          | $          | — |   | $ | (69,365 | ) |
|                                      |       |                  |       |           |       |        |       |              |       |            |       |              |       |       |       |
| **Balance  at December 31, 2007**         |       | 2,487,631             |       | $              | 24,078,828 |        | $          | 266,908           |       | $               | —     |              | $          | (3,214,960 | )          | $ | 58,158 |   | $ | 21,188,934 |   |
| Share-based  compensation expense         |       |                  |       |           |       | 173,257     |       |              |       |            |       |              |       | 173,257    |       |
| Unrealized gain  on investment securities |       |                  |       | —         |       |        |       | 118,176           |       | —          |       | 118,176           |       | 118,176    |       |
| Net loss                                  |       |                  |       |           |       |        |       | (1,166,761        | )          | (1,166,761      | )          |              |       | (1,166,761 | )          |
| Total  comprehensive loss                 |       |                  |       |           |       |        |       | $                 | (1,048,585 | )               |       |              |       |       |       |   |
| **Balance  at March 31, 2008**            |       | 2,487,631             |       | $              | 24,078,828 |        | $          | 440,165           |       |            |       | $                 | (4,381,721 | )          | $          | 176,334 |   | $ | 20,313,606 |   |

 

The accompanyingnotes are an integral part of this financial statement.

 

5

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**ManhattanBancorp and Subsidiary**

**Consolidated Statements of Cash Flows**

**(Unaudited)**

** **
| ** **                                                                                | ** ** | **For the**             | ** ** | **June 19, 2006**       | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                | ** ** | **three-month**              | ** ** | **(date of inception)** | ** ** |
| ** **                                                                                | ** ** | **period ended**        | ** ** | **through**                       | ** ** |
| ** **                                                                                | ** ** | **March 31, 2008** | ** ** | **March 31, 2007**      | ** ** |
| **Cash  flows from operating activities**                                                 |       |                         |       |                              |       |
| Net loss  including organizational expenses in ‘date of inception’ presentation |       | $                            | (1,166,761 | )                                 | $          | (519,365 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:              |       |                         |       |                              |       |
| Net change in:                                                                            |       |                         |       |                              |       |
| Depreciation and  amortization                                                            |       | 67,195                       |       | 4,310                             |       |
| Provision for  loan losses                                                                |       | 166,000                      |       | —                            |       |
| Share-based  compensation                                                                 |       | 173,257                      |       | —                            |       |
| (Increase) in  accrued interest receivable and other assets                               |       | (62,679                      | )          | (131,092                          | )          |
| Increase in  accrued interest payable and other liabilities                               |       | 36,300                       |       | 138,224                           |       |
|                                                                                      |       |                         |       |                              |       |
| Net cash used in  operating activities                                                    |       | (786,688                     | )          | (507,923                          | )          |
|                                                                                      |       |                         |       |                              |       |
| **Cash  flows from investing activities**                                                 |       |                         |       |                              |       |
| Net (increase)  in loans                                                                  |       | (13,994,298                  | )          | —                            |       |
| Decrease in time  deposits - other financial institutions                                 |       | 1,000,000                    |       | —                            |       |
| Proceeds from  repayment and maturities from investment securities                        |       | 220,688                      |       | —                            |       |
| Deposit pending  purchase of FHLB stock                                                   |       | (138,300                     | )          | —                            |       |
| Purchase of  premises and equipment                                                       |       | (23,690                      | )          | (65,361                           | )          |
|                                                                                      |       |                         |       |                              |       |
| Net cash used in  investing activities                                                    |       | (12,935,600                  | )          | (65,361                           | )          |
|                                                                                      |       |                         |       |                              |       |
| **Cash  flows from financing activities**                                                 |       |                         |       |                              |       |
| Net increase  (decrease) in:                                                              |       |                         |       |                              |       |
| Demand deposits                                                                           |       | 3,186,961                    |       | —                            |       |
| Interest bearing  demand deposits                                                         |       | 328,732                      |       | —                            |       |
| Savings and  money market deposits                                                        |       | (901,590                     | )          | —                            |       |
| Certificates of  deposit equal to or greater than $100,000                                |       | 5,245,610                    |       | —                            |       |
| Certificates of  deposit less than $100,000                                               |       | 2,138,645                    |       | —                            |       |
| Increase from  borrowings                                                                 |       | —                       |       | 159,080                           |       |
| Net proceeds  from issuance of common stock                                               |       | —                       |       | 450,000                           |       |
|                                                                                      |       |                         |       |                              |       |
| Net cash  provided by financing activities                                                |       | 9,998,358                    |       | 609,080                           |       |
|                                                                                      |       |                         |       |                              |       |
| Net (decrease)  increase in cash and cash equivalents                                     |       | (3,723,930                   | )          | 35,796                            |       |
|                                                                                      |       |                         |       |                              |       |
| **Cash  and cash equivalents at beginning of period**                                     |       | 8,963,333                    |       | —                            |       |
|                                                                                      |       |                         |       |                              |       |
| **Cash  and cash equivalents at end of period**                                           |       | $                            | 5,239,403  |                              | $          | 35,796 |   |
|                                                                                      |       |                         |       |                              |       |
| **Supplementary  information**                                                            |       |                         |       |                              |       |
|                                                                                      |       |                         |       |                              |       |
| Interest paid on  deposits                                                                |       | $                            | 120,039    |                              | $          | — |   |
|                                                                                      |       |                         |       |                              |       |
| Income taxes  paid                                                                        |       | $                            | —     |                              | $          | — |   |

 

The accompanyingnotes are an integral part of this financial statement.

 

6

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**MANHATTANBANCORP**

**NOTES TO FINANCIAL STATEMENTS**

**MARCH 31, 2008**

 

**Note1.      CONSOLIDATED FINANCIAL STATEMENTS**

 

Theaccompanying unaudited condensed consolidated financial statements of ManhattanBancorp (the “Bancorp”) and its wholly-owned subsidiary, Bank of Manhattan,N.A. (the “Bank”), together referred to as the “Company” have been prepared inaccordance with the instructions to Form 10-Q and Article 8 ofRegulation S-X.  Accordingly, certaininformation and notes required by accounting principles generally accepted inthe United States of America, for annual financial statements are not includedherein.  In the opinion of Management,all adjustments considered necessary for a fair presentation of results for theinterim periods presented have been included. These interim condensed consolidated financial statements should be readin conjunction with the financial statements and related notes contained in theCompany’s 2007 Annual Report on Form 10-K as amended.

 

Thecondensed consolidated financial statements include accounts of the Bancorp andits wholly-owned financial subsidiary, Bank of Manhattan, N.A. (the “Bank”).    For the period from June 19, 2006(inception) to August 15, 2007, the Bancorp was in a development state,engaging in the preparation of applications for regulatory approvals, raisingcapital, financial planning, systems development, acquisition of equipment andfacilities, as well as recruiting activities. When the Bank commenced its operations, the Bancorp officially became abank holding company.  All net expenses,which were incurred during the period from June 19, 2006 through August 15,2007, were pre-opening expenses and are reported in the statement ofstockholders’ equity included to facilitate the financial presentation of theCompany.  The Consolidated Statement ofOperations included in the report provides no comparable statement for thethree-month period ended March 31, 2007, as the Company’s operations didnot commence until August 15, 2007.  However, a development stage statement of operations has been includedcovering the period from June 19, 2006 through the end of March 31,2007.  All expenses recorded during thisperiod were related to the organization phase of the Company.

 

Thepreparation of consolidated condensed financial statements in conformity withthe accounting principles generally accepted in the United States of Americarequires Management to make estimates and assumptions.  These estimates and assumptions affect thereported amounts of assets and liabilities, the disclosure of contingent assetsand liabilities at the date of the consolidated financial statements and thereported amounts of revenues and expenses during the reporting period.   Actual results could differ from theseestimates. All material intercompany accounts and transactions have beeneliminated.

 

Certainamounts in prior presentations have been reclassified to conform to the currentpresentation.  These reclassificationshad no effect on shareholders’ equity, net loss or loss per share amounts.

 

**Note2.      RECENT ACCOUNTING PRONOUNCEMENTS**

 

ACCOUNTINGFOR UNCERTAINTY IN INCOME TAXES: In July 2006, the Financial AccountingStandards Board (“FASB”) issued *FASB Interpretation (“FIN”)No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation ofFASB Statement 109.”*FIN No. 48 prescribes a recognitionthreshold and a measurement attribute for the financial statement recognitionand measurement of a tax position taken or expected to be taken in a taxreturn. Benefits from tax positions should be recognized in the financialstatements only when it is more likely than not that the tax position will besustained upon examination by the appropriate taxing authority that would havefull knowledge of all relevant information. A tax position 

 

7

----

 

thatmeets the more-likely-than-not recognition threshold is measured at the largestamount of benefit that is greater than fifty percent likely of being realizedupon ultimate settlement. Tax positions that previously failed to meet themore-likely-than-not recognition threshold should be recognized in the firstsubsequent financial reporting period in which that threshold is met.Previously recognized tax positions that no longer meet the more-likely-than-notrecognition threshold should be de-recognized in the first subsequent financialreporting period in which that threshold is no longer met. FIN No. 48 alsoprovides guidance on the accounting for and disclosure of unrecognized taxbenefits, interest and penalties. The adoption of FIN No. 48 as of January 1,2007 did not significantly impact on the Company’s financial statements.

 

InJuly, 2006, FASB issued FASB Staff Position (“FSP”) No. 48-1 “*Definition of Settlement in FIN No. 48.” *FSP 48-1 provides guidance on howto determine whether a tax position is effectively settled for the purpose ofrecognizing previously unrecognized tax benefits.  FSP 48-1 was effective retroactively as of January 1,2007 and did not impact the Company’s financial statement.

 

FAIRVALUE MEASUREMENTS: In September 2006, the FASB issued SFAS No. 157*, “Fair Value Measurements.” *SFASNo. 157 defines fair value, establishes a framework for measuring fairvalue under accounting principles generally accepted in the United States ofAmerica, and expands disclosures about fair value measurements. SFAS No. 157is effective for the Company as of January 1, 2008 and is not expected tohave a significant impact on the Company’s financial statements.

 

InFebruary 2007, the FASB issued SFAS No. 159, “*The FairValue Option for Financial Assets and Financial Liabilities-Including anAmendment of SFAS 115.” *SFAS No. 159permits**an entity to choose to measurefinancial instruments and certain other items at fair value.  Most of the provisions of SFAS No. 159are elective; however the amendment of SFAS No. 115, “*Accountingfor Certain Investments in Debt and Equity Securities,”*applies toall entities with available for sale or trading securities.  For financial instruments elected to be accountedfor at fair value, an entity will report the unrealized gains and losses inearnings.  SFAS No. 159 is effectiveas of the beginning of an entity’s first fiscal year that begins after November 15,2007.  The Company does not expect theadoption of SFAS No. 159 to have a material effect on the Company’sconsolidated financial statements.

 

**Note3.     INTEREST-EARNING ASSETS WITH OTHERFINANCIAL INSTITUTIONS**

 

TheCompany had interest-earning deposits with other financial institutions of$1,386,000, with a weighted average yield of 5.15% and an average weightedremaining life of approximately five months.

 

**Note4.     INVESTMENT SECURITIES**

 

Investmentsecurities have been classified in the balance sheet according to management’sintent. The following table sets forth the investment securities at theiramortized cost and estimated fair value with gross unrealized gains and lossesas of March 31, 2008 and December 31, 2007.

 

8

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| ** **                               | ** ** | ** **              | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** ** | ** ** |
|------------------------------------------|------------|-------------------------|------------|----------------|------------|----------------|------------|------------|------------|
| ** **                               | ** ** | **Amortized**           | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**   | ** ** |
| ** **                               | ** ** | **Cost**                | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Value**  | ** ** |
| ** **                               | ** ** | **(in thousands)** | ** ** |
| **March 31, 2008**             |       |                    |       |           |       |           |       |       |       |
| **Available-for-sale  securities:**      |       |                    |       |           |       |           |       |       |       |
| U.S. government  and agency securities   |       | $                       | 1,230      |           | $          | 37             |       | $          | —     |   | $ | 1,267 |   |
| Mortgage-backed  securities              |       | 4,644                   |       | 140            |       | —         |       | 4,784      |       |
| **Total  available-for-sale securities** |       | $                       | 5,874      |           | $          | 177            |       | $          | —     |   | $ | 6,051 |   |
|                                     |       |                    |       |           |       |           |       |       |       |
| **Held-to-maturity  securities:**        |       |                    |       |           |       |           |       |       |       |
| State and  municipal securities          |       | $                       | 988        |           | $          | 18             |       | $          | —     |   | $ | 1,006 |   |

 
| ** **                               | ** ** | ** **              | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** ** | ** ** |
|------------------------------------------|------------|-------------------------|------------|----------------|------------|----------------|------------|------------|------------|
| ** **                               | ** ** | **Amortized**           | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**   | ** ** |
| ** **                               | ** ** | **Cost**                | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Value**  | ** ** |
| ** **                               | ** ** | **(in thousands)** | ** ** |
| **December 31,  2007**              |       |                    |       |           |       |           |       |       |       |
| **Available-for-sale  securities:**      |       |                    |       |           |       |           |       |       |       |
| U.S. government  and agency securities   |       | $                       | 1,230      |           | $          | 19             |       | $          | —     |   | $ | 1,249 |   |
| Mortgage-backed  securities              |       | 4,861                   |       | 39             |       | —         |       | 4,900      |       |
| **Total  available-for-sale securities** |       | $                       | 6,091      |           | $          | 58             |       | $          | —     |   | $ | 6,149 |   |
|                                     |       |                    |       |           |       |           |       |       |       |
| **Held-to-maturity  securities:**        |       |                    |       |           |       |           |       |       |       |
| State and  municipal securities          |       | $                       | 987        |           | $          | 4              |       | $          | 2          |   | $ | 989 |   |

 

The fair value of these securities is based uponquoted market prices, unless otherwise indicated in Note 7, “*Fair Value – Adoption of SFAS No. 157”.*  There were no realized gains or losses forthe three-month period ended March 31, 2008 or the three month periodended December 31, 2007.   The netunrealized gain on available-for-sale securities included in accumulated othercomprehensive income was approximately $118,000 for the quarterly period ended March 31,2008. There is no comparable figure for the first quarter of 2007.  No securities were pledged as of March 31,2008 or December 31, 2007.

 

Management does not believe that any of the Company’sinvestment securities are impaired due to reasons of credit quality.  Declines in the fair value ofavailable-for-sale securities below their cost, that are deemed to beother-than-temporary, are reflected in earnings as realized losses.  In estimating other-than-temporary losses,management considers among other things: (i) the length of time and theextent to which the fair value has been less than cost, (ii) the financialcondition and near-term prospects of the issuer and (iii) the intent andability of the Company to retain its investment in the issuer for a period oftime sufficient to allow for any anticipated recovery in fair value.  However, as of March 31, 2008, therewere no investments with either realized or unrealized losses in the portfolio.

 

At March 31, 2008, the Company had nosecurities with unrealized losses that were in a continual loss position forgreater than 12 months.

 

**Note5.     LOANS AND ALLOWANCE FOR LOANLOSSES**

 

Loansare summarized as follows:

 
| ** **                             | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|----------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | **Amount**                   | ** ** | **Percentage of**          | ** ** | **Amount** | ** ** | **Percentage of** | ** ** |
| **(dollars in thousands)**   | ** ** | **Outstanding**              | ** ** | **Total**                       | ** ** | **Outstanding** | ** ** | **Total** | ** ** |
| Commercial loans                       |       | $                            | 12,148     |                            | 37.7       | % | $ | 7,876 |   | 43.3 | % |
| Real estate  loans                     |       | 18,637                       |       | 57.9                            | %          | 9,293 |   | 51.1 | % |
| Other loans                            |       | 1,408                        |       | 4.4                             | %          | 1,030 |   | 5.6 | % |
| Total loans,  including net loan costs |       | 32,193                       |       | 100.0                           | %          | 18,199 |   | 100.0 | % |
| Less : allowance  for loan losses      |       | (435                         | )          |                            |       | (269 | ) |   |   |
| Net loans                              |       | $                            | 31,758     |                            |       |   | $ | 17,930 |   |   |   |

 

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

 

9

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

** **
| ** **                                     | ** ** | **For the Three** | ** ** | **For the Three** | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **Month Period**       | ** ** | **Month Period**       | ** ** |
| ** **                                     | ** ** | **March 31,**          | ** ** | **December 31,**       | ** ** |
| ** **                                     | ** ** | **2008**                    | ** ** | **2007**                    | ** ** |
| ** **                                     | ** ** | **(in thousands)**     | ** ** | **(in thousands)**     | ** ** |
| Allowance  balance at beginning of period      |       | $                           | 269        |                        | $          | 102 |   |
| Additions to the  allowance charged to expense |       | 166                         |       | 167                         |       |
| Recoveries                                     |       | —                      |       | —                      |       |
|                                           |       | 435                         |       | 269                         |       |
| Less loans  charged-off                        |       | —                      |       | —                      |       |
|                                           |       |                        |       |                        |       |
| Allowance  balance at end of period            |       | $                           | 435        |                        | $          | 269 |   |

 

**Note6.     STOCK-BASED COMPENSATION**

 

Duringthe quarterly period ended March 31, 2008, the Company recordedapproximately $173,000 of stock-based compensation expense.  At March 31, 2008, unrecordedcompensation expense related to non-vested stock option grants totaledapproximately $1.7 million and is expected to be recognized as follows:

 
| ** **         | ** ** | **Stock Option**   | ** ** |
|--------------------|------------|-------------------------|------------|
| ** **         | ** ** | **Compensation**        | ** ** |
| ** **         | ** ** | **Expense**             | ** ** |
| ** **         | ** ** | **(in thousands)** | ** ** |
| Remainder of  2008 |       | $                       | 524        |   |
| 2009               |       | 698                     |       |
| 2010               |       | 432                     |       |
| 2011               |       | 1                       |       |
| Total              |       | $                       | 1,655      |   |

 

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

 

Thefollowing table summarizes the assumptions utilized for stock options grantedfor the period presented:

 
| ** **           | ** ** | **Three Months**        | ** ** |
|----------------------|------------|------------------------------|------------|
| ** **           | ** ** | **Ended**                    | ** ** |
| ** **           | ** ** | **March 31, 2008** | ** ** |
| Risk-free rate       |       | 2.74%                        |       |
| Expected term        |       | 6 years                      |       |
| Expected  volatility |       | 32.81%                       |       |

 

10

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Thefollowing table summarizes the stock option activity under the plan for thequarterly period ended March 31, 2008, there being no comparable period in2007:

 

Asno options were exercisable as of March 31, 2008, there were no optionsexercised during the three-month period ended March 31, 2008.

 
| ** **                                      | ** ** | ** ** | ** ** | ** **                | ** ** | **Weighted Average** | ** ** | **Aggregate** | ** ** |
|-------------------------------------------------|------------|------------|------------|---------------------------|------------|---------------------------|------------|---------------|------------|
| ** **                                      | ** ** | ** ** | ** ** | **Weighted Average** | ** ** | **Remaining**             | ** ** | **Intrinsic** | ** ** |
| ** **                                      | ** ** | **Shares** | ** ** | **Exercise Price**   | ** ** | **Contractual Life** | ** ** | **Value**     | ** ** |
| **2008**                                        |       |       |       |                      |       |                      |       |          |       |
| Outstanding at  December 31, 2007          |       | 531,770    |       | $                         | 9.99       |                      |       |          |       |   |
| Granted                                         |       | 7,800      |       | $                         | 9.73       |                      |       |          |       |   |
| Exercised                                       |       | —     |       | —                    |       |                      |       |          |       |
| Expired                                         |       | —     |       | —                    |       |                      |       |          |       |
| Forfeited                                       |       | 1,000      |       | $                         | 10.00      |                      |       |          |       |   |
| Outstanding at  September 30, 2007         |       | 538,570    |       | $                         | 9.73       |                      | 9.40       |          | $          | 9,165 |   |
| Options  exercisable at September 30, 2007 |       | —     |       | —                    |       | —                    |       | —        |       |
|                                                 |            |            |            |                           |            |                           |            |               |            |  |  |

 

**Note7.     FAIR VALUE MEASUREMENTS**

 

EffectiveJanuary 1, 2008, the Company adopted Statement of Financial AccountingStandards (“SFAS”) No. 157, “Fair Value Measurements”.  SFAS No. 157 clarifies the definition offair value, describes methods used to appropriately measure fair value inaccordance with generally accepted accounting principles in the United Statesof America, and expands fair value disclosure requirements.  This statement applies whenever otheraccounting pronouncements require or permit fair value measurements.  The fair value hierarchy under SFAS No. 157prioritizes the inputs to valuation techniques used to measure fair value intothree broad levels (Level 1, Level 2, and Level 3).  Level 1 inputs are unadjusted quoted pricesin active markets (as defined) for identical assets or liabilities that thereporting entity has the ability to access at the measurement date.  Level 2 inputs are inputs, other than quotedprices included within Level 1, which are observable for the asset orliability, either directly or indirectly. Level 3 inputs are observable inputs for the asset or liability, andreflect the reporting entity’s own assumptions about the assumptions thatmarket participants would use in pricing the asset or liability (includingassumptions about risk).

 

TheCompany performs fair value measurements on certain assets and liabilities asthe result of the application of accounting guidelines and pronouncements thatwere relevant prior to the adoption of SFAS No. 157.  Some fair value measurements, such as foravailable-for-sale securities, are performed on a recurring basis.

 

Thefollowing table summarizes the Company’s assets and liabilities, if any, whichwere measured at fair value on a recurring basis during the period, withdollars reported in thousands:

 
| ** **                          | ** ** | ** **         | ** ** | **Quoted Price in** | ** ** | **Significant** | ** ** | ** **       | ** ** |
|-------------------------------------|------------|--------------------|------------|-------------------------------|------------|-----------------|------------|------------------|------------|
| ** **                          | ** ** | ** **         | ** ** | **Active Markets**       | ** ** | **Other**       | ** ** | **Significant**  | ** ** |
| ** **                          | ** ** | **March 31,** | ** ** | **for Identical**        | ** ** | **Observable**  | ** ** | **Unobservable** | ** ** |
| **Description of Assets/Liability** | ** ** | **2008**           | ** ** | **Assets**                    | ** ** | **Inputs**      | ** ** | **Inputs**       | ** ** |
| ** **                          | ** ** | ** **         | ** ** | **(Level 1)**                 | ** ** | **(Level 2)**   | ** ** | **(Level 3)**    | ** ** |
| Available-for-sale  securities      |       | $                  | 6,051      |                          | $          | —          |       | $                | 6,051      |   | $ | — |   |
|                                     |            |                    |            |                               |            |                 |            |                  |            |  |  |  |  |

 

Available-for-salesecurities are valued based upon inputs derived principally from observablemarket data.

 

11

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Changesin fair market value are recorded in other comprehensive income as thesecurities are available for sale.

 

**Note8.     EARNINGS (LOSS) PER SHARE**

 

TheCompany follows SFAS No. 128, “*Earnings per Share”*.  Basic earnings (loss) per share representsincome available (loss reported) to common stock divided by the weightedaverage number of common shares outstanding during the period reported on theStatement of Operations. The weighted average number of shares for thethree-month period ended March 31, 2008 was 2,487,631. Diluted earnings (loss)per share reflect additional common shares that would have been outstanding ifdilutive potential common shares had been issued, as well as any adjustment toincome that would result from the assumed conversion. There were no dilutivepotential common shares outstanding as of March 31, 2008.

 

12

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***Item 2 – Management’s Discussion and Analysis ofFinancial Condition and Results of Operations***

 

***Forward-Looking Statements***

 

**Thestatements contained in this Quarterly Report on Form 10-Q, that are nothistorical facts, are forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995, and are based upon management’scurrent expectations and beliefs concerning further developments and theirpotential effects on Manhattan Bancorp and its subsidiary.  The Company’s forward-looking statementsinvolve risks and uncertainties, including the risks and uncertaintiesdescribed under the caption “Factors Which May Affect Future OperatingResults” found in the Company’s December 31, 2007 10-K/A, ITEM 1A. RiskFactors.  There can be no assurance thatfuture developments affecting Manhattan Bancorp will be the same as thoseanticipated by management, and actual results may differ from those projectedin the forward-looking statements. Statements regarding policies and procedures are not intended, andshould not be interpreted to mean, that such policies and procedures will notbe amended, modified, or repealed at any time in the future.**

 

***The Company***

 

ManhattanBancorp (“Bancorp”) is a bank holding company, which was incorporated in August 2006,in order to acquire Bank of Manhattan, N.A. (the “Bank”), a de novo bank whichwas acquired on August 14, 2007. The Bank is a nationally-chartered banking association which wasorganized under the laws of the United States on August 15, 2007.  The Bancorp operates exclusively through theBank, and the capital stock of the Bank is its principal asset.  The Bank is located in El Segundo, Californiaand as of March 31, 2008 had $49 million in assets, $32 million in netloans receivable and $28 million in deposits. Unless the context requires otherwise, references in this Form 10-Qto the “Company,” “we” or “us” refer to the Bancorp and its consolidatedsubsidiary, the Bank.

 

***Earnings and Financial Condition Overview***

 

Itis customary to compare current quarter and year-to-date results with thecorresponding periods in the prior year for earnings presentations.  As the Company did not commence businessuntil August 15, 2007, there are no corresponding figures for the firstquarter of 2007.  To facilitate a betterunderstanding of the Company’s position and the results of its operations,comparisons are being made to the prior three-month period ended December 31,2007, where appropriate.

 

Forthe three-months ended March 31, 2008, the Company recorded a loss of $1.2million or $0.47 per basic share.  Comparing the Company’s fourth quarter loss of $1.3 million or $0.52 perbasic share with the current operating quarter reveals an approximate 9.0%reduction in the reported quarterly loss. The reduction is attributable tostrong loan growth in the first quarter, benefiting net interest income,despite the declining general interest rate environment.

 

Netinterest income after provision for loan losses for the three-month periodended March 31, 2008 was $264,000, an increase of $64,000 over the priorthree-month period.  This 32% improvementin net interest income was primarily due to an increase in interest income, up$107,000 for the three-month period ended March 31, 2008 over the previousthree-month period.  In comparison,interest expense increased by only $44,000. The provision for loan loss was essentially the same for both periods atapproximately $166,000.

 

Non-interestexpense decreased approximately $40,000 from approximately $1.484 million inthe three-month period ended December 31, 2007 to approximately $1.444million in the three-month period ended March 31, 2008.

 

13

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Asof March 31, 2008, total assets were $48.5 million.  This represents an increase of approximately$9.1 million or 23.3% over the number reported as of December 31,2007.  The growth in total assets can beattributed to an increase of approximately $14.0 million in gross loan balancesor 76.9% from $18.2 million reported as of December 31, 2007.

 

Fundingfor the significant loan growth was obtained primarily from strong depositgrowth, coupled with reductions in federal funds sold and investments in timedeposits with other financial institutions. At March 31, 2008, total deposits were $27.9 million compared withthe balance of $17.9 million as of December 31, 2007.  This represents an approximate $10.0 millionincrease or 56.0%.  Reductions in federalfunds sold and investments in time deposits of approximately $5.1 millionprovided the other source of loan funding.

 

Thefollowing table provides selected financial data that highlights the Company’sfinancial performance for each of the two full quarters that it has been inoperation.

 
| ** **                                             | ** ** | **For the three months ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                             | ** ** | **3/31/2008**                                      | ** ** | **12/31/2007** | ** ** |
| ** **                                             | ** ** | **(Unaudited)**                                    | ** ** |
| **Statements  of Operations:**                         |       |                                               |       |   |   |
| Interest income                                        |       | $                                                  | 560        |   | $ | 453 |   |
| Interest expense                                       |       | 130                                                |       | 86 |   |
|                                                   |       |                                               |       |   |   |
| Net interest  income                                   |       | 430                                                |       | 367 |   |
| Provision for  loan losses                             |       | 166                                                |       | 167 |   |
|                                                   |       |                                               |       |   |   |
| Net interest  income after provision for loan losses   |       | 264                                                |       | 200 |   |
|                                                   |       |                                               |       |   |   |
| Non-interest  income                                   |       | 13                                                 |       | 1 |   |
| Non-interest  expense                                  |       | 1,444                                              |       | 1,484 |   |
|                                                   |       |                                               |       |   |   |
| Net loss from  operations                              |       | $                                                  | (1,167     | ) | $ | (1,283 | ) |
|                                                   |       |                                               |       |   |   |
| **Per  Share and Other Data:**                         |       |                                               |       |   |   |
| Basic and  diluted loss per share                      |       | $                                                  | (0.47      | ) | $ | (0.52 | ) |
| Book value as of  period end                           |       | $                                                  | 8.17       |   | $ | 8.52 |   |
| Weighted average  shares outstanding-basic and diluted |       | 2,487                                              |       | 2,487 |   |
|                                                   |       |                                               |       |   |   |
| **Balance  Sheet Data:**                               |       |                                               |       |   |   |
| Investments and  fed funds sold                        |       | $                                                  | 12,915     |   | $ | 18,087 |   |
| Loans, net                                             |       | $                                                  | 31,758     |   | $ | 17,930 |   |
| Assets                                                 |       | $                                                  | 48,526     |   | $ | 39,367 |   |
| Deposits                                               |       | $                                                  | 27,861     |   | $ | 17,862 |   |
| Shareholders’  equity                             |       | $                                                  | 20,314     |   | $ | 21,189 |   |
|                                                   |       |                                               |       |   |   |
| **Selected  Financial Ratios**                         |       |                                               |       |   |   |
| Net loss as a  percentage of average earning assets    |       | -10.73                                             | %          | -14.46 | % |
| Net loss as a  percentage of average equity            |       | -22.54                                             | %          | -23.39 | % |
| Dividend payout  ratio                                 |       | —                                             |       | — |   |
| Equity to asset  ratio                                 |       | 41.86                                              | %          | 53.82 | % |
| Net interest  margin                                   |       | 4.34                                               | %          | 4.56 | % |
|                                                   |       |                                               |       |   |   |
| **Credit  Quality**                                    |       |                                               |       |   |   |
| Allowance for  loan losses                             |       | $                                                  | 435        |   | $ | 269 |   |
| Allowance /total  loans                                |       | 1.35                                               | %          | 1.48 | % |

 

14

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***RESULTS OF OPERATIONS***

 

***Net Interest Income***

 

Tofacilitate a better understanding of the Company’s financial position and theresults of its operations, comparisons are being made to the prior three-monthperiod ended December 31, 2007.

 

TheCompany’s earnings depend largely upon our net interest income, which is thedifference between the income we earned on interest-bearing assets, such asloans, and the interest we pay on deposits and borrowed funds.  Net interest income is related to (i) therelative amounts of interest earning assets and liabilities and (ii) theinterest rates earned and paid upon these balances.  Total interest income can fluctuate basedupon the mix of earning assets between loans, investments and federal fundssold and the related rates associated with their balances.  Some of the funding sources for these assetsalso have an interest cost which can fluctuate based upon the mix ofinterest-bearing liabilities and the related rates associated with theirbalances.

 

Theinterest rate spread represents the difference between the weighted averageyield on interest earning assets and the weighted average rate paid on interestbearing liabilities.

 

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

 

Thefollowing table sets forth interest income, interest expense, net interestincome before provision for loan losses and net interest margin for the periodpresented:

 
| ** **                                            | ** ** | **Three Months Ended** | ** ** | ** **            | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **March 31,**               | ** ** | **December 31,** | ** ** | **Percent** | ** ** |
| ** **                                            | ** ** | **2008**                         | ** ** | **2007**              | ** ** | **Change** | ** ** |
| ** **                                            | ** ** | **(Unaudited)**                  | ** ** |
| ** **                                            | ** ** | **(in  thousands)**              | ** ** |
| Interest income                                       |       | $                                | 560        |                  | $          | 453 |   | 23.62 | % |
| Interest expense                                      |       | 130                              |       | 86                    |       | 51.16 | % |
| Net interest  income before provision for loan losses |       | $                                | 430        |                  | $          | 367 |   | 17.17 | % |
| Net interest  margin                                  |       | 4.34                             | %          | 4.56                  | %          | -4.82 | % |

 

Thefollowing table presents the weighted average yield on each specified categoryof interest earning assets, the weighted average rate paid on each specifiedcategory of interest bearing liabilities, the resulting interest rate spreadand the net interest margin for the periods indicated:

 

15

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**ANALYSIS OF NET INTEREST INCOME**

** **
| ** **                                              | ** ** | **(Unaudited)**                                                | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                              | ** ** | **(dollars in thousands)**                           | ** ** |
| ** **                                              | ** ** | **Three months ended March 31, 2008** | ** ** | **Three months ended December 31, 2007** | ** ** |
| ** **                                              | ** ** | ** **                                                     | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                              | ** ** | ** **                                                     | ** ** | **Interest** | ** ** | **Average** | ** ** | ** ** | ** ** | **Interest** | ** ** | **Average** | ** ** |
| ** **                                              | ** ** | **Average**                                                    | ** ** | **Income/** | ** ** | **Rate** | ** ** | **Average** | ** ** | **Income/** | ** ** | **Rate** | ** ** |
| ** **                                              | ** ** | **Balance**                                                    | ** ** | **Expense** | ** ** | **Earned/Paid** | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Earned/Paid** | ** ** |
| **Interest-earning  assets:**                           |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Federal funds  sold                                     |       | $                                                              | 7,208      |   | $ | 58 |   | 3.24 | % | $ | 17,369 |   | $ | 199 |   | 4.55 | % |
| Deposits with  other financial instituions              |       | 2,177                                                          |       | 26 |   | 4.80 | % | 1,272 |   | 16 |   | 4.99 | % |
| Investments                                             |       | 7,115                                                          |       | 89 |   | 5.03 | % | 4,066 |   | 65 |   | 6.34 | % |
| Loans(1)                                                |       | 23,364                                                         |       | 387 |   | 6.66 | % | 9,243 |   | 173 |   | 7.43 | % |
| Total  interest-earning assets                          |       | 39,864                                                         |       | 560 |   | 5.65 | % | 31,950 |   | 453 |   | 5.63 | % |
| Non-interest-earning  assets                            |       | 3,856                                                          |       |   |   |   |   | 3,242 |   |   |   |   |   |
| Total assets                                            |       | $                                                              | 43,720     |   |   |   |   |   | $ | 35,192 |   |   |   |   |   |
|                                                    |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing  liabilities:**                      |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Demand                                                  |       | $                                                              | 430        |   | $ | — |   | 0.25 | % | $ | 115 |   | $ | — |   | 0.50 | % |
| Savings and  money market                               |       | 3,525                                                          |       | 26 |   | 2.97 | % | 3,697 |   | 34 |   | 3.65 | % |
| Certificates of  deposit                                |       | 10,703                                                         |       | 104 |   | 3.91 | % | 4,965 |   | 52 |   | 4.16 | % |
| Total  interest-bearing liabilities                     |       | 14,658                                                         |       | 130 |   | 3.57 | % | 8,777 |   | 86 |   | 3.89 | % |
| Non-interest-bearing  demand deposits                   |       | 7,957                                                          |       |   |   |   |   | 4,255 |   |   |   |   |   |
| Total funding  sources                                  |       | 22,615                                                         |       |   |   | 2.31 | % | 13,032 |   |   |   | 2.62 | % |
| Non-interest-bearing  liabilities                       |       | 285                                                            |       |   |   |   |   | 401 |   |   |   |   |   |
| Shareholders’  equity                              |       | 20,820                                                         |       |   |   |   |   | 21,759 |   |   |   |   |   |
| Total  liabilities and shareholders’ equity        |       | $                                                              | 43,720     |   |   |   |   |   | $ | 35,192 |   |   |   |   |   |
|                                                    |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Excess of  interest-earning assets over funding sources |       | $                                                              | 17,249     |   |   |   |   |   | $ | 18,918 |   |   |   |   |   |
| Net interest  income                                    |       |                                                           |       | $ | 430 |   |   |   |   |   | $ | 367 |   |   |   |
| Net interest  rate spread                               |       |                                                           |       |   |   | 2.08 | % |   |   |   |   | 1.74 | % |
| Net interest  margin                                    |       |                                                           |       |   |   | 4.34 | % |   |   |   |   | 4.56 | % |

 

----

(1)   The average balance of loansis calculated net of deferred loan fees/cost, but would include non-accrualloans, if any, with a zero yield.  Loancosts net of amortized fees included in total net income were approximately$10,000 for the three-month period ended March 31, 2008 and $4,000 for thethree-month period ended December 31, 2007.

 

Thetable below sets forth changes for the consecutive three-month periods ended March 31,2008 and December 31, 2007 for average earning assets, average interestbearing liabilities and their respective rates:

 

**VARIANCE IN BALANCES AND RATES**

 
| ** **                                 | ** ** | **(Unaudited)**                                    | ** ** |
|--------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                 | ** ** | **(dollars  in thousands)**                        | ** ** |
| ** **                                 | ** ** | **Average Balance**                           | ** ** | ** ** | ** ** | ** ** | ** ** | **Average Yield/Rate** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **for the three months ended** | ** ** | ** ** | ** ** | ** ** | ** ** | **for the three months ended** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **March 31,**                                 | ** ** | **December 31,** | ** ** | **Variance** | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **2008**                                           | ** ** | **2007** | ** ** | **dollar** | ** ** | **percent** | ** ** | **2008** | ** ** | **2007** | ** ** | **Variance** | ** ** |
|                                       |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest-earning  assets:**              |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal funds  sold                        |       | $                                                  | 7,208      |   | $ | 17,369 |   | $ | (10,161 | ) | -58.50 | % | 3.24 | % | 4.55 | % | -1.31 | % |
| Deposits with  other financial instituions |       | 2,177                                              |       | 1,272 |   | 905 |   | 71.15 | % | 4.80 | % | 4.99 | % | -0.19 | % |
| Investments                                |       | 7,115                                              |       | 4,066 |   | 3,049 |   | 74.99 | % | 5.03 | % | 6.34 | % | -1.31 | % |
| Loans                                      |       | 23,364                                             |       | 9,243 |   | 14,121 |   | 152.78 | % | 6.66 | % | 7.43 | % | -0.76 | % |
| Total  interest-earning assets             |       | $                                                  | 39,864     |   | $ | 31,950 |   | $ | 7,914 |   | 24.77 | % | 5.65 | % | 5.63 | % | 0.02 | % |
|                                       |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing  liabilities:**         |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  demand                   |       | $                                                  | 430        |   | $ | 115 |   | $ | 315 |   | 273.91 | % | 0.25 | % | 0.50 | % | -0.25 | % |
| Savings and  money market                  |       | 3,525                                              |       | 3,697 |   | (172 | ) | -4.65 | % | 2.97 | % | 3.65 | % | -0.68 | % |
| Certificates of  deposit                   |       | 10,703                                             |       | 4,965 |   | 5,738 |   | 115.57 | % | 3.91 | % | 4.16 | % | -0.25 | % |
| Total  interest-bearing liabilities        |       | $                                                  | 14,658     |   | $ | 8,777 |   | $ | 5,881 |   | 67.00 | % | 3.57 | % | 3.89 | % | -0.32 | % |

 

16

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Avolume and rate variance table is provided below which sets forth the dollardifferences in interest earned and paid for each major category ofinterest-earning assets and interest-bearing liabilities for the consecutivethree-months periods ended March 31, 2008 and December 31, 2007:

 
| ** **                                 | ** ** | **For the three months ended**                      | ** ** |
|--------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **March 31, 2008 over December 31, 2007** | ** ** |
| ** **                                 | ** ** | **Volume**                                                              | ** ** | **Rate** | ** ** | **Total** | ** ** |
| **(unaudited)**                            | ** ** | **(Unaudited)**                                                         | ** ** |
| **Interest  income:**                      |       |                                                                    |       |   |   |   |   |
| Federal funds  sold                        |       | $                                                                       | (117       | ) | $ | (24 | ) | $ | (141 | ) |
| Deposits with  other financial instituions |       | 11                                                                      |       | (1 | ) | 10 |   |
| Investments                                |       | 48                                                                      |       | (24 | ) | 24 |   |
| Loans                                      |       | 261                                                                     |       | (47 | ) | 214 |   |
| Net increase  (decrease)                   |       | 203                                                                     |       | (96 | ) | 107 |   |
|                                       |       |                                                                    |       |   |   | — |   |
| **Interest  expense:**                     |       |                                                                    |       |   |   | — |   |
| Interest bearing  demand                   |       | —                                                                  |       | — |   | — |   |
| Savings and  money market                  |       | (2                                                                      | )          | (6 | ) | (8 | ) |
| Certificates of  deposit                   |       | 59                                                                      |       | (7 | ) | 52 |   |
| Net increase  (decrease)                   |       | 57                                                                      |       | (13 | ) | 44 |   |
| Total net  increase (decrease)             |       | $                                                                       | 146        |   | $ | (83 | ) | $ | 63 |   |

 

Areview of the above tables shows that the overall increase in net interestincome of approximately $63,000 between the two consecutive quarters ending at March 31,2008 is the result of several factors.

 

Amongthe most significant factors is the overall growth in earning assets, upapproximately $7.9 million or 24.8%, coupled with the change in the mix ofinterest-earning assets from federal funds sold to loans.  The percentage of average loan dollarsoutstanding, as a percentage of interest-earning assets grew from 28.9% percentas of December 31, 2007 to 58.6% as of March 31, 2008.  This movement in the utilization of funds,coupled with the overall growth in assets, resulted in the increase of interestincome of approximately $203,000, more than fully offsetting the result of thegeneral market interest rate decline of approximately $96,000, leaving thetotal interest income increase at $107,000. While general interest rates declined 200 basis points during the firstthree months of 2008, the shift toward higher yielding loans resulted in a 2basis point increase in average weighted yield on average interest-bearingassets.

 

Interestexpenses, however, increased by $44,000 as a result of a large increase incertificates of deposit, which more than fully offset any savings due tooverall declining rates.  It becomesincreasingly more difficult for the Bank to fully absorb rapid rate declineswhen rates are once again approaching historical lows.  When interest rates paid on deposits approachzero, an implied floor emerges, where even minor reductions in rates paid oninterest-bearing assets cannot be matched with equal reductions on the fundingside.

 

***Provision for Loan Losses***

 

TheCompany made provisions for loan losses of $166,000 for the three-month periodended March 31, 2008, compared to $167,000 for the previous three-monthperiod ended December 31, 2007. These provisions were determined based upon the periodic credit reviewof the loan portfolio, consideration of past loan loss experience, current andpredicted economic conditions, and other pertinent factors.  For further analysis of the adequacy of theloan loss reserve, see *Asset Quality andAllowance for Loan Losses.*

 

***Non-Interest Income***

 

Non-interestincome for the three-month period ended March 31, 2008 was negligible.

 

17

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***Non-Interest Expense***

 

Thefollowing table sets forth changes for the two consecutive three-month periodsending March 31, 2008 and December 31, 2007, allowing comparisonsbetween these two initial quarters:

 
| ** **                                | ** ** | **For the three months ended** | ** ** | ** **            | ** ** | ** **  | ** ** |
|-------------------------------------------|------------|----------------------------------------------------|------------|-----------------------|------------|-------------|------------|
| ** **                                | ** ** | **March 31,**                                 | ** ** | **December 31,** | ** ** | ** **  | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **2008**                                           | ** ** | **2007**              | ** ** | ** **  | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **(dollars in thousands)**               | ** ** | **Variance**          | ** ** |
| ** **                                | ** ** | **(Unaudited)**                                    | ** ** | **Dollars**           | ** ** | **Percent** | ** ** |
| Compensation and  benefits                |       | $                                                  | 948        |                  | $          | 983         |       | $ | (35 | ) | -3.6 | % |
| Occupancy and  equipment                  |       | 158                                                |       | 169                   |       | (11         | )          | -6.5 | % |
| Technology and  communication             |       | 125                                                |       | 115                   |       | 10          |       | 8.7 | % |
| Professional and  administrative expenses |       | 106                                                |       | 88                    |       | 18          |       | 20.5 | % |
| Other non-interest  expenses              |       | 107                                                |       | 129                   |       | (22         | )          | -17.1 | % |
| Total  non-interest expenses              |       | $                                                  | 1,444      |                  | $          | 1,484       |       | $ | (40 | ) | -2.7 | % |

 

Theoverall decrease in non-interest expense between the two consecutivethree-month periods is negligible.

 

***FINANCIAL CONDITION***

 

TheCompany’s increase in total assets level to $48.5 million as of March 31,2008 represents over a 23% increase, or approximately $9.2 million, from thetotal assets level of $39.4 million as of December 31, 2007.  The growth is centered in loans, which werefunded by locally generated deposits.

 

***Loans***

 

Totalgross loans as of March 31, 2008 increased by approximately $14.0 millionover December 31, 2007.   Althoughoutstanding loan balances increased in all categories, most of the growthoccurred in real estate loans, where the total grew by more than 101%. As of March 31,2008 and December 31, 2007, the Bank had no construction loans.

 

Thetable below sets forth the changes from December 31, 2007 to March 31,2008 in the composition of the loan portfolio:

 
| **(in thousands)**          | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **Variance** | ** ** |
|----------------------------------|------------|--------------------|------------|-----------------------|------------|--------------|------------|
| **(unaudited)**                  | ** ** | **2008**           | ** ** | **2007**              | ** ** | **Dollars**  | ** ** | **Percent** | ** ** |
| **Loan  Classifications:**       |       |               |       |                  |       |         |       |   |   |
| Commercial loans                 |       | $                  | 12,111     |                  | $          | 7,855        |       | $ | 4,256 |   | 54.18 | % |
| Real estate  loans               |       | 18,623             |       | 9,243                 |       | 9,380        |       | 101.48 | % |
| Other loans                      |       | 1,402              |       | 1,024                 |       | 378          |       | 36.91 | % |
| Total loans                      |       | 32,136             |       | 18,122                |       | 14,014       |       | 77.33 | % |
| Add: purchase  premium           |       | 47                 |       | 50                    |       | (3           | )          |   |   |
| Add: Unamortized  costs          |       | 56                 |       | 40                    |       | 16           |       |   |   |
| Less: Deferred  fees             |       | (46                | )          | (13                   | )          | (33          | )          |   |   |
| Less: Allowance  for loan losses |       | (435               | )          | (269                  | )          | (166         | )          |   |   |
| Net loans                        |       | $                  | 31,758     |                  | $          | 17,930       |       | $ | 13,828 |   | 77.12 | % |

 

18

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Ofthe Bank’s total loans outstanding as of March 31, 2008, 23.0% were due inone year or less, 30.7% were due in one to five years, and 46.3% were due afterfive years.  As is customary in thebanking industry, loans can be renewed by mutual agreement between the borrowerand the Bank.  Because we are unable toaccurately estimate the extent to which our borrowers will renew their loans,the following table is based on contractual maturities, reflecting grossoutstanding loans without consideration of purchase premium, deferred fees ordeferred costs.

 

**Loan Maturity Schedule as of March 31, 2008**

 
| ** **                                | ** ** | **Maturing**            | ** ** |
|-------------------------------------------|------------|-------------------------|------------|
| ** **                                | ** ** | **Within One**     | ** ** | **One to Five** | ** ** | **After Five** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Year**                | ** ** | **Years** | ** ** | **Years** | ** ** | **Total** | ** ** |
| ** **                                | ** ** | **(in thousands)** | ** ** |
|                                      |       |                    |       |   |   |   |   |   |   |
| Commercial                                |       | $                       | 6,981      |   | $ | 3,130 |   | $ | 2,000 |   | $ | 12,111 |   |
| Real estate                               |       | —                  |       | 3,747 |   | 14,876 |   | 18,623 |   |
| Other loans                               |       | 401                     |       | 250 |   | 751 |   | 1,402 |   |
| Total                                     |       | $                       | 7,382      |   | $ | 7,127 |   | $ | 17,627 |   | $ | 32,136 |   |
|                                      |       |                    |       |   |   |   |   |   |   |
| Loans with  pre-determined interest rates |       | $                       | 2,050      |   | $ | 4,358 |   | $ | 6,939 |   | $ | 13,347 |   |
| Loans with  floating or adjustable rates  |       | 5,332                   |       | 2,769 |   | 10,688 |   | 18,789 |   |
| Total                                     |       | $                       | 7,382      |   | $ | 7,127 |   | $ | 17,627 |   | $ | 32,136 |   |

 

Ofthe gross loan dollars outstanding as of March 31, 2008, approximately 58%had adjustable rates, a reduction from the 78% as of December 31,2007.  The adjustable rate loansgenerally have interest rates tied to the prime rate and would adjust withchanges in the rate on a daily basis.

 

*Commercial Loans.**                       *The Bank offersa variety of commercial loans, including secured and unsecured term andrevolving lines of credit, equipment loans and accounts receivable loans.  As of March 31, 2008, approximately 81%of the commercial loans had adjustable rates. The Bank underwrites secured term loans and revolving lines of creditprimarily on the basis of a borrower’s cash flow and the ability to service thedebt, although we rely on the liquidation of the underlying collateral as asecondary payment source, where applicable. Should the borrower default and the Bank forecloses on the assets, wemay not be able to recover the full amount of the loan. In the quarter ended March 31,2008, approximately 47% of the growth was associated with cash securedtransactions.

 

*Real Estate Loans.**                           *The Bank’s realestate loans are secured primarily by commercial property, including asignificant percentage in multi-family complexes.   Approximately 43% of the real estate loansare adjustable during the term of the loan. Approximately 80% of the real estate loans have a remaining maturitybetween five and ten years.  As of March 31,2008, the weighted average ratio of the original loan extension to theunderlying value of the property was approximately 50% with weighted averagedebt service coverage of 1.66.  Noindividual loan to value ratio exceeded 70%.

 

*Other Loans.**                                                          *The Bank offersother types of loans, including home equity lines of credit.  Home equity lines of credit have adjustablerates and provide the borrower with a line of credit in an amount which doesnot exceed 75% of the appraised value of the borrower’s property at the time oforigination.

 

19

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***Off-Balance Sheet Credit Commitments and Contingent Obligations***

 

Weenter into or may issue financial instruments with off-balance sheet creditrisk in the normal course of business to meet the financial needs of ourcustomers.  Since inception through March 31,2008, these have been limited to undisbursed commitments to extend credit toboth businesses and individuals.  Thesecommitments were associated with loans and were therefore subject to the samecredit underwriting policies and practices as other on-balance sheet obligations.  When deemed advisable, the Bank obtainscollateral to support such commitments.

 

Commitmentsto extend credit are agreements to lend up to a specific amount to a customeras long as there is no violation of any condition in the contract.  Commitments generally have fixed expirationdates or other termination clauses, which may require payment of a fee.  Since we expect some commitments to expirewithout being drawn upon, the total commitment amounts do not necessarilyrepresent future loans. There was $8.8 million in undisbursed loan commitmentsas of March 31, 2008, an increase of $1.5 million or 20.3% from the December 31,2007 figure of $7.3 million.

 

***Non-Performing Assets***

 

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

 

TheBank had no non-performing assets as of March 31, 2008 or as of December 31,2007.

 

***Deposits***

 

Depositsare the Bank’s primary source of funds. The following table sets forth the amount of deposits outstanding bycategory at March 31, 2008 and December 31, 2007, and the net changesbetween the two periods.

 
| **(in thousands)**                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **Variance** | ** ** |
|--------------------------------------------|------------|--------------------|------------|-----------------------|------------|--------------|------------|
| **(unaudited)**                            | ** ** | **2008**           | ** ** | **2007**              | ** ** | **Dollars**  | ** ** | **Percent** | ** ** |
| **Deposit  Classifications:**              |       |               |       |                  |       |         |       |   |   |
| Non-interest-bearing  deposits             |       | $                  | 8,582      |                  | $          | 5,395        |       | $ | 3,187 |   | 59.07 | % |
| Interest-bearing  demand                   |       | 1,472              |       | 1,143                 |       | 329          |       | 28.78 | % |
| Savings and  money market                  |       | 3,343              |       | 4,244                 |       | (901         | )          | -21.23 | % |
| Certificate of  deposit $100,000 and over  |       | 11,436             |       | 6,190                 |       | 5,246        |       | 84.75 | % |
| Certificate of  deposit less than $100,000 |       | 3,028              |       | 890                   |       | 2,138        |       | 240.22 | % |
| Total deposits                             |       | $                  | 27,861     |                  | $          | 17,862       |       | $ | 9,999 |   | 55.98 | % |

 

Asof March 31, 2008, 30.8% of the Company’s deposits werenon-interest-bearing demand deposits, essentially the same as of December 31,2007 at 30.2%.  At December 31,2007, we had no brokered funds on deposit. At March 31, 2008, the Bank held approximately $600,000 in brokeredfunds. All other funds have been placed with the Bank by local depositors atcompetitive rates with the Bank’s marketing area.

 

The*Analysis of Net Interest Income,*foundwithin this document, summarizes the distribution of the average depositbalances and the average rates paid on deposits during the Bank’s twoconsecutive full quarters ended March 31, 2008.

 

20

----

 

Thefollowing table shows the maturity of all of the Bank’s time deposits as of March 31,2008:

 
| **Maturities**                        | ** ** | **Amounts**             | ** ** |
|---------------------------------------|------------|-------------------------|------------|
| **(unaudited)**                       | ** ** | **(in thousands)** | ** ** |
| Three months or  less                 |       | $                       | 6,348      |   |
| Over three and  through twelve months |       | 8,116                   |       |
| Over twelve  months                   |       | —                  |       |
| Total                                 |       | $                       | 14,464     |   |

 

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

 

TheCompany maintains an allowance for loan losses (“ALL”) to provide for potentiallosses in its loan portfolio.  Additionsto the allowance are made by charges to operating expense in the form of aprovision for loan losses.  All loansthat are judged to be uncollectible will be charged against the allowance,while recoveries would be credited to the allowance.  We have instituted loan policies designedprimarily for internal use, to adequately evaluate and assess the analysis ofthe risk factors associated with the Bank’s loan portfolio, to enable us toassess such risk factors prior to granting new loans and to assess thesufficiency of the allowance.  We conductan evaluation on the loan portfolio monthly.

 

The calculation of the adequacy of the ALL necessarily includesestimates by management applied to known loan portfolio elements.  We employ a 10-point loan grading system inan effort to more accurately track the inherent quality of the loanportfolio.  The 10-point system assigns avalue 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. As of December 31, 2007, the weightedaverage risk rating for the Bank’s loan portfolio was 4.56, indicating anoverall risk rating midway between average and acceptable. As of March 31, 2008, the weightedaverage risk rating for the Bank’s loan portfolio was 4.25, once againindicating an overall risk rating midway between average and acceptable.

 

Inaddition, management considers other trends that are qualitative relative toour marketplace, demographic trends, the risk rating of the loan portfolios asdiscussed above, amounts and trends in non-performing assets and concentrationfactors.

 

***Regulatory Capital***

 

TheBank is subject to various regulatory capital requirements administered by thefederal banking agencies.  Failure tomeet minimum capital requirements can trigger mandatory and possibly additionaldiscretionary actions by the regulators that, if undertaken, could have amaterial effect on the Bank’s financial statements and operations.  Under capital adequacy guidelines andregulatory framework for prompt corrective action, the Bank must meet specificcapital guidelines that involve quantitative measures of the Bank’s assets,liabilities, and certain off-balance sheet items as calculated under regulatoryaccepted accounting practices.  The Bank’scapital amounts and classifications are also subject to qualitative judgmentsby the regulators such as components, risk-weightings, and other factors.

 

21

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Quantitativemeasures established by regulation to ensure capital adequacy require both theCompany and the Bank to maintain the following minimum amounts and ratios (setforth in the table below) of total and Tier 1 Capital to risk-weighted assetsand Tier 1 Capital to average assets. As of March 31, 2008, the Companyand the Bank exceeded all applicable capital adequacy requirements.

 

Underthe Federal Reserve Board’s guidelines, Manhattan Bancorp is a “small bankholding company,” and thus qualifies for an exemption from the consolidatedrisk-based and leverage capital adequacy guidelines applicable to bank holdingcompanies with assets of $500 million or more. However, while not required to do so under the Federal Reserve Board’scapital adequacy guidelines, the Company still maintains levels of capital on aconsolidated basis which qualifies it as “well capitalized.”

 

Thefollowing table sets forth the Company’s and the Bank’s regulatory capitalratios as of March 31, 2008:

 
| ** **                             | ** ** | ** **              | ** ** | **To Be Adequately** | ** ** | **To Be Well** | ** ** |
|----------------------------------------|------------|-------------------------|------------|--------------------------------|------------|--------------------------|------------|
| ** **                             | ** ** | **Actual**              | ** ** | **Capitalized**                | ** ** | **Capitalized**          | ** ** |
| **(unaudited)**                        | ** ** | **Amount**              | ** ** | **Ratio**                      | ** ** | **Amount**               | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| ** **                             | ** ** | **(in thousands)** | ** ** |
| **Company**                            |       |                    |       |                           |       |                     |       |   |   |   |   |   |   |
| Total Capital  (risk-weighted assets)  |       | $                       | 20,592     |                           | 54.6       | %                        | $          | 3,019 |   | 8 | % | $ | 3,774 |   | 10 | % |
| Tier 1 Capital (risk-weighted  assets) |       | $                       | 20,592     |                           | 53.4       | %                        | $          | 1,509 |   | 4 | % | $ | 2,264 |   | 6 | % |
| Tier 1 Capital  (average assets)       |       | $                       | 20,592     |                           | 46.1       | %                        | $          | 1,749 |   | 4 | % | $ | 2,186 |   | 5 | % |
|                                   |       |                    |       |                           |       |                     |       |   |   |   |   |   |   |
| **Bank**                               |       |                    |       |                           |       |                     |       |   |   |   |   |   |   |
| Total Capital  (risk-weighted assets)  |       | $                       | 20,100     |                           | 53.3       | %                        | $          | 3,019 |   | 8 | % | $ | 3,774 |   | 10 | % |
| Tier 1 Capital  (risk-weighted assets) |       | $                       | 19,645     |                           | 52.1       | %                        | $          | 1,509 |   | 4 | % | $ | 2,264 |   | 6 | % |
| Tier 1 Capital  (average assets)       |       | $                       | 19,645     |                           | 44.9       | %                        | $          | 1,749 |   | 4 | % | $ | 2,186 |   | 5 | % |

 

***Liquidity and Liquidity Management***

 

Liquiditymanagement for banks requires that funds always be available to pay anticipateddeposit withdrawals, fund loan commitments, and to meet other commitments on atimely and cost effective basis.  Theacquisition of deposits is our primary source of funds.  This relatively stable and low-cost source offunds has, along with the initial balances in stockholder’s equity, provided100% of the funding since the Bank’s inception.

 

Wealso have liquidity as a net seller of overnight federal funds at a level thatwould cushion in part any unexpected increase in demand for loans or decreasein funds deposited.  During thethree-month period ended December 31, 2007, we had an average balance of$17.4 million in overnight federal funds sold representing approximately 49% ofour average assets. During the three-month period ended March 31, 2008, wehad an average balance of $7.2 million in overnight federal funds soldrepresenting approximately 16% of our average assets.  Both ratios are far above the minimumguideline of 3% established in the Bank’s liquidity policy.

 

Tomeet liquidity needs, the Company maintains a portion of its funds in cashdeposits in other banks, federal funds and investment securities.  As of December 31, 2007, liquid assets(including cash, federal funds sold, interest-bearing deposits in otherfinancial institutions and available-for-sale investment securities that havenot been pledged as collateral), as a percentage of the Company’s deposits, was98.0%.  As of March 31, 2008, liquidassets as a percentage of the Company’s deposits, although declining, remainhigh at 45%.

 

Whileliquidity was not a major concern in 2007, management has established and isseeking to establish secondary sources of liquidity.  As of March 31, 2008, the Bank maintainsa line of credit totaling $5 million 

 

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withtwo correspondent banks for the purchase of overnight federal funds.  The lines are subject to availability offunds and have restrictions as to the number of days used during themonth.  Another method that the Bankcurrently has available for acquiring additional deposits is through theacceptance of “brokered deposits” (defined to include not only depositsacquired with deposit brokers, but also deposits bearing interest rates farabove the local market rates), typically attracting large certificates ofdeposits at high interest rates. Currently, the Bank is actively in the processof establishing a credit line with the Federal Home Loan Bank of San Francisco.  The Bank has not utilized these borrowingfacilities since it began operations. The Bank had a nominal amount of “brokereddeposits” as of March 31, 2008 of $600,000 or just over 2% of totaldeposits.

 

***Item 3 – Quantitative and Qualitative Disclosuresabout Market Risk***

 

TheCompany’s market risk results primarily from two sources, credit risk andinterest rate risk.  Risk management isan important part of our operations and a key element of our overall financialresults.  Banking regulators, in recentyears, have emphasized appropriate risk management, prompting banks to haveadequate systems to identify, monitor and manage risks.  The Bank has both board and managementcommittees who meet on a regular basis to oversee risk functions.  The Company’s Audit Committee is responsiblefor overseeing internal auditing functions and for interfacing with the Company’sexternal auditors.  The Bank’s LoanCommittee establishes Loan Policy, reviews loans made by management andapproves loans in excess of management’s lending authority.  This committee is also responsible for thereview of any problem credits and assessing the adequacy of our allowance forloan losses.  The Asset/LiabilityCommittee reviews investments made by management, and monitors compliance withinvestment, interest rate risk and liquidity policies.

 

***Credit Risk***

 

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

 

***Interest Rate Risk***

 

Interestrate risk is the exposure of a bank’s financial condition and the results ofoperations to adverse movements in interest rates.  Movements in interest rates affect both thegeneration of earnings as well as the market value of assets andliabilities.   Interest rate risk resultsfrom more than just the differences in the maturity or repricing opportunitiesof interest-earning assets and interest-bearing liabilities.  Other factors that affect the interest raterisk include changes in the slope of the yield curves over time, imperfectcorrelation in the adjustment of rates earned and paid on different instrumentswith similar characteristics, interest-rate-related embedded options such asloan floors, ceilings, and prepayments, as well as callable investmentsecurities and early withdrawal of time deposits.

 

Thepotential impact of interest rate risk is significant because of the liquidityand capital adequacy consequences that reduced earnings or losses mayimply.  While we recognize and acceptthat interest rate risk is a routine part of banking operations, the objectiveof interest rate risk management is to measure, monitor and control exposure ofnet interest income to excessive risks associated with interest rate movements.

 

Understandingthe inherent weakness in traditional gap analysis to properly measure interestrate risk, the Bank employs modeling techniques which measure the affect ofinterest rate shocks on the net interest income and the market value of equityon the Bank’s existing mix of assets and liabilities.

 

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Theresults of the model’s simulations on the potential loss of net interest incomeas of March 31, 2008 reflect the following:

 

**Earning at Risk**

 
| **Rate**                        | ** ** | **Maximum**   | ** ** | **% (Loss) Gain**   | ** ** |
|---------------------------------|------------|---------------|------------|-------------------------------|------------|
| **Shock**                       | ** ** | **Policy**    | ** ** | **in Net Interest** | ** ** |
| **(in basis points)** | ** ** | **Guideline** | ** ** | **Income**                    | ** ** |
| -300                            |       | -15           | %          | -5.3                          | %          |
| -200                            |       | -10           | %          | -3.4                          | %          |
| -100                            |       | -5            | %          | -1.6                          | %          |
| +100                            |       | -15           | %          | 1.4                           | %          |
| +200                            |       | -10           | %          | 2.8                           | %          |
| +300                            |       | -15           | %          | 4.2                           | %          |

 

Themethod employed in rate shocking the earnings at risk was “ramping”, (i.e.changing the indicated rate movement gradually over a 12 month horizon).  Based upon the model simulation as of March 31,2008, the Bank’s interest rate risk exposure as measured by rate movement onnet interest income is within policy guidelines.

 

Theresults of the model’s simulations on the potential loss of the Company’sequity as of March 31, 2008 reflect the following:

 

**Market Value of Equity**

 
| **Rate**                        | ** ** | **Maximum**   | ** ** | **% (Loss) Gain**   | ** ** |
|---------------------------------|------------|---------------|------------|-------------------------------|------------|
| **Shock**                       | ** ** | **Policy**    | ** ** | **in Market**            | ** ** |
| **(in basis points)** | ** ** | **Guideline** | ** ** | **Value of Equity** | ** ** |
| -300                            |       | -30           | %          | 11.6                          | %          |
| -200                            |       | -20           | %          | 7.8                           | %          |
| -100                            |       | -10           | %          | 3.7                           | %          |
| +100                            |       | -10           | %          | -3.6                          | %          |
| +200                            |       | -20           | %          | -7.1                          | %          |
| +300                            |       | -30           | %          | -10.5                         | %          |

 

Themethod employed in rate shocking the market value of equity is referred to as “regulatoryshock” i.e. changing the indicated rates instantaneously.  Based upon the model simulation as of March 31,2008, 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***

 

TheCompany maintains disclosure controls and procedures (as defined in theExchange Act Rule 13a-15(e)) that are designed to assure that informationrequired to be disclosed in our Securities Exchange Act of 1934 reports isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms, and that suchinformation is accumulated and communicated to management, including the ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosures.

 

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Indesigning and evaluating the disclosure controls and procedures, managementrecognizes that any controls and procedures, no matter how well designed andoperated, can provide reasonable assurance only of achieving the desiredcontrol objectives, and management necessarily is required to apply itsjudgment in weighing the costs and benefits of possible new or differentcontrols and procedures.  Limitations areinherent in all control systems, so no evaluation of controls can provideabsolute assurance that all control issues and any fraud within the Companyhave 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.

 

Duringthe quarter ended March 31, 2008, there were no significant changes in ourinternal controls over financial reporting (as defined in Rule 13a-15(f) ofthe Securities Exchange Act of 1934, as amended) 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***

 

TheCompany is not a party to any legal proceedings.

 

***Item 1A. – Risk Factors***

 

Asa smaller reporting company, the Company is not required to provide theinformation required by this item as a part of the Form 10-Q.

 

***Item 2 – Unregistered Sale of Equity Securities andUse of Proceeds***

 

None

 

***Item 3 – Defaults upon Senior Securities***

 

NotApplicable.

 

***Item 4 – Submission of Matters to the Vote ofSecurity Holders***

 

NotApplicable

 

***Item 5 – Other Information***

 

None

 

***Item 6 – Exhibits***

 
| **Exhibit   Number** | ** ** | **Index to Exhibits**                                                                                                                                                 | ** ** | **Page** |
|---------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| 11                        |       | Statement Regarding Computation of Net Income (Loss)  per Share                                                                                                                 |       | (1)      |
| 31.1                      |       | Certification of the Chief Executive Officer  pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act  of 1934, as amended                                  |       | 28       |
| 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                                  |       | 29       |
| 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 |       | 30       |
| 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               |       | 31       |

 

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(1)   The information required by this exhibit isincorporated by reference from Note 8 to the Company’s financial statementsincluded herein.

 

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### **SIGNATURES**

### ** **

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

 
|        | **MANHATTAN  BANCORP** |
|--------|------------------------|
|   | ** **             |
|   |                   |
| Date:  | May 13,  2008     | /s/  Jeffrey M. Watson |
|   |                   | Jeffrey M. Watson |
|   |                   | President and |
|   |                   | Chief Executive Officer |
|   |                   | (Principal Executive Officer) |
|   |                   |   |
|   |                   |   |
| Date:  | May 13,  2008     | /s/ Dean Fletcher |
|   |                   | Dean Fletcher |
|   |                   | Executive Vice President and |
|   |                   | Chief Financial Officer |
|   |                   | (Principal Financial and |
|   |                   | Accounting Officer) |
|        |                        |  |  |

 

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